TBC Capital: FMCG Sector will exceed GEL 9.4 billion

TBC Capital: FMCG Sector will exceed GEL 9.4 billion

TBC Capital: FMCG Sector will exceed GEL 9.4 billion

The FINANCIAL – TBC Capital has presented a second investment analysis on the FMCG sector for food and Fast-Moving Consumer Goods, intending to review the current market situation and the development potential of the sector, alongside companies and potential investors. According to the survey, by the end of 2019 the FMCG sector will exceed GEL 9.4 billion, of which organized players - branded trading networks, will occupy 28% of the market, which exceeds the 2016 figures by a staggering 10%.

Expenditure on the Fast-Moving Consumer Goods for the local population is projected to reach GEL 8.1 billion by 2019, while direct spending on tourism and restaurants will reach GEL 1.3 billion over the same period.
“Our research provides a good basis for identifying the growth potential for the sector. We predict that sales of organized players will increase to GEL 5.5 billion over the next five years, a staggering 13% increase in organized market share with more than 600 new stores for consumers. If in previous years the expansion of the major players mostly occurred in the capital city of Tbilisi, now we predict that the organized market will become more concentrated in the regions, driven by increased tourism and high activity during the summer,” stated Tornike Kordzaia, Head of TBC Capital Studies.
TBC Capital is an affiliate of TBC Bank and a licensed company providing investment banking services to its customers. Since 2017 TBC Capital has become a part of TBC Bank’s corporate and investment banking business.
The main business areas of the company are: financial consulting and credit rating services, bond and stock issuance, investment research and brokerage activities.


FMCG MARKET IN 2019: MARKET REVENUE IS INCREASING

FMCG sector expected to reach GEL 9.4bn in 2019. FMCG sector revenues increased substantially to GEL 8.8bn in 2018, up by 13.4% y-o-y and are expected to reach to GEL 9.4bn in 2019, +7% y-o-y. TBC Research estimates sector revenue by adding direct domestic and tourism FMCG expenditures and restaurant food expenditures.
FMCG sector growth surpassed our previous estimates by 0.6bn in 2019. Higher inflation and increased tourism spending contributed to increased market revenue, +7% compared to our previous estimate expected at GEL 8.8bn in 2019.”
Domestic FMCG expenditures growth is driven mainly by higher purchasing power and increased inflation, for 2017-2019 years with population broadly unchanged over that period. Domestic FMCG expenditures were up by 9.2% to GEL 7.6 bn in 2018. It is further expected to grow by 7.6% y-o-y and reach GEL 8.1bn in 2019.
Tourist spending on FMCG likely stagnant in 2019, following the general expectation of a low-single digit decline in tourism inflows to the country y-o-y. Tourists spent GEL 728mln on FMCG in 2018, accounting for 8% of total sector revenue. Revenues in this segment displayed substantial growth (+82% y-o-y) in the same period. The per-capita daily tourist spending in restaurants in 2018 was GEL 51, 2x higher than the food and drinks spend outside restaurants (GEL 24).
Restaurants’ share in FMCG spending is stable at 6% of total sector revenue, with spending increasing to GEL 520mln in 2018 (+16% y-o-y) and GEL 590mln5 (+13% y-o-y) in 2019. Restaurants support the FMCG trade by purchasing food products from FMCG sellers. Total restaurant turnover was GEL 1.2bn in 2018.

