The FMCG sector has its own set of challenges and it would be interesting to see whether Reliance will manage to pull off a Jio moment in this cluttered sector
About a week ago, Isha Ambani, director of Reliance Retail, announced at the company’s annual general meeting that it would foray into India’s booming fast-moving consumer goods (FMCG) market this year. With its eyes set on the space, the retail arm of Reliance Industries Limited (RIL), the country’s second largest conglomerate, took a step in that direction with its recent acquisition of iconic ’70s soft drink Campa Cola.
As the Mukesh Ambani-led group turns its focus to FMCG, it is evident that it has big plans. After taking over Campa, the aerated drinks brand from Pure Drinks, for Rs 22 crore, it is also reportedly looking to acquire brands such as Lahori Zeera, Garden Namkeens from CavinKare, and Bindu Beverages to strengthen its FMCG portfolio.
RIL is traditionally seen as a company that becomes the numero uno in whichever sector it enters—often at the cost of displacing competition. The FMCG segment, however, is old and deeply entrenched, and has its own challenges. While established players have distribution and retail networks that date back to several decades, RIL has walked in fresh with plans to dominate the space.
Having said that, for companies with serious expansion plans in FMCG, having private brands in their portfolio will become crucial and RIL has already set out on that route. Going forward, the group’s moves will be closely followed by the industry and experts alike.
Reliance’s Game Plan
India’s FMCG market is expected to increase at a CAGR of 14.9 per cent to touch $220 billion by 2025 from $110 billion in 2020.
RIL plans to enter the food, home care and personal care categories in the FMCG space. Tier-II and Tier-III cities would become the main playground for the company, say experts.
“Overall, the FMCG space is getting disrupted on multiple counts. One is the growth of online commerce. Then there is assisted commerce where you are onboarding kirana stores. We would probably see Reliance doing both assisted commerce and ecommerce. Tata has also been aggressive in building a FMCG portfolio. All options are therefore open to Reliance to enter the segment at an accelerated pace,” says Ankur Bisen, senior partner and head-consumer, food and retail at Technopak Advisors.
As per experts, the favourable route for RIL would be through mergers and acquisitions (M&As) of regional brands. Its own brands, which are sold at its supermarkets and hypermarkets, would be going to general trade.
Reliance Retail Ventures had taken the acquisition route even in its lifestyle offerings. The company has over 60 brands, majority of which are international. It has a retail footprint of 595 stores and 744 shop-in-shops in India. Its portfolio includes Jimmy Choo, Michael Kors, Superdry, Scotch & Soda, Steve Madden, Hamleys and Burberry, among others. Iconix Lifestyle India, a joint venture between American Iconix Brand Group and Reliance Brands, acquired the IP rights of British brand Lee Cooper for India last year.
In terms of India names, it acquired a 52 per cent equity stake in designer Ritu Kumar’s Ritika Pvt Ltd, which is the owner of brands like Ritu Kumar, Label Ritu Kumar, Ritu Kumar Home and Living, RI Ritu Kumar, and aarké. Reliance also reportedly agreed to buy a 40 per cent stake in designer Manish Malhotra’s MM Styles and designer label Satya Paul is also part of its portfolio. It has even invested in menswear designer Raghavendra Rathore’s eponymous label.
It is unlikely that RIL would waste time growing organically, brick by brick, in the FMCG space. Since the overall structure and market are being disrupted in a way that presents all kinds of opportunities, according to Bisen, the trade off to acquire is far better than building a brand of one’s own.
“In the lifestyle segment, it (RIL) has acquired a lot of labels. It has acquired a lot of foreign companies. So, going by how it has entered segments earlier, it would be looking at all such options—of brownfield acquisitions, own brands, other brands—to be part of their portfolio and that is how they would enter the FMCG market,” Bisen adds.
At the same time, he also points out that in spite of all the growth of ecommerce, 85 per cent of the business is still done through traditional retailers. “So, can all retailers be part of Reliance? I think FMCG needs to be understood in that context,” he opines.
Mission Disruption?
While new technology and players have entered the FMCG sector, they have not been able to completely dislodge the old.
