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Tuesday, Apr 27, 2004

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FMCG sector — in a lather

Milind Sarwate

THE fast moving consumer goods sector has been in news often in recent times for the wrong reasons. It has been an island of lacklustre growth in an economy raring to go on the back of an excellent monsoon. It has seen bitter price wars, erosion of pricing power and stagnation of value on the stock market.

Is growth, then, a major issue for the FMCG sector?

A scan of the industry would show up a few exceptions, which have grown year-on-year, though the sector as whole seems to be under pressure. There could be several explanations for this:

FMCG is a typically defensive sector — with a relatively inelastic demand. Neither the sector's revenues dip when prices rise or incomes contract, nor they expand when prices fall or incomes expand. There is also a time lag between the contraction/expansion of incomes and the impact on FMCG revenues because of the `daily necessity' nature of these products; it takes time for consumers to move away or into these products. However, within a given group of FMCG products, there would be down and up trading; consumers moving from a low value for money (VFM) products sold on imagery to a high VFM products during a recession and do the reverse during revival.

In the current economic revival too, these movements will happen in the FMCG sector but with a time lag. There may be a visible impact in the coming quarters, especially in respect of companies where there is a clear movement towards providing higher value added products.

And, amid the hype of de-growth, many developments could have been missed out. The FMCG sector has acquired many new consumers through better penetration using the smaller pack or the low unit price strategy; volumes are yet to rise significantly, though.

But the real market growth could be a little better than what the research numbers show. For, Direct/Multi-level marketing, store brands and imported products are not necessarily captured by the market research agencies. And, the menace of unfair competition — counterfeiters, adulterators, etc., — could be taking away 5-10 per cent of the industry's turnover. But, yes, compared to the rest of the economy, the growth rates in the sector have not been dazzling.

Is the FMCG sector, then, losing its pricing power, because of intense competition?

One of the much-commented sidelights of economic liberalisation in India is the "emergence" of a large middle-class, and its ability to absorb many FMCG items. Such was the hype created about these factors that many players, not even in FMCG business, entered the sector with a variety of products leading to intensified competition at various points, especially at the regional levels.

With no entry barriers — in terms of technology or investments — the FMCG business seems an easy sector to get in. There have thus been many a case of a new product reaching dizzy heights of turnover in a short time, but falling by the wayside once the consumer realises that the value equation is not working out.

Although the role of the intermediary is important, especially as the influencer at the point of purchase, the consumer will go for a product that he wants, not necessarily the one the trade pushes.

Also, as the supply chain environment has improved with better infrastructure, mere availability of products at retail outlets is not going to be enough; a value proposition is needed to break the increasing clutter of products.

In some categories, such as toilet soaps, there has been little creativity and innovation, and instead a misplaced insistence on `bribing' the consumers with freebies. In such cases, the consumer have realised that the USP is just a better effective price — an effective loss of pricing power through a move away from branding into commoditisation.

Imagery and price premium is central to FMCG marketing propositions. However, that needs to be backed by a clear value add. Taking the consumer for granted does not pay; companies that "fleece" the consumer with unduly high margins may eventually be forced to compete with one another in taking price cuts!

The writing on the wall is clear: The consumer, and not the competition, is the queen!

Is there scope for the FMCG sector to get re-rated on the bourses?

Unlike other sectors, FMCG, being a defensive play, would take time to bloom in a market boom. The time lag would depend upon the magnitude and pace of the greater realisation of the potential of up-trading and movement of smarter companies up the value chain through innovation.

There are some other relevant and recent factors, such as HLL, the company with the largest market capitalisation in the FMCG industry, losing considerable value on the bourses.

This has taken some sheen off the sector. Recent hype about price wars could dissuade investors from getting into the warring MNCs as also into the affected Indian companies. Then there is the delisting of such companies as Cadbury and Reckitt, which leaves few "good" options for investors.

The trend is, therefore, likely to be in favour of companies that have not merely made brand promises, but also kept them! Thus, while the entire sector may not get re-rated, there will surely be some value picks.

Let us not forget that the price war is restricted to a few segments and there are still havens of peace left! The sector still has long-term charm!

(The author is Chief Financial Officer, Marico Industries Limited.)

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