ORGANIZED MARKET: SUSTAINED SOLID GROWTH

The organized FMCG market sales grew 27% y-o-y to GEL 2.1bn6 in 2018. Growth is expected to sustain in 2019, leading to the GEL 2.6bn of organized market sales in the same period. The Organized market high growth in 2017-2019 years was largely driven by gaining market share from unorganized retailers, considering that overall market displayed 10% annual growth in the same period.
Retail Group is expected to be the fastest growing player in 2019. The retailer entered the market in 2018 and sales reached GEL 69mln in the same period. Following the expansion strategy of the organized market regional player its number of stores exceeded 100 in 2018. TBC Research expects that the retailer y-o-y sales growth will exceed 100% in 2019.
Sales annual growth for market leaders Carrefour and Nikora Trade was high in 2018, comprising 22% and 29% respectively. But Ori Nabiji closely follows the market leaders and its sales growth (+38%) was higher in the same period.
Franchise stores boost sales of organized player SPAR. Sales y-o-y growth of retailer in 2018 reached 50% (16% excluding franchise stores). The retailer strategy of increasing franchise stores is expected to continue in 2019.
Organized market share of top 4 players decreased by 4 p.p. to 62% in 1H 2019 for the two year period. Carrefour and Nikora Trade are leading the FMCG market by sales. Joint market share of those retailers was 40% in the 1H 2019.
The concentration of organized retailers’ stores in Tbilisi is expected to decrease from 77% of the total in 2017 by 17p.p. to 60% in 2019. Number of stores of selected Georgian FMCG retailers were up by 55% y-o-y to 768 in 2018 and is expected to exceed 1,000 (+21% y-o-y) in 2019. New store openings in the regions (+260) is expected to surpass the new store openings in the capital (+173) for the two year period in 2017-2019.
Top players are expanding more slowly to the regions, compared to the overall market. Concentration of number of stores in Tbilisi of Top 4 players by sales is expected to decrease by 8 p.p. to 78% in 2019, compared to 2017. This is less than the overall market shift, but we expect that it will be accelerated in the following years, considering low concentration in the regions. Also, one of the main regional players, Daily started to operate under SPAR franchise from 2018.
Wholesale trade format of the retailer JIBE Cash & Carry could be interesting strategy for other retailers. Jibe Cash & Carry mainly operates in the regions with the main focus on wholesale trade. According to the company financials, retail trade accounted to only 18% of total sales in 2018. Sale of the products is carried out directly from the wholesale warehouse and the main customers are legal entities.
Fresco and Goodwill cooperate with Clean House10 to increase the offered product varieties to its consumers. Clean House is a non-food retailer which concentrates on housekeeping goods. The retailer operates 82 stores and generated GEL 78mln sales in 2018.

Average sales per square meter of selected Georgian FMCG players increased by 6% y-o-y to GEL 12,006 in 2018, but is expected to somewhat decrease to 11,446 (-5%) in 2019. This is below the same parameter in the EU, the Baltics and the UK but exceeds the same parameter in neighboring peers - Russia and Turkey. The general increase in purchasing power and price levels in the country underpin the growth of sales per square meter, but the expansion in the regions with the lower purchasing power and smaller population density depresses the country’s average.

