Is modern trade future growth driver for FMCG?

Modern Trade spreading its tentacles

Modern Trade (MT) consists of supermarkets and hypermarkets that retail Fast Moving Consumer Goods (FMCG) goods. Also known as organized retail, this retail format started in India in the early 1990s, and since then has slowly been gaining in importance.

As per Nielsen, the proportion of consumers who claim to shop at MT "occasionally" has grown from 54% last year to 66% in 2012. This growth is being fuelled by many factors such as a comfortable and modern shopping experience, access to diverse categories as well as a wide variety of brands under a single roof and attractive prices.

A whopping 54% of the MT shoppers actively seek promotional deals, with 35% of them making bulk purchases. In fact, organized retail has gained momentum with increasing numbers of 'urban crossover shoppers' who patronize multiple store types. They visit MT stores but also rely on the neighbourhood Kirana stores (General Trade) to replenish day-to-day convenience shortfalls. Nielsen's study states that over a third of the Indian shoppers, on average, frequent 2 or more types of stores.

Modern Trade - A boon for certain consumer goods

Modern Trade by virtue of effective merchandise display has spurred sales of certain FMCG categories. This is particularly true for impulse purchases made by shoppers. Food categories such as salty snacks, cheese, biscuits, noodles, breakfast cereals and chocolate in MT clocked over 20% growth during 2011. Even food staples, which were the exclusive domain of Kirana stores, have successfully entered MT in the form of branded staples. In 2011, packaged rice and packaged atta retailed through MT registered brisk double-digit growth. Apart from that, MT has coaxed consumers to opt for more premium products. For example, refined edible oils witnessed considerable "uptrading" from the regular edible oils to premium refined edible oils in the MT channel in 2011. Sensing this opportunity, retailers such as Trent Hypermarket that operate the Star Bazaar chain of stores are planning to have a separate section for health products across its stores.

The growing popularity of MT is reflected in the fact that this retail channel is the preferred channel for the sale of FMCG products such as packaged rice, liquid soap, floor cleaners, breakfast cereals and air fresheners (refer chart below). Hindustan Unilever (HUL) claims that in, certain categories, its sale volumes through modern trade are growing faster than through general trade. This faster growth of certain product categories in MT have led to the emergence of private label brands. These are essentially in-house "retailer" brands (for example Future Group's Tasty Treat snack foods) sold at lower prices than higher ad spending main-frame brands. Despite the relatively recent arrival of private label products, it has already clinched 7% of overall MT sales.

Source: Nielsen

Modern Trade - Current Share and Penetration

Modern Trade has a market share of 9.2% in overall FMCG sales. But MT still continues to be an urban phenomenon. As per Nielsen, 17 key metros account for a whopping 73% of overall modern trade in India and accounted for a third of the general trade's sales in those geographies.

Further, one in every five urban shoppers now frequents Modern Trade in the form of super or hyper markets. This growing importance of MT has also resulted in FMCG companies setting up sales and marketing teams dedicated only to MT.

Modern Trade accounts for more than 10% of HUL's overall FMCG sales at present. Dabur India gets 60% of its Activ Fibre juice sales from the organized retail stores.

The growing clout of MT saw this retail channel growing by 28% in FY11 that has powered the 18% rise in overall FMCG sales for the year.

Conclusion:

Modern Trade has opened up an important sales channel catering to the growing urban shoppers who have strong purchasing power and with more choices, a willingness to experiment. This sales channel has not only nudged consumers to make more impulse purchases but has also led to the growth of premium products and incubated new product categories. Although modern trade has only a 9.2% share in overall FMCG trade in India, it is growing much faster than general trade.

Going forward, Nielsen expects modern trade to continue its stellar performance, clocking growth of more than 25% in line with the current 28%, and so it will further increase its penetration.

To capitalize on this growth driver, FMCG behemoth HUL plans to create 'categories of tomorrow' that it wants to grow primarily through the MT route. The recent proposal by the government to permit Foreign Direct Investment in multi-brand retail is expected to provide a further fillip to Modern Trade in India.

Clearly Modern Trade is complementing the growth of FMCG business. Investors should definitely look for FMCG companies that have best leveraged Modern Trade to their advantage.

Equitymaster.comis India's leading independent equity research initiative