Moneycontrol Pro Panorama | Buying the consumption story

consumption IIP

Dear Reader,

Last week ended with news that Tata Consumer Products, which has been on the prowl for big acquisitions for some time, bagged two companies. One was Capital Foods that has carved out a niche with its range of Chinese noodles, sauces and condiments and another was Organic India, which sells premium products in categories such as teas and infusions and packaged foods.

The amount in question is significant at Rs 7,000 crore and may have been even higher but for the structure. The Organic India purchase is for a 100 percent stake, but involves an additional payout if the business hits certain targets in FY26. The Capital Foods acquisition involves Tata Consumer buying a 75 percent stake, with the founder staying on as a consultant. Tata Consumer retains a right to purchase the balance 25 percent stake belonging to the founder over three years. This implies that the founder helps run the business, helping Tata Consumer meet its integration and business targets, and potentially may earn a higher payout for the stake. Do read our two takes on the acquisition, here and here.

Making acquisitions work, it is said, depends a lot on culture and strategy, some say. But success of these two acquisitions also depends on how well India’s consumer market grows in the coming years. One of the worries facing FMCG companies at present is that the market is not seeing uniform growth across consuming classes. Companies are reporting good growth in the premium segments despite headwinds such as stiff inflation. But the mass segments are seeing cracks, as reported by companies.

One question that remains to be answered is whether it is solely income stress that is reflecting in performance or whether the organised players have raised prices so much, that consumers are shifting to lower-priced brands sold by smaller, regional players or even unbranded products.

But macro data does support the theory that consumption has been hurt in recent years. My colleague Manas Chakravarty writes, “The latest data point is the advance estimate of national income for 2023-24, which puts growth in private consumption at a low 4.4 percent. That’s the lowest in many years, excluding the pandemic-hit year of 2020-21. Excluding that year, the last time growth in private consumption was so low was in 2008-09, during the Global Financial Crisis, when it was 4.45 percent. Interestingly, GDP growth in that year was a mere 3.1 percent.”

Even IIP data is showing that between April-November 2019 and April-November 2023, the index of consumer non-durables has risen by only 3.7 percent. What does that imply? Do read his piece to know more.

The expensive valuations at which FMCG stocks trade cannot sustain for long if the mass market consumption does not come back roaring. The long-term market opportunity that India offers is undeniable, but the speed bumps on that runway are causing a few jitters, for sure. If the slowdown continues, then acquisitions may become a much sought-after source for attaining growth. In the near term, all eyes will be on whether the Budget strikes a few blows for low-income consumers to boost their buying power.

Meanwhile, Moneycontrol carried out a survey of CEOs in the run-up to the Budget. They seem a pragmatic lot, with a sizeable number expecting both inflation and interest rates to hold in the first half of 2024. They are an optimistic lot also, with nearly all of them being cautiously optimistic or very optimistic. But their caution on hiring, with a fifth saying they don’t plan to hire and a third saying it depends on market demand, is a sign that current conditions are not very supportive. For overall consumption to pick up pace, one needs the entire income pyramid and not just the affluent to be in a mood to spend.

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