FMCG cos bank on speed to win

Cut Time To Market Amid Downtrading Fears During Slowdown

Mumbai: Fast-moving consumer goods (FMCG) companies are using speed as a competitive weapon to win in the market place, especially when talks of a slowdown bring the possibility of downtrading into sharp focus.

Growth in the FMCG Industry has not lost steam even as other sectors have slowed down, but there is concern about a possible impact considering a deficient monsoon this year. The industry believes there is one weapon which can help companies win, and that is speed.

A Boston Consulting Group (BCG) report, ‘Speed To Win’, says increased agility can solidify a competitive position, boost profitability and reduce risk. It says for standard new product development, a seven months time to market can separate the best in class from average players. But would it also work in a slowdown? “In slowdown situation it is even more important as the consumers typically start to change their consumption patterns and it is important to refine the offerings (in terms of price pack architecture, composition and packaging) to ensure alignment with the consumer requirements,” said Abheek Singhi, partner & director, BCG.

A company can outpace its rivals by increasing its market share, boosting its negotiating leverage towards trade and positioning itself as an innovator and the mantra is: standardize, prioritize and mechanize. Take the case of Nivea lipcare. Speed helped the company redefine this category with the trade in terms of merchandising and distribution. The category was treated like an “impulse confectionery” and not like a traditional skincare category. “Our actions have followed out thoughts and results are there to be seen. We have been quicker than most of competition in developing the premium lipcare category for Nivea. All our initiatives have hit before competition, be it variety/price points/distribution. This has given us leadership,” said Rakshit Hargave, MD, Nivea India.

With compressed product life cycles, especially in some of the newer categories, being quicker to the market is a great advantage. “Speed to market is important, not just with new product development but also with reaching out to the consumer and ensuring that even the remotest of corners of the country get the products in a short period of time,” said Sunil Duggal, CEO, Dabur India.

Dabur integrated its consumer care and consumer health businesses and this was the genesis of ‘Project Speed’, which was designed to help the firm cope up with challenges by leveraging the power of its combined product portfolio through a unified sales & distribution structure. Dabur has also put in place an initiative to double its rural reach. The company is hopeful that this would enable it to have a direct access to 3,000-population villages across 10 states that account for 72% ofthe rural FMCG potential.

Some other examples are brands from mid-sized companies like Paras and Emami which were successful in gaining share as their product development times were shorter than others in the sector. When Emami conceived the idea of a men’s fairness cream, it knew it had a winning concept. What was important, however, was to ensure that it was put into market at a speed before others. “We were able to go to market within just under a year from the time the idea was conceived. This requires great agility. It took our established competitors by surprise as elements of marketing were in place within the short time,” said N Krishna Mohan, CEO, sales, supply chain and human capital, Emami. As a result, Emami enjoys market leadership in the category.

“Empowered companies with flatter and decentralized decision making structures can outpace its rivals in speed to market. This, when accompanied by stronger local consumer insights can develop into a potent competitive advantage,” said Saugata Gupta, CEO, consumer products division, Marico.

Supermarkets Make a Tryst with Record Sales on Independence Day

Top retail chains posted their highestever weekly sales in the six days to Independence Day, when heavy discount offers lured buyers to splurge on daily household products, apparels and consumer durables.

