Fast moving goods slow to a crawl in
India By Indrajit Basu
KOLKATA - Analysts were expecting it, but they
never imagined it would be so disappointing. Three weeks
back when Hindustan Lever Ltd (HLL), the Indian arm of
the Fortune-500 transnational, Unilever, and one of
India's top consumer household products companies (or
fast moving consumer goods - FMCG - companies), reported
a 45% drop in second quarter net profits along with a
4.7% drop in revenues, it sent shock waves across the
industry.
After all, HLL has been reporting
continuous growth and profitability for 25 years and was
once dubbed a "widow's stock" by those who invested in
its shares, based on the assumption it would always
remain stable. Besides, HLL, which launched its first
packaged mass consumption product in India in 1888, has
been dominating the minds of Indian consumers, the
country's markets and a few other foreign FMCG companies
for generations.
But HLL was not alone. Its
peers, like Nestle, reported a 36% drop in net profits a
few days earlier, and almost all old-timer multinational
FMCG companies like Colgate Palmolive, Proctor and
Gamble (P&G), Cadbury, and even later entrants like
Kellogs and Heinz have experience an equally
disappointing drop in profits and sales volume. On the
other hand, though, Indian FMCG players such as Marico
Industries, Godrej, Dabur, and even smaller regional
players like Jyothi Laboratories, Nirma and the likes,
are reporting consistent growth.
Indeed, this is
one reality that big multinational consumer goods
players in India's increasingly fragmented US$11 billion
FMCG market are learning to live with; competition from
smaller but aggressive regional players which are fast
creating strong brand equity and a clear competitive
edge by selling their wares at cut-throat prices. For
multinational FMCG players then, India, a country where
the per capita (yearly per head) consumption of FMCG
products is only just over half of its 1 billion plus
people - still abysmally low - selling high-profile
branded products like soaps, detergents, shampoos,
orange juice, and even "essentials" like toothpastes,
shaving creams and flour, has suddenly become painfully
tough. While brands like Surf, Aerial (detergents), Lux
(soap), Cadbury Milk Chocolate, and Clinic (shampoos)
have started crawling, Medimix (soap), Vatika (shampoo),
and Amul (food products) are flying off the shelves of
Indian grocery stores.
So what is going wrong
for these marketers that were once considered
invincible, and prime case-study material for Indian
business schools?
Analysts say that
post-liberalization of the early 1990s, the dynamics of
the Indian consumer markets and the consumer mindset
have undergone a paradigm shift. But the FMCG
multinationals in India, particularly the older ones,
are still following business models which may have led
them to their zenith earlier, but now need to be totally
revamped.
Multinational FMCG companies haven't
kept in touch with the ground realities, says T Thomas,
ex-chairman (1973 to 1980) of HLL. "Even with all the
improvements in communication and reporting systems,
there is no substitute for a first-hand gathering of
information and impressions," he says. "Some of the
wisest suggestions and observations about products come
from salesmen in the field when one spends time with
them and not in seminars held in star hotels."
There is another problem, however. Perhaps the
country's multinational FMCGs have become too big for
their boots. India's FMCG sector registered stupendous
growth in the early 1990s - the initial phase of
liberalization. During that time, the floodgates were
swung open for various new products and brands. Rural
markets then were also virgin pockets and there was a
huge scope even in the urban sectors. Multinational FMCG
companies, therefore, in order to strengthen their
networks to reach the grocery store shelves in every
nook and corner, expanded their distribution channels
far beyond what could have made economic sense.
"But," says Animesh Singh, a FMCG sector analyst
in a Mumbai-based investment bank, "over the past couple
of years, these markets have been completely exploited;
penetration levels in most categories in the sector have
reached saturation level. Hence, no significant gains
can be expected by any kind of increase in distribution.
Alternately put, distribution is not driving volume
growth any more." Moreover, says Arvind Singhal,
chairman of Delhi-based KSA Technopak, India's largest
management consultancy specializing in the consumer
products segment, "Indian consumers are no different
from consumers in most other markets across the globe,
and are becoming increasingly savvy when evaluating the
price-performance ratio for the goods and services."
Which, then, raises the important question of
how Indian FMCG players are thriving, if the country's
FMCG markets have become stagnant, with buyers turning
increasingly discerning.
According to Thomas,
local players may be growing partly due to what he calls
the multinational FMCG firms' "inertia of success". "The
inertia of success is a disease that companies have to
be vigilant about, especially when they have a decade or
more of sustained high performance," says Thomas. "When
corporations grow uninterrupted for years they tend to
ignore the dangers of competition. That is what must
have caused HLL and others to push up the margins on
their products to a level that provided an umbrella for
nimble competitors to eat into their dominant market
share. It allowed local companies like Marico, Calvin
Care and Nirma to gain a foothold in its space."
Thomas' opinion is ratified by Singhal. He says,
"All things being equal, Indian consumers are also no
different from their international counterparts when
they seek increased value each time they buy any
particular product or service. Companies that have
acknowledged this fact and have reoriented their
businesses to rise to this challenge are the ones that
have been successful."
Admittedly, local FMCG
companies have been ruthlessly aggressive in recent
times. Facing reduced margins, while multinationals
FMCGs started increasing their prices a few years back,
local players started selling equivalent products at
less than half the multinationals' prices. Besides, they
also doled out freebies to push volumes through their
extended distribution networks. With much lower
overheads, those freebies and lower prices still left
the local players with enough margins to thrive.
The multinational players fought back, though.
P&G and HLL, for instance, cut prices of their
products by as much as 60% in certain categories, but
due to much higher distribution costs and other sales
overheads, those cuts directly hit their bottom lines
instead of achieving a desired hike in sales volume.
Many feel that the multinational era in India's
packaged mass consumption goods sector is truly well and
gone, and now it is the era of "India shining". Still, M
S Banga, the current chairman of HLL, refuses to believe
so, and says with a changed strategy, his company will
be back to rule the markets soon. According to Banga,
multinationals have embarked on new diversifications and
brand revamps, which will bring them back to their
former glory. Moreover, they will also be aided by the
emergence of modern trade. "The rise of shopping formats
and malls has given us the opportunity to reach out," he
says.
The multinationals may also have history
on their side. According to Thomas, the "inertia of
success" phenomenon had affected mass sellers in the
United States, too. Companies like IBM and General
Motors, which were undisputed leaders in their
respective fields, were beset with the same problem
between 1972 and 1992. Their market shares were taken by
Toyota and Apple. Both IBM and General Motors had to
take drastic steps to regain their dominant positions.
Which is why aficionados of India's once "blue
chip" FMCG companies feel that there will be a comeback.
But for the moment, fingers are crossed.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years' experience in business/finance and technology
journalism. Besides writing for Asia Times Online, he
writes for other US-based publications and IT
companies.
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