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Impact of Slowdown and Inflation and Changing Strategies in FMCG Sector
Published on India Infoline on 2nd Dec, 2008The recent financial crisis has impacted several industries across the globe. In this article I will be addressing the impact on FMCG sector in India and the changing strategies which are being considered to counter the meltdown.Impact on FMCG SectorPost liberalization, because of the entry of a number of MNCs in India, the FMCG sales went up. But soon between 2000 and 2004, FMCG sector got hit, attributed to agricultural crisis and industrial slowdown. The crisis of declining FMCG markets was also driven by new avenues of expenditure for growing consumer income such as consumer durables, entertainment, mobiles, motorbikes etc. Indian population was all set to experience the new basket of products, but with cut-down on FMCG products. This lead to low share of FMCG spends in the consumers wallet.But every year the disposable income was increasing, from $424 in 2002 to $599 in 2007. There was an inflection in 2005, when they could spend on value added/ premium products along with the new basket of products. This was the boom stage; all categories were growing at healthy double digit rates.As the share of FMCG spend has come down over the last few years, high inflation will not have a major impact on the consumer. The incremental expenditure will not pinch. In the current slowdown and high inflation, my hypothesis is that the consumers may not reduce the expenditure on FMCG products; rather they may cut down expenditure on expensive restaurants. People may prefer local cinema halls or in-house entertainment (Movies on Demand), than multiplexes. Consumers may prefer a local transport than Taxis. They may hold their decision of buying a new car for sometime.Having said that let me discuss what possible impact can be there on FMCG sector.1. Marginal Slowdown in products with low perceived valueCan you think of consumers stop consuming Atta in North and Rice in South in the current scenario? Will consumers stop bathing and washing their clothes? The answer is No!! The simple reason being its a necessity. Now the next question is whether consumer will buy expensive/ premium detergents or the basic ones. I think that if the perceived value from the offer is high, consumers will not downtrade to cheaper brands. This means that Value for Money products will not be impacted. Here Value for Money is independent of the price. There may be products that are inexpensive, but may offer less value to the consumers. Those will get impacted.Therefore, large mass FMCG segment, which deliver value, may be insulated from the vagaries of the financial market; the under-penetrated premium-end category could face the heat.From 2005, we have seen willingness in consumers to move to evolved products/ brands, because of changing lifestyles, rising disposable income etc. This was the key reason for FMCG companies like HUL, P&G, Marico focusing lot on value-added products and premium-end products to drive their growths. We all have seen big launches of two premium Anti-Ageing brands, namely Olay and Pond’s Age Miracle.In the current scenario, there may be some hit to the premium FMCG brands, because of mainly two reasons:1. Products which are not differentiated and have low perceived value will be impacted. Consumer may reconsider buying expensive skin care products, high-end food items.2. Some consumers who were ready to upgrade from popular to premium brands may hold, as they may find more value in popular brandsIn a nutshell, consumer will look for value and not the MRP.2. Rural FMCG Sales: The growth engineIn last few months we have several FMCG categories like shampoos, toothpaste, hair oils etc growing faster in rural than urban markets. This is attributed to higher prices of farm produce, farm loan waiver and rising rural income. These consumers are not impacted with the global slowdown. The rural consumers are upgrading to higher end products, which is driving the volume sales of FMCG companies.Now to understand the impact on FMCG sales, let us see the split. Rural, semi-urban and urban contributed 57%, 21% and 22% respectively in 2007-08. Rural with the highest base is growing the fastest. So even if there is marginal drop in premium and value-added products (as mentioned in the previous point), the overall sales would not be impacted much. Therefore, FICCIs prediction of growth of FMCG sector by 16% may marginally come down, because of less than expected growth rates in the premium segments.Changing Strategies in FMCG SectorAs mentioned in the first half of my article, the overall impact on the FMCG sales will be marginal. Heavy dependence on the agri-sector and FMCG not being very capital-intensive are among the factors that have insulated the sector from the downturn. But rising input prices, inflation and increased commoditization of products are forcing FMCG companies to adopt new strategies, to have a viable business proposition. Let me enlist few of the strategies which companies have adopted and the outcome of the same.1. Increase in price: Due to increase in raw material prices, many companies were forced to increase their prices and pass on the cost to the consumers.a) HUL: Hiked the price of its detergent bar Surf Excel (120 g) earlier known as Rin Supreme from Rs 13 to 15. They have also increased some of their toilet soap brandsb) Tea Companies: Tata Tea and Duncans Tea have also hiked prices for select brands in their stables. Even regional players like Royal Girnar and Soceity Tea have increased prices of their brands to compete with national playersc) Britannia: Hiked the price of its popular