Mergers and acquisitions may intensify in Indian FMCG sector: KPMG

NEW DELHI - The food, drinks and consumer goods industry is likely to see a consolidaton in the coming months, with large size firms looking to improve margins by acquiring smaller peers, according to global consulting firm KPMG.

“The Indian household and personal care market is likely to continue to see deal interest from strategic players in 2010 because it requires significant marketing and advertising spend, as well as distribution channel investments, to build scale,” said a recent global KPMG report on mergers and acquisitions in consumer markets.

The report, which calls India ” a busy market driven by consolidation and economic growth”, said players with limited financial muscle and brand portfolio are expected to yield to their larger counterparts.

Another reason for consolidation is the expanding footprint of large organised retailers such as the Future Group, Shopper’s Stop, Reliance Retail and Aditya Birla Retail.

The retail chains are squeezing the margins of food, drink and consumer goods (FDCG) companies. Though foreign players are barred from operating in the multi-branded retail segment, global retailers such as Wal-Mart, Metro and Tesco have still entered India through franchises and partnerships in their cash and carry wholesale businesses.

Add to this the pressure from multi-national behemoths like Hindustan Unilever and Procter & Gamble, which are taking the pricing war to smaller Indian firms.

“This has pushed Indian FDCG businesses into consolidation as many believed they had reached the limit of their growth. We believe the pressures behind this will continue throughout 2010 and result in increased transaction volumes,” said Nandini Chopra, practice head, consumer and retail corporate finance, KPMG in India.

“However, the lack of large acquisition targets and the number of acquirers looking for opportunities means valuations will continue to be at a premium,” said Chopra.

The food and drink sector in India is, however, unlikely to see any large deals because the local brands have not scaled up beyond the $20-25- million mark and the larger deals have already taken place.

Since French food and facilities management frim Sodexo SA acquired Radhakrishna Hospitality Services for $125 million in March 2009, activity in this sector has been relatively slow.

Indian Consumer goods are now increasingly looking beyond their shores for the next growth wave. Godrej, Wipro, Dabur and Marico have made several acquistions across Asian and African markets.

“These companies are all poised to become global FDCG (food, drink and consumer goods,” said Chopra.