THE DRIVERS OF FMCG MARKET AND 2019-2023 FORECASTS

Price hikes are expected to slow down in the future. Prices on food and non-alcoholic beverages were up by 5.7% in 2018 compared to 2017, and grew further by 4.4% in 10 months of 2019. Excise tax hikes are responsible for the sharp increase in prices on tobacco and alcoholic beverages (+17%) in the same period. Considering National Bank of Georgia (NBG) long-term target inflation rate of 3% and the elimination of excise tax base-line effect, the price growth will be relatively moderate in the future.
Higher urbanization and decreasing unemployment will drive FMCG consumption. Average wages amounted to GEL 1,068 in 2018, up by 7% y-o-y. More rural subsistence farmers are moving to urban areas and entering the formal employment market. Share of hired employees increased 1.5 p.p. y-o-y to 51% in 2018, accompanied by the higher urbanization rate of 58.7% (+0.3 p.p.), in the same period.
Urbanization rate in Georgia is expected to increase to 60% by 2024. According to the UN11 , 55% of the global population lives in urban centers, and this share is expected to grow to 68% by 2050. Urbanization rate in Georgia reached 58.7% in 2019, close to the world average but below most of the neighboring and EU countries. Increasing urbanization and higher population densities creates opportunity for FMCG retailers to substitute unorganized market.
Going forward, government policies are expected to promote more inclusive growth by increasing retirement pensions and other social benefits to low income populations. The resulting reduction of inequality should create additional opportunities for the FMCG sector as even though the FMCG retail is generally non-cyclical, the marginal propensity to consume is higher among low-income individuals.
More consolidation is observed on developed markets worldwide. The share of organized retail stands at 8% in India, 20% in China with the share of the unorganized retail market decreasing as the wealth of the country rises. The share of organized retail in the US stands at 85%, at 89% in Japan and as high as 92% in the UK. The share of organized FMCG market has been growing in Georgia from 18% in 2016 to 24% in 2018. It is further expected, that this share will reach 28% by the end of 2019.
The estimated benchmark for organized FMCG market penetration in Georgia by 2024 is 41%, a projection based on the regression analysis of the share of organized market against the GDP per capita (PPP) of Georgia and other developing and developed countries. To achieve this benchmark, the organized FMCG market should increase by 16% CAGR over the next five years, which is slower than the 28% annualized growth of the organized market in 2016-2019 years. Slowdown of the organized market growth is expected with the increased market penetration of the later.

"We expect the overall FMCG sector revenue to grow by 7% per year for the next five-year period. Three key drivers underpin our projections: Population is expected to sustain the current consumption growth of 5.8%, explained by the higher prices and increased purchasing power. High growth in tourism inflows will continue to support FMCG demand. Over the forecast period, we expect annual average growth in tourism inflows at 13.9%. Restaurants’ annual spending on FMCG is projected to continue growing by 14% annually", TBC Research said.
The FMCG retailers are pushing into more populated areas, as they compete for market share by attracting more customers. 43% of Georgia’s population, circa 1.6mln people, live in four major cities: 1.2mln in Tbilisi, 166,000 in Batumi, 138,000 in Kutaisi, and 128,000 in Rustavi. During 2013-2019, population in those cities increased by 5.7% .
The number of unorganized FMCG retailers decreased by more than 20% for the last four years. Number of active organizations involved in the FMCG sale decreased at four-year CAGR of 5% to 15,508 as of October 2019. During the ten months in 2019, the 0.8% y-o-y increase in number of active FMCG organizations was observed, which could be attributed to the tendency of unorganized FMCG retailers officially registering as legal entities – a step towards the formalization of the market.
Selected organized retailers sales/sqm in Tbilisi is on average 12% higher, compared to the country average in 2018. The average household spending on FMCG in Tbilisi is estimated at GEL 8,776 in 2019, 14% above the country average of GEL 7,726. Among Georgia’s regions, household spending in Adjara and Kvemo Kartli is relatively higher, partially explained by higher urbanization in those regions, 57% and 44% respectively.
FMCG sector revenue in Tbilisi exceeded GEL 3.5bn in 2019, +540mln compared to 2017. Tourism boosts FMCG expenditures in the regions. In two most visited regions after Tbilisi, - Adjara and Mtskheta-Mtianeti, tourism spending accounted for more than 14% and 33% of total FMCG expenditures, respectively. This can also partly be explained by the low domestic consumer base in these regions. Overall, tourist direct FMCG expenditures in the regions is estimated at GEL 400mln.
Share of organized retail in regional FMCG spending is expected to increase by 7 p.p. from 2017 to 12% in 2019.
For now, Tbilisi is still leading in this respect, as the market share of selected organized FMCG retailers here is estimated at 54% of total FMCG expenditures.

