The Fast Moving Consumer Goods (FMCG) is a significant contributor to the economy. FMCG sector which consists of FB&T (Food and non-alcoholic Beverages (F&B), alcoholic beverages and tobacco) together with wholesale and retail trade contributes more than 30% of GDP and close to 20% of the overall employment in the country.
Sri Lanka (SL) is a consumption heavy economy with consumption as a % of GDP continuing to hover around 75% of GDP among which private spending dominates with 67.6% of GDP in 2016.
Expenditure on FB&T recorded a 5 year Compound Annual Growth Rate (CAGR) of 6.6% during 2011 to 2016. In 2015 expenditure on FB&T recorded a significant YoY growth of 17.8% in comparison to 5.6% YoY growth recorded in 2014. This was mainly due to a one off salary increase that was made in Jan 2015 for the public sector employees (17.6% of total workforce) and the single digit lower inflation that prevailed during the year. However, in 2016 expenditure on FB&T slowed to 5.8% amidst increase in taxation, currency depreciation, uptick in inflation as well as increasing interest rate environment prevailed during the year.
The expected per capita income growth in the country continues to be the key demand driver for the sector whilst population growth, reduction in income disparity and demand from the tourism sector are expected to be supplementary drivers. However, NDBS expects a slight slowdown in spending on FB&T in the short term, mainly due to the tightening monetary policy as well as increased inflation. Hence, NDBS research forecasts expenditure on FB&T to record a 5 year CAGR (2017 – 2021) of 8.1%.
In terms F&B, NDBS continues to be optimistic on the demand dynamics of dairy products such as fresh milk, yoghurt and ice-cream as well as meat products such as chicken.
Dairy
Sri Lanka is heavily dependent on imported milk based products to cater to the local demand. The total local milk production recorded a suboptimal 16 year CAGR of 4.8% during 2000 – 2016. However, 65% – 70% of the demand for the milk based products were catered by the imports.
In Sri Lanka 80% of milk based products are consumed as milk powder, followed by yoghurt (5.8%), Ice cream (4.2%) and fresh milk (2.7%) according to the household survey done by census and statistics department in 2012/13.
Further, Sri Lanka remains one of the lowest per capita milk consumption countries recording 49 litres per annum per person (which is almost 50% of the per day per capita milk consumption of 275 ml recommended by the medical research institute, that is ~100 litres per annum per person) whereas developed countries such as the UK, Australia and New Zealand record above 100 litres per capita milk consumption per annum.
In order to meet the required demand locally as stipulated by the medical research institute, the country needs to produce ~2 bn litres per annum whereas in 2016 it produced only ~18.0% (384 mn litres) of the requirement.
Despite several nutritional benefits available when consuming milk as fresh milk as opposed to milk powder Sri Lankans prefer the milk powder mainly due to the lack of availability of refrigerator facilities and prevailing higher cost of fresh milk across the country (SL has one of the lowest refrigerator penetration rate of 60% in comparison to Global average of 85%).
Yoghurt and ice cream are other two milk based products which are currently enjoying substantial demand from consumers. Ice Cream per capita consumption in the country currently stands at 2.0 litres per annum, though this is higher than the regional countries (India’s 0.18 litres and Vietnam’s half a litre) it lags behind world average of 2.77 litres/annum. According to the industry reports current supply for yoghurt is not meeting the ample demand.
Chicken
Poultry (mainly chicken) is the largest consumed meat item in Sri Lanka accounting for 78.5% of overall meat consumption according to the latest household consumption survey. Lower cost and religious beliefs amongst consumer segments are two main reasons for chicken dominating the meat segment.
Per capita chicken consumption in the country has more than doubled to 9.9 Kgs per annum in 2016 as opposed to 4.4 kgs per annum recorded in year 2005.
Though per capita consumption of the country is on par with its regional counterparts, it lags behind countries in the upper middle income category. Malaysia and Thailand per capita consumption stood at 10.0 kgs and 41.4 kgs per annum respectively in 2015.
We expect chicken consumption to further improve mainly due to expected increase in per capita income, higher nutritional and health benefits attached to white meat as opposed to red meat and expected tourists arrivals to the country. However, escalation in poultry feed (poultry feed accounts for 70% of direct cost in the production) may impact margin for poultry producers.