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The dichotomy in packaged foods - Surprises & Shocks

Amidst all the sectors in the economy taking a bad beating, one sector looks poised to show a positive surprise. The one that brings you your icecream tubs, and Maggi noodles during your quarantine - packaged foods! But is that cause for optimism?

In today's post we look at the packaged food sector in India, analyze the drivers that can drive up sales and consumption, and end with the negatives that face this sector as well.

Stock -More, Eat - More

One impact of the corona virus on people's behaviour is that they are staying home a lot. A lot of the folks staying back home are young millenials with limited culinary skills often having to fall back on that pack of Maggi noodles or Sunfeast Pasta to make do. Channel checks with local grocers seem to confirm the higher purchase trend.

If unchecked, folks working from home for extended periods of time can show trends of increasing consumption (lack of formal breaks for food makes you "snack" a lot more) thereby fueling the growth of packaged food further. A certain amount of panic plays the role of the last key catalyst, driving sales further.

In light of all these factors it looks like packaged food will have a sharp boost in sales in the days to come. As analysts start speaking to the end channels future estimates will probably begin to move upwards - don't get too excited about that though.

What lies ahead

While this quarter may be a bright spot for packaged foods and stand out sharply especially given how badly the other sectors are doing, it is not necessarily a reason for cheer.

On the demand side, if this does escalate into a global recession, people begin to cut back on all non essential spend, and that includes premium packaged foods. Even today, as folks lower down the socio-economic strata lose their daily wage jobs and either migrate back to their villages temporarily or stay in the cities and consume less, the impact on the foods space will be material. It helps to know that this will still remain amongst the least hit in comparison to other sectors but hit nonetheless.

On the supply side, while the government will try to keep essential activities open despite all curfews, supply shocks from either the labour or raw material markets, as well as stability of the supply chain from factory to shop can be under stress. Analysts looking at the space will be mindful of these challenges in the future before they become too bullish based of the short term performance.

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.

Disclaimer - This is an attempt to understand the drivers in a sector better and should NOT be construed as investment advice.


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