The market size is fairly large and to that extent, there is opportunity and head room for everyone to grow, says Manoj Menon, Head – Research & Consumer Analyst (Staples & Discretionary).Reliance Retail is clearly now the giant among the top grocery retailers especially after its merger with the Future Group. What does it mean for listed players like DMart?So three things actually. The first is what is the impact of the industry consolidation on the retailer but the simple answer here is that the market size is fairly large and so to that extent, there is opportunity and head room for everyone to grow. As such it is really not negative for DMart specifically. Second, there are two facets to the business model. One is modern trade and second is digitisation of the kirana vertical. From an FMCG perspective and that too in a country like India where the top three brands control 80% of the market, it is a very consolidated industry that we are talking about. What it essentially means is that the negotiation power on the table between two parties is equally split between the retailers as well as the FMCG brand itself. To give you an example, no modern trade player or a digitised kirana player can realistically try to sell a toothpaste without having Colgate on the shelf because like it or not, they have 55% market share. The same thing applies to shampoo. The same thing applies for a soap, for detergents. So a lot of the FMCG categories are very highly consolidated. Having said that, most of the listed players across the spectrum in FMCG are market leaders in their respective categories. Realistically speaking, we do not really see a risk to the listed space. But yes, the number three, four, five, retail brands in most categories might actually have an issue.How do you see the valuations evolving in the FMCG space? Would we see some corrections given the kind of consolidation that we are already beginning to see?Before I comment on valuation, I want to make a small point. Whenever we talk about modern trade and ecommerce, it is mostly seen through the lens of disruption for FMCG, but the reality is that in a large market like the US, share of modern trade is very large. The evolution had probably started 50-60 years back. Let us say take the case study of Walmart and Procter & Gamble. One-third of Procter & Gamble”;s US revenue comes from one customer which is Walmart. 15% of their overall revenue probably comes from this one customer globally. So the big picture that we have observed is that because of the premiumisation benefits, because of the fact that they actually get a better shelf space because of the supply chain configuration integration due to data sharing, particularly on the frontend, P&G probably has a higher margin through this channel than the rest of what they actually get. It is not necessarily a threat and it is actually an opportunity as well for the well run large players actually so that is point number one. Valuations are the trickiest part. As an analyst what we have been actually facing in the last five, six years is since the respect for cost of capital is very low and for any valuation metric it is extremely important to have an understanding on what your cost of capital is. What really matters at this point in time is the narrative, what really matters is earnings growth and we are reasonably sanguine on valuations. We do not really see any material correction in FMCG.

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