India's largest company by market capitalisation, Reliance Industries (RIL), is set to foray into the FMCG space.
RIL's FMCG Entry: Can it disrupt the FMCG space and whether it will lead to rerating of FMCG stocks like Nestle, HUL?
- RIL's entry into the FMCG sector has initiated a discussion if the oil-to-telecom-to-retail behemoth will disrupt the FMCG space the way it did the telecom sector in 2016.
In her speech at the 45th annual general meeting (AGM) of RIL, Isha Ambani- the director of RIL's retail arm - announced that RIL will launch a fast-moving consumer business (FMCG) business this year.
It seems that the company is quite ready to take a plunge into the FMCG sector. RIL has acquired soft drink brand Campa, the Economic Times reported. The brand, which was once a market leader with its cola variant Campa Cola, is set to launch the brand near Diwali in October, the report added.
"I am excited to announce that this year, we will launch our fast-moving consumer goods business. The objective of this business is to develop and deliver products that solve every Indian's daily needs with high-quality products at affordable pricing," said Isha Ambani.
RIL's entry into the FMCG sector has initiated a discussion if the oil-to-telecom-to-retail behemoth will disrupt the FMCG space the way it did the telecom sector in 2016.
Can it disrupt the FMCG space?
Analysts agree that RIL's entry into a business is big news as due to its size, market reach and financial strength, the company is capable of making a significant impact in any sector. However, it is unlikely that it will create the same disruption in the FMCG sector as it created in the telecom space.
This is primarily because the telecom sector has only one product and has a limited number of players while the FMCG is a huge and complex sector.
"In telecom, there is only one product whereas, in the FMCG sector, there are multiple categories, products and variants. Building brands may take time although the other prerequisite i.e. distribution network-wise, JioMart has a good presence across metros and tier-1 and tier-2 cities. Getting deeper into Bharat may take some time for them," said Deepak Jasani, Head of Retail Research, HDFC Securities.
The company's primary focus may be on the grocery segment and small packs of food items under its own label. The impact of this move may be significant.
"While private label brands spanning food, groceries and other categories have been getting sold from RIL’s own store networks for some time now, this foray would mean a wider distribution to general and modern trade. The initial focus of the company would be on the small packs and groceries segment, with wider diversification to follow gradually," said brokerage firm ICICI Securities.
Before the entry of RJio, the telecom sector's prime focus was mainly calling services. RJio tapped this opportunity and made data the primary product of the sector. The rest is history.
The FMCG space is wide and full of multinational and homegrown players which have mastered the price-value dynamics keeping in mind the price-sensitive consumer sentiment. RIL will face stiff competition in the sector. However, its already well-established retail segment will be a strong positive factor.
"Reliance Industries’ big bang entry into the FMCG segment will definitely face tough competition from multinational and homegrown players. However, unlike the unsuccessful FMCG forays by other companies in the recent past, what will work in Reliance Industries’ favour is their established brick-and-mortar retail network of 15,688 stores, Reliance Smart and online retail platform, Jiomart," said Shirish Jaisingh Pardeshi, FMCG Analyst, Centrum Broking.
Pardeshi believes these platforms will offer a perfect launch pad for RIL to unleash its game plan to build a robust presence, but to do that, Reliance needs to build FMCG product brands capable of building stronger consumer traction.
"As per media reports, Reliance has plans to roll out products at much lower price points compared to those of rival FMCG players. However, the predatory pricing model which Reliance Jio launched to capture the telecom space may not find a way into its FMCG foray of Reliance. In the FMCG space, particularly in personal care, the ballgame is different and Reliance Industries will build the product bandwidth, manufacturing and distribution competencies with strategic collaborations and acquisitions," Pardeshi said.
Kush Ghodasara, CMT and independent market expert are also of the view that RIL may not disrupt the FMCG space as they did in the telecom sector because telecom was capital intensive and almost like a duopoly market after the 2G scam. In contrast, the FMCG sector already has many successful players. Secondly, local provision stores also have loyal customers which could restrict them from getting as big and fast success as telecom.
The impact on FMCG firms
It is certain that there will be a gradual impact of RIL's entry into the FMCG sector but a sharp and immediate effect is unlikely.
Jasani believes FMCG companies may see a downward shift in their valuations in future depending on the speed with which Reliance manages to enter and succeed in the space. Other large groups like Adani are also planning to enter different categories of FMCG products and hence the brand value enjoyed by existing FMCG companies may gradually erode over the medium term, he said.
Those FMCG companies who can bank on continued brand stickiness may be able to withstand this competition well, said Jasani.
Rerating of FMCG stocks possible?
Pardeshi is of the view that RIL's foray into the FMCG space won’t impact FMCG stocks much.
"Rerating FMCG stock depends on various other factors such as the revival of economic activities, inflationary impact, consumer sentiment, etc., and more importantly turning positive consumer sentiments, which we strongly believe should turn in next one month around the festive season," said Pardeshi.
Ghodasara believes FMCG firms won't be any rerating on existing stocks until Reliance spends a year in the FMCG sector because in the past, someone like Kishor Biyani, who is known as the father of retail, has failed in the sector. So, brokerage firms will watch the first few quarters closely before re-rating existing stocks, he said.
What new will RIL offer to the FMCG sector will be seen in the future but it remains a fact that there is huge headroom for growth in the $110 billion domestic FMCG segment which is likely to grow to $220 billion by 2025. RIL certainly has the potential to be one of the strongest players in the segment.
Disclaimer: The views and recommendations are those of individual analysts or broking firms, not MintGenie.