Performance Indicators of FMCG Industry

Tons of technical analysis is available online on ways to pick a stock. I considered few and got confused. Why investment decisions are supported with too many technical analysis and forecasts? Interesting thing is that the rules of the game are variable and so it is not so simple. Still I dare to find some simple ways and try to understand rules of the game. To start with I’ve taken one of the largest industries, the FMCG industry. The basic question I tried to answer about the variables affecting the industry performance. Stock pick would be automatically in place if the performance indicators are known.
First and foremost is changing market dynamics with fluctuating crude oil prices and inflation. Last few months were terrible. On one side input prices are increasing resulting in thinner margin to manufacturers. On the other side the share of wallet of consumer is decreasing. Overall decrease in category demand is now become visible. Companies with better brand equity are successful in transferring this burden to consumers. However with high competition already in place every time price increase will not be a viable solution.
Second emerging market dynamics is the emergence of organized retail. In this new format, relatively weaker brands also get equal opportunity to place their products and offerings along side a stronger brand. Two things will distinctly visible in such situation. Either exclusively differentiated product or the most cost effective product will get lead in the battle. In high inflationary situation consumer would tend to choose second option in order to control the outflow from their wallets. So brand loyalty earned by various major players will be at stake. Product with very high brand equity could maintain their position till the situation improves. Weaker or moderate brands will be the target of new cost effective products or brands.
Third is the cost leadership. A company’s pro activeness towards innovation, rationalization of cost structure, capabilities in manufacturing and in outsourcing gives a long term perspective of their approach towards cost leadership.Take the example of shampoo in which a crude oil derivative is used in packaging shampoos, while PET, a petroleum-based plastic product, is employed in manufacturing hair oil bottles and packaged water bottles. Crude oil derivatives account for almost 17 per cent of the total cost of corrugated boxes. Which company is working towards other innovative solutions? Another cost iscost of distribution which is very high in FMCG sector. So efficiency of supply chain and logistics adds significant value to cost leadership.
Fourth is competition with unorganized sector and regional players. Their overhead costs are much lower than a company with national presence. Being ‘local’ gives them a very cost effective advantage of distribution and logistics. Their presence can be felt at remote rural level. But since they are small the effect of inflation are even bigger for them. Poor management and poor cash flows are other prominent concerns. So a comprehensive consolidation can also be seen in next 2 to 5 years. The companies with better cash will take this.
Let me summaries the performance indicators to address health of a FMCG company in following parameters:
1. Brand equity with competitive advantage
2. Operating profit margin to understand cost advantage
3. Distribution efficiency by evaluating rural presence
4. Proportion of outsourced manufacturing
5. Cash in hand