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Are FMCG Start-Ups the Means To Beat Recession?

FMCG

A report published in the Mint quoting Credit Suisse suggests that consumer spending across the FMCG and consumer packaged goods (CPG) segment has fallen sharply in the last couple of quarters. The segment is going to see a continued revenue decline by around 5% in the second and third quarters of 2019-20.

Consequentially, the drop has apparently got the leading FMCG firms like Haldiram’s, Wipro Consumer Care and Lighting Ltd, LuLu Group and Burman Family Holdings to bank on startups in the segment.

These leading firms are setting their eyes on consumer brand startups to invest in, and battle the period of economic slowdown, says the report.

Opportunities for the Startups?

Does the situation not sound like a golden opportunity for the FMCG startups? Wipro Consumer recently launched a venture fund to invest in startups in the consumer brands space. A spokesperson for Wipro was quoted by the Mint to suggest that it plans to invest about Rs.10-Rs.30 crore in early to mid-stage startups in the space.

“We will be looking at those startups where we can add value as well learn from them. Financial returns would be an important objective of the fund as well as adding strategic value, but all as a minority investor,” said the spokesperson.

Dabur Group’s family office Burman Family Holdings’ has been evaluating startups in the branded consumer goods space. Gaurav Burman, director of Dabur International and investor in Burman Family Holdings, said his family fund’s investments will be stage-agnostic with a long-term investment view. “We have no minimum limit on ticket size, although we will look to deploy at least ₹70 crore per investment through the life of the opportunity,” Burman said.

Haldirams, one of the oldest names in packaged foods space in India, is also reportedly in discussions with multiple startups in the consumer brands space including Bengaluru-based Frozen Bottle, a quick-service restaurant (QSR) chain that sells milkshakes and desserts.

While big FMCG and CPG majors turn to consumer brands led by startups, their overall revenues have also been declining consistently in the past couple of quarters, amid an economic slowdown.

Dabur, Hindustan Unilever, ITC Ltd and Britannia Industries have also acknowledged the slowdown and its bruises, in terms of falling revenues.

Are Startups Bankable Enough?

One major reason why the traditional firms are eyeing at the startups is the least impact borne by them in the period of slowdown. If logic like this is to be stood by, then big FMCG and CPG firms ought to take the benefits. However, is that reason enough?

According to analysts and industry experts, the dropping consumer spends in the FMCG can be attributed to a lack of brand innovation, and failure to understand niche consumer needs, especially in Tier-1 and Tier-2 markets.

If we flip this argument around, it could also mean that these are two challenges which the startups in the FMCG segment are required to overcome. The question that the investors must ask is – whether the start-ups are capable enough to meet these challenges and become the stepping stone for their investors?

If yes, then how do you gauge their capability and if not, are you going only by the least slowdown bruises experienced by them?

The reasons why the start-ups didn’t receive the impact of slowdown could be multiple. The investors must scrutinize them well before making the final decisions.

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