CONSUMER TRENDS: SLOWLY BUT MOVING TO CARD PAYMENTS

Consumers becoming more comfortable with cashless payments in FMCG. Cashless payments in the FMCG sector is estimated to reach 15% of total by the end of 2019. Mostly due to the higher share of e-payments in the organized market, which is expected to increase from 22% in 2017 to 32% in 2019. Additionally, the average card payment tickets size has decreased by 5% y-o-y to GEL 13 in the same period, indicating more frequent and day- to-day usage of the cards.
FMCG shopping pattern displays sharp increase in December. Number and volume of consumer e-payments in the FMCG sector in December were on average 33% and 31% above average monthly growth rates in 2017-2018 years.
Household expenditure pattern remains broadly unchanged for the last two years. During the 10 months of 2019, the average households spending amounted to GEL 1,500 per month, and food, beverages & tobacco accounted to 37% of total expenditure, 1 p.p. higher, compared to 2017.

FINANCIALS: ORGANIZED MARKET EXPANSION DEPRESSES PROFITABILITY IN SHORT-TERM

Total assets of selected Georgian FMCG retailers is expected to reach GEL 600mln17 in 2019. The selected FMCG retailers’ assets grew by 19% y-o-y to GEL 490mln in 2018 and new store openings is expected to further increase total assets by 20% y-o-y in 2019.
Organized FMCG market expansion in Georgia increases average payable days and creates pressure on Current ratio. Current ratio stayed the same (0.5) during 2017-2018 years, lower compared to the organized retailers in different countries. It could be explained by the fact that the industry is in the growth stage, which is financed partially by the high average payable days, which sustained the same level at 74 in 2018, compared to 2017.

ORGANIC GROWTH VS M&A: ROOM FOR BOTH IN GEORGIA

The M&A appetite among the retail companies is at its highest level in nearly a decade worldwide, according to the EY’s Global Capital Confidence barometer, as 71% of executives in retailers assume their company will actively explore M&A possibilities.
Mergers and acquisition landscape is quite active in CIS. January 2019 saw announcement of the merger of three Russian retailers: Dixy, Red & White and Bristol, which formed the third-largest retail chain in Russia, DKBR Mega Retail Group, with 13,000 stores and expected revenues of USD 9.8bn per annum. The deal poses a challenge for X5 and Magnit. In April 2019 Magnit announced a USD 1.8bn bid to acquire the smaller competitor, Lenta, but the deal did not go through. In January 2019, retail network of Kazakhstan, Magnum Cash & Carry, acquired Realist.

E-COMMERCE IS A FOOD FOR THOUGHT

Providing a short-cut to otherwise time-consuming experience, online grocery is the fastest growing grocery channel as of today with the estimated CAGR of 17% till 202223 worldwide.
Increasing internet penetration (up from 70.1% in H1 2016 to 79.3% in H1 2019) and credit card usage (up 40.7% YoY in 9M 2019) are the two main drivers in e-commerce retail. Currently, most of the companies which deliver consumer goods in Georgia are located in the capital. Physical groceries continue being a main channel for sales, especially on developing markets like Georgia, where the growth of organized industry is still ongoing.
• Third party shopping: Companies like Glovo pick the purchases at traditional groceries and deliver them to consumers. The company partners with Supta Sakhli, Nikora and Spar. Glovo’s services are not limited to only retail, as the same Glovo serves 182 cafes and restaurants in Tbilisi and 32 in Batumi. Goodwill and Spar alongside several other retailers utilize a website momitane.ge for online delivery.
• Home delivery: Substituting the traditional grocery shopping, websites like Soplidan.ge and GreenBazar.ge are delivering the food products to the client’s doorstep. Goodwill has been operating Goodwilldelivery.ge since 2011. Spar operates the platform sparonline.ge. Online Supermarket Georgita was launched in 2018.
• Click and collect, a hybrid model where the customer picks the purchase at a physical store after acquiring the items online. This model has proven a fit with the traditional chains with a wide geographical coverage24 , although it is less developed in Georgia (available in Spar, for instance).

Online FMCG has comparatively little adoption in Eastern Europe. In Western Europe, on average less than 5% of food sales was conducted via e-commerce, with UK and France leading the grid. High YoY growth in the Netherlands is driven by the appearance of Picnic, a “Europe’s fastest growing online supermarket”.

