Consumer goods continue to drive Bangladesh Economy Sector Report May 8, 2011

Transcription

1 M M Shahnewaz Kabir Shawon Research Associate shahnewaz@bracepl.com Consumer goods continue to drive Bangladesh Economy Sector Report May 8, 2011 Bangladesh is home to the eighth largest population in the world. Despite many infrastructural problems Bangladesh has achieved steady growth in GDP. Being single dominant factor consumption accounted for 75% of country s GDP in Although the growth rate of private consumption is more volatile than GDP growth rate, it has cushioned the country s economy during recessionary pressures of and periods. Figure 1 show that, in 2009 real annual growth rate of Private consumption (5.9%) was higher than that of GDP (5.7%). Moreover, private consumption has been demonstrating a bullish trend during the period. In this report we will highlight the trends of private consumption growth. What are consumer goods? Consumer goods are final goods and services consumed by households and not used in production of other goods or services. Consumption of these goods is termed as Private consumption or Household consumption. On the other hand, public goods are final goods and services consumed by the government for the welfare of the country. The consumer goods can be divided into two heads: Consumer Staples and Consumer Discretionary. Consumer staples are goods and services that are necessary for survival and hence consumption is often independent of level of income. Examples include food, beverages, prescription drugs, groceries etc. Consumer staples are mainly goods with inelastic demand and considered as inferior goods in economics due to their negative income elasticity. Demand for consumer staples is non-cyclical in nature as they are not very sensitive to the state of economy. Hence demand for these goods is expected to be correlated with population growth and demonstrate less variability across the economic cycle. On the other hand, consumer discretionary goods and services are not necessary for survival and often dependent on the level of income. For example, Fast Food, Luxury products, Consumer Durables etc. These goods and services have elastic demand and considered as normal or luxury goods in economics because of their positive income elasticity. Demand for consumer discretionary goods is cyclical in nature and dependent of the state of economy. The demand for these goods increases when economy is booming but decreases when economy is in recessionary mood. Standard and Poor s Global Industry Classification Standard has classified Consumer Discretionary sector into 5 in industry groups: a. Automobiles & Components: Two industries under this industry group are Automobiles and Auto Components. b. Consumer Durables & Apparel: Three industries under this industry group are Household Durables, Leisure Equipment & Products and Textiles, Apparel, Footwear & Luxury goods. c. Consumer Services: Two industries under this industry group are Hotel, Restaurants & Leisure and Diversified Consumer Services (Education, and other Specialized Consumer Services.) d. Media: This industry is consisted of Advertising, Broadcasting & Cable TV, Movies & Entertainment, and Publishing. e. Retailing: This industry group is divided into four types of retailers: Distributors, Internet & Catalog retail, Multiline Retail and Specialty retail. Figure 1: Real Annual Growth Rate 0.0% -1.0% According to the database of Registrar of Joint Stock of Companies and Firms (RJSC) there are 5691 companies involved in the consumption discretionary business. There are 3,615 apparel and accessories manufacturing companies, 59 Source: Registrar of Joint Stock of Companies, Bangladesh fast moving consumer goods (FMCG) producer, 44 footwear companies, 52 furniture companies, 22 jewelry companies, 164 hotel and restaurants and 489 education companies listed in Registrar of Joint Stock of Companies, Bangladesh. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% GDP Source: World Bank Database Private Consumption Table 1: Number of Companies making consumer discretionary products Sub-Sector Number of Companies Education 489 Hotel And Restaurants 164 Radio and TV Broadcasting 70 Tourism 95 FMCGs 59 Footwear 44 Furnitures 52 Jewelry 22 Automobiles 74 Ceramics 49 Apparels and Accessories 3,615

