How to make money in large consumer markets?

The unsaid problem with a large consumer market, is the number of false positives it throws up.

Think about it. If you put up a 'Chola- bhatura' thela, at any reasonable populous location, youd likely be off the ground. But the problem isn't the zero to one in consumer markets

Its the 1 to 10 and 10 to 100.

Extending the example, it might be easy to make INR 1k per day from your thela, but scaling it to INR 10k, then 100k, then 1cr - thats the issue.

Distribution within FMCG, especially food and beverages dictates sustainable scalability.

Just last week news broke that TCP was looking to buy a majority stake of 51% in Haldiram, which led to a 4% surge in stock prices (both parties have denied the news). But it highlighted what makes a for a truly great f&b enterprise in a large consumer market like India -

Great F&B Enterprise = Brand Perception/Quality + Distribution Strenght

But it does open up an interesting wealth creation opportunities does the sector truly hold?

India’s Consumption Story - in Numbers

The Indian growth story over the last 30 years, post economic reforms in 1991 has largely been consumption driven.

• Nearly 60% of India’s GDP is driven by domestic private consumption (while it’s just 40% in China)
• In 2021, Indias consumer spending was above US$ 1.8 Trillion
• Indian villages now contribute over 35% to overall FMCG sales.
• E-commerce now accounts for 17% of overall FMCG sales.

• India’s consumption basket is heavily skewed towards food having a 30-32% share, a lot more in comparison to the US, where food only constitutes 7-8% of the consumption basket.

Tech vs. F&B: Two ends of a circular spectrum ?

Even with cutting-edge AI companies being the hottest investment trend of the year, consider this: as per this year's 13F filing, Warren Buffett's third-largest investment remains in Coca-Cola.

Why?

Because in the world of technology, predicting winners is a monumental challenge. Tech giants like Intel invest millions in R&D just to stay relevant. Meanwhile, a timeless classic like Coca-Cola, cherished for nearly a century, offers a reasonable expectation of being in the spotlight for another 10-20 years.

Predictable products equals Predictable profits

Legacy brands hold their value to consumer across generations, as long as the quality of their offering isnt impacted.

Which is why the Haldiram rumour seemed very plausible. Haldirams extensive franchise network(~150 outlets) and strong brand presence, claiming 13% of India's $6.2 billion savoury snack market makes it an almost priceless asset.

Also why some new, large organizations acquire legacy brands. Think

• Byjus acquisition of Akash
• Pharmeasy acquisition of Thyrocare

But theres an interesting move toward tech, even for the tech giants like HUL, J&J, ITC and the like.

Technology is being used by brands, to overcome the disadvantage of size. Proliferation of successful D2C plays and the interest of larger players to acquire such efficient distribution bears testimony that we are undergoing a paradigm shift.

But private market is a risky game and not for everyone. So what about stocks of F&B cos ?

F&B Stock Performance

The top F&B stocks in the country -

• Jubilant,
• Nestle,
• TCP,
• Varun beverages,
• Britannia have on average given a 244% return in the last 5 years. While the top 5 IT companies (Wipro, HCL, TCS, Infosys, LTI Mindtree) have given a return of 111% over the last 5 years.?

So pretty solid (ofcourse it doesnt mean you should enter at any valuation). All you need to seek out -

1. Brand equity / legacy

2. Strong margin profile +product innovation

3. Strong distribution network

For those with an aggressive risk profile and an ability to sift rising D2C stars, the startup space might offer you more options.

In a large consumer market like India, you will definitely find many false positives.

But only in a large consumer market like India, can you play offense, with 'defensives'