At a time when the economy and industry sectors such as automobiles, aviation and financial services are reeling from the global slowdown, the consumer goods sector in India has managed to buck the trend with most companies posting double-digit growth in net profits in the first half of fiscal 2009 backed by healthy sales. Led by consumer goods company Hindustan Unilever Ltd, or HUL, which reported net sales of Rs8,243.54 crore in April-September, the sector averaged a revenue growth of 17-20% in the first half of 2008-09, although the volume growth was a bit slower.
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According to research firm AC Nielsen, the total consumer goods market in India during the June quarter was estimated at Rs22,354.25 crore, a growth of 15.8% over the same period last year. In the second quarter ended September, the market was estimated at Rs23,891.75 crore, registering a growth of 19.6% over the same period a year ago. The industry is expected to grow to Rs95,150 crore by the end of fiscal 2009, up from Rs85,470 crore in the last fiscal, a growth of 16%, says the Federation of Indian Chambers of Commerce and Industry, or Ficci.
Driving growth: (clockwise from top left) Neeraj Chandra, VP, sales, marketing and innovation, Britannia [Madhu Kapparath / Mint]; Milind Sarwate, chief, HR and strategy, Marico; and Amit Burman, vice-chairman, Dabur.
These growth figures were, however, not easy to achieve. The sector faced the heat of rising prices of essential commodities and crude oil during the first quarter of 2008-09. Price hikes were the first line of defence in the battle to protect margins. Most consumer goods companies hiked prices by 5-15% during the first half of the fiscal.
Soap and detergent brands saw a considerable increase in prices as the cost of raw materials went up substantially. HUL, which markets a range of personal and home care products that straddle various price points, increased prices by at least 10% on certain brands. “Consumer spending remains robust in FMCG (fast moving consumer goods) and we continue to improve our turnover ahead of aggregated market growth. We have sustained volume growth in a high inflationary environment and offset the cost impact through aggressive cost management and judicious pricing,” Harish Manwani, chairman, HUL, said after the company announced its September quarter results.
HUL clocked a 34% increase in net profit for that quarter at Rs546.61 crore against Rs408.06 crore in the same quarter a year ago. The company’s net sales increased by 19.71% at Rs4,027.87 crore, up from Rs3,364.63 crore.
Net sales of bakery and dairy products maker Britannia Industries Ltd increased 27.3% and net profits increased by 10.0% in the July-September quarter compared with the same period last year. Britannia had increased the prices of its products in certain categories by 5-7%. “Our growth has come from a healthy mix of underlying volume growth, price increases and improved product mix,” says Neeraj Chandra, vice-president, sales, marketing and innovation, Britannia Industries.
Similarly, Marico Ltd hiked prices of its flagship hair oil brand Parachute by about 10%, while Emami Ltd’s products became dearer by 10-15%. “To tackle the rising input cost, inflation and arrest decline in margins, most FMCG companies have initiated a weighted average price hike of 5-10% during the last six months across product categories,” an October report by Mumbai-based brokerage Angel Broking Ltd said. “Categories such as soaps, laundry, sunflower oil, coffee and dairy (products) witnessed maximum increase.”
Similarly, cost-cutting initiatives saw a renewed focus as firms looked beyond price hikes in order to protect their margins. “Adverse economic environment made companies work towards synchronizing supply and demand and reducing inventories. They also became cautious about the way they are going to market and targeting a specific customer segment,” says Ashish Nanda, partner, retail and consumer products, Ernst and Young India Ltd.
Even GlaxoSmithKline Consumer Healthcare Ltd, which makes the health drink Horlicks and over-the-counter products such as pain reliever Iodex and antacid Eno, has in the last six-nine months undertaken cost-containment programmes in areas such as packaging, raw material and other overhead costs. “If we would not have done all of these, our financial performance would have been poorer,” says Shubhajit Sen, vice-president, marketing, GlaxoSmithKline.
As raw material costs spiralled, companies such as Nestle India Ltd and Dabur India Ltd revisited their sourcing programmes to identify cheaper raw materials. “Intelligent buying of raw materials is among the various initiatives undertaken by Dabur to increase efficiency and reduce cost of operations,” says Amit Burman, vice-chairman, Dabur. “We do what is called forward cover on future exchanges for non-essential commodities such as glucose, guar, sugar, etc. So, while we don’t buy in bulk in the physical market, buying on futures exchanges helps in protecting our margins.”
“Many companies looked at cutting down the operational costs. For instance, Nestle focused on raw material sourcing to drive efficiency,” says Angel Broking analyst Anand Shah.
As crude oil prices increased, so did the cost of petro-based packaging materials. Consequently, firms started to look at innovative and more affordable ways of packaging. “In case of metal cans being used by soft drinks companies and beer makers, we started using thin tin plates as compared to thicker ones without compromising on performance, which technically means down-gauging,” says Atit Bhatia, vice-president, business development, Rexam HTW Beverage Can (India) Ltd. “Even a 1% reduction in cost per can means a lot of cost saving.” According to Bhatia, around 350 million beverage cans are sold in India every year.
“Other ways of cost-cutting include techniques that lead to lesser scrap generation and automation,” he adds.
