One of the key points which caught my attention from your latest write-up is that upcoming elections could actually inject a lot more liquidity in the hands of people, especially in tier II, tier III and the rural side and that could boost sales of consumer items. What category of consumption are we talking about here and what is your hypothesis?
Anand Ramanathan: Yes, indeed, we will see high retail growth in 2024. We expect it to be about 10% to 13% and this is largely driven by an uptick in rural demand too. Urban demand had picked up, but we are seeing green shoots in rural India and retail today in India is still about two-thirds of it is food and groceries. So, food will be one of those big categories.
But beyond that, if I were to look at other categories, while the overall retail market is expected to double by 2030, we have some categories like luxury, for example, which will grow at about 5x. We will have e-commerce grow at about 4x compared to the overall market at about 2x and hence these will be categories or segments that will grow faster than the rest of the market.
We have seen that certain ticket items, especially in FMCG, have been posting very weak volume growth for several quarters now. Are there any green shoots? Even if we talk about the mid-range value retailing items, what would provide the trigger change over there?
Anand Ramanathan: FMCG as a category will continue to grow but we will see a shift from mass brands to niche brands. So, there will be D2C brands, there will be private labels. Private labels are expected to grow 6x in a period where retail is otherwise growing at 2x. White labels, we are seeing a lot of online brands, for example, do really well. So, there will be a greater penetration of some of these smaller brands which cater to micro segments and relative niches within the market and we will see more discretionary behaviour and typically discretionary behaviour promotes variety seeking and hence there is a greater number of brands and loyalty of at least consuming a few mass brands will perhaps reduce over the next few years and that is the reason for the volume sluggishness that you have seen because most of the large FMCG brands that we target are mass brands. We really do not look so closely at the smaller D2C brands or the private label brands.
The other thing which is happening is that the view that high inflation levels have also led to a lot of consumer base actually to shift downwards in value terms and in trying to adjust whatever liquidity they have, they are trying to adjust their requirements and there was a down trading happening at every category. Do you think this will continue or will it get arrested?
Anand Ramanathan: Overall we have seen the market look good, particularly rural India and hence as demand strengthens, we will see some of these pressures of inflation soften plus see 60% to 70% of an FMCG brand’s cost is going to come from the cost of raw material and therefore, inflation and geopolitics and commodity prices, etc, all of it has an impact on pricing which many a times they are not able to pass on to the consumer. Some of these have also eased up a little. Hence, we will see that at least in the near term in the next three to six months, there will be some relief both in terms of attractive demand, as well as less pressure from commodity price fluctuations.
How are retailers adopting AI, analytics to ensure higher sales or even reaching the right target audience and achieve much more efficiencies and also by the use of all of this, do you see some brands, actually D2C kind of brands, achieve bigger sales?
Anand Ramanathan: I think analytics is transformative. So, there will be a lot of investments, firstly, on the foundation layers, just to have all of the data in one place whether it is customer, whether it is inventory, whether it is sales and hence, you will see foundation investments, but then comes in the real value add from analytics which is on the insights.
Now with generative AI, with machine intelligence, a lot of predictive analytics can improve performance in this sector. We will see investments both on the front end, as well as the back end of the business. On the front end, you mentioned D2C, analytics will help track what individual customer experience is and what the needs and preferences of individual customers are and hence things like personalisation, etc, can direct better conversion as well as better value for the customer. And on the back end, whether it is the supply chain, whether it is finance or looking at even people analytics, there is a lot of scope for efficiencies which will kick in into all of these different functions at the back end. So, we will see investments in analytics as one of the biggest drivers of change in the consumer sector.