The Hindu Business Line : That sweet thing

Rigid price points, rising input costs, distribution difficulties and competition ail the confectionery segment. Catalyst gets a taste of what companies are doing to get around these troubles.

WHEN South Korean major Lotte Confectionery Co trained its guns on India as a potential market for its confectionery business, it was in a quandary about how to handle the logistics a country of this size would need. After some pondering, however, the company devised a smart plan to keep a lid on costs while simultaneously reaching remote corners of this vast country. It set up operations in two ends of the country — in Chennai by acquiring the erstwhile Parrys Confectionery Ltd and in Delhi by forging a separate joint venture with the DS Group.

In doing so, Lotte appears to have tackled perhaps one of the most nettlesome issues of running a confectionery business in India — distribution. But lack of a robust distribution model is only part of the problems that ail the Indian confectionery industry. It is already battling inflexible price points; add steadily increasing input costs and more competition in the form of new overseas companies eyeing a share of the pie, and there is surely no reason to rejoice, at least for existing players! From averaging about 24 per cent growth till about three years ago, the industry is not expecting more than a 5-6 per cent sales increase this time round.

However, the industry appears to be still upbeat on revival and players are taking several initiatives to recover the magic growth numbers. On the anvil are investments by several of the companies in expanding capacities and entering new product areas in a bid to broadbase growth.

The Lotte-DS Group venture plans to pump in Rs 75 crore to set up a manufacturing plant at Solan, Himachal Pradesh, in the first phase and begin operations by December next year by launching chewing gum. Market leader Perfetti Van Melle has chalked out a Rs 200-crore investment plan over the next two years in marketing, brand building and to increase its manufacturing capacity. The company has set up its first manufacturing plant outside India, in Bangladesh, investing Rs 20 crore, and also plans to increase capacity at the two existing plants in Manesar (Haryana) and Chennai. Not to be outdone, Candico has already charted a $ 6-million investment in two separate joint venture companies in Africa and is now negotiating with potential partners in Nepal and Bangladesh besides some more African companies for forging similar ventures in those countries.

Nutrine Confectionery, the market leader in sugar boiled confectionery, is adding 600 tonnes per month capacity at its existing factory at an investment of Rs 10 crore to Rs 12 crore. It currently has the capacity to produce 2,000 tonnes of confectionery a month. It also plans to expand its range to deposit candies for which it is installing a new process line. "Today, a complete quality range of confectionery needs a deposit candy range," says Dwarakanath Reddy, Chairman, Nutrine. Meanwhile, ITC Ltd also expanded its Mint-O range recently by launching Mint-O Fresh, a cough lozenge in two flavours of eucalyptus and clove. So, even as the industry grapples with multiple issues, the main players in the fray are going ahead with ambitious investment plans.

"The challenge for the confectionery industry is to increase price realisations with better products. Also, older companies with legacy systems in place, like Nutrine, Parry (now Lotte India) and Parle, pay a higher margin to the trade that is difficult to reduce. The new entrants are working on lower margins to the trade. So, one way to increase realisations is by launching better products that give consumers more value-add," says Lotte India Managing Director N. C. Venugopal.

After a recent decision by the Government to allow sugar-free confectionery, companies, including Wrigley's and Perfetti, have been quick to grab space in the sugar-free gum market. Though a small market in India at present, sugar-free confectionery is growing at a healthy pace globally and perhaps some manufacturers could use India as a global sourcing base for such products. Unlike the world market where 80 per cent of gum sold is chewing gum and the rest bubble gum, in India it is the reverse.

Not only are companies venturing into new products to broadbase their product basket, they are also creating additional capacities in a bid to tap select overseas markets. Says Karan Gupta, Executive Director at Candico, "The objective of Candico is to become a global brand. Having consolidated our operations in the domestic market, we are going in aggressively for overseas growth - be it through joint ventures, setting up our own manufacturing facilities or expanding distribution reach."

However, even as companies have realised the need to invest further in capacity building and marketing, problems such as excessive market fragmentation due to an abundance of unorganised players remain. For several years now, the industry has been stuck at the 50 paise price point, even though inputs costs have been going up and the industry struggles to maintain this price point. As Lotte's Venugopal points out, 70 per cent of the candies sold in the country are sold as singles and to take up the price point to even say 75 paisa, coinage will be an issue. Also, the minute the organised industry vacates the 50 paise price point, there are a whole lot of fakes and counterfeiters waiting in the wings to offer similar looking brands at this price. So the industry persists as it cannot afford to vacate this price point.

Also, analysts say the confectionery market is still largely associated with products that cater to kids, unlike in developed countries where adults also form a large chunk of consumers.

Says Amit Adarkar, Vice-President at market research agency Synovate: "There could be an increase in adult confectionery, non-sugar confectionery, natural (fruit-based) confectionery and innovative formats in terms of shape, sizes and flavours in the near future. Also, the market is likely to witness increased emphasis on building loyalty, based either on taste or `acquired' habit (as in the case of breath freshener mints)."

However, the mass end is likely to be under price pressure, given that manufacture of confectionery does not involve large entry or technological barriers. The premium end (niche products, those meant for adults, breath fresheners) is likely to grow at a faster pace, he said.

Take the case of ITC, which entered the confectionery business by acquiring Mint-O from Candico and then launching "kids' " brand Candyman. While industry sources say that the brands are not generating expected growth, CEO of ITC Ltd's Foods Division Ravi Naware says: "Given ITC's strength in the convenience, Candyman and Mint-O dominate the channel in terms of shares and penetration."

Asked whether growth this year is expected to be flat for the industry, he said that as the majority of the confectionery business is at 50 paise and Re 1 price points "it is tough, given the increase in input costs and packaging material prices. The only way out is to build brands and rationalise profit margins. Also, one needs to build volumes across a balanced portfolio for sustaining the business."

One of the reasons for Perfetti Van Melle's success in India has been its ability to consolidate its position in whichever market segment it operates in. While PVM India has had to withdraw products, much like other FMCG companies, Managing Director Stefano Pelle says the experience has been rather pleasant. "Generally, it is an accepted rule that only about one new product launch in 30 is successful in our category but in India we've had a remarkably good success rate with new launches. The last major product we withdrew from this market was Brooklyn strip gum but that was a good nine years ago."

It seems the industry will have to take a leaf out of Perfetti's book to have the same measure of success. Doubtless the company had deep pockets - it is the biggest advertiser in confectionery - but it has also not shied away from investing resources in launching new products and building capacities while keeping a tight hold on margins.

Ad impact

IT appears as if the slackening growth rate of the sugar confectionery industry has had an adverse impact on this category's advertising spends as well. For the first time in the last four years, advertising spends have fallen. According to estimates by AdEx India (a division of TAM Media Research), there has been an over 11 per cent fall in combined ad spends for television and print between January and September 2004 at Rs 36.97 crore against the corresponding period of the previous year. Also, while ad spends by sugar confectionery companies on television have decreased to about Rs 35.94 crore during the first nine months of 2004 against Rs 41.19 crore during the corresponding period of 2003, those on print have seen a marginal increase.

According to AdEx, Perfetti Van Melle Pvt Ltd was the highest spender on television with 49 per cent of the total ad spends, followed by Parle Products (17 per cent), ITC Ltd (9 per cent), Nutrine Confectionery (8 per cent) and Hindustan Lever Ltd (7 per cent).

The brands that ruled television advertising during the period under review included Chatar Patar (15 per cent), Parle Smoothies (10 per cent), Alpenliebe Cream Stawberry (9 per cent), Alpenliebe Lolipop (9 per cent) and Mentos Mint (7 per cent).

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