Growth in income levels to drive Consumer and Retail industry despite near-term headwinds

Asia Securities, Sri Lanka’s leading independent stockbroking and research firm, hosted the fifth instalment of its ‘Wealth Insights’ series of investor events recently. 

The event, titled ‘Poised for a Shopping Spree’ focused on the outlook for the Consumer and Retail sector and brought together industry leaders with institutional and high net worth investors. The session’s discussion focused on unearthing deeper insights into sector dynamics that should better inform investment decisions.

The event kicked off with Asia Securities’ Consumer and Retail sector analyst Mangalee Goonetilleke, presenting highlights from the sector reports and Asia Securities’ positive outlook of the Consumer and Retail industry. Goonetilleke’s presentation concluded that the long-term growth story for the Consumer and Retail industry remained on track, despite headwinds in the near-term, due to monetary and fiscal policy tightening. She pointed to the upward trajectory in income levels as the key factor which will sustain demand in the long-run.

The presentation was followed by a panel discussion consisting of prominent industry figures; Singer (Sri Lanka) PLC Group CEO Asoka Pieris, John Keells Group President Consumer Foods Group Jitendra Gunaratne, Hemas Manufacturing Ltd. Managing Director Roy Joeseph and Nielson Sri Lanka Managing Director Sharang Pant.

Commenting on the consumer durables industry, Pieris noted that consumer durables industry is primarily driven by growth in disposable income. He pointed out that while income levels have improved, there is still demand for basic products such as refrigerators and washing machines due to low penetration levels in the country. In addition, he also noted that advancement in technology, shorter replacement cycles, and changes in lifestyles are also driving demand for consumer durables and electronics.

On consumer food, Gunaratne noted that the last three years saw a significant growth due to higher disposable income levels. Interestingly, he pointed out that at one point during this period, rural consumption levels outpaced urban consumption. He noted that, going forward, companies would need to be nimble and relevant to offer the correct product range as consumer lifestyles change. On retailing, he believes that the perception of supermarkets being high priced is diminishing, while the ability to shop in one destination is fuelling the growth of the modern food retailing space.

Speaking on the personal care space, Joseph noted that in addition to growth in income levels, the sophistication levels of the broader Sri Lankan consumer has also increased over time, creating demand for a more vast and sophisticated product range. Furthermore, growth in income levels within the rural population has led to rural households now accounting for a significant part of the personal care market demand. He also pointed out that an increased number of women in the workforce is another driving factor for personal care products across the country.

Pant shared his learnings from other comparable countries which have observed changing consumer demand patterns with income levels. He pointed out that in economies which surpasses the $ 3,500-4,000 GDP per capita income levels, one of the key trends to note is the movement towards non-essential items. While spending on food and beverages will not slow down, it will reduce as a percentage of total spending. However, as income levels rise, particularly in rural areas, consumers would move away from commodities to branded products or higher consumption of processed foods. He opined that surpassing the $ 4,000 per capita mark will also result in demand for new lifestyle trends resulting in manufacturers having to re-define their product portfolio while noting that there would be a strong pick-up in e-commerce.

Regarding increase in value added taxes, the panel noted that some of the price increases have already gone through, when it was initially implemented in May, and hence will result in minimal price increases post passing the legislation in November. Further Goonetilleke highlighted that with increase in income tax threshold levels and reduction in prices of several essential items, could show an uptick in disposable income levels for the low to mid income earners.

 Asia Securities, Sri Lanka’s leading independent stock brokerage firm, offers best-in-class research across macroeconomics and multiple sectors listed on the Colombo Stock Exchange. The ‘Wealth Insights’ series which has garnered significant investor interest, focuses on investment ideas and outlook for key sectors. Asia Securities provides the broadest reach among investors including domestic institutional, high net worth and retail, as well as foreign institutional and high net worth clients.