The Hindu Business Line : FMCGs: The return to growth

And returning growth was only part of the story. The marketplace also saw evolutionary changes — a shift towards premium products, the rise of modern trade and a pick-up in acquisition activity by firms.

Back to growth

The market for FMCG, which tentatively revved up in the second quarter of 2004, moved decisively into a higher gear in 2005. The overall FMCG market expanded by about 5 per cent in 2005 — not an impressive number, but a sea change from the shrinking market of the preceding years. Rising demand from young and newly-affluent urban consumers contributed to healthy growth in the urban centres through the years. But demand for FMCGs also picked up from the rural hinterland in the second half of 2005, with the rural market expanding by 2-3 per cent, after shrinking for several years in a row.

Not all categories of FMCG benefited equally from the renewed consumer appetite. Categories associated with "lifestyle" or "wellness" clearly did better than those that are seen as mere groceries. Within home and personal care, shampoos and skin care raced ahead at double-digit growth while soaps and detergents chugged along in the sedate single digits.

The foods category, after failing to live up to its promise for so long, also showed signs of life. But again, high-end products such as instant coffee, processed foods and fruit juices did vastly better than branded atta or packaged tea.

Trading up, instead of down

Across categories, there was evidence in 2005 that consumers were shedding their earlier thriftiness and are now willing to spare more of their wallet to FMCG purchases. For one, consumers seemed to take small increases in selling prices of FMCGs in their stride. This helped players abandon a price-oriented strategy and push through marginal price hikes on products such as shampoos and detergents, which saw bitter price wars the previous year.

Second, consumers also seemed willing to experiment with new high-end FMCGs. Reflective of this trend, low penetration categories such as hair colour, conditioners, liquid detergents and men's cosmetics showed new buoyancy. Surprisingly, rural consumers also seemed to be in the mood to uptrade to higher priced products. Toothpastes grew while tooth powders shrunk, and shampoos grew more in the rural markets than in the urban ones.

The new-found appetite for premium products also found replication at the distribution end of the business. Modern trade, in the form of department stores and supermarkets, garnered a larger share of FMCG sales from the mom & pop stores. An estimate by AC Nielsen says that modern trade now accounts for close to 3 per cent of all FMCG sales in India and 9 per cent of FMCG sales originating in the metros.

The pace at which the revival unfolded probably surprised many of the players in the industry. However, after aggressively expanding their manufacturing capacities and relocating them in tax-free zones over the past two years, the market leaders were well-prepared to make the most of resurgent demand for FMCGs. In fact, with a larger proportion of their output now coming from tax-exempt products, large organised players managed to level the playing field with regional competitors. Through the year, in categories such as detergents, shampoos and toothpastes, the top two players gained market share from the regional brands.

Constructive adspend

As the year progressed, players also stepped up their brand-building efforts and redoubled launch activity. Leading listed companies in the FMCG space have expanded their ad budget by between 25 and 40 per cent in the September quarter and adspends are now expanding at a much more rapid pace than sales.

Unlike the earlier years, when a chunk of the adspend was redirected into brand-sapping promotional offers and freebies, this year saw a slew of new product launches and brand extensions. Players attempted some genuine innovation after a long spell, rolling out products that are new to the Indian market. ITC's foray into the processed foods market with Sunfeast Pasta, HLL's rollout of the Hairnext range of hair sprays and conditioners, Marico's Saffola food supplements and Dabur's low-sugar Activ range of fruit juices are some examples.

Desis catch up

This was also a year in which the desi FMCG companies decisively caught up with the MNCs on the stock markets, managing to command similar valuations. Recent operational restructuring helped companies such as Godrej Consumer, Marico Industries and Dabur India post growth rates that were superior to the MNC counterparts. Many of these companies have also managed to retain their market share in intensely competitive categories.

They have also been active participants in the M&A wave that is once again rearing its head in the FMCG space. 2005 saw three large acquisitions in the FMCG space and each of these was engineered by a homegrown company. Dabur India acquired Balsara Hygiene Products, Godrej Consumer sewed up a deal to buy the UK-based Keyline brands and Tata Tea acquired the US-based specialty and herbal tea marker, GoodEarth Corporation.

What does 2006 portend for the FMCG market? With income levels heading northwards, a substantial addition to the young workforce, consumer confidence in fine shape and several new brands and products on shelves, the new year could well deliver better growth rates than this one.

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