Has India’s consumption story gone bust?
A slump in growth and rampant retail inflation are forcing middle-class India to cut back on spending, switch to cheaper variants consumer products
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Mumbai: For the past five months, Laxmi Shankar Verma has given up using Colgate toothpaste and has switched to chewing a twig of the Neem tree instead. Called a datun, the slender twig is a popular teeth cleanser in rural India and chewing it is supposed to help fight plaque and gum disease.
But the reputed health benefits of the Neem twig have nothing to do with his decision to stop using toothpaste. “Mehngai bad gayi hain (Prices have increased),” said Verma, 42, who works as a security guard at a residential building in the suburbs of Mumbai.
In his village in Uttar Pradesh state, in north India, “everyone uses this”, added Verma, who earns Rs.8,000 a month, including the money he makes by doing odd jobs, out of which he keeps up to Rs.1,000 for his expenses and sends the rest to his family of six—mother, wife and four children.
The trend is called downtrading—whether it’s Verma cutting out a cost item from his budget altogether by switching to the Neem twig he can break off a roadside tree, or middle-class households moving to cheaper brands and smaller pack sizes, or using a product less often.
The trend has accelerated as India’s worst economic downturn in a decade deepens and inflation stays at heightened levels. The Reserve Bank of India (RBI) expects inflation, measured by the Consumer Price Index (CPI), to top 9% in the three months to 31 March, and range between 7.5% and 8.5% a year later.
Consumer prices rose 9.87% in December, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
The pace of growth in the sales of consumer goods has been slowing since December 2012, but it was only in the quarter ended September 2013 that sales by volume actually contracted.
The sales of packaged consumer goods shrank 0.5% in the third quarter of 2013 from a year ago, according to a December report by market research firm Nielsen and Co. In terms of value, sales improved by 6%, but all of it was driven by price increases, said Nielsen.
Compare this with 2012, when volume growth was around 10%, said the report authored by Sameer Shukla, director of Nielsen’s India unit.
Growth by volume represents the component of sales growth on account of selling more units of a product; value growth is mainly a function of price increases or inflation.
Some analysts are already asking whether the consumption story that paced the Indian economy’s average 9% growth in 2003-07 is as good as over. Growth began to moderate with the financial crisis that struck the world in 2008, and in the fiscal to 31 March 2013, slumped to 5%, the slowest pace in 10 years. In April-September, economic growth averaged 4.6%, and is forecast by RBI to slump below 5% in the full year to next 31 March.
“We must urgently accept the India consumption story has some big problems on the fundamentals that we must try and change or accept and factor into our expectations and our business strategies,” market research consultant Rama Bijapurkar wrote in the 17-23 January edition of MintAsia.
“Consumer India is not anywhere near what we believe it to be—a healthy, young fruit tree, growing in an environment that has all the natural ingredients needed for it to flourish and yield an ever-increasing crop year after year nearly as if on ‘auto pilot’ and almost forever,” she wrote.
“On the contrary, it is like the demographic dividend—it has lots of potential, but miles to go before it gets fulfilled.”
Facts back her up. India’s private final consumption expenditure (PFCE) grew at its slowest rate in 37 quarters in the three months ended 30 September, India Ratings and Research Pvt. Ltd, the local arm of Fitch Ratings Inc., said in a report released on 3 December.
“Low growth in private consumption is becoming a well entrenched trend,” the report said, adding that PFCE for the quarter grew at only 2.2% year-on-year from 1.6% in the previous quarter. “These are the two lowest growth rates in the last 37 quarters.”
PFCE is the money spent on goods or services that are used for individual and household needs or wants.
Changing consumer priorities
A stagnant PFCE means retailers and manufacturers are fighting for a share of the consumer’s wallet that hasn’t increased in size, explained Arvind Singhal, chairman and managing director, Technopak Advisors Pvt. Ltd, a retail consulting firm.
While the consumer has the same amount of money to spend, priorities have changed, with education, mobile phone voice and data plans acquiring priority over products such as body lotions and and skin creams.
The slump in economic growth and the consequent job losses and cutbacks in corporate hiring have shaken consumer confidence. Even until 2012, India had the highest consumer confidence levels among countries included in Nielsen’s quarterly Consumer Confidence Index. In the September quarter of 2013, confidence in India plunged six points, pushing India to the third spot, behind Indonesia and the Philippines.
In the prevailing economic climate, it’s not surprising that sales of consumer packaged goods have slumped, retailers said.
