Retailers in Sri Lanka see rising demand for fast-moving consumer goods

 

Emerging Asian markets have had a significant impact on the growth of the fast-moving consumer goods (FMCG) segment. The region’s FMCG consumers pack a powerful punch: around a third of Nestlé and Procter & Gamble’s global sales growth between 2008 and 2014 came from emerging Asia, according to Euromonitor data. Indeed, for both large foreign and smaller domestic FMCG firms, participation in the region’s FMCG segment requires a long-term view when it comes to investment and presence, with sustainable growth the main goal. It is also necessary for FMCGs operating in emerging Asia to be flexible enough to respond to local dynamics, while simultaneously establishing or maintaining regional distribution hubs and creating a powerful marketing presence.

Unilever, Nestlé, Danone, Procter & Gamble, L’Oréal and the Coca-Cola Company were the top-six FMCG multinational corporations (MNCs) operating in Asia in 2014, according to Euromonitor data.

A Growing Segment

Household consumption drives the majority of sales in the FMCG segment. Growth in this segment has increased considerably in emerging markets in recent years, due in large part to long-term trends such as a growing urban middle class with rising disposable incomes and changing consumer preferences for traditionally Western products.

According to a study by consulting firm McKinsey, emerging market consumers make up less than one-third of global revenue for the 15 largest multinational FMCG manufacturers. However, consumer spending in these markets is expected to grow about three times as quickly as that in developed economies. By 2020 McKinsey forecasts such spending will reach $6trn and account for nearly half of total consumer spending.

Sri Lanka’s packaged food sales – the largest categories of which are dairy, bakery, and fats and oils – posted a compound annual growth rate (CAGR) of 11% over 2009-13, reaching $1.9bn in 2013, according to Euro-monitor. The packaged food segment was expected to sustain this momentum, with Euromonitor forecasting it would post a 10% CAGR during 2013-18, reaching almost $3bn in 2018. In addition to the increase in demand for packaged food sales, between 2009 and 2013 Sri Lanka’s expanding middle class also created a rising demand for tissues, hygiene and other FMCG products, which recorded a CAGR of 19% in value during the period, as well as beauty and personal care sales, which resulted in a 10% CAGR over the same period.

Market researcher Nielsen determined that the country would likely see significant growth in terms of sales volume in the FMCG segment, according to a 2015 report. It observed that Sri Lankan consumers were allocating more disposable income to lifestyle products, especially food and durable products for the home.

Kantar Worldpanel’s annual study of global FMCG brands, “Brand Footprint”, ranks the top-10 FMCG brands. The 2016 iteration of the study included Sri Lanka for the first time, with findings for the island nation derived from the Lanka Market Research Bureau Household Panel, which monitors the consumer purchase behaviour of 45 selected FMCG categories. The analysis found that local brands commanded the bulk of shopper choices when it came to buying FMCGs, with brands such as Munchee, Sunlight, Maliban, Lifebuoy, Anchor, Signal, Vim, Nestomalt, Ratthi and Diva occupying the top-10 places for Sri Lanka in 2015.

A Returning Player

This is a trend that seems set to continue, as a state-controlled wholesale giant, the Cooperative Wholesale Establishment (CWE) re-entered the domestic FMCG market in April 2016 after exiting the wholesale market and FMCG sector in 2003. As the main government corporation with the ability to intervene in the control of prices of essential consumer items, the CWE can also import and distribute commodities to stabilise prices.

Established in 1949, the CWE is Sri Lanka’s oldest state-owned corporation, and launched Sri Lanka’s self-service supermarket culture in 1978. Indeed, Lanka Sathosa, the country’s largest state-owned retail chain, was formerly the CWE’s retail arm.

“CWE is being restructured and will have its own customer base as a result and former glory – that’s our aim,” Rishad Bathiudeen, minister of industry and commerce, explained at the opening of CWE’s regional sales and distribution hub in Vavuniya in April 2016. “If necessary, CWE is ready to import FMCGs and essentials to stabilise prices and meet sudden market demands,” he noted. The CWE’s northern wholesale centre in Vavuniya will distribute FMCGs to the entire Northern Province. Regional CWE hubs will subsequently be opened in Badulla, Kurunegala, Colombo and Kandy.

