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Why fragmented, unorganized sectors often produce the biggest long-term winners

One of the challenges of doing business in India is the intensity of price competition. No matter what your price is, someone will under-cut you – often, by a large margin. Almost every product or service has innumerable competitors, many from the loosely defined “unorganized” sector.

The term “unorganized” generally refers to small or informal businesses, or those that don’t pay GST, or don’t comply with labour laws, or don’t keep accurate books, or don’t have clear corporate identities. In practice, everyone has their own definition, so choose whatever works for you.  

While many “unorganized” companies are fully compliant, others tend to be more adventurous and avoid or bypass compliance, taxation, minimum wages, environmental norms, and so on. This allows them to undercut taxpaying and compliant businesses – and thereby stay alive.

This competition affects all players, as everybody cuts prices, nobody makes money, and the consumer probably ends up buying inferior products. Investors are usually advised to stay away from such businesses.

However, in industry after industry, we see a gradual consolidation over time. Eventually, better companies gain market share, and derive scale benefits that enable profits at lower prices. Larger companies then can spend more on R&D, tap export markets and hire better talent. Interestingly, different industries consolidate in different periods, and at varying speeds based on their inherent market dynamics and regulation.

Policy and technology also drive these changes. New regulations like GST and RERA, or digitalization (including digital payments) have meant far greater transparency, and therefore compliance. The new labour laws will make it harder to evade non-payment of mandated employee benefits.

This formalization was and is inevitable.

What’s interesting is the opportunity it can create.

Back in the nineties, driven by generous IPO investors and the ability to import technology and machinery easily (post liberalization), a few thousand small companies set up factories to make all kinds of things, from tiles to sanitary ware to plastic bags to pig iron to sponge iron and all kinds of things in between.

After an initial period of oversupply, hyper-competition and chaos, weaker players folded while stronger ones invested in quality, branding and people — steadily gaining market share. This virtuous cycle created some big winners at the stock market – but it took many years.

Kajaria Tiles, which is today the market leader in tiles, has multiplied share value almost 50 times in the last 20 years, or a CAGR of 22%. And this is after the share has gone nowhere in the last four years! The closest listed competitor is 1/9^th their market cap.

Cera Sanitaryware has multiplied 171 times in the last 20 years (CAGR of 29%), despite falling around 50% from 2024 highs! There are many others including Pidilite, Supreme, Vardhman Textiles, etc., that grew and prospered in industries with a large share of unorganized players.  

One can pass moral judgements on consolidation, but this evolution happens worldwide, and pretty much across industries. Telecom is now a de facto duopoly. There are only four national airlines today, and one dominates with a 60% share. The same is evident in paints, automobiles, cement, banking and many other categories. In fact, in new-age sectors, the speed of consolidation is more dramatic. Just look at Zomato or PB Fintech!

So what’s the lesson for investors?

Well, very simply, some of the most attractive long-term opportunities often lie in highly fragmented, low-profit, seemingly unappealing industries.

Of course, there’s the issue of picking the winners. However, even if you’re slightly late to the party, the consolidation trend can take years, even decades, to play out. For instance, Kajaria, Cera and Pidilite could be clearly identified as market leaders by 2010 or earlier.

Technology, digitization, modern taxation and compliance norms will only accelerate consolidation across industries. If you can identify an emerging market leader in a hyper-competitive and fragmented industry, and are willing to hang in for several years, you may be on to a good thing.

Would love to hear what you think. If you can identify any such industries ripe for consolidation, do share—preferably before everyone else figures it out!