Retailers such as Future Group, Reliance Retail, Bharti Retail, RPG Group’s Spencer and K Raheja Corp’s HyperCITY — helped by active participation of several consumer product companies — offered deep discounts across product categories to push volumes at a time when consumer spending is slowing and there are fears of poor monsoon rains impacting demand.
“Consumers are looking at savings more than ever before,” said Rakesh Biyani, joint MD of the country’s largest retailer, Future Group, whose 164 Big Bazaar outlets across some 90 cities saw more than 8.1 million visitors during the week ended August 15. “We have been working to integrate our supply chain to bring down prices as far as possible.”
Several suppliers, including Coca-Cola, Britannia and Procter & Gamble, participated in special Independence week deals, helping retailers to offer higher discounts than before.
Darshana Shah, business head for marketing at HyperCITY, a hypermarket format run by Shoppers Stop, said increased vendor participation as well as entire malls going for sales helped pull in the crowds. “The sale was definitely better this year as we had stronger and bigger deals since market sentiment was soft,” she said. HyperCITY also increased its spend on marketing this year at around 2% of overall sales. During the week, Big Bazaar outlets sold more than 1.4 lakh packs of a combination of 5 kg of rice and sugar each with 5 litre of edible oil, and more than 1,500 tonnes of detergent. LED TVs, mixer-grinders and induction cookers were among the other top sellers at Big Bazaar, officials said.
Spencer’s Retail said its same-store sales increased 24% year-on-year during August 11-15, driven by beverages, health and beauty, bakery products and staples that saw over 30% sales growth. Sales of FMCG household products grew over 50% while liquor sales rose 30%, Sanjay Gupta, executive director (marketing & business development) at Spencer’s Retail, said.
Such discounting, however, reflects the escalating pressure on retailers, whose sales are slowing during non-discounted periods. “Because of the slowdown sentiment, consumers have been withholding purchases, so companies are trying to push volumes through discount seasons at retail chains,” said Mayank Shah, group product manager at Parle Products, the country’s largest biscuit maker.
But those volumes come at the cost of bottom lines, he added. Earlier this month, credit rating agency Fitch said same-store sales growth of retailers slipped across lifestyle and value-based formats in the quarter ended June, adding that it expects retailers to combat slowing sales by offering discounts.
“However, this may lead to an erosion of gross margins,” Fitch said, while revising the outlook for the Indian retail sector to negative from stable for the first half of this fiscal due to sustained decline in the discretionary spending ability. A slew of factors such as economic slowdown, deepening crisis in Europe, high food and fuel prices has impacted consumer sentiment in the country, slowing sales of everything from cars to carpets.
Some retailers use inflation as a marketing tool. A case in point is Bharti Retail’s “freedom from inflation” campaign at Easyday stores, which help people fight inflation by providing quality merchandise at low prices. Retailers such as Reliance Retail used the week to increase their customer base. Reliance introduced discount offers such as ‘double the difference’ price guarantees across various product categories.

Rural India Laps up Diapers, Colognes, Sanitary napkins.

Rural consumers are buying diapers, salty snacks, colognes and even contraceptives other than condoms like never before, despite signs of falling demand for traditional FMCG categories such as shampoos and soaps in hinterlands due to unabated inflation. Data from Nielsen, a global provider of insights and analytics, shows that tens of contemporary and indulgent product categories including sanitary napkins and chocolates are growing at high double-digit rates in Indian villages (see graphic).

