New Delhi [India], October 14 : Fast-moving consumer goods (FMCG) companies are likely to face challenges in sustaining or accelerating growth over the next three to five years as changing consumer spending patterns, inflation and increasing competition weigh on the sector, according to a report by Kotak Institutional Equities.
The report said growth across the FMCG companies covered by the brokerage has moderated over the past few years due to modest growth in per capita income and private consumption expenditure, while income growth has lagged price increases driven by inflation.
Consumers are also allocating a larger share of their spending to consumer electronics, durable goods and lifestyle products, creating additional challenges for traditional FMCG categories.
"Given the structural nature of some of these headwinds, sustaining or accelerating revenue CAGR over the next 3-5 years would require strong execution in the core, alongside successful portfolio shifts toward higher-growth categories," the report said.
Revenue CAGR refers to the compound annual growth rate, which measures how quickly a company's revenue grows on average each year over a specified period.
The report identified several factors affecting the sector's growth, including limited scope for further expansion of distribution networks for some companies and limited opportunities to increase product penetration in certain categories.
Competition from direct-to-consumer (D2C) brands and private labels is also adding to the changing market environment. D2C brands sell directly to consumers, while private labels are products sold under a retailer's own brand name.
The report said competition from these businesses has had a limited impact so far, although some categories have become more fragmented, partly due to the growth of quick commerce and e-commerce.
Against this backdrop, FMCG companies are increasingly focusing on changing and expanding their product portfolios to find new sources of growth.
These efforts include launching products in higher-growth categories, acquiring businesses and updating established brands to meet changing consumer preferences.
Kotak Institutional Equities said companies are pursuing a mix of organic and inorganic initiatives to prepare their portfolios for future growth.
Organic initiatives involve expanding a business through its own operations and product launches, while inorganic initiatives include acquisitions.
The report also highlighted rising raw-material costs as an additional challenge for the sector. It revised its estimates to account for higher-than-anticipated inflation in crude-linked packaging inputs, palm oil, sugar and select agricultural commodities, driven by the ongoing war and El Niño-related disruptions.
However, it expects margin pressures to ease by FY2028E, supported by a likely moderation in raw-material costs. Margins refer to the share of revenue left after accounting for relevant costs.
The report said portfolio transformation and stronger execution in existing businesses would be important for FMCG companies seeking to sustain or accelerate growth over the medium term.