The Hindu Business Line : Fast moving, quicker growth

Sectors from passenger cars to new homes may be feeling the heat from a slowing economy, but fast moving consumer goods (FMCG), as items of daily consumption are known, still appear to be flying off the shelves. Leading FMCG companies have closed 200 7-08 with a strong double-digit growth in sales and are hopeful of sustaining these growth rates over the next year. Nor do players appear singed by the dragon of inflation, as yet, with profits in recent months growing at a much healthier pace than sales. FMCG makers seem to have adroitly balanced a frenetic pace of new launches, with judicious price increases on their products, to deliver this growth.

More players in fray

The market for FMCGs expanded by 18 per cent to about Rs 70,000 crore in the previous financial year 2007-08. Sales growth for the companies listed on the bourses surged to 16.8 per cent this year from 12.1 per cent last year. An outstanding feature of the year has been that more companies and categories participated in the growth story. Ten of the 13 listed FMCG players managed to grow their sales in double-digits this year. Gillette India, Dabur, Nestle India and Henkel topped the league tables on growth, their sales expanding by much more than 20 per cent . ITC managed a 49 per cent growth in FMCGs (excluding cigarettes). Even behemoth Hindustan Unilever pulled a rabbit out of the hat, its topline growth edging up from a modest 9.4 per cent in 2006 to 13.3 per cent in 2007, before surging further to 19 per cent in the March quarter of 2008.

Given Unilever’s width of offerings across many product categories from detergents to toothpaste, its growth numbers are a sure sign that the revival in FMCG sales has expanded much beyond small niches such as grooming products, hair colour and personal products which reported high growth in the previous years.

Though “staple” categories such as soaps and laundry grew only in the single digits, 2007-08 saw large categories such as oral care (14 per cent growth), skin creams (18 per cent) and shampoos (15 per cent) expand sharply.

Themes driving growth

So what really brought about this change of fortunes? A break-down of the numbers into individual brands and segments shows that the triggers to the FMCG revival were as varied as the brands themselves. Resurgent rural demand, aspirational spends by urban consumers, the rise of modern trade and the fad for health and wellness seem to have been the key themes underpinning the story (see accompanying article).

Finally, uptrading!

Urban consumers too indulged in their own share of splurging, with niche segments such as male grooming, hair colour, post-wash treatments and styling gels witnessing strong growth. Among the larger categories, both shampoos and skin care managed robust sales growth of 15 and 16 per cent respectively this year. Says Anil Chugh, Senior Vice-President, Wipro Consumer Care, “Urban demand was ignited by growth in tier II cities and smaller urban centres such as Nagpur, Indore, Kochi and Coimbatore attracting high investment.”

If FMCG sales outside of the urban centres were backed by players’ efforts at reaching further into the hinterland, city-centric categories such as skin and hair care were buzzing with new product launches and brand extensions. HUL’s Dove hair care range, Dabur’s Vatika shampoo and Marico’s After Shower gel were some recent launches that clicked and reflected the high growth in hair care products. FMCG brands with a ‘natural’ or herbal association were definite winners, with offerings such as Dabur’s Gulabari, Meswak toothpaste, Wipro’s Santoor and Emami’s Malai Kesar Cold Cream reporting healthy sales.

In categories such as skin care and shampoos, the battle on the urban turf was clearly fought on product attributes, rather than on price discounts or promos. Strong FMCG sales in modern trade formats saw the large players expanding their premium and super-premium offerings in these categories in a bid to capture more shelf space. Even a tired category such as toilet soaps saw a few premium launches and extensions (Lux Crystal Shine, Wipro’s Santoor White and ITC’s Vivel). With urban consumers in an aspirational mood, discounters witnessed slow growth and in some cases, erosion of market share. The steady slide in Godrej Consumer’s market share in the hair colour segment is a case in point. As Chugh explains, ‘evolving’ FMCGs with low penetration have managed higher growth rates. “These categories are also adding to their consumer base, thanks to the upwardly mobile middle class which has seen better disposable income. Players in these categories too have introduced low price points and stock keeping units, generating trials.”

As Saugata Gupta, CEO, Consumer Products, Marico Ltd, explains, “There are two segments where the consumers are showing diverse behaviour. In the case of ‘look good and feel good’ products which have an external manifestation people are willing to pay for value. Therefore, it is not price but value. In the case of basic goods people could downtrade and look at costs. For example, you might pay a higher price for a better skin care product while you downtrade on your detergent at home.”

Food heats up

Another dominant theme that put FMCGs into high gear this year was the renewed fad for products with a health or wellness tag. As a corollary to this theme, the foods business witnessed high growth for every FMCG player with a presence in this segment, be it Hindustan Unilever (Kissan, Knorr), ITC (Sunfeast, Aashirwaad, Bingo) or Nestle India (Maggi, Milkmaid). Nestle India saw its topline expand by an impressive 24.4 per cent in the year ended December 2007. Though prepared dishes (Maggi et al), expanding 30 per cent in value, was the strongest performer in the Nestle portfolio, dairy (22 per cent) and indulgence products such as chocolates (25 per cent) and beverages (19 per cent) weren’t far behind. HUL’s foods portfolio also gained traction to grow in strong double digits. The consumer leaning towards “wellness” is also reflected in the robust sales growth managed by brands such as Saffola (22 per cent growth), Real fruit juice (20 per cent), and malted food drinks. These trends suggest that the “foods” business which has always failed to deliver to its potential in the Indian context, may finally have reached an inflexion point.

What’s ahead?

The above numbers certainly suggest that consumers have loosened their purse strings for FMCGs. But it must be remembered that the robust sales growth managed by FMCG players last year owes almost as much to price increases as to volume growth (which indicates demand). With input costs on an upward spiral, most FMCG categories saw players pegging selling prices higher (in some cases, indirectly by reducing unit sizes) in 2007-08, after three consecutive years of holding the price line. For the year 2007-08, this paid off in the form of stable margins and healthy profit growth for the protagonists.

But with the entire shopping basket now getting more expensive, will consumers begin to economise on FMCGs, nipping the revival in the bud? Leading FMCG players do not seem to believe so. Most companies are confident of making small price increases to compensate for higher costs; they are optimistic that resurgent sales volumes will take care of the rest.

“Price increases would come into effect largely to neutralise the hike in input costs. This will be particularly true for categories like hair care and health – that are in line with the growing consumer aspirations. But in functional categories, companies might find it tough to hike prices,” says Dabur’s Sitaram.

He makes the point that aspirational categories such as personal products and hair care may be better placed to effect price increases than “staples” such as soaps or laundry. On their part, FMCG makers are continuing to drum up excitement through a steady stream of new launches. Sitaram predicts that new launches will continue. While large players such as HUL and Nestle have reactivated their plans for their foods and dairy portfolio, homegrown companies such as Emami, Dabur and Marico have several products in the prototype stage, pending launch.

The companies that are thinking long-term will keep spends on advertising and marketing up. Points out Marico’s Gupta, “FMCG companies have learnt the lesson in the last downturn in early 2000 when they switched to a lot of below-the-line tactical spends to shore up short term volumes. I think there is no alternative to investing in long-term brand building and innovation and resisting the short-term quarterly pressure. You cannot ignore it but cannot be a hostage to it. In fact, in Marico, in spite of huge cost pressures and volatility we are actually maintaining our spend levels and our innovation programme.” The rest of the year promises to be as exciting as a roller-coaster ride for FMCG companies.

(With reports from Vinay Kamath)

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