“The rural mindset is open to consumption of newer, more contemporary categories, as a result driving consistent growth,” says Nielsen India VP Prashant Singh.
Nielsen categorises rural markets as those with population of less than 5,000, but there could be some exceptions. It estimates that the country’s rural FMCG market will grow to $100 billion by 2025 from $12 billion in 2011.
For MNCs like Procter & Gamble and PepsiCo, it’s an achievement of sorts to have broken ground in rural markets, by initiating consumers into newer categories such as diapers and salty snacks and upgrading them from unbranded or regional products to branded ones like in the case of cooking oils.
So, how did they achieve this?
P&G adopted the classic and tested strategy of betting on low-volume, lowpriced packages — sachets in the case of detergents and shampoo, and, for diapers, a pack of two at Rs. 15.  The move has paid off.
“We have seen a near doubling of the diaper category in rural India over the last two years,” says P&G Brand Manager (Pampers) Girish Kalyanaraman.
P&G launched the country’s first lowpriced trial pack of two Pamper diapers two years ago, educated people in rural areas about the benefits of uninterrupted overnight sleep for babies; and ran an awareness campaign on Doordarshan and satellite channels. Result: Demand for diapers has grown 90% a year in the last couple of years.
American snacks and beverages maker PepsiCo is another company that achieved tremendous growth in rural areas. Besides using fixed low price points such as Rs. 2, 3 and 5, PepsiCo has been using innovation, backward linkages for procurement and expanded distribution to drive growth in the hinterlands, a PepsiCo spokesman said.
“There’s a massive under-served demand for hygienic packaged snacks; we are expanding our manufacturing footprint and investing heavily in expanding distribution,” he said.
The company has moved away from centralised manufacturing and, instead, partners with local entrepreneurs across the country to cater to regional preferences and tastes, using locally grown ingredients. Examples for this include the extension of Kurkure brand to three local variants — Mumbai Usal, Bengali Jhaal and South India Spice—and testing of Lehar Iron Chusti puffs and biscuits at Rs. 2 in Andhra Pradesh. Kolkata-based Emami—maker of Boroplus anti-septic cream and Zandu Balm pain reliever—broke into the rural cooking oil market with a Rs. 5 pack of its edible oil Healthy & Tasty. “Rural consumers are used to buying unbranded or loose oil from local kirana shops for Rs. 5 or 10,” says Emami Group of Companies Director Aditya Agarwal, explaining the idea behind the low-cost edible oil packet.

Chain Reaction

A 1700 crore brand, Amway India’s direct selling business journey involves thinking and acting like an FMCG company

FOR A company that’s built on a model of minimal mass media advertising and maximum direct selling, resorting to above the line communication sure does raises eyebrows. But William S Pinckney, CEO of Amway India knows that to drive the company further into the Indian market, using advertising to increase brand awareness is important. So from a corporate ad that projected Amway more as a FMCG company and less as a direct marketing business, Pinckney says the company will now start with category advertising soon to “to educate customers about the brand as many people don’t know us.”

Pinckney’s worry may be the unfamiliarity of the brand in India, but looking at the numbers Amway has notched up, it seems to be spreading the right message. Amway will be closing the financial year with a turnover of 1700 crore, clocking a CAGR of 20%. With over a decade’s presence in India, Amway today sells around 115 SKUs — from products in beauty to home and personal care. While beauty (10%) and HPC (30%) are important categories for Amway, 60% of its sales in India come from nutrition products and its brand Nutrilite, according to Pinckney, is among the Top 5 in the world in its category. Pinckney accepts that the company‘s growth has revved up only in the past few years thanks to key changes initiated in the overall business model.

The changes however do not mean that Amway has moved from its multi level marketing model that is the USP of the company. Products are still sold through a network of Amway Business Owners (ABOs) across the country with emphasis on bottomline margins. Pinckney says one of the thrust areas has been a faster delivery of the product range to end users. Using a network of seven contract manufacturing facilities, the SKUs move to a central warehouse and from there to regional warehouses across the four main metros — Delhi, Kolkata, Mumbai and Bangalore. Amway today has a network of 130 offices, 55 warehouses that reach around 4000 cities and towns across India.

Taking a leaf out of the FMCG sector, Amway has introduced smaller SKUs like single use sachets to generate trials among customers and get them interested. Further, to get customers to ‘touch and feel’ the products, the company has ‘brand experience centres’. These centres situated within shopping malls and high streets allow customers to look at the product range. Pinckney says that the centres are manned by consultants who provide information on the products on display. However, these centres don’t sell as he is clear that selling happens through ABOs. “The retail format is not a point of sale as we don’t want it to cannibalise our core business operation.

Customers can try our products at the experience centres and we will help them get in touch with the ABO in the area they live to buy the products,” says Pinckney. However like any FMCG company, Pinckney says providing a retail experience is important even for Amway and therefore the company plans to have a footprint across the country with over 30 brand experience centres.