“We have to reconcile to the fact that the overall GDP (gross domestic product) growth has fallen approximately to 4.5%, and this is a reflection of that. So it was a matter of time for it to percolate to the FMCG sector, partly because of the high inflation and partly because of the GDP slowdown,” said Harsh Mariwala, chairman and managing director of Marico Ltd, the maker of Saffola cooking oil and Parachute hair oil.
GDP is the value of a country’s output of goods and services. FMCG is short for fast moving consumer goods, which refer to often-purchased goods such as home and personal care products, including food and toiletries.
In December 2013, Mint reported that slowing economic growth and the high cost of finance and fuel had made car ownership more expensive, impacting buyer sentiment. Car sales fell 5% to 1.2 million between April and November, according to the Society of Indian Automobile Manufacturers (Siam), an industry lobby. “India has entered into a slow growth, high cost, high inflation economy. There are various reasons for that and nothing is going to change in the next four-five years,” said Singhal of Technopak Advisors.
Consumer packaged goods firms have come to accept that the new reality means they will now grow below the nominal GDP growth rate, unlike in the past when they exceeded the pace.
“Over the past 12 quarters, domestic FMCG revenues have grown at 1.2x the nominal GDP growth. The third quarter of fiscal 2014 will see the first trend reversal, and FMCG domestic revenues will grow at 0.9x nominal GDP growth,” analysts Anand Mour and Sreekanth P.V.S. of ICICI Securities Ltd wrote in a 3 January report.
Companies are now going slow on the number of launches in India and even consolidating their product portfolios.
Family budgets shrink
For instance, Unilever Plc, the Anglo-Dutch parent of Hindustan Unilever Ltd (HUL), aimed to cut 20% of its stock keeping units (SKU) by end-2013 and another 10-20% in 2014, the Financial Times reported on 5 December, citing Pier Luigi Sigismondi, the firm’s chief supply chain officer.
Unilever’s portfolio has about 50,000 SKUs. A distributor in Mumbai for the maker of Wheel and Rin detergents and Lifebuoy and Lux soaps said the firm had withdrawn new launches like Fair and Lovely night cream and Sunsilk Natural shampoo from the market in the past year.
“The growth in 2012 was in double digits and in 2013 it is in single digits. Clearly there is a very significant slowdown in volume and value. From our perspective, at least in the short-term, the market growth for the next few quarters will remain slow and it might be two or it might be three,” said R. Sridhar, chief financial officer of HUL, at a press conference in Mumbai on 27 January.
HUL’s volume growth in the December quarter slowed to 4% from 5% in the preceding three months.
India’s biggest packaged consumer goods maker earned a net profit of Rs.1,060 crore in the quarter ended 31 December, an increase of 22% from a year ago. Sales rose 9.5% to Rs.7,040 crore, led by price increases.
According to Sridhar, the consumers are being far more conscious about their family budgets and tightening discretionary spending—money used to purchase non-essential items. “They are more conscious of their frequency of usage,” he said.
To manage costs, HUL has dropped some promotional offers and increased prices. The firm has also changed its focus from expanding further into the interiors to improve sales from its existing network of stores, Sridhar said.
In an interview to Mint newspaper in November, Sunil Duggal, chief executive officer at Dabur India Ltd, admitted that the mood among consumer goods makers was defensive and Dabur was being conservative in expanding its portfolio.
The rural story
Likewise with rural penetration. On an average, firms increased their rural reach by 50-150% in the past three years, says Vikash Agarwalla, principal at consulting firm Booz and Co.
For instance, Dabur India, the maker of Vatika shampoo and Real juice, has more than doubled its reach in the last 18 months to cover 30,000 villages. Marico has nearly doubled its reach in the last five years to 30,000 towns.
But with the rural consumer joining her urban counterpart in cutting back on spending, companies are rethinking their strategies.
According to data by research firm IMRB International, which tracks sales in 30 core consumer categories such as soaps, shampoos, detergents and packaged staples, growth across rural markets between January and September slowed to 4% from 7% in the year-ago period. Urban growth (across categories) declined from 8% to 2% in the same period, the report said.
“We have slowed down on geographical expansions, and not increasing the number of outlets under our coverage,” said Krishna Mohan, chief executive at Emami Ltd, the maker of Zandu balm and Fair and Handsome skin cream.
The last three months of 2013 saw a handful of consumer companies effect top-level management changes, putting in place executives better equipped with navigating the slowdown.
On 9 December, beverage maker PepsiCo India Holdings Pvt. Ltd named D. Shivakumar as the new chairman and chief executive officer (CEO) for the India region. Shivakumar, a former senior executive at Finnish handset maker Nokia Oyj, succeeded Manu Anand, who left the company in June.
Anand joined Mondelez International Inc., the maker of Oreo biscuits and Cadbury chocolates, in July as president for India and South Asia and managing director of Cadbury India, replacing Anand Kripalu, who led the business for eight years. Top-management changes were also effected at HUL, Nestle India and L’Oreal India Pvt. Ltd, the maker of Maybelline and Garnier.
In a slowing economy, the room for non-performance is limited as the stakes are high, said Chander Mohan Sethi, senior vice-president, South-East Asia, Reckitt Benckiser Plc. “Making a top-level change may be expensive but companies are not shying away from bringing in the best talent as good people will pay for themselves,” he said.
In the past few years, consumer firms had focused on immediate market gains at the expense of execution quality even as overall consumption was slowing, according to Agarwalla of Booz.
In an interview to Financial Times on 14 January, Nandu Nandkishore, who heads Nestlé’s Asia business, conceded that the maker of Kit Kat chocolate and Maggi noodles had made a mistake by focusing on the mass market and ignoring the emerging affluent segment.
Nestlé’s sales in India had been growing at about 20% a year in the three years to 2011, but this growth decelerated sharply—to 8%—in the third quarter of 2013.
Faced with declining sales, a depreciating local currency, slowing economic growth, higher input costs and rising domestic competition, Nestle is redrawing its strategy to cater to more affluent Indians whose household budgets are more immune to the country’s rising inflation and faltering economy, Nandkishore told the Financial Times.
In a bid to maintain prices in spite of the high inflation, manufacturers of consumer packaged goods have started substituting expensive raw materials with cheaper alternatives.
“With the dollar-rupee volatility and prices of crude increasing in the past few months, we have looked at substituting LABSA with vegetable oil-based surfactants in making soaps and detergents,” said G. Ramakrishnan, director (home and personal care business), Galaxy Surfactants Ltd, a supplier to companies like Unilever, Henkel AG and Reckitt Benckiser.
LABSA is short for linear alkyl benzene sulphonic acid, which is used in the formulations of all types of synthetic detergent powders, liquids and cakes.
Similarly, manufacturers of tomato ketchup like Nestle and HUL have also reduced the quantity of tomato paste in the ketchup, The Times of India reported on 4 January.
The strategy may boomerang, said Singhal.
“In my opinion, what the consumer companies are doing is something fundamentally dangerous,” he said. “They are changing pack sizes to the smaller size. This is cheating to the consumer. The firm thinks it’s maintaining the price point. The price point is maintained by reducing quantity or then lowering the quality.”
He pointed to the trend of smaller regional firms gaining a foothold by catering to consumers who are comfortable with trying new products because they have felt cheated by the larger brands.
Small enterprises are chasing aggressive growth plans with an eye on the future.
“We want to be a Rs.10,000 crore company by 2020,” said Ullas Kamath, joint managing director, Jyothy Laboratories Ltd, in an interview in December. Kamath expects to close the financial year with close to Rs.1,350 crore of sales.
In the past two months, the maker of Ujala fabric whitener has raised Rs.650 crore to pay off debt that it had acquired during the acquisition of the Indian unit of Henkel in May 2011 and build a corpus of Rs.250 crore to fuel its growth.
Also with an eye on the long-term growth story, multinationals remain invested in India and have announced ambitious investment plans.
For instance, in mid-July, Unilever increased its stake in its Indian subsidiary from 52.5% to 67.3% by spending nearly Rs.29,220 crore.
In November, PepsiCo India pledged Rs.33,000 crore of investments in the country by 2020.
“A couple of companies are carrying out their pilot projects in Indian markets, which, if successful, would be rolled out to other South-East Asian economies. Thus, from that perspective, there is enough mind share investment,” said Rachna Nath, leader of the retail and consumer practice at PricewaterhouseCoopers Pvt. Ltd.
Still, even when economic growth accelerates and market conditions stabilize, it may be a while before consumers gain enough confidence to spend like they used to in the boom years or start trading up to more expensive products and lifestyles.
“As consumers cut back on spends, trade brands or pack sizes for a smaller or cheaper brand or discontinue to buy a particular brand, they may not revert to consuming it immediately even if the economic growth reverses to becoming better,” Sandeep Kaul, chief executive officer of personal care business unit at ITC Ltd, said in November at a corporate event in Mumbai. “They will stick to the lower priced brand for longer.”
The downturn has inured people to focusing more on necessities and less on aspirational purchases, causing a shift in the consumption pattern, said Kaul.