ELEPHANT ‘S GROWTH IS THREATENING THE DRAGON AND GIANTS LIKE USA, UK AND JAPAN.

DATES:-7 May 7, 2007

After the boom in all sectors like InfoTech, metals, telecom, engineering and others it’s now turn for FMCG and organized retail. India’s favorable demographics is already creating ax express high way for retail growth. Mc Kinsey report shows that in India middle class families having income between 2-10 lakhs will grow from 50 million to 583 million by 2025 registering an all around growth of 15% thanks to the rising salaries in the Indian markets. This population segment will be twice the population of USA and will form third largest country by its size. The income is set to rise from Rs.113744 to Rs.318896 in 2025 at a CAGR of 5.3%. Thus the PCI works out to be $7600 which looks meager but its PPP stands at $40000 which looks every attractive. India has been witnessing vast changes in its demographics. Firstly the number of earners per family is on a rise with women liberalization and becoming a part of the workforce. Secondly in India the number of dependents will fall drastically and ensure a larger income is available for spending. Moreover the major stimulant of growth is the rising income. Law of economics says once the basic needs are satisfied the consumers are willing to spend their rest of income on branded luxury and comfort and leisure goods because they provide higher marginal utility. Thus future is very bright for consumer durables and luxury goods manufacturers. Slowly and steadily the organized retailing will expand at the cost of unorganized retailers. The study by McKinsey also indicates that though the overall expenditure on food, tobacco and beverages will drop from 45% to 25% the reason being cited above. But FMCG companies will continue to grow at 4.5% annually creating a huge pie for them to cater to. India will continue to its robust spending to reach to 5th largest consumer in world after Japan, USA, UK and China. India’s consumption will rise more than 4 times from Rs.1500000 cr to Rs.70, 00,000 cr ($1.5 trillion). If PPP is considered India’s consumption will reach $8.2 trillion far ahead then US consumption which stands at $7.8 trillion. Economic reforms show results and often have a time lag of more than 10-15 years. For instance China made reforms in 1990s and its results started showing in the millennium. In India the reforms have already been introduced and their results will start showing in coming years. Further reforms being introduced will only hasten pace of growth but even if the process remains irreversible India is poised to benefit heavily from the sustained growth rate up to 2025.

Thus considering all these companies in the FMCG, autos, leisure and recreation and consumer durables are set to benefit. So one could consider investments in these sectors taking a long term cue. A correction of 5-10% in coming months should be looked as a buying opportunity especially in auto segment from a long term perspective of 3 years. The slow down has already been factored in prices and after a correction this stocks looks attractive. Moreover companies like Dabur and Marico in midcap space look attractive. These companies should use strategies for creating their brand name to survive in brand war against them posed by retail giants like HLL, Colgate Palmolive, P&G, Wal-Mart, Carrefour and others. A new kind of branding has already started taking place consider the brand creation process undertaken by MIAL (Mumbai International Airport Pvt Ltd). They have created their unique logo and creating vast retail outlets in airport vicinity to cater to vast population of 20-25 million clients visiting airport. These will house all International Brands and will help airport earn its revenues and reduce dependence from flight operations to 55%. Thus around 50% of its revenues will come from leasing out retail spaces at airports which will offer huge markets to retailers. As soon as one enters the airport, the airport brand will attract them, and only when the customer enters a shop the individual brand will takeover from airport brand. This brand will be given adequate promotions through bill boards, advertisements etc and could be looked as revenues by leasing them out to giant retailers.