The Hindu Business Line : The value proposition

FMCG firms are in a race with other marketers for the consumer's rupee. So they are returning to brand-building and going easy on price-offs and freebies in a bid to create sustainable growth.

M. S. Banga, the Chairman of Hindustan Lever Ltd (HLL), recently prophesied that the snail-paced growth in the Indian FMCG business would not last very long. "I am convinced that over the long term, growth in this business will be in the double digits. I cannot predict when this (acceleration) will happen. It could happen within a couple of years; it could take several. But it is bound to happen," he asserted. HLL and most players in the FMCG business hope they can successfully capitalise on an expanding working population and growing consumer affluence to pep up India's abysmally low usage level for soaps, detergents, toothpastes and personal products.

Is recent growth sustainable?

The domestic FMCG market limped back to growth in 2004, after shrinking in the preceding two years. Market growth, according to numbers from HLL, has picked up pace from 0.8 per cent in the June 2004 quarter to 2 per cent in September 2004 and further to 6.1 per cent in the previous quarter. But is this the beginning of a sustainable uptrend?

In the analysts' meet announcing HLL's full-year results, Banga identified three key factors responsible for higher demand for FMCGs in 2004. One, the aggressive action by market players to upgrade the "value" offered to the consumer. Two, the robust rural economy which has boosted rural spending. Three, Indian consumers, who have been affected by sudden changes to their spending patterns over the past 4-5 years thanks to exploding choices and easy finance, getting more used to them.

If these are the factors that have expanded the FMCG market over the past year; then the ball may be squarely in the players' court in the coming year. Some of the external factors that boosted FMCG spends in 2004 may not necessarily work to their favour in 2005.

The robust rural economy, for instance, is partly on account of a lag effect from the good monsoon in 2002-03. This, combined with a sharp upward spiral in the prices of farm products, boosted rural incomes in 2004, probably ramping up demand for FMCGs. The monsoon for 2003-04 has been far less satisfactory and many agri-commodity prices are flattening out after their sharp spiral. This suggests that FMCG spends are unlikely to receive a big boost in 2005-06 from rural spending.

Competing with new rivals

Then, there is the issue of the exploding choices for the consumer, which could continue to affect the share of wallet available for FMCG purchases. There is as yet no sign of let-up in consumers' appetite for homes, cars, durables or mobile phone purchases. Sales numbers for two-wheelers, automobiles and mobile phones continue to grow in the robust double digits. The buoyancy in tourism and air travel suggests that consumers are certainly not skimping on leisure and entertainment. In most businesses, whether it is travel, retail loans or telecom, marketers are aggressively cutting prices and expanding their distribution network to reach out to new customers.

Retail loan disbursements continued to grow at 15-20 per cent through the second half of 2004. Bankers claim these growth rates came from roping in new customers rather than from existing ones borrowing more. This means more consumers now have an EMI weighing on their paycheck, which could affect spends on categories such as FMCGs.

All this doesn't mean that the consumer cannot afford to spend a few hundred rupees more on her FMCG purchases. It only suggests that FMCG companies will have to continue competing hard with a host of unconventional rivals to persuade the consumer to spend on their products. If FMCG companies are hoping to be swept up in the demographic transition that now seems to be under way in India, so are a host of new service providers and marketers.

On the right track

But recent initiatives by the leading players in the Indian FMCG space do suggest that they have started on the right track to deal with such competition. For one, players have stopped leaning heavily on price-offs and have gone back to building enduring franchises for their brands based on product attributes. After taking deep price cuts in detergents and shampoos, HLL has been actively exploring other avenues to offer better value. It has re-formulated products such as Lifebuoy and Rin, stepped up marketing communication for skin creams and introduced affordable packs at strategic price points for toothpastes and tea.

Second, players are sharply increasing their spends on brand-building and advertising and emphasising less on freebies and promotions. The former is a healthy trend more likely to have a lasting impact on growth than the latter.

Third, for the first time in several years, players are investing substantially in expanding the manufacturing facilities. A move from outsourcing to manufacturing gives the players greater control over the formulation and quality of their products and puts them in a better position to control costs. Many of these facilities are situated in tax havens, giving players greater pricing flexibility. This shows the FMCG companies are really serious about offering better products at more realistic prices.

If these initiatives do pay off, FMCG companies could well go back to the days of robust double-digit growth of the early Nineties. And this would be more sustainable growth than one predicated on regular increases in prices by one or two dominant players, which was the key growth driver in that era.

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