The FMCG index has outperformed the benchmark in 2022 year-to-date (YTD). The Nifty FMCG index has surged 17 percent in this period as against a 3 percent rise in the benchmark Nifty.
The outperformance in the FMCG sector has been going on for a while. In the last 1 year, the FMCG index is up nearly 9 percent versus a 2 percent rise in Nifty. Meanwhile, In the last 1 month as well, while the Nifty has risen just 1 percent, the FMCG index has added 4 percent.
This comes mainly on the back of a fall in prices of palm oil, wheat, edible oils and crude oil due to improvement in supply chain issues and a recovery in demand. As supply issues recede, analysts expect commodity prices to cool off further in the coming months, which will provide more relief to the consumer goods companies.
However, the success of direct-to-consumer (D2C) poses challenges to some top FMCG firms, cautioned analysts. A recent report by brokerage house Axis Capital attempts to look at the changing landscape in the Beauty and Personal care (BPC) space due to the advent of D2C.
The brokerage estimates that Emami and HUL are at higher risk to D2C disruption with 23 percent and 30 percent of their domestic revenue at risk, respectively. Meanwhile, it further pointed out that Dabur and Marico are at lower risk with 10-13 percent of revenue at risk and Godrej Consumer is at the lowest risk with only 4 percent of its revenue at risk.
"For HUL, while BPC growth over FY19-22 at 3 percent was hit by slowdown and Covid disruptions, D2C market in BPC over the same period grew by 10 times from ₹500 crore to ₹5500 crore as online penetration of BPC surged," explained the brokerage.
As per the brokerage's assumptions for HUL’s BPC revenue CAGR of 10 percent during FY22-25 are at risk if online BPC penetration keeps rising.
However, is this shift temporary or structural will become clearer over the next few years as Covid tailwinds fade for D2C and offline retail stabilizes for legacy FMCG companies, noted the brokerage.
In the last 1 month, HUL has lost over 3 percent, however for 2022 YTD, it is up over 8 percent.
Understanding D2C model
The pandemic has ushered significant changes in consumer mindset, their preferences, and the way they shop including the transition from offline to online channels and the rise of the digital-
first or Direct-to-consumer (D2C) brands (refers to businesses that typically get the majority of their revenue or customer acquisition from online channels), pointed out the brokerage.
According to the Axis, D2C brands are agile and behave differently versus legacy FMCG brands in the way they recruit (through online channels), educate (via digital content/ social media and influencers) and retain consumers (digital marketing, constant feedback loop and fast-paced innovation). It noted that D2C brands have a strong understanding of consumers and have been quick to capitalize on products which coupled with high gross margins (65-70 percent) and an asset-light model has helped them to scale up fast.
However, as D2C grows, it is becoming difficult to break away from clutter, retain consumers, and improve profitability for the companies, said Axis.
Despite the challenges, top D2C companies are rising to scalability challenges through – (1) omnichannel expansion (imperative and way forward, several top D2C companies are getting 30 percent revenue from offline), (2) launching a set of smaller brands to cater to wider audience/niches, (3) adopting inorganic route and/or expand into international geographies and (4) evolving into a house of brands model (Mamaearth) or an all-encompassing content-to-commerce model (The Good Glamm Group), explained the brokerage.
Going ahead, the brokerage estimates the overall D2C market size in BPC at ₹5500 crore in FY22, which is 4.3 percent of total BPC and 33 percent of the online BPC market. Axis estimates it to grow at 45 percent CAGR over FY22-27 to ₹35000 crore.
On an aggregate basis, top-10 D2C companies in BPC have seen 11 times rise in revenue over FY19-22 from ₹240 crore to ₹2700 crore, informed Axis. It noted that this spike is partly also aided by consolidation/ acquisitions, especially by players like MyGlamm which restructured itself to Good Glamm Group in FY22 and undertook spate of acquisitions.
It further highlighted that D2C companies in BPC are largely focused towards categories like baby care, cosmetics, skin care, fragrances, hair care, body wash/ hand wash, depilatories, and men’s grooming. This ‘relevant market’ for D2C companies in BPC together constitutes 57 percent of the BPC market i.e. ₹71900 crore in FY22, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.