The Hindu Business Line : On a growth curve

A buoyant economy and growing disposable income have presented several opportunities and challenges. The year ahead should see consumer goods companies driving the growth agenda.

AS WE go through the closing days of 2005, the Indian capital markets are at record highs. This reflects the state of the economy and our positive outlook. The broad thrust of the reforms process continues; the growth in several sectors is high.

With a GDP growth rate of 6-8 per cent, ours is the second fastest growth among emerging economies. This has clearly begun to benefit the FMCG sector, which experienced rather sluggish growth a few years ago. In 2004-05, the sector saw a 6 per cent growth.

As we see turns in economic cycles, we observe that the FMCG sector is resilient and one of the last to be affected in a downturn. Conversely, as the economy shifts into a growth phase, FMCG companies experience a lag. Higher income levels would initially lead to a spending on higher order `basics' such as white goods and mobile phones as has happened recently. These would see a level of satiation and shifts in favour of FMCG products. Here too, the initial growth will be from indulgence or impulse buys such as soft drinks and snacks before it begins to affect larger sections of the population. At this stage, the consumers begin to upgrade from commodity goods to branded products.

The economy has now reached a point in the cycle where the impact of growth is widespread. The overall economic growth has been accompanied by higher disposable incomes both in the urban and rural markets. This has thrown up several opportunities and challenges for FMCG companies.

At the upper end of the spectrum are aspirational categories with very low penetration compared to other emerging markets — indicating the possibility of fast-paced growth. Colour cosmetics, skincare products beyond fairness and male grooming items are just a few examples. Discerning consumers are willing to pay a price for superior products. These categories may continue to see several launches including the introduction of imported brands. Marketers will have to invest in establishing their brand name and, in some cases, even educate consumers on product features.

There has been a rise in the disposable income in the hands of the middle class. By virtue of the sheer numbers of this consuming segment, the demand for FMCG products has seen a significant upturn. Attitudes towards money have also been changing. Indians are more willing to take debt, and credit card usage is growing exponentially. Consumers, however, seek value for money and the challenge for companies is to ensure affordability to gain critical mass. Competition from regional players and the unorganised sector is ever increasing. FMCG companies must, therefore, find innovative ways to differentiate their products and still reduce cost.

In the less affluent segment, there exists the aspiration to use branded products that are functional. Apart from the rural markets, with increased urbanisation, there is a fairly large population of `urban poor'. Given the infrastructure issues in reaching rural India and the wide dispersal of villages in the hinterland, FMCG companies are looking at tapping households with low per capita disposable incomes, including those of daily wage earners in urban India. Several categories are offering small packs at attractive price points, learning from the sachet revolution in shampoos.

Packaged foods, which have done well in 2005, should continue to witness increased demand in the coming years. FMCG marketers would, however, have to develop innovative products that suit the Indian palate. The branded snacks category has seen fast paced growth in the recent past. The trend towards healthy lifestyles, manifesting itself in various forms of exercise, be it mere walking or workouts at the gym, has also led to less guilt associated with occasional indulgence. The branded snacks category will leverage this together with the possibility of introducing healthy snack products without compromising on taste.

The country's leadership in the ITES sector and the BPO boom have seen the rise of several young consumers, who typically live with their families and have large disposable incomes that can be spent at their discretion. You can see them at the movie theatres, shopping malls and bowling alleys, sporting a Tommy Hilfiger T-shirt and streaked hair and exchanging the latest mobile ring tones. These young consumers are willing to experiment and try out new products. Capturing insights into their needs and synthesising these into strategies and final product formats is key for FMCG marketers. This is likely to see the launch of many youth products over the next couple of years.

Retailing has experienced a revolution over the last few years. On the one hand, there are chains like Subhiksha, which are focused on greater affordability, delivered through squeezing efficiencies in the supply chain. The future will see the expansion of this concept beyond South India where Subhiksha is present.

On the other hand, we are seeing the emergence of the large modern retail format. While this comprises about 3 per cent of FMCG sales today, like elsewhere in the world, the share will increase manifold. FDI in retail is expected to be permitted in the country, which would attract overseas retailers to participate in one of the fastest growing consumer booms today.

Marketers would have to upgrade their skills in merchandising and shelf management as the open formats allow more interaction between the consumer and the products. This provides an opportunity for new brands/products to be picked up by the experimenting consumer. Companies will also leverage information technology to create supply chain synergies. For strong brands, the perceived shift in the bargaining balance may not cause great worry.

At another level, companies are keen to carry the highly penetrated categories in urban India to the hitherto unexplored urban hinterland. HLL, through its self-help group model Shakti, and ITC, through its e-choupal, had sown the seeds of direct selling in villages. The gestation periods of such initiatives are long, but they are being extended to more States. To increase the basket of products on offer, both HLL and ITC are considering carrying brands from other companies in this network. This will facilitate wide distribution of FMCG products that already penetrate deep into the urban markets. The process is likely to be slow, but a beginning has been made.

The overall likely increase in consumption seems to provide a large opportunity for FMCG marketers. The task of winning over consumers and retaining them, however, remains challenging. Constant interaction with consumers and gleaning specific insights that convert into products and product delivery is a key ingredient to successfully tap this opportunity. Cutting through the clutter of advertisements will require the communication to be that much more distinctive. Intense competitive pressure and sharper consumer segmentation make it even more challenging to create single new mega brands. Marketers may focus on building strong franchises with multiple offerings.

On the fiscal side, there were some welcome moves such as the implementation of the value added tax in many States. However, companies now have to bear the additional burden of the fringe benefit tax. But FMCG companies have taken advantage of setting up manufacturing facilities in excise-free zones and those offering income tax exemptions under 80 IC.

The year 2006 could see some restructuring of the value chain to optimise its impact to the extent not already implemented, as companies do all that is necessary to stay competitive and meet the consumers' needs. Despite the concerns over prices of crude oil, a sense of optimism prevails over the Indian industry. FMCG companies will drive the growth agenda through product launches, catering to a more sharply segmented market, a wider distribution network and acquisitions. A buoyant economy has supported a healthy topline and the margin growths in 2005. I carry this optimism into 2006.

(The writer is Chairman and Managing Director, Marico Ltd.)

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