First Published: Wed, Mar 05 2014. 11 55 PM IST

Inconsistencies in policies scare off investors from India: Vijay Vishwanath

Bain and Co.’s Vishwanath think of the cost-cutting as simplifying an organization
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Inconsistencies in policies scare off investors from India: Vijay Vishwanath
Vijay Vishwanath says cost-cutting simplifies an organization and releases money to invest in growth areas. Photo: S. Kumar/Mint
Mumbai: Global consumer product companies such as Unilever Plc, Mondelez International Inc., The Coca-Cola Co., Nestle SA and H.J. Heinz Co. have, in the past few months, moved their focus to profitability, and are cutting costs in the face of a prolonged slowdown across developed, even emerging, markets. Vijay Vishwanath, partner and director, Bain and Co., based out of Boston, US, spoke to Mint about the implications of these measures as companies review their positioning and investments in India and other emerging markets, picking product categories rather than just investing in these countries as growth drivers. Edited excerpts:
Growth from emerging markets across China, Brazil, Indonesia and India has slowed. How has this impacted MNCs (multinational companies) that were looking at emerging markets for growth?
You look at Brazil, China or Indonesia—growth is the one big issue everywhere. Look at the numbers for any of the MNCs—Procter and Gamble Co., Nestle, Mondelez, Coca-Cola; they now look at about 9% or 11% growth from these markets which is down from 14-15% growth seen in the past years. So growth is the No. 1 issue. It’s at a point where the smart companies which have a long term-oriented approach have decided to invest so that they come ahead of the market. In the short term though, all these companies are facing earnings pressure, so they have to balance that. That said, they will yet need to invest for the future. That is the biggest challenge.
Companies are now speaking about focusing on profitability and cutting costs. Will this impact investments in India?
I think both these strategies are very consistent—that’s the beauty of this. Companies have become so complex that it is actually hurting their growth—there are layers and complexities that they have created to manage countries, to manage product lines and to manage businesses. I think of the cost-cutting as simplifying an organization and this releases an enormous amount of money to invest in growth areas.
How attractive is India for MNCs now?
The country has certain challenges with policies and inconsistencies in economic policies scare off investors. There is a lack of clarity. Look at the packaging law or the (law on) foreign direct investment in retail...
Is this a change from 4-5 years ago when India was top of the list of destinations for MNCs?
Unfortunately, yes. There was an India-China story that people kept talking about. Now there is a decoupling of the two. For FMCG (fast moving consumer goods) companies, the scale that China has given them compared to India is far more and people are being more thoughtful.
There is no such thing as India overall. Investing in India will depend on the category. So, for some categories the opportunity is in Vietnam; for others it might be Indonesia or Brazil; and for some categories it would be India.
Can you explain?
Categories in some places are so consolidated that the game’s over. Take Africa, said to be the next frontier: you have to look at it category-wise. For instance, (for) beer in Nigeria, (the) game is over. It’s virtually impossible to get into that category. You can’t make blanket statements that these markets are exciting.
We are seeing multinationals launching more of their global products here rather than making products that are relevant for the Indian consumer. Is this a cost-cutting measure?
What the cost-cutting is signalling is a convergence of developed and emerging markets. There are four areas of convergence we have seen. These four trends—category consolidation, premiumization, nature of buying and point of sale—are not just developed market trends, but also in the advanced markets.
Can you explain these trends and their implications?
Take the trend of category consolidation in emerging markets. In categories like beer in China, the top four players have grown their share from 20% 10 years ago to 50% now. That kind of category consolidation took 40 years in the United States. So you are seeing the same convergence that happened in developed markets happening extremely fast in emerging markets.
The second trend is premiumization. In most emerging markets, companies used to focus only on market share gain whereas in developed markets it’s been about premiumization and trading up. In India, premiumization is growing at a higher rate than the average category growth rate across categories, be it biscuits, soaps or skin creams. Third is the nature of how consumers shop. This has changed.
Loyalty-based shopping has been the norm for marketers historically. Earlier, if you wanted to eat a chocolate, you would ask the shopkeeper for Cadbury. What we are finding increasingly is that there are very few categories that are loyalty-based. Most are repertoire-based.
In other words, the consumer is willing to buy a number of brands in that category. So, the implication of that is the importance of point of sale, which is the fourth trend. In the repertoire category, often, 80% of the time, the shopper is making the decision of which brand to buy at the shelf. So, the marketer needs to find a way to activate the brands at the point of sale.
What impact do these trends have on companies in India?
In India fast moving consumer goods companies are looking for growth abroad—Africa, Middle East, Latin America and the US. Many of them are not picking their battles. When I see India-based companies looking at the US and overseas markets, they are not thinking it through. When categories are so consolidated, it’s very easy to get sales in one year, but the lack of focus costs in the long run.
Even for MNCs entering India, in many categories, it’s far too late. So, one has to be very thoughtful. Categories that are consolidated in India include haircare, skin and personal wash.
I have seen in many markets, over time, an uptick in the (move to) premium (products) and then a downtick. We have seen it in Brazil over the last 10-15 years. Brazil is going through a huge slowdown. But the companies that have a broad portfolio have survived. One danger I see is that many companies see a trend and jump in and then don’t have the affordability when the downturn arrives as they don’t have deep pockets. But companies that have long-term visibility and investment capability are the ones that will take advantage (of this). It’s a good shakeup.
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