Take for instance, Patanjali’s entry into the space a few years ago. Patanjali was aggressive, some players were impacted more than the others and dynamics changed but some of the old players could still stand their ground, indicating how fragmented and dynamic the segment in India is.
A research report by ICICI Securities found that only 9 per cent of Dabur's portfolio was affected by Patanjali in 2016. On the other hand, 45 per cent of Hindustan Unilever's portfolio was impacted by Patanjali, including traditional HUL segments like soaps, shampoos, detergents, dish wash and oral care. According to the report, Dabur lost 2 per cent market share in Chyawanprash in the third quarter of FY16, while HUL's oral care segment, including brands like Pepsodent and Close Up, was also found to be losing market share to Patanjali.
In FMCG, it is very difficult for one brand to represent all needs and aspirations across all markets, says Bisen. Can one brand achieve all the dreams of all the consumers, he asks.
Talking about RIL's entry into the space, Bisen says, “Rules of the game would surely change. It is already undergoing change. The landscape would probably see reorientation as far as market shares and dominance are concerned. That would be interesting to see.”
Then there are challenges that the sector is facing as a whole. The fallout of the Covid-19 pandemic has impacted the sector. As per a recent Nielsen IQ’s report, the FMCG market grew 6 per cent in the January-March quarter compared to last year due to double-digit price growth. Rising inflation and lack of purchasing power was reflected in the sector’s volume growth contracting 4.1 per cent year-on-year.
“A decline in consumption is echoed across all zones and the town classes, but more prominent in rural markets, which saw a 5.3 per cent dip – the highest consumption slowdown in the last three quarters. The south and north zones witnessed more than 5 per cent volume decline,” the Nielsen IQ release said.
According to a report by JM Financial, top nine consumer goods companies saw their aggregate gross margins narrowing down 447 basis points in the second quarter of FY23, the third consecutive quarterly decline.
"Given that the demand environment, especially in rural, does not seem to be as buoyant as what it was perceived to be earlier, sustained commodity inflation would not be good news since it could necessitate further tinkering of selling prices, which would be more difficult to absorb in a weak demand environment," the report said.
In the food business that RIL is looking to get into, experts believe that there is not enough money on the table, especially where Tata Consumer Products has been aggressive. Categories like daal and spices give least margins in the food portfolio and the category has low profitability from the business side of things.
“This is a segment that is already highly competitive, irrespective of whether a new company wants to enter. What Reliance is aiming at is to boost productivity in general trade. But this segment has its own set of challenges. It is not like telecom where at no marginal cost you can reach a lot more people,” says Varun Singh, assistant vice president, IDBI Capital.
New Wine In Old Bottles
It is not just Reliance that is looking to make the most out of the FMCG sector. Tata Consumer Products, the flagship FMCG arm of the Tata Group, India’s largest conglomerate, is said to be in talks to buy five consumer goods brands.
In an interview with Bloomberg, Sunil D’Souza, CEO of Tata Consumer Products, said that the company was having serious deliberations with companies in which Tata saw decent valuations. “We are reaching out to potential targets to have a chat to see if there is interest. There are places where valuations are high, but given the macro environment, given the liquidity, tightening etc, I am keeping my fingers crossed that they will become much more affordable,” D’Souza said in the interview.
The company was formed in 2020 after streamlining the brands under the 153-year-old Tata conglomerate which operates across sectors. Tata Consumer Products diversified its portfolio by acquiring stakes in companies like NourishCo Beverages, a bottled water company, and cereal brand Soulfull.
Reuters reported that RIL had plans of acquiring as many as 60 small grocery and household consumer goods brands in the next six months. From the looks of it, both Tata and Reliance are entering the FMCG space to take on existing global giants like Unilever and Nestlé and Indian behemoths like ITC and Godrej that dominate India’s FMCG space.
While RIL is the biggest private player in oil and gas and its entry into the telecom space in 2016 was a watershed moment, splitting the timeline of India’s telecom industry into pre Jio and post Jio, it is natural to assume that its entry into the FMCG sector would be marked by widespread disruption. But the FMCG sector has its own set of challenges and it would be interesting to see whether Reliance will manage to pull off a Jio moment in this cluttered sector as well.