Besides tinkering with the packaging material, companies such as Colgate-Palmolive (India) Ltd, which makes oral care and personal care products, kept expenses down by reducing its stock keeping units, or SKU. On 17 July 2008, at the company’s annual general meeting, Colgate-Palmolive India chairman Justin Skala told shareholders that the company was initiating a series of steps to rein in rising costs and become more efficient. “The company is becoming more efficient by reducing the number of SKUs. A team has been formed to reduce SKUs by 15% and the management is confident this target will be achieved by the team well before the deadline.”
Consumer goods companies also worked on reducing logistics costs even as they tried to keep a control on inventory levels and ensure better supply chain management.
“The FMCG companies have started looking at logistics more seriously now. We keep getting queries from companies dealing in apparel, food and beverages and other FMCG items for reducing inventory costs,” says Anshuman Singh, chief executive officer, Future Logistics Solutions Ltd, the logistics arm of Future Group. “Earlier, companies were following push-chain strategy, which meant stocking up the distributors and leaving it to them to sell the products even when the demand was less. But now, firms are starting to follow demand-driven pull-chain.”
Echoing this, Rakesh Kumar Sinha, chief operating officer, Godrej Consumer Products Ltd, or GCPL says, “Cost-cutting for us is an ongoing process. We had a relook at the supply chain management and modes of transport. Coupled with other initiatives, GCPL is able to save around Rs10 crore annually without compromising on the quality.”
Consumer goods companies not only reduced the weight of their products while maintaining the price points, some also launched products in smaller sizes to drive volumes. “We re-engineered our products and played the price point game. For instance, we introduced a 45g soap at Rs6 in order to maximize volumes. Otherwise, the same soap costs Rs16 to customers for 100g,” says Anil Chugh, senior vice-president, Wipro Consumer Care and Lighting, a division of Wipro Ltd.
Similarly, Coca-Cola India Ltd, which posted 18% growth in sales by volume during the September quarter, introduced a 350ml PET bottle for most of its major brands priced at Rs15, a move to widen its profit margin.
“Small packs drive growth and increase penetration. Recently, we also launched a Rs10 pack for Iodex,” says GlaxoSmithKline’s Sen.
“We have stayed away from symbolic or emblematic steps which typically address C-category items while spreading undue gloom around. Instead, we have focused on picking big-ticket items and driving efficiency in those,” says Milind Sarwate, chief, human resources and strategy, Marico. For instance, the company launched new variants of brands such as Saffola and Parachute.
Rising input costs notwithstanding, fierce competition forced companies to continue investing in advertising and promotions, or A&P, to build stronger brands and protect their market share. “This year, firms did not cut down A&P spends and looked upbeat,” says Kaustav Ray, senior analyst, consumer markets, Datamonitor India.
GCPL tied up with actor Hrithik Roshan for the relaunch of its Cinthol brand, while Emami spent Rs1.8 crore in promoting Himani Fast Relief brand.
According to AdEx India, a division of TAM Media Research, the television ad expenditure of consumer goods sector grew by 18% in January-September 2008 compared with the same period in 2007. Food and beverages was the top category within this sector and HUL the No. 1 advertiser.
A slew of product launches and variants also helped companies plug gaps in the consumer value chain and thereby increase turnover. HUL launched brands such as Amaze Brainfood and Skippy peanut butter from its international portfolio targeting affluent customers, besides focusing on relaunching mass-market brands such as Close-Up toothpaste and Sunsilk shampoo. Dabur launched around 15-20 new products and variants, including Dazzl surface cleaner and milk beverage Chyawan Junior targeting popular price points, while ITC Ltd launched a range of personal care products under its new Vivel brand and Marico entered the kids shampoo segment with Starz. “The current sentiment in the market is not likely to impact our progress plans.We will continue to expand our portfolio irrespective of the situation right now, as it is bound to change,” says Sandeep Kaul, chief operating officer, ITC.
Even the processed foods segment had several new launches, with Nestle unveiling Omega 3-rich NesVita Pro-Heart low-fat milk and Marico launching Saffola Functional Food for diabetics.
Along with these supply-side initiatives, the higher offtake in rural markets also helped the FMCG sector’s cause. Largely insulated from the economic downturn, good agricultural growth and government focus on these markets have led to higher disposable incomes in the hinterland. “In the last four consecutive years, rural India has been showing very positive growth. The per capita income is growing at a rate of 4% annually. Also, the non-urban markets account for almost 55% of the total FMCG sales in India,” says Rajesh Shukla, senior fellow at National Council of Applied Economic Research.
Recognizing this, consumer goods companies, too, are stepping up distribution in smaller towns and increasing focus on advertising products aimed at the mass market. “Most of the companies have realized that rural India is where the growth is now. Firms are not only stepping up their distribution network in smaller cities and villages, but are also focusing on launching smaller SKUs, and setting up special teams to cater to such markets,” says Angel Broking’s Shah.
The second half of fiscal 2009 is expected to be better with inflation slowing along with the excise duty cuts announced by the government in December. It now remains to be seen how consumer goods companies are able to use these to their advantage to end the fiscal with even higher returns.