Giant Partners

In mid-2016 Lanka Sathosa announced it was partnering with multinational FMCG giant Unilever in its presence as Unilever Sri Lanka to promote FMCG items. Unilever Sri Lanka’s FMCG brands include Rexona, Lipton, Signal toothpaste, Lux, Surf Excel, Knorr, Becel/Flora, Dove and Omo. The government plans that the Lanka Sathosa network would grow from 312 to 500 branches by 2017.

A Full Field

For its part, Cargills’ FMCG business, with a six-percentage point margin difference over its retail and restaurant businesses, is expected to be the future driver of growth for the company. It enjoyed substantial volume growth in 2015, driven by investments in capacity expansion and supply chain development. According to the company’s 2015 annual report, its FMCG national brands contributed 18% towards the group’s turnover. Its brands include fresh and powdered dairy products, processed meats, and its Kist brand of nectars, cordials, jams, sauces and bottled water.

Other FMCG industry stakeholders in Sri Lanka include Nawaloka Holdings’ distribution company, East West Marketing (EWM), which distributes some of the world’s leading FMCG brands. The EWM product portfolio includes Milgro Milk Powder and the Turkey, Bega, Aparna, Sunrise and Super chef brands as well as edible oil, rice, fish, cheese, soya meat, tea and sauce products. Also active in the country’s FMCG segment are Sunshine Holdings’ Watawala Tea Ceylon, which produces tea, edible oil and packaged water; Lanka Canneries; and the Renuka Group’s Shaw Wallace Ceylon, which produces and distributes, among other products, fish, soya, snacks, instant drinks and colourings.

Exports

But perhaps the future growth story for Sri Lanka’s FMCG segment will unfold in exports, as indicated by several local FMCG manufacturers that have turned to foreign markets to grow their market share.

Sri Lankan conglomerate Hemas is one such case. About 34-40% of its sales come from its FMCG business. Hemas directly exports its FMCG products (Kumarika, Baby Cheramy, Clogard, Nimex, Goya and Pro Sport) to consumers in 12 countries in the Middle East, Asia Pacific, Asia, South America, Africa and South-east Asia. It also indirectly exports products through the Sri Lankan Export Development Board.

Ceylon Cold Stores is another example. In October 2016 the company announced it was partnering with a UK-based bottling facility for the production of 1.5-litre plastic variants of its popular Elephant House brand Cream Soda, Necto and Orange Barley beverages. In 2016 Elephant House Cream Soda won the Sri Lanka Institute of Marketing-Nielsen Peoples award for “FMCG Beverage Brand of the Year” for the 10th consecutive year. The deal was made in order to increase exports into the European market, with expansion into Swiss, French, Italian and German markets targeted.

“Europe is the next big step for Elephant House in terms of export growth, and we are gearing up for it by expanding our range of offerings so as to meet our strategic goal of significantly expanding our presence,” Daminda Gamlath, head of beverages at Ceylon Cold Stores, told local media in October 2016. “We are confident that it can achieve even bigger gains in Europe over the coming months, especially considering the already existing demand for Necto, Cream Soda and Orange Barley amongst our European consumers.” Elephant House beverages are exported to many EU markets and sold at Tesco stores and Wal-Mart’s Asda stores in the UK. In addition, they are exported to stores in China, India, Korea and most countries in the Middle East.

Staying The Course

For MNC FMCG retailers, developed markets are saturated and remain “very challenging,” Kimjin Gan, a partner at EY’s Asia-Pacific advisory centre, told media. However, “We do not see our clients giving up their share in emerging markets to refocus on developed markets, even within Asia,” Gan noted, adding that FMCGs were continuing to invest in emerging Asia markets because those markets’ returns on investment and business cases continue to outperform those of developed markets, and are expected to reap long-term benefits.

Domestic firms often have an advantage over their international competitors, because they are closer to their customers and better acquainted with their buying preferences and habits. While MNCs have to work hard to ensure their brands stay relevant by localising their products, local players such as those in Sri Lanka have that knowledge built into their FMCG products.

 

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The Report: Sri Lanka 2017

Industry & Retail chapter from The Report: Sri Lanka 2017