2 Consumption Pattern in Bangladesh Table 2: Average monthly Income and Consumption Year Income Consumption Expenditure Ratio Rural % % CAGR 5.9% 6.0% Urban % % CAGR 7.4% 6.7% Source: Bangladesh Bureau of Statistics Table 3: Breakdown of Consumption Expenditure in percentage of total Year Food and beverage Cloth and footwear Source: Bangladesh Bureau of Statistics Housing and House rent Fuel & Lighting Misc. Expenditure Rural Urban Household consumption, also known as private consumption has been supporting steady growth of this country s economy for quite a long time. Historically private consumption ranged from 83% to 75% of GDP. In 2009 private consumption stood at BDT 4,589.4 billion which is 75% of GDP. The real annual growth of private consumption (5.9%) in 2009 was higher than that of GDP (5.7%). Since the growth of GDP and private consumption is highly correlated, private consumption is expected to grow steadily with the growth of GDP. Household Income & Expenditure Survey (HIES) conducted by Bangladesh Bureau of Statistics (BBS) in 2005 depicts average household income and consumption (Table 2). During the 1984 to 2005 period, CAGR of income and consumption in urban areas were 7.4% and 6.7% respectively. In the same period, CAGR of income and consumption in rural areas were 5.9% and 6% respectively. In 2005 consumption to income ratio stood at 88.4% in rural areas and 79.5% in urban areas and consumption to income ratio increased in rural areas while it declined significantly in urban areas. So, consumption grew at a rate faster than income in rural areas while the opposite is true for urban areas. From the breakdown of the consumption expenditure it is apparent that, expenditure on food is declining in both urban and rural areas but in rural areas still majority of income is spent on food and beverages (Table 3). In 1984 average monthly expenditure on food items for rural families was 66.70% while it declined to 58.50% in Meanwhile it was 56.70% for urban families in 1984 and declined to 45.20% in The breakdown of non-food item shows that percentage spend on clothing and footwear is waning while percentage spent on housing and fuel is more volatile but stable in both rural and urban areas. Housing and house rents however is much higher in urban areas compared to rural areas. Also expenditure on miscellaneous other categories are rising with increase of income over the years.

3 Comparison with other countries Table 4 shows that Bangladesh has low GDP per capita (1,572 international dollar measured in PPP terms), low per capita consumption of electricity, energy and cement. Also Bangladesh has very high population density (1,127 person per square km), and moderate population growth (1.29%). Median age (23.5 years) of Bangladesh population is quite low which means a relatively younger population. But, private consumption as percent of GDP (75%) is very high in Bangladesh compared to other countries and only below Pakistan (80%). And Gini Index (33.4) of Bangladesh is low; only above Pakistan (30.6). The level of Gini index shows equitable distribution of wealth among total population which implies more purchasing power of the mass people. Table 4: Comparison with other countries Per capita GDP (PPP) Private consumption (Internation al Dollar) as % of GDP Per Capita Electric Energy consumption (watt/year) Per Capita Energy consumption (kgoe/year) Source: UN, Wikipedia, CIA, CMAI, BCMA, PCMA, VCMA, Vharatbook.com, LBS Per Capita Cement consumption (kg/year) Population Density (sqr-km) Population Gini Country Median Age Growth Index India 3, % Pakistan 2, % Sri Lanka 5, % Bangladesh 1, % 1, Vietnam 3, % Malaysia 14, ,318 N/A % Figure 2: Age Distribution of Population Factors affecting consumption 65+ years, 3.50% 0-14 years, 32.90% Consumption is dependent on many factors including the level of income, marginal propensity to consume, marginal propensity to save, inflation rate, credit availability and many other demographic and social factors. Source: Wikipedia years, 63.60% Figure 3: Gender Distribution of Population years years 65+ years Age and Gender Distribution The population of Bangladesh is dominated by youth ages with median age of 23.3 years and average life expectancy at birth of 64.5 years. According to 2009 data (Figure 2), 32.9% of Population is between 0 to 14 years while 63.60% of population is between 15 to 64 years. Only 3.5% of population is aged 65 years or more. The male-female distribution is almost equal in all the age levels (Figure 3). A younger population depicts there will be strong demand for goods like tobacco, fast food, apparels, and consumer durables such as household electronic products. Male Female Source: Wikipedia