 

BRIEF DESCRIPTION OF SELECTED ORGANIZED FMCG RETAILERS
Agrohub
The local brand with two hypermarkets in Tbilisi. Entered the market in 2016 and focuses on fresh FMCG goods, sourced mainly from small rural producers. Wholly owned by one individual shareholder.
Carrefour
The international brand, represented in Georgia by Majid Al Futtaim Group, opened its first hypermarket in Georgia in 2012. Currently operates 15 stores and employs more than 2000 people. The retailer offers private label products to its customers. In 2019 Carrefour Georgia launched loyalty program – My Club Card.”
Daily
The local supermarket chain opened its first store in 2014 and mainly operates throughout the regions of Georgia. The chain had 23 stores as of end-2017, with just one location in Tbilisi. From 2018, retailer started to operate under SPAR franchise.
Europroduct
The local brand entered the FMCG market as an importer in 2004. Currently, the company operates 12 stores in Tbilisi, with plans to expand throughout the country. The retailer also supplies imported products to other organized FMCG players; income from its distribution business exceeds retail revenues.
Fresco
The retailer was introduced in 2012. Currently operates 8 supermarkets in the capital, including the suburbs. Besides the FMCG organized market player sells other household goods and offered loyalty card to its consumers.
Goodwill
Georgia’s first hypermarket operates four stores in Tbilisi and four throughout the rest of the country. The store has a line of private label products and offers delivery of prepared foods. The retailer runs a loyalty program where customers earn points based on their purchase volume.
JIBE Cash & Carry
The local brand was established in 2010. Its main business is the FMCG wholesale trade but has also retail sales. The retailer is mainly concentrated outside the capital and total stores
Madagoni
The local brand was established in 2008 and main business line is retailing with hypermarket and supermarket store format. Currently the group has 5 stores in Kvemo Kartli (Mostly Rustavi) and three in Tbilisi.
Memo/Universami/Uni
The Tbilisi-based local brand opened its first hypermarket in 2010 and added another 5 in 2014. By the end of 2018, the retailer operated eight stores, with another two franchise stores under the brand’s umbrella.
Nikora Trade
Nikora Trade operates following branded chains: Nikora Supermarket, Sunday and Libre. Nikora was the first FMCG retailer to finance growth by issuing bonds (GEL 25 mln in 2018 and GEL 28 mln in 2019). Having expanded largely through acquisition, the chain now operates more than 260 branches countrywide. The company has a line of private label products and a customer loyalty program.

Ori Nabiji
The local brand was founded in 2009 and by the end of 2017 had 100 stores in Tbilisi and 11 in the rest of the country. Number of stores increased to 180 in 2019. The retailer has adopted a neighborhood shopping strategy.
Retail Group
A local brand that is focused on regional areas of Georgia, Retail Group started operating in 2018 and its number of stores is expected to reach 200 as of the end of 2019. The retailer’s main strategy is to compete with the unorganized market in the regions, even in the villages.
SMART
Local brand operates with 14 stores and most of them is located in the regions. Retailers changed its format from large supermarket to small convenient store, which are located near the main roads and next to the GAS stations. Retailer is planning to open 50 stores additionally in the next three years.
SPAR (Foodmart)
Supermarket chain Foodmart started operating in 2013 by acquiring two other retailers (Populi and IOLI). It then secured a franchise from international brand SPAR in 2014. Retailer increased its number of stores to 157 (including franchise stores) by the end of 2018 and are expected to surpass 270 by the end of 2019. Foodmart is planning to open its first store in Armenia under the International brand SPAR, in the same period.
Zghapari
Local brand was presented in 2006 and operated 16 stores with supermarket format in Tbilisi by the end of 2018. The retailer entered regions (Kutaisi and Zestafoni) and is planning to open new store in Batumi also by the year end 2019. Besides organic growth, retailer main strategy is to expand store chain and substitute unorganized market.

 

 


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