Is the moat of the FMCG industry changing?

**Krishna** (0:04)
In today's episode, we will talk about two interesting stories. In the first one, I talk about a reset in the FMCG industry.
In the second one, I'll talk about India's trade moves.
Welcome back to The Daily Brief show by Zerodha, where we cut through the news to help you understand what's actually happening in the most important stories from business and markets. I'm your host Krishna, and today is Thursday, 23rd July. Indian FMCG has long been one of the most dependable ways to make money in this country.
These companies have compounded through recessions, demonetization, and even a pandemic while consistently generating cash. The market has rewarded that consistency too, valuing FMCG companies at a premium to most other sectors in our economy. Now there could be many reasons for that, but the one that stands out to us is their moat. A moat is simply a lasting advantage that helps a company stay ahead of rivals and protect its profits.
And for decades, some FMCG companies built strong moats around them. Now we are no experts here, just curious observers of businesses. But from everything we have read, the FMCG moat has always come down to one thing, winning the consumer. And there were two ways to do that, reaching their hands or reaching their minds. Now getting in front of them meant distribution. For years, that mostly meant being present at neighborhood kirana store. Getting into their head meant branding. Memorable TV hats, catchy jingles, and products people instinctively reached out for. Everything else was in the service of these two goals. Now a report from HDFC Securities argues that this moat might be resetting. It's even titled the Great Moat Reset. Now that's a very bold claim. FMCG is one of India's oldest industries, and industries like this rarely change overnight. But we do think there's something interesting in the argument. And the easiest way to understand is to go back to the question that has always, according to us, defined this industry.
How do you win the consumer? Think of it all as a mental model and not a prediction. Almost every projection about Indian consumption leans on the same demographic trend. Millennials and Gen Z are becoming the country's dominant consumers. More importantly, they will make up a much larger share of India's working population. By the end of the decade, these two generations are expected to account for almost 75% of all consumer spending in India. Now, much of what follows is anecdotal. But this generation behaves a little differently. They want different products, shop differently, and are influenced by different things. Now, that's a challenge for legacy FMCG companies that spend decades understanding a very different consumer. It also changes the answer to the question we asked earlier, how do you win the customer? Part of the answer lies in what you sell. For most of FMCG's history, companies built products for an entire category. HUL had Clinic Plus, P&G had Head & Shoulders. These were products designed to serve the broad hair care market with line extensions like panty and tressme, filling a few gaps along the way. Now, the report argues that this playbook is breaking down. Today's customer doesn't want a product made for everyone. They want one made for them. They don't just want a shampoo, they want a sulfate-free shampoo for coloured hair.
In other words, one large category is splitting into dozens of smaller needs or what the report calls, partitions. Instead of one product serving everyone, each need gets its own product. Now, there's some evidence that this is already happening. Broad, mass-market categories are slowing while a long tail of focused brands chip away their market share. Take Dr. Milaxin, the South Korean skincare label that just launched in India through Reliance's Tera platform. Now, it isn't trying to solve skincare. Instead, it sells clinically positioned products for specific concerns like pigmentation, texture and firmness. Now, this is where income bents are starting to lose ground. Their overall market share may still look intact but the incremental customer, the young urban first-time buyer, is increasingly choosing these focused brands. In other words, a disproportionate share of new industry growth is flowing to the challenges, not income bents. So, how does a 100-year-old FMCG giant respond?
Now, it has two choices.
It can build a niche brand from scratch, but that's slow and often goes against its stick for scale. Or it can buy one. The faster route is to buy, and over the last few years, the biggest names have gone shopping for exactly the focused, digital first brands the new customer likes. HUL acquired minimalist, a brand built around ingredient-led skin care with products like niacinamide serums. Now, this is very different from the mass-market beauty brands like Ponds or Glow and Lovely, it built over decades. Mariko, meanwhile, has spent the last few years acquiring and backing digital first brands like Beardo, Just Herb, Plix, and Cosmix, each catering to a much narrower consumer need than its traditional portfolio. Most of these started online, spoke a very different language, targeted specific consumer problems, and built loyal communities before they ever reached supermarket shelves. That's why buying them often makes more sense than building them. Mariko could have launched its own wellness nutrition band to compete with Cosmix. But a legacy FMCG company would have struggled to create the same credibility, community, and identity that Cosmix has already built with its audience. Of course, buying brands isn't cheap. And that brings us to the next question. Who can actually afford to play this game? The balance sheet gives the answer. ITC sits on the largest cash pile in the sector. Dabur has the biggest cash reserve relative to its own size. HUL also has a comfortable watch list. And at the other end, Godrej Consumer and Gopal snacks are in net debt.