A local kirana store: The consumers are back

There is a spring in the step of almost every fast moving consumer goods (FMCG) marketer these days. In the past two months alone, the sector's best-known company, Hindustan Lever Limited (HLL), made over half-a-dozen presentations to a clutch of blue-chip foreign institutional investors in Mumbai, New Delhi and Singapore. In contrast, there were just five such from the company's investor relations team last calendar, 2004.

Make no mistake, the feel-good factor is clearly back in the sector. After almost three years of a long, dry winter, sales growth is back in the Rs 48,000-crore FMCG sector. And it looks like it's here to stay. HLL has posted double-digit growth, after almost five years, in the past six months. Cigarette-to-hotels major ITC's two-year-old non-cigarette FMCG business grew over 87 per cent in July-September 2005, prompting the company to revise its non-cigarette FMCG target to Rs 1,000 crore, up from Rs 800 crore for 2005-06.

For the same period, Dabur India's sales are up 26 per cent and Procter & Gamble Hygiene and Health Care's 35 per cent. It's the same happy story of strong double digit growth (see Growth Is Back Across The Board), which repeats itself in most other companies such as Colgate-Palmolive India, Godrej Consumer Products, GlaxoSmithKline Consumer Healthcare, and Nestle India.

"In FMCG you don't see a sudden downtrend once a momentum has been built," says Atul Rastogi, an FMCG analyst with Mumbai-based brokerage Motilal Oswal. He is right. The growth was back, almost a year ago, although it was insignificant at just under 1 per cent; now it has blossomed into strong single digits, enveloping most categories and players (see It's Springtime Once Again For FMCG). And forget the David versus Goliath story, even the down-trading scourge of yesteryears. "The trend of the last two-three years of smaller companies gaining at the expense of big FMCG players has reversed in the last six months," says Siddhartha Roy, Economic Advisor with the Tata Group. "And consumers are upgrading to products perceived to be high-end." Even though the current growth, at 5.4 per cent for July-September 2005, is largely urban-led, it is just a matter of time before the effect of three successful monsoons start kicking in growth for FMCGs even in the rural markets (where the growth is currently under 3 per cent).

It's The Economy

A buoyant economy growing at over 7 per cent has a big role in the current upturn in FMCG sales, in terms of both volume and value. "The FMCG growth is coming back because of the overall buoyant economy," says Satish Kumar, Managing Director, Henkel Spic. In line with strong GDP and buoyant consumer sentiment (highest ever in the last three years, according to bt-Indica Research Index of Consumer Sentiment, May 2005) July-September 2005 saw the sixth consecutive quarter of positive urban growth and the third for rural growth for FMCGs.

The rural FMCG market went through a decline of 6.7 per cent in 2003, and remained in negative territory for all of 2004. The beginning of 2005 saw it picking up slowly, reaching a not-too-bad 2.8 per cent growth in July-September 2005. Urban growth touched a reassuring strong single digit only around the end of last year, coming after negative growth for 2002, 2003 and much of 2004.

"There was a long period of stagnation in FMCGs. The resurgence, though clearly visible, is slow," says R. Subramanian, md, Subhiksha, a discount food chain company based in Chennai. As the economy slumped in 2002-03 (GDP growth 3.7 per cent), the FMCG market took almost a year before the adverse impact kicked in, with growth at a negative 2.5 per cent in 2003. And even though the economy picked up nicely to post an 8 per cent GDP growth in 2003-04, it was only around the end of last calendar that any real growth started trickling in for FMCGs. So, even though the GDP-FMCG growth linkages, once again, are clearly established, there is this time lag before the sector starts mirroring the big picture (read: the economy).

Investing In Building Momentum

"A substantial part of the FMCG growth of 13 per cent (in value terms) is driven by volume growth coming out of the real income growth and the rest is inflationary, accounted by the marginal price hikes, which the sector has been able to effect this time," says Tata's Roy. This marginal price hike read together with the sector's slight dip in margins, and huge jumps in advertising and promotional (A&P) spends, is actually good news for the sector (see Higher Ad Spends Is Good News). It shows that the sector is not just content with harvesting its good fortune, because of the upbeat economy, but equally willing to invest and strive for higher growth.

Costs Down, Prices Up, Money For Growth

In a quest to lower costs, most FMCG biggies are moving large part of their manufacturing to notified backward regions (such as Assam, Jammu & Kashmir, Sikkim, Himachal Pradesh and Uttaranchal), where there is a huge, around 5 to 6 per cent, savings on excise tax. Almost half of Dabur India's production is in these tax heavens, and it is set to go up to 70 per cent by end of 2005-06. Implementation of the value-added tax (VAT) regime, across 19 states this year, has also brought raw material costs down for FMCG companies, helping them shave costs further, though there has been some cost pressure on petroleum-based inputs, such as packaging material. Analysts point out that in a buoyant, growing market, the companies have been able to pass on the inflationary cost to the consumers without sacrificing volumes or market share. This, coupled with the sector's focus on margin rich brands, sometimes at the cost of low margin brands, have had a positive impact on gross margins. The obsession with growth, though, has meant that all these savings are going into supporting an aggressive advertising & promotional stance, instead of bolstering the bottom line.