Amway may have notched up some serious numbers in a short span of time, but there are challenges as it looks to scale up the ladder. Foremost is the beauty and personal care category that’s witnessing an aggressive play off between established FMCG players. Market observers believe for Amway to make an impact, it will have to project each product as a brand with its own character and personality. “A lot of brands in these category are imagery driven. Any premium that a brand charges depends on the brand message it sends across,” says one market observer. That’s precisely the reason why Amway is now looking at above the line communication for individual brands. On the other side of the spectrum is the price war that one comes across in home and personal care. With well known FMCG companies playing the price card regularly, Amway for its offering has to be in sync with the market when it comes to pricing, say market observers. Pinckney knows that in terms of marketing and communication, he doesn’t have the muscle to match the FMCG behemoths in the market. But Amway’s trying to overcome the perception and familiarity issue through training. Amway provides free training to its ABOs and so far it has conducted 29,000 training sessions for more than 1.5 million people. “As this is a one-to-one marketing business, it is important that ABOs know about the product they are selling,” says Pinckney.

Amway has acquired some traction in the multi level marketing business, but to keep the chain going, the company will need to think more like a consumer goods company and less like a direct seller.

 

Big bazaars score over kiranas

EARLYthis year, when escalating prices were crunching household budgets, modern retailers were more responsive in cutting or holding prices of day-to-day products than traditional retailers, thanks to their ability to check operational costs bargain hard with suppliers and launch private labels.

According to a study by The Nielsen Company, modern retail dropped prices by more, or increased them by less, for more product categories than traditional retailers, or kiranas, between the last quarter of 2009 (Oct-Dec) and the first quarter of 2010 (Jan-Mar).

“The power of modern retail lies in the scale and efficiencies which we have built over the years,” says Kishore Biyani, CEO of Future Group that operates retail formats such as Food Bazaar, Big Bazaar, Pantaloon and KB’s Fairprice stores.

The Nielsen Shop Census study compared prices of 47 commonly used items including toothpastes, washing powder and confectionery. Modern retail dropped prices by more, or increased them by less, than traditional retailers for 29 product categories while traditional retailers did better in 18 categories.

It collected data from 16,000 stores (11,000 urban and 5,000 rural, in both modern and traditional retail) in 462 towns and 1,427 villages.

During this period, the rate of inflation, as measured by the Wholesale Price index, was hovering around 10% and food inflation was more than 12%.
In the past two years, modern retail has been able to significantly cut operational costs related to real estate rentals, energy costs and increase persquare-feet productivity of employees leading to savings in people costs.
They also launched private labels to get a better grip on selling prices and profit margins, and some savings were passed onto customers.

Higher collaboration with small and medium suppliers as well as distributors of large FMCG companies helped them cut costs in transportation and logistics.

Efficiencies of scale helps one source the goods closer to the manufacturer says Mr Biyani. In 2009, Big Bazaar sourced 26,000 tonnes of rice, 4 crore pieces of clothing, 20 lakh suitcases, 36 lakh mixer-grinders, 45,000 manufactured beds, 20 lakh bedsheets and 19,000 LCD TVs. Each of these figures will be higher by a minimum of 30% for the year 2010, he says. “Such large sourcing allows us to get better prices directly from manufacturers and producers.”

Big Bazaar is the largest player in the segment contributing over 33% of modern retail sales. Other top retail formats competing with traditional kirana for essential purchases include Reliance Retail, Aditya Birla Retail’s More and Spencer’s Retail.

Kumar Rajagopalan, CEO, Retail Association of India, says strong sourcing power helps modern formats offer better prices. “They have done away with the extra level of intermediaries,” he says.

Meanwhile, grocers too are working on protecting their turf by leveraging on their strengths such as customer relationships, home delivery, credit facilities and expanding their product portfolio.

Top FMCG companies such as Hindustan Unilever, Procter & Gamble Marico and Godrej have begun adopting kiranas, teaching them category management and effective merchandising to counter big retailers and their private labels.