4 Figure 4: Urban Population Urban population (% of total) - LHS Source: World bank Urban population growth (annual %) - RHS Increasing Urban Population Total population of Bangladesh is million (July 2010 estimate) which is growing at a rate of 1.29%. Although the majority of the population in Bangladesh live in rural areas, the urban population is rising steadily. In % of total population lived in urban areas which have increased to 27.62% in 2009 (Figure 4). Although the growth of urban population is slowing down it is still higher than 3%, while the growth rate of total population is only 1.29%. Due to the rapid urbanization joint families are decreasing in number and nuclear families are gaining popularity. This trend will increase demand for housing, construction materials, transportation, recreation etc. Expanding Labor Force Figure 5: Labor Force Growth Rate 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Population Growth Rate Labor Force Growth Rate Source: World Bank Database Figure 6: Age Dependency Ratio Age Dependency Rtatio % 80.00% 60.00% 40.00% 20.00% 0.00% Age Dependency Rtatio Source: World Bank Database Historically the labor force of Bangladesh has been grown annually at a rate faster than the country s population growth rate (Figure 5). In 2009 the growth rate of labor force was 2.42% while the total population growth rate was 1.38%. The age dependency ratio declined from 85.42% in 1990 to 54.66% in 2009 (Figure 6). This decline in age dependency ratio implies that the ratio of working age population (between 15 to 65 years) is increasing at a faster rate compared to population unable to work (below 15 years or above 65 years). Also the female participation in the labor force is increasing. Although Agriculture accounts for 20% of the country s GDP, almost 50% of the labor force of the country is employed in agricultural sector. But rapid industrialization is attracting more labors in the industrial sector. As a result, minimum wage level has increased. These changes in the labor force has increased purchasing power of mass people. Demand for house hold electronics, ready-made food, day care center, homes for elderly, recreation, housing etc. will surge due to more participation in the labor force. Increasing Literacy Rate The literacy rate in Bangladesh has been very low. In 1990 literacy rate of adult population was only 35% and literacy rate of adult male and female was 44% and 26% respectively. But the literacy situation is improving fast and in 2009 literacy rate of adult population was 56% while literacy rate of adult male and female increased to 61% and 51% respectively. Primary school enrollment is more than 95%. Enrollment in secondary and tertiary levels are improving as well. More literate population will have different consumption pattern and will consume more of fast foods, IT products and other consumer durables. Rising Middle Class A growing labor force along with increased literacy rate is improving gender equality and further development of literacy of the population further. With the rise of gender equality women will have better bargaining power in the consumption decision in the family. Women are more likely to purchase goods for their household and specifically for their children. So the consumption of food, healthcare, education, childcare, consumer durables will increase. Also demand for financial products will increase as women are expected to save more. Changing Lifestyle Globalization, Information Technology and Mass Media along with many other factors are changing life style of this life. Culture of

5 Figure 7: Turnover of AMCL Western countries are affecting consumption pattern of this country s population. For example, fast food shops are gaining immense popularity in both urban and rural areas. World famous franchises like KFC, Pizza Hut, Nando s have already entered Bangladesh market. In terms of apparels and footwear people are becoming more conscious about fashion which is increasing demand for branded apparels. Consumption of consumer products Turnover (BDT mn) Source: Annual report of AMCL Now we will look at consumption trend of certain goods and services. Since total consumption data is not available, as a proxy, we will look at turnover and production in the last five years of certain market leaders in the respective sector. Packaged Food Agricultural Marketing Company Ltd (AMCL) is market leader in packaged food in local market of Bangladesh. They produce packaged foods and beverages. Figure 7 shows the revenue figure of AMCL through the last few years. Table 5: Operations statistics for Local Operations of Bata Shoe Total Shoe (mn pairs) 26,174 29,634 31,163 28,568 31,425 Sales (BDT mn) 2,913 3,698 3,806 4,408 4,765 Source: Annual report of Bata Shoe Footwear Bata shoe is the market leader in Bangladesh footwear market. Table 5 shows total shoes and breakdown of shoe production of Bata for 2005 to 2009.They have grown their total shoe sales steadily. Table 5: Telecommunication Usage Total Subscriber (in mn) Subcriber of GP (in mn) ARPU of GP Source: BTRC, Grameenphone Annual Report Telecommunication Bangladesh has experienced a huge growth in mobile phone subscriber in recent years. Table 6 shows total subscriber number over periods and as a case study ARPU (average revenue per user), AMPU (Average Minutes per user) and total subscriber of country s leading telecommunication company Grameenphone. Presently there are six telecommunication companies with one public company in Bangladesh market. Due to decrease in call rates ARPU is falling over the years.

