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Consumer goods firms sharpen focus on core categories

Unlike in 2009-11 when they chased growth aggressively, firms turn prudent as they seek to grow operating profits
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First Published: Thu, Aug 08 2013. 11 24 PM IST
GSK Consumer Healthcare has put Foodles and Chill Dood on the back-burner and is instead focusing on core products—Horlicks and Boost, which account for over 70% of its revenue. Photo: Ramesh Pathania/Mint
GSK Consumer Healthcare has put Foodles and Chill Dood on the back-burner and is instead focusing on core products—Horlicks and Boost, which account for over 70% of its revenue. Photo: Ramesh Pathania/Mint
Updated: Fri, Aug 09 2013. 12 27 AM IST
Mumbai: Ullas Kamath , joint managing director of Jyothy Laboratories Ltd , the maker of Ujala fabric whitener, has changed his strategy in the past six months.
“Earlier, the thinking was that we wanted to grow in every category and every geography. Sales growth was important. Now sales growth and Ebitda (earnings before interest, taxes, depreciation and amortization, or operating profit) are important,” he said.
Consequently, Jyothy Lab is focusing only on its top seven “power” brands—Ujala, Maxo, Exo, Henko, Pril, Fa and Margo—and has stopped spending on brands such as Chek, Neem and Mr White. “During tough times, money is important,” said Kamath. “We have to decide how we want to grow and where to spend the money.”
Similarly, GlaxoSmithKline Consumer Healthcare Ltd no longer wants to compete in “mass segments”, different from what it did in 2009-2010 when it launched products such as Foodles, its noodles version similar to Nestle India Ltd’s Maggi, or Horlicks Chill Dood, a milk drink.
“We don’t want to play in mass segments, in ‘me too’ segments. We will only enter segments where we can differentiate with science,” said Zubair Ahmed, managing director, GSK Consumer Healthcare, who has put Foodles and Chill Dood on the back-burner and is instead focusing on products such as sensitive toothpaste Sensodyne, where it has achieved market leadership within two years of launch, and core products—Horlicks and Boost, which account for over 70% of its revenue.
Jyothy Lab and GlaxoSmithKline are simply cases in point.
Unlike the strategies that packaged consumer goods companies adopted between 2009 and 2011 when they got aggressive about growth and launched products and categories, they are now being cautious and focusing on operating profits even as they chase growth in a sluggish economy where consumers are cutting back spending on small and essential items.
Nestlé India, for instance, has undertaken a portfolio rationalization. At an investors meet on 30 July, Nestlé, the maker of Maggi noodles and Nescafe, told analysts it will stop support for low unit packs like Rs.5 Munch and Rs.2 and Rs.5 Nescafe powder packs as these don’t give the company much margins.
“Nestlé says it ‘cleansed’ the portfolio by weeding out ‘low value-add propositions’. Essentially, it has exited many mass-market, low-unit packs that were not meeting the ‘required’ margins,” said Manoj Menon, equity research analyst—consumer, media and retail, Deutsche Equities India Pvt. Ltd, Deutsche Bank Group, in his 31 July report.
However, advertising budgets are on the rise as competition has increased.
“Overall competitive intensity has increased as overall market volume growth has plunged by approximately 700 basis points (bps) from second quarter of financial year 2013 to first quarter of financial year 2014,” analysts Abneesh Roy and Pooja Lath of Edelweiss Securities Ltd said in their 29 July report, quoting Nitin Paranjpe, managing director and chief executive, Hindustan Unilever Ltd (HUL).
One basis point is one-hundredth of a percentage point.
HUL, the Indian unit of Unilever Plc., increased its advertising and promotional budgets from 11.9% of sales in fiscal 2012 to 12.5% in fiscal 2013.
Jyothy Lab allocated its entire advertising budget to its seven power brands, increasing the budget for these by Rs.150 crore. “The idea is to dominate in a category and ensure we make money,” said Kamath.
“Since 2009, consumer companies were chasing growth by increasing the number of launches, entering new categories and markets. However, the big change visible now is that the companies are focusing largely on core categories where they have a competitive advantage,” said Anand Mour, vice-president, consumer analyst, ICICI Securities Ltd.
The need to be prudent is apparent. Consumer sentiment weakened in the June quarter, according to a survey by Nielsen, an information and insights provider. HUL, for the June quarter, reported a 4% volume growth—the lowest in 14 quarters. Its overall sales growth at 7.1% for the quarter fell from 13.1% in the preceding March quarter.
“The outlook for the next 18 months is not so good,” said Rachna Nath, leader, retail and consumer, PriceWaterhouseCoopers India, adding that in bad times companies look at consolidation and removing inefficiencies from the system.
For instance, the number of new consumer packaged goods brands launched in the market grew from 2,850 in the 12 months to October 2010 to 7,437 in the full year to October 2012, according to Nielsen. But many of these brands are no longer available in the market or have limited visibility.
“In FMCG (fast-moving consumer goods), only 20-25% of SKUs (stock-keeping units) and new variants/launches survive and success rate is thus at best 20-25%,” said Devendra Chawla, president, Food Bazaar, a food and groceries retail chain by India’s largest listed retailer Future Retail Ltd.
For instance, in the past few years, the Indian unit of Cincinnati-headquartered Procter and Gamble Co. (P&G) entered seven new categories via a combination of brand launches including Ariel, Pampers, Olay, and acquisitions such as Gillette.
“While a majority of our launches have been successful, as is evinced by our results, the success rate of new entries tends to be low. Hence, we de-prioritized Rejoice (shampoo) as consumers were rewarding us by choosing our leading product propositions, Pantene and H&S instead, which helped lead the high growth in value share,” said a P&G spokesperson.
Parle Agro Pvt. Ltd, the maker of Frooti and Appy packed juices, withdrew LMN—a packaged version of the popular nimbu pani (similar to lemonade) that it launched in 2009, according to a general trade distributor and a modern retail chain executive who did not want to be identified.
Consumer companies are also consolidating their backend supplier and distribution networks as they prepare for a prolonged downturn.
“Transport and logistics account for around 14% of consumer companies’ overall costs. By reducing these costs to 7-8% and better control on supply chain and distribution, companies can add anywhere between 10-15% to their top-line,” said Nath, who is working with a number of consumer packaged goods firms but declined to disclose names.
Over the past year, Jyothy Lab, too, has consolidated its distribution channel, reorganizing its 3,000-odd stockists into distributors, super-stockists and sub-stockists as it integrated Henkel India Ltd’s acquired business. It now has 1,700 distributors and 200 super stockists whom they service, and there are 1,700 sub-stockists who get serviced by the super stockists.
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First Published: Thu, Aug 08 2013. 11 24 PM IST