In the following article I have tried to briefly analyse the Indian Fmcg industry and its growth patterns amidst the ongoing world financial crises. Views are personal.
Going by the current trends in the global economy, every thing seems to be plummeting and all the industries seem to be bearing the brunt of global crisis. However, the only industry which seems to be holding its horses firm and registering growth is the Fmcg industry.
The investor confidence in Fmcg is backed by some very robust principles:
1.)Increasing rural penetration by Fmcg companies which has happened due to creative and innovative ways to reach out to the masses.
2.)Sensible product modifications and category stretching.
3.)Adequate insulation from business cycles, inflatory trends & recession.
Let us look at these principles in detail.
Producers are eyeing the untapped rural market, the so called “bottom of the pyramid” which promises to provide lucrative profits. Apart from the premium products, firms are producing mass products which assure a sizable market. Also there are making their premium products available to the masses in innovative ways.
Sachet Marketing is one such pioneer effort in this context where world class FMCG brands were made affordable for the masses. This not only improved the product penetration but also achieved volumes for the company and made the developing countries prime growth destinations. Amidst intense domestic competition and consumer resistance for bulk packs, sachet marketing highlights that for the MNCs it was important to “unlearn” or “forget traditional approaches” and try micro-selling methods, serving up products, services and loans in small portions and sizes, light versions, or single-use sachets, so that aspiring consumers can afford and get to know and like their brand. Who ever thought that brands like “Garnier” (shampoo) and “Hienz” (Tomato ketchup) would be available at affordable price points and break the sales records of developed markets where the very same brands are sold in bigger, bulk packs.
In consumer goods parlance, `economy pack' has usually referred to larger pack sizes. The economy pack is the marketer's way of rewarding a consumer who buys more of his brand at one go. But the new rage for low-priced sachets in the shampoo market has just reversed this logic. With most shampoo sachets, one saves more if one buys less. As per Asscham, FMCG will be witnessing more than 50% of its growth in the rural and semi-urban segments by 2010. Currently, nearly 34% of the offtake of FMCG companies come form rural areas. In 2008, the rural areas would provide a huge potential. Companies like HUL, ITC and Colgate have already established good distribution networks in these regions. Other companies would start catering to these regions in near future.
Innovative initiatives and programs such as Project Shakti by HUL & e-Choupal by ITC are making way for sustainable long term development and demand. With managers adopting creative and unique ways to lure the customers the growth in rural penetration is going to happen at an accelerated speed, the fmcg companies are bound to make good profits, which make them come under the scanner of investment companies who would like to invest in this positive and evidently profitable trend.
Many products under the fmcg sector are showing tremendous growth potential in recent years. Besides soaps and detergents, products such as creams, moisturizers, body sprays are also making a big splash. The shampoo sales in India in 2006-2007 alone were 1,500 crores which grew to a staggering 14.4 % (quarter ended June 2007)
Apart from the big players like HUL and P&G, many new players are entering the market and trying to gain from the growth trend (e.g. Godrej: No.1 shampoo). A good example of category stretching can be highlighted by HUL. They very successfully launched Dove hair care range after the success of Dove Soaps. Value adding extensions with distinct positioning can do wonders for a company.
Firms are not only coming out with different product variants under this sector but also modifying the products in accordance with the changing trends and Indian sensibilities. The new innovations and offerings are backed by through research and testing (The increasing number of product accreditations by world renowned institutes have been growing.)
Another important reason for investors being interested in FMCG companies is that these companies are not massively affected by the different business cycles, inflatory trends, recession etc. The consumers do not change their consumptions pattern so easily. There is always a ready and enthusiastic market for these products. Even the second level/subsidized market for dumping of these goods is easily available which assure the performance level of companies.
I recently read interviews of marketing professionals across various FMCG Companies in India. All of them held a unanimous point of view that the consumer sentiments have dampened a little due to the ongoing financial turmoil, however this has not yet taken a toll on the consumer spending on the FMCG basket Interestingly the spending on the FMCG goods has seen an increase of over 30% of consumers spending. All the companies have reported decent growth numbers in the 1st Quarter. The managers said that if the liquidity crunch continues with rising inflation numbers, the growth of the companies might stagnate in the 3rd Quarter.
And finally, an emerging contributor for the good health of FMCG is retail growth. India is witnessing a retailing revolution in recent times. While some retail chains are of large retail formats enabling huge volumes, some are focused on affordability and thereby squeezing the margins. The Indian market is dominated by more than 12 m small ‘mom and pop’ retail outlets. However only 4% is in the organised sector, thereby reducing the reach. With FDI expected to be allowed, the share from the retail formats by the FMCG players is expected to increase.
How will FMCG continue in the times to come will be interesting to analyse. Will we see witness the industry mayhem or new path breaking efforts from industry stalwarts...only time can tell.
Posts