Bharatiya Udyog Vyapar Mandal (BUVM), the biggest national-level association of mom-and-pop stores, has formed city-centric associations that negotiate directly with manufacturers such as Unilever and P&G and do away with any middlemen.

This helped kiranas offer 5-20% discounts on MRP of branded products like detergents, shampoos soaps, oil and atta.

“When prices rose due to inflation some kirana stores offered customers the option of paying in instalments apart from extending them credit for a month,” says Vijay Prakash Jain, secretary general of BUVM that comprises 17,000 state and district-level associations across 27 states.

Interestingly, kiranas managed the prices of items such as detergent bars toilet soaps, shampoo, packaged tea and iodised salt better than modern retail, according to the Nielsen study.

Currently, traditional retail, both grocers & chemists, constitute over 95% of total sales in the country.

Modern trade at just 3-5% of the total national industry sales, had grown aggressively at over 35-40% contributing to over 15-25% sales for most consumer goods companies last year.

FMCG cos ride the fast lane on stable prices.

The fast-moving consumer goods have started moving off the shelves faster in the past two months on stable prices, tempting companies to boost promotional activities and offer products at multiple price points. Key product segments such as soaps, detergents, toothpastes, biscuits, snack foods and soft drinks saw volume growth of more than 20% in April-May 2009, with companies ploughing back savings from lower commodity prices into brand building, consumer discounts and promotions, coupled with improved distribution strategies. In fact, most players have taken a break from their two year-old practice of raising prices since input cost pressures have come down.

The growth rate this year is expected to be volume-led. “Since April this year, we are witnessing an upturn in growth rates. Post-election results and a stable government assuming office, sentiment across corporates, trade and consumers has turned positive,” said Parle Biscuits executive director Arup Chauhan.

These companies are also investing significantly in distribution and tailoring their products and prices to specific geographies as demand picks up in both urban and rural markets. “Both urban and rural growth numbers are encouraging and we are recording our strongest growth in recent years. Buoyed by the overall political stability and expected fiscal stimuli, consumer confidence has picked up remarkably,” said Godrej group chairman Adi Godrej. Rough industry projections estimate growth at 30% in 2009-10. The industry recorded 17-18% volume growth in the last financial year.

Dabur has delivered its best organic growth in a decade in 2008-09 and is optimistic about continued strong performance. “New products contributed almost 20% to the sales growth during the last fiscal and we expect this contribution to go up to 30% in 2009-10,” Dabur COO VS Sitaram said.

Outlining key drivers that have led to growth at Dabur, Mr Sitaram said focus on rural markets in key states, coupled with sharper brand strategies, increasing competitiveness of brand propositions and investment in sales force with the introduction of category-focused teams in top markets worked for the company. Dabur ended 2008-09 with a 17.5% growth in net profit and gross sales of Rs 2,834.11 crore, up 18.3% over the previous year.

With summer setting in, the beverages segment too is witnessing higher sales. PepsiCo is recording a 30% growth in the current quarter against 12% in the same quarter last year. “The beverages arm has been clocking unit case volume growth of 30%, with both carbonated and non-carbonated drinks posting healthy growth,” said PepsiCo India chairman & CEO Sanjeev Chadha. Rival Coca-Cola’s India division has been posting unit case volume growth of 31% — its highest since the pesticide controversy in 2003.

To address healthy rural demand and a cautious urban consumer, companies such as Hindustan Unilever (HUL), Nestle, Procter & Gamble, Godrej and Dabur are shifting focus to volume growth and making higher investments in mass brands. HUL, which had been focusing on premium high-margin products, is now sharpening its mass-products strategy.

Foods companies such as Nestle, Britannia and Frito-Lay have introduced multiple price points to prevent the consumer from downtrading. Latest ACNielsen numbers indicate that low-priced packs are growing faster than bigger ones.

