Packaged goods makers to see slower growth in mature segments

Firm such as Unilever and P&G will see growth dip in segments that have served them well in the past decade
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First Published: Wed, Dec 05 2012. 11 17 PM IST
In the coming decade, the increase in revenue for packaged goods makers will be more from new markets and emerging categories. Photo: Pradeep Guar/Mint
In the coming decade, the increase in revenue for packaged goods makers will be more from new markets and emerging categories. Photo: Pradeep Guar/Mint
Mumbai: Multinational consumer packaged goods companies such as Unilever Plc and Procter and Gamble Co. (P&G), which derive a significant portion of their revenue from emerging markets such as India, will see growth dip in mature segments such as soaps, detergents and dishwashing products that have served them well in the past decade.
In the coming decade, the increase in revenue will come more from new markets and emerging categories such as face wash, liquid cleaners, deodorants, and catering to trends such as health and wellness and “premiumization”, say experts.
“We find that in many of the mature categories such as soaps, detergents, hair oils, etc., the penetration-led growth seen since FY2000 is over,” said a 23 October report by Nomura International Plc analysts Manish Jain and Anup Sudhendranath.
The report indicated that some home and personal care categories in India will increasingly mirror (the slow) growth rates seen globally over the next decade, even as companies will have to spend a significant amount of money to support brands and maintain market share in the mature categories.
Growth in the total household and total personal care markets has slowed in 2012 compared with 2005-10, said the report. The laundry segment, for instance, saw an average annual compounded sales growth of 8.4% between 2005 and 2010. This is expected to dip to 7.1% in 2012, according to the Nomura report. Similarly, in the bath and shower segment, the compounded average growth rate was 11.7% in 2005-10, which is expected to fall to 8.5% in 2012.
India ranks as one of P&G’s top 10 developing markets. These developing markets account for 38% of the company’s global revenue and grew at 12% on a compounded average over the last 12 years, while markets such as India grew at a higher rate of over 20% organically in the last decade. Cincinnati-based P&G expects to grow at close to 1% in fiscal 2013 (year-ending June), according to an in vestor presentation on the global website dated 15 November.
Unilever’s sales grew 6.5% in 2011 with growth in the developed world being subdued at 0.8%, as big markets such as the US, the UK, Germany and France—representing 61% of the revenue—grew 1-4%. Emerging markets delivered 11.5% sales growth for fiscal 2011.
For the Indian consumer packaged goods industry, the home and personal care segment—representing categories such as soaps, detergents and dishwashing—accounts for 40% of the overall Rs.1.8 trillion industry, according to research firm Euromonitor.
For Hindustan Unilever Ltd (HUL), India’s largest consumer packaged goods company by revenue, soaps and detergents account for more than 50% of overall sales.
In the coming decade, the drivers of growth will be different for a host of reasons, say experts.
For instance, new segments such as urban India’s poorest households that earn less than Rs.72,000 per year will expand. This is estimated to grow 50% in the next three years and add $1 billion (Rs.5,460 crore today) to the packaged consumer goods market, according to a 29 November report by Adrian Terron, executive director of research firm Nielsen India.
Companies are also expanding their reach into rural areas in search of new consumers.
In the last three years, P&G’s three Indian subsidiaries—Procter and Gamble Home Products Pvt. Ltd, Gillette India Ltd and Procter and Gamble Hygiene and Health Care Ltd —have increased their distribution reach by 60% to six million stores.
Likewise, in the last two years, HUL, the maker of Surf detergents, Lux soaps and Kissan tomato ketchup, has trebled its direct reach to stores in rural India by adding a million stores across the country to take its overall reach to more than seven million stores.
“HUL’s volumes have likely been boosted by close to 2% due to higher direct coverage,” said a 22 November report on India consumers by Deutsche Bank AG, which quoted industry experts.
Besides new consumer segments, there are new channels such as modern trade (representing supermarkets and hypermarkets such as Big Bazaar and Walmart) that will also aid growth.
Modern trade accounts for less than 10% of the overall revenue of consumer companies. As modern trade channels grow, first-time shoppers are expected to add another $1 billion to the overall packaged consumer goods market, Nielsen said in its report.
“Growth is coming from premiumization and reduced pack sizes. Or from the top of the market that has changed its consumption to premium, and bottom of the market, which is moving into branded goods consumption for the first time as their affordability increases,” said Raj Hosahalli, president of Nielsen India. He added that “the middle is getting squeezed”.
For instance, premium brands such as Dove (HUL) and Pantene (P&G) are the fastest growing shampoo brands. Likewise, “sensitive” toothpastes as a category did not have a meaningful representation three years ago. Now toothpastes such as GlaxoSmithKline Consumer and Healthcare Ltd’s Sensodyne and Colgate Sensitive, which sell at a premium, are already said to comprise 10% of the oral care market, analysts Abhay Laijawala, Gaurav Bhatia and Manoj Menon of Deutsche Bank said in their report.
Emerging categories such as hand wash, anti-ageing and conditioners total around Rs.250 crore each in size currently, but are growing fast at 30%. Well-penetrated categories such as tea bags are growing fast at 40%, but on a small base of Rs.150 crore, said the Deutsche Bank report.
The high growth of these categories persuaded Marico Ltd, the maker of Parachute and Saffola, to acquire the personal care brands of Paras Pharmaceuticals Ltd from British consumer goods firm Reckitt Benckiser Group Plc in February this year to get into segments such as leave-on hair conditioners (brand name Livon) and deodorants.
P&G plans to bring the parent’s entire portfolio to the country with the exception of toilet paper, Shantanu Khosla, managing director at P&G India, said in an interview in September.
However, even as companies increase the number of categories they are present in and launch new variants and premium products, consumers simply replace existing categories by experimenting with new ones. “Overall, number of categories bought has remained same at 23 in 2005 and 2010,” said Manoj Menon, group business director at IMRB International.
Also, the emerging categories are very small.
For instance, oats, which emerged as a category less than two years ago, is about Rs.200 crore now, according to the Marico management. “Marico has gained about 10% share to become the No. 3 player in the market, according to the management, but the brand still contributes less than 2% to the overall company sales,” said Nomura in its report.
Moreover, profitability in the mature segments of home and personal care has seen a structural decline and is likely to remain at these suppressed levels in the medium term, Nomura said in its report. It added that companies will have to spend a significant amount of money to support brands and maintain market share in the mature categories.
Additionally, the short-term macroeconomic environment also holds challenges. “The high input cost environment in the last year or so has meant a further hit to profitability, although there should be some respite from this in FY13F (forecast), we expect, due to falling commodity costs,” said Nomura.
Yet, companies remain upbeat.
“We believe there will be growth in every category in India, even in the so-called laundry and personal washes, which have become fully penetrated, there are growth opportunities like premiumization,” said Nitin Paranjpe, managing director of HUL, at the company’s second quarter earnings press conference on 26 October.
He added that the consumption opportunity in India remains substantial as new people come into the category and those already buying a category of products are buying better or premium products such as fabric conditioners in laundry or body wash instead of soaps.
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First Published: Wed, Dec 05 2012. 11 17 PM IST
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