And what's important is that companies in the sector are using price hikes and cost savings, by moving large part of their manufacturing to low-tax havens such as Himachal Pradesh and Uttaranchal, to support higher A&P spends, instead of fattening their profits, a practice followed by most companies during the FMCG downturn (see Costs Down, Prices Up...). Even a highly bottom line-sensitive company such as HLL has seen its margins decline over 1 per cent and A&P spend go up by 0.6 percentage point for July-September 2005. The jump of 46.28 per cent (for July-September 2005) in Colgate-Palmolive's year-on-year A&P spend shows its born-again aggressiveness to capture a larger share of the growing business. The company's A&P spend dipped from Rs 185 crore in 2002-03 to Rs 148 crore in 2003-04, hitting a low of Rs 137 crore in 2004-05.

It is interesting to note that all these A&P spends are not just going merely to support existing brands, but also support the flurry of new launches and re-launches that the sector is witnessing after almost a two-three year hiatus. HLL has already re-launched over two dozen brands, including Annapurna atta, Red Label tea, Rexona soap, Fair & Lovely, Lux and Axe, in last nine months. For Dabur, the aggressive A&P push on recently launched products has meant around 6 per cent of sales coming from them in the first half 2005-06.

Sensing consumers' readiness to experiment and adopt new products, new launches are happening across various categories: Marico launched Parachute After Shower Hair Cream nationally around three months ago; Dabur entered the personal wash category with Vatika's brand extension into a herbal beauty soap; and fairness cream is now being peddled to men, with the Kolkata-based Emami Group splurging on a high-decibel ad campaign to support its new brand, Emami Fair & Handsome cream. GlaxoSmithKline Consumer launched Boost ChocoBlast, which promises all the energy of Boost with a chocolate taste. Nestle recently launched ready-to-cook pastes, and is developing culinary products for Indians living abroad, which it may launch in India too. "Growth in FMCGs is apparently linked to innovations, which is what we are beginning to see in all major companies, including HLL," says Nikhil Vora, Vice President (Research) at Mumbai-based brokerage SSKI. "ITC's entry into the foods category, Dabur's into non-herbal Ayurvedic space and Godrej's global acquisitions bode well for the industry."

Other Growth Drivers

New retail formats, branded services and acquisitions provide another lever for the sector to outgrow the economy, much like other consumer sectors, auto, durables, telephony and banking. Most FMCG marketers are taking a measure of modern retail format (MRF) stores such as Big Bazaar and Spencer's, which already account for around 9 per cent of all FMCG sales in metros. "MRF is critical for the success of FMCG companies. The format is playing a major role in big cities with the mall culture picking up among consumers," says Nick Massey, MD, GlaxoSmithKline Consumer Healthcare.

HLL, which claims to have already captured a higher market share in toothpaste, tea and fabric wash at MRF stores, is waiting to bring Unilever best practices in this arena. For Nestle, the most urban of all FMCG companies because of its product skew towards urban consumers, the new MRF stores represent a big opportunity. "We have created a new department, National Key Account Management Organisation, to focus on modern formats in retail," says a Nestle spokesperson. ITC is betting big on its new rural mall initiative, Choupal Sagar, as it gets deeper into the FMCG sector and looks at entering product categories such as soap, detergents, shampoo and skin creams. There are already three Choupal Sagars in Madhya Pradesh, and another 10 are close to completion.

Branded services, such as HLL's Ayush Therapy Centres and Marico's Kaya Skin clinic, are increasingly becoming critical for FMCG companies in their quest for growth. HLL is looking at expanding Ayush Therapy centres, currently numbering 18. Marico has raced ahead with its cosmetic dermatological services network of 39 Kaya Skin Clinics, and is all set to expand the network to 45 by March 2006.

With MRF's ability to support high-end products, most Indian FMCG companies are realising the need to build a portfolio of top-end brands, currently a lacunae in their stable. For Godrej Consumer, the acquisition of UK's Keyline brands means not only a foothold in the international FMCG market, but also an opportunity to bring Keyline brands to India. "The acquisition of Keyline gives us exposure to (modern) retail trade handling, which will become very necessary in India shortly," says H.K. Press, Executive Director, Godrej Consumer. And Tata Tea's recent acquisition of Good Earth, a specialty tea brand in the US, also means building scale and size to its global tea brand portfolio, which already includes UK's Tetley, back home in India. Why, even Dabur's acquisition of Balsara Home Products in April 2005, gives, at one level, a somewhat Ayurvedic-focussed company not just an entry into new product categories, but also the scale and size to compete on a more equal footing with the biggies in the sector. With so much happening in the FMCG sector right now, 2002, 2003 and even 2004 looks like a bad dream that is best forgotten.