The Hindu Business Line : Fast moving goods again

In February 2006, Hindustan Lever Ltd, announcing its full year earnings for 2005, said it had posted an 11 per cent increase in its sales. This surprised analysts as well as investors as double-digit topline growth was way beyond the market's expectation.

The market had expected the company to return to the growth path but a double-digit increase was indeed a surprise. This was probably the first sign that the fast moving consumer goods (FMCG) market, on a downward slump for several quarters, had begun to turn around.

The challenging period for the FMCG sector when growth slowed down appears to have ended, at least for HLL, whose reliance on external factors became prominent as it ran out of growth engines in the last three years.

While most of the FMCG companies were sprinting, HLL was ambling along with difficulty, slipping mid-way as competition hotted up not only from its domestic competitors but also from imports. Additionally, cost pressures were gnawing at its margins.

At HLL, top officials were confident that the FMCG major would return to growth. While acknowledging that the market's momentum partly helped its 2005 performance, the company also believed that it would have to drive growth and invest in brands.

"The FMCG segment, which witnessed a scenario of poor or no growth in the past few years, began to change for the better, with good growth numbers posted across various categories throughout 2005," HLL's annual report for 2005 said, quoting its chairman, Harish Manwani.

"You need to drive market growth and give it sufficient amount of tail wind in your favour. Advertising and promotion spends are what convert market growth to your growth," D. Sundaram, Director - Finance at HLL had told Business Line. Almost all its categories posted good sales numbers for 2005 as well as for the first quarter of 2006.

The most critical factor that helped the FMCG turnaround was a pick-up in rural buying of conventional FMCG products - soaps and toothpaste.

This revival helped HLL the most as the other FMCG companies' presence is largely confined to the urban markets. Among all FMCG companies, HLL has the biggest exposure to the rural markets.

Operating at a much smaller level, most other FMCG companies continued growing despite the market momentum. They are also present in businesses that are much smaller in size compared to the conventional FMCG segments such as soaps.

Godrej Consumer Products Ltd (GCPL), a relatively smaller company in comparison to HLL, is into products - hair colour - where the market is still at a nascent stage. GCPL, therefore, has consistently grown ahead of the market. "GCPL's businesses have not only gone far ahead of the categories' overall growth but have also increased their share," said Hoshedar K. Press, Executive Director and President, GCPL.

Like most FMCG companies, GCPL also focused on cost management, an initiative now very much part of the corporate sector courtesy raw material price increases.

In the cost initiative process, almost all FMCG companies resorted to one tactic - shifting some of their manufacturing to tax-free zones, thereby mitigating the impact of input costs increases.

At a time when the FMCG behemoth was struggling to get its strategy right, home grown companies like GCPL, Marico, Dabur and Emami chose aggression to forge ahead. Despite the inherent risk, some of these companies have clearly chosen the acquisition route to get to the top of the heap.

Marico plans to raise Rs 500 crore to refinance recent acquisitions and finance future growth plans. Having made four acquisitions in India and overseas last fiscal, Marico now wants to have a proper financing mix. Should any acquisition opportunities arise, the company will have funds ready, Milind Sarwate, Chief Financial Officer of Marico, points out.

GCPL has also chosen the inorganic route to growth, having recently acquired Keyline brands. Dabur, which took over Balsara in 2004 in a major domestic acquisition, is intent on growing its international business. Its appetite for inorganic growth has far from ebbed.

Emami has not only gone in for innovative products (fairness cream for men) but also chosen an aggressive advertising campaign for some its products. New launches and brand extensions helped it to turn in robust numbers in its topline as well as bottomline. "Companies are expanding their geographical horizons in search of better margins," said an analyst at a domestic broking firm.

Equity analysts tracking the sector believe that the growth optimism is based on ground realities that demand for consumer goods is going to be strong over the next few quarters. Almost all FMCG companies have reported good sales for the March quarter, especially. More importantly, profit margins have been expanding, an outcome of the market dynamics as well as internal operational efficiencies employed by companies. Today, consumers are willing to experiment with new products, be it innovation or brand extension. This appetite for buying stems from the fact that disposable income of people in urban as well as rural India has gone up. "We are optimistic about the future. No doubt the market is better than what it was in the past but our strategies have also worked," said Press.

"The wallet's share for FMCG products has once again picked up. A couple of years ago people chose to buy consumer durables, luxury goods and automobiles. Having saturated their buying in that segment, they have probably moved to fast moving consumer goods, not only in urban areas but more so in rural India," the analyst said. As long as the economic growth sustains itself, leading to a rise in disposable incomes, the FMCG sector will continue to ride the wave.

Reporter Associate: Shyam G. Menon

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