Rural India: Glitter in times of gloom.

No company can afford to ignore two third of the consumer population pie. However inaccessible they may be and whatever changes may be required in the company’s strategy to attract them. No wonder, the growing power of the rural consumer (accounting for 64 per cent of country’s total consumer base) is forcing Indian blue chips and MNCs to flock to rural markets. Not only FMCG companies but even banks, auto, telecom and retail companies are finding it difficult to keep themselves away from the lure.

Fathom this. Seventy per cent of India’s and 12 per cent of global population lives in rural India and contributes 50 per cent of the country’s GDP. Their population of 75 crore (750 million) is more than that of US, UK, France, Japan, Italy and Germany put together. In fact, as per Mckinsey, despite rising urbanisation, 63 per cent of India’s population will continue to live in the rural areas even in 2025.

Surging ahead in terms of growth

As per National Council of Applied Economic Research, rural market accounts for 55 per cent of LIC [Get Quote] policies, 70 per cent of toilet soap consumption, and 50 per cent of TV, fans, bicycles, tea and wrist watch consumption. So as a target market, it is attractive not only because of the size, but also because of impressive growth potential.

Rural GDP has been witnessing strong growth in the last four years (avg of 4 per cent) not only on the back of increase in minimum support prices for the agri-products but also due to availability of alternative employment opportunities.

Income_Distribution

Income_Distribution

Source: Business Today

In 2008, the rural areas grew at a robust rate of 25 per cent as compared to 10 per cent growth in urban retail market According to a McKinsey, rural India, would become bigger than the total consumer market in countries such as South Korea or Canada in another twenty years. It would grow almost four times from estimated size of $577 bn in 2007. While the per capita income is lower than urban areas, the customer base is thrice that of urban areas.

Resilient to slowdown

On account of negligible tax liability and little or no burden of loan repayments, the Indian rural population has a higher propensity to save. The rural areas account for 33 per cent India’s total savings. Being more conservative than their urban counterparts, the rural populace has not burnt their fingers in the real estate or stock market bust. Further, the rural income distribution pattern is also changing and the bottom is getting narrower.

While 18 per cent of rural India has earnings in the range Rs 45,000 to Rs 215,000 per annum, 58 per cent of urban population earns in this range. However, 27 m individuals form a part of this income bracket in rural areas while in urban areas it is about 29 m; of which large base is already tapped.

No of households (m)

Demographic classification

Urban

Rural

Total

Rich ( income greater than Rs 1 m
per annum)

4.8

1.3

6.1

Well off (income greater than Rs 0.5
m per annum)

29.5

27.4

56.9

Total

34.3

28.7

63.0

% of total

54.4%

45.6%

Source : Ministry of Communications & Information Technology , India

As per the Associated Chambers of Commerce and Industry of India, the rural market is becoming increasingly attractive for FMCG, automobiles and organised retail businesses. Rural India accounts for more than 40 per cent consumption in major FMCG categories such as personal care, fabric care, and hot beverages.

FMCG sector in rural areas is expected to grow by 40 per cent as against 25 per cent in urban areas in the coming quarters. The size of retail market in India is estimated at US$ 280 bn of which the rural retail market works out to be $112 bn. This is expected to double in next 4 to 5 years because of the huge potential. Even auto companies in recent times are witnessing shift in trend as they are gearing to explore the huge market potential lying in the rural areas.

Top 20 cities

Other cities

Rural

Car

23

5

3

Bicycle

37

61

69

Colour Tv

68

47

17

AC

5

3

0

Refrigerator

63

34

8

Computer

8

3

1

Source: Mint

As rural India becomes more lucrative and the government becomes more committed to its development, schemes like the rural employment guarantee, Bharat Nirman, focus on rural education, debt waiver plan and higher support prices will aid the rural demand. Although the penetration levels are still very low, the scope is huge. And India Inc. is not letting go of this opportunity.

%d bloggers like this: