Mumbai: The double-digit sales growth in the so-called fast-moving consumer goods (FMCG) sector in 2007 may not have been on account of growth in demand, as widely believed.
An analysis of data gathered from two leading market research agencies—IMRB International and UK-based Datamonitor Plc. that tracks consumption trends in several sectors in India—reflects that while demand in most categories last year either declined or remained stagnant, growth in sales was mainly on account of price hikes and the launch of premium products by most companies, which bring in higher revenues to marketers.
Data by the two agencies reveal that demand for soaps, shampoos, detergents and toothpaste, which account for the bulk of FMCG sales, either fell or remained stagnant during 2007.
Yet, these categories registered growth in terms of value thanks to price increases resorted to by FMCG companies. According to Datamonitor, which primarily covered branded products, during 2007, the Rs4,938 crore annual soaps market grew 3% in value terms, but volume itself declined by 0.8%.
Similarly, the Rs2,399 crore annual oral-care market saw an increase of 6.35% in value even as the volume fell by 0.1%. The shampoo market also registered a healthy increase of 12.2% in value while volumes grew just 6%.
Value and volume reflect revenues realized through sales and the number of units sold, respectively.
Meanwhile, IMRB data, which covered 20 categories for both branded and non-branded products, indicates that around 10 categories registered a decline or stagnation in unit sales, while the rest grew only between 1% and 5%. Volumes for products such as washing powder, soaps, coffee, hair oil and talcum powder recorded a decline over 2006, while toothpaste, tea, detergents, skin creams and milk food drinks remained stagnant, or grew less than 5%.
The only exception was the shampoo category, which registered a 12% growth in volumes but, considering that about 70% of sales in shampoos come from single-use sachets on which many companies cut prices last year, analysts underplay the growth figures.
Even as volume growth slowed last year, revenue posted by FMCG companies did not. Between January and December 2007, total sales of the top 13 FMCG companies by revenue in India grew 18.2% over the same period in the previous year to Rs31,756.4 crore. The net profit in 2007 was some 19%.
The data from IMRB and Datamonitor suggest that it was largely the increase in prices and the launch of premium products that led to increases in higher revenue realization. While sales in sub-segments in the premium category grew in double digits, the non-premium, or mass, brands either declined or rose marginally both in value and volume terms.
According to Datamonitor, between April 2007 and March, 475 new products—46% more than the number of new products launched in the same period in the previous year—were launched in the FMCG sector.
“With a record number of new launches in 2007-08, the FMCG sector, which was struggling for higher single-digit growth up until 2004, managed double-digit growth last year,” notes Vinit Oza, a consumer analyst at Datamonitor. “New products were launched almost in all product categories. A majority of these were premium products.”
To be sure, Hindustan Unilever Ltd (HUL), the country’s largest consumer products maker, relaunched its Pond’s skincare range and introduced several top-end products such as Pond’s Age Miracle, Pond’s White Beauty and Pond’s Perfect Result.
Another leading company, Procter & Gamble Co., launched Olay. Priced at Rs450 and Rs599 for a 50ml bottle, the two products were at least 300% more expensive than other popular skincare products.
HUL’s own mass brand Lakme sells a 50ml moisturizer bottle for Rs55 and Garnier’s moisturizer, a premium product, costs Rs110.
Besides the launch of premium products, most firms also raised prices across categories. Prices of soaps and detergents increased by 8-10% and 10-12%, respectively, in 2007, according to a report by MF Global India Research. Prices of edible oils, toothpaste and skin creams, among other products, went up between 5% and 8%, the report said.
To increase their margins, some companies reduced quantities in packaging even as they increased the prices. For instance, the weight of HUL’s largest selling detergent soap Wheel was reduced from 1kg to 850g and from 250g to 190g, though in this case the prices remained the same. “With such tactics, the companies managed to protect their revenues and profits even as the volumes dipped,” says Manoj Menon, insights director, IMRB.
HUL’s net sales grew 13.3% in the financial year ended December whereas the volume growth was 6% vis-a-vis the previous year.
Still, many companies have started taking action to also push real demand. “In categories such as liquid detergents and hair dyes, we will try to increase penetration and attract non-users in an effort to negate the slowdown,” says R.K. Sinha, chief operating officer, marketing and operations, Godrej Consumer Products Ltd.
Some companies refute the notion that their revenue growth in 2007 was mainly on account of price increases or new launches. Marico Ltd, which sells brands such as Parachute and Saffola, claims that growth in the past three years was mainly volume driven, but it also concedes that it might be difficult to keep volumes growing in the coming months. “We see some very early signs of a slight slowdown, but we don’t see any significant impact on our volumes. While it is unlikely to drop prices for our products, we will try to maintain our unit margins and will not resort to price hikes to cream the market further,” said Chaitanya Deshpande, Marico’s head of corporate finance.