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Nov 29, 2019

FMCG Sector Analysis: Moving Fast

Sector Reports

  • A pie is getting bigger. The Georgian FCMG market is expected to reach GEL 9.4bn in 2019, up 7% y-o-y. Ongoing urbanization, decreasing unemployment and higher purchasing power drive the domestic FMCG consumption, while high growth of tourism creates the additional demand.
  • The organized FMCG is getting larger. In addition to this organic growth, the local FMCG players are benefiting from substituting the unorganized market through the formalization. As more than 20% of unorganized FMCG players closed their business for the last four years, the share of organized market is expected to reach 28% in 2019 from 16% in 2016, surpassing 2.6Bn GEL and 1,000 stores thresholds by the year-end. Based on our models, the FMCG market will grow at 7% CAGR for next five years, while the organized market penetration will further increase to 41% by year 2024. These numbers translate into 5.5Bn in revenues and more than 600 additional stores till 2024.
  • The market is entering the uncharted territories. Organized market is expanding to regions as the concentration of the larger retailers in Tbilisi decreases from 77% in 2017 to 60% in 2019. So far, the market penetration in Imereti and Kakheti is below the country’s trend line. The quickly growing regional entrants will increase competition in the organized market, as captured by the HHI index. At the same time, the expansion in the regions with the lower purchasing power and lower density depresses the sales per square meter.
  • Current high growth with low margins will change. There is a room for economies of scale and margin improvement of organized retailers. Given the annualized high growth of 27% for 2017-2019 years and EBITDA margin of only 3% in 2018, Georgian organized FMCG sector lies significantly below the worldwide as well as the peer country trend. We believe this pressure on margins to be natural for the current phase of the industry, and that scale and operating costs will be the source of efficiency as the market eventually enters a more mature phase.
  • M&A activity to drive growth after the room for formalization declines and organic growth slows down. Large chains like Spar have already started the practice of absorbing smaller stores via franchising. But we do not expect major strategic consolidations to be the main source of growth until as late as 2025. At some point, the larger players will have to consolidate among themselves to extract value from necessary growth, economies of scale and synergies. Consolidation through the vertical acquisition of value chain players from distribution and logistics is also an opportunity for the sector players.
  • The purchasing trends are changing. Consumers are becoming more comfortable with cashless payments, with millennials now accounting for 55% of total FMCG e-payments in Georgia. Although still constituting less than 0.1% of the market, the FMCG e-commerce had a solid year in 2018, with top players entering the market.
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