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.

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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 firms take to brand valuations

A few months ago, Godrej Consumer Products (GCPL) wondered why its Cinthol brand was growing slower than fellow soap brand Godrej No 1. In its quest for the answer, it embarked on a valuation exercise and came up with a revelation.
 
The potential value of its top five brands – Cinthol, Fairglow, Godrej No 1, Ezee and Godrej Powder Hair Dye – was Rs 3,900 crore. Their realised value at that time was pegged at only Rs 2,600 crore.
 
This had a significant influence on Godrej’s strategy. The thing to do was to take steps to ensure higher performance through more “consumer offers”, like advertising to customers, than “trade offers”, which are to retailers.
 
“The guidelines suggested by the exercise will help us keep adding value to our brands,” says Hosehdar Press, the company’s executive director and president.
 
GCPL has also decided to publish a detailed report on the exercise in its annual report.
 
Brand valuation measures mainly two criteria – the potential profitability of the brand and non-financial factors like brand recall as compared with competitors.
 
In India, such exercises have been undertaken mostly by large conglomerates, such as Tata, since it is easier to quantify the royalty to be charged from group companies using the corporate brand name.
 
However, of late, companies across sectors, especially fast-moving consumer goods and telecommunications, have been valuing their individual brands.
 
In the FMCG sector, brand valuation used to be popular mainly among multinational companies. However, sources say a clutch of home-grown entities are taking the route.
 
Among these companies are Marico, Dabur India, Sun Earth Ceramics (the maker of Sonora tiles), Cholayil (the maker of Medimix) and personal care services firm VLCC.
 
Disclosing the value of brands enables companies to have better investor relations and consumer perception. It also helps in tackling corporate litigations considering the rise in trademark cases, say companies.
 
For Surya Foods, the maker of Priyagold biscuits, this exercise was a precursor to the initial public offering. The value ascertained by the company for its brands was Rs 1,200 crore.
 
“We undertook the exercise to give a better picture to our potential consumers, distributors and retailers about the value of our brands,” said B P Agrawal, the company’s managing director. The company will use insight from the exercise to implement expansion plans nationwide.
 
Experts say brand valuation is more than a mere marketing tool: it has become a key management application.
 
For multinational companies such as Coca-Cola and PepsiCo, brand valuation is central to the strategy, which determines their marketing spend for each brand and gives them a competitive advantage. It is also a significant contributor to enterprise value.
 
“For Indian companies to partner the International Financial Reporting Standards (IFRS), brand valuation is crucial,” says Sanjiv Agrawal, partner, Ernst & Young.
 
“It helps companies to take key corporate decisions like selling a brand, setting up a joint venture, an acquisition, or towards improving brand performance. It’s also a check on the performance of their brand managers,”
 
“With more companies getting listed, or heading abroad to raise capital, and a flurry of mergers and acquisitions, global accounting standards expect companies to be transparent about their business operations, which includes listing brand valuation figures in financial statements,” said Unni Krishnan, managing director of Brand Finance India, a global brand consultancy company.
 
“There is also a growing realisation among companies that cutting costs is not the only way to create value. While brands are intangible assets, they are central to businesses like in the FMCG sector and, therefore, cannot be left unaccounted for,” he said.
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