6 Table 6: Operation statistics of BAT Bangladesh Production (mn sticks) 20,906 22,441 21,271 23,649 24,701 Sales (mn sticks) 21,291 22,336 21,332 23,438 24,725 Turnover (mn BDT) 9,261 11,025 11,933 14,030 17,576 Source: BAT Bangladesh Annual Report Tobacco Figure 8: Turnover of Marico and Reckitt Benckiser in Bangladesh Table 8 shows statistics for British American Tobacco Bangladesh (BATBC), the largest premium tobacco producer of the country. The steady growth of tobacco sales of BATBC demonstrate rising demand for tobacco. Tobacco consumption is increasing due to young and urban population FMCG Figure 8 demonstrates total revenue of two FMCG (fast moving consumer goods) companies of Bangladesh. Marico produces different types of coconut oil and soap while Reckitt Benckiser focuses on toiletries, pharmaceuticals and foods. Both of them strong growth in revenue and in particular Marico has seen exponential growth in their revenue figure. The revenue growths of these companies are expected continue for quite some time. Marico (BDT bn) Reckitt Benckiser (BDT bn) Source: Mario and Reckitt Benckiser Annual Reports Table 8: Number of Registered Automobiles Motor Car 136, , , , ,503 Jeep/Wagon/Microbus 61,381 67,031 73,568 82,595 90,635 Motor Cycle 440, , , , ,933 Others 294, , , , ,826 Total 932,785 1,054,057 1,198,476 1,343,719 1,504,897 Source: BRTA Database Automobiles Table 8 shows total number of automobiles in Bangladesh according to BRTA (Bangladesh Road Transport Authority) database. Number of motor car and motor cycle has grown steadily which proves increased purchase of automobiles by households. Number of buses has remained stable. That is public transport has not increased in the last five years. Consequently, demand for auto rickshaw has peaked and resulted in rise in their number. Conclusion The demographic, economic and social factors predict a rise in consumption of discretionary items in future. Also from the data of consumption of certain discretionary items provides further evidence to the data. That being said, we expect to see steady growth in the companies producing consumer discretionary goods for quite some time.

7 IMPORTANT DISCLOSURES Analyst Certification: Each research analyst and research associate who authored this document and whose name appears herein certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe. Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, BRAC-EPL may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which BRAC- EPL is registered and any distribution outside those jurisdictions is strictly prohibited. Compensation of Analysts: The compensation of research analysts is intended to reflect the value of the services they provide to the clients of BRAC-EPL. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to specific corporate finance transaction. General Risk Factors: BRAC-EPL will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks that can impact future operational and financial performance: (1) Industry fundamentals with respect to customer demand or product / service pricing could change expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes; (3) Unforeseen developments with respect to the management, financial condition or accounting policies alter the prospective valuation; or (4) Interest rates, currency or major segments of the economy could alter investor confidence and investment prospects. BRAC EPL Stock Brokerage Capital Markets Group Aminul Haque, CFA Head of Capital Markets amin@bracepl.com Md. Monirul Islam, ACA Research Analyst monirul@bracepl.com Parvez Morshed Chowdhury Research Analyst parvez@bracepl.com Ali Imam Investment Analyst imam@bracepl.com Asif Khan Investment Analyst asif@bracepl.com Khandakar Safwan Saad Research Associate safwan@bracepl.com Aasim Tajwaar Matin Research Associate tajwaar.matin@bracepl.com Shahnewaz Kabir Research Associate shahnewaz@bracepl.com BRAC EPL Research WW Tower (7 th Floor) 68 Motijheel C/A, Dhaka-1000 Tel: Fax: research@bracepl.com