brand Britannia NutriChoice Digestive from Rs 14 to 15.Some companies have been able to maintain the prices. Parle Agro has not changed the price of Frooti in spite of upward pressure on prices.It may be easy to increase the prices of premium products but in case of popular products, the preferred choice is between reducing grammage and maintaining the same price points or introducing another price point to suit consumer pockets.2. Introduction of lower SKUs: To prevent down trading, the companies have introduced packs with lower SKUs so that per unit purchase does not pinch the consumers wallet. With that companies are sharpening their focus on the existing smaller packs and increase their availability.a) Henkel: Introduced a new 400 gm pack of Henko washing powder at Rs 40 and withdrawn the 500 gm pack that used to sell for Rs 46. As quoted by Henkel, A family of four requires only 400-425 gm of washing powder in a month. We withdrew the 500 gm packs as they were making consumers spend more and consume more. They have reintroduced Pril liquid for Rs 50 (425 gm bottle), down from Rs 55 (500 gm). They recently brought out its popular Fa deodorant in 75 ml and Margo soap in 40 grams.b) Procter & Gamble: P&G has reduced the pack size of its flagship detergent brand Tide from 1 kilo to 850 gm while maintaining the price point at Rs 62. They have also also reduced the size of its 500 gm to 480 gm at the same price.c) Gujarat Cooperative Milk Marketing Federation: Amul introduced 25 gm packs of butter few months back, which is now registering higher sales than the traditional 100 gm and 500 gm packs. Same has happened to their milk powder. They used to sell more of traditional packs of 200 gm, 500 gm and 1 kg, with the 500 gm packs selling the most. In the recent scenario, 25 gm and 50 gm packs are selling in higher numbers.As an outcome, companies are registering faster offtake in the mid-sized packs.3. Cost Cutting Strategies: While companies resorted to price hike, many companies are exploring ways to cut down cost.a) Companies are busy in strengthening their distribution and logistics, by bringing in more efficiency and innovation in the supply chain. Companies are closely monitoring their stock levels and loading patternsb) Soap companies have shifted to cheaper options of raw materials to source their products at a competitive price.c) Some companies have cut down their spends on advertisement4) Mergers and Acquisitions: The turmoil in global markets seems to have a favorable impact on Indian FMCG majors acquisition. While many big FMCG companies find this situation an ideal opportunity to go for acquisitions, there are others who are cautious to invest in M&A. CK Ranganathan, chairman & managing director, CavinKare Pvt Ltd said that the global melt down will have a favorable impact for Indian companies acquisition plans. According to him, its an opportunity for them to acquire companies as they get good value for money. The current financial crisis may offer more opportunities because of better valuation.5) Restructuring to leverage synergies: With the power of one strategy, PepsiCo is aligning its beverages and snacks businesses under a common leadership. This will help them to maximize synergies of the two businesses across key functions such as procurement, agriculture and production, which will lead to production efficiencies. This will help them to minimize the price hike.Outcome: FMCG sales & profit unaffected despite mayhemIn the June quarter, FMCG companies saw an impressive topline growth. However, rising input prices and inflation impacted their profitability. To counter the decreasing profitability, as mentioned above, companies adopted multiple strategies.As an outcome, if we look at September quarter results, it clearly shows that the FMCG sector is not impacted, despite rise in raw material cost; credit crisis and the global meltdown. The combined net profit of 12 Bombay Stock Exchange (BSE) FMCG index companies has increased by 14% as compared to the same quarter last year. In fact, net profit of 350 BSE-500 companies increased 7% in the July-September 2008 quarter, as compared to the same period last year.The robust net profit was boosted by a 21% increase in net sales of these 12 companies, despite the fact that raw material cost increased by 29% as compared to the same period last year. This clearly indicates that companies were able to offset the input cost hike by passing it on to the consumers as retail prices of goods in this segment increased on an average by 10-20% in the last few months. The sector is showing strong volume growth across product categories.VoteHas the recent increase in prices of FMCG products impacted your FMCG buying behavior?a) Downgraded from Expensive Brands to Cheaper Onesb) Stuck to your old brand; but moved to cheaper SKUsc) No change in buying behaviorReferencesTop-end FMCG products may witness slowdown (Times of India)FMCG cos remain unaffected despite turbulence (Financial Express)PepsiCo to go ahead with India plans (Economic Times)Slowdown in India won’t impact growth, says Nestle (Business Standard)FMCG: Strong volumes, margin pressure (Equitymaster)Despite slowdown, FMCG cos put M&As on fast lane (Financial Express)Inflation blues: FMCG prices set to rise (Financial Express)FMCG companies push product launches despite inflation (Financial Express)Inflation heat has not dampened FMCG offtake (Hindu Business Line)Companies bet big on small packs to beat inflation heat (Economic Times)Inflation: FMCG majors on a reinventing spree (Economic Times)FMCG cos buck downtrend, may grow 17 pc (Ibef)FMCG firms in a fix over pricing strategy (Business Standard)FY10 should be good for FMCG: Godrej (Utvi)
