Is 'niche' the new norm in FMCG? - Views on News from Equitymaster

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Is 'niche' the new norm in FMCG?

Apr 2, 2013

The FMCG industry is struggling with demand slowdown. Despite increase in advertisement spends to promote sales, companies like Hindustan Unilever, Colgate and Dabur posted single-digit growth in volumes in December 2012 quarter. As inflation continues to remain high, consumer goods companies are finding it difficult to pass on higher input costs. Therefore, companies have devised strategies to protect margins.

Some of the key strategies are outlined below

Exiting competitive mainstream categories

Several FMCG companies are exiting mainstream categories that are highly competitive. Glaxo SmithKline Consumer Healthcare (GSKCH), for instance, has phased out its creams & cookies biscuits under the flagship Horlicks brand. But the company has retained its nutritious biscuits range under the brand. GSKCH has exited out of the maida noodle segment that is more competitive. But the company has launched multi-grain noodles on the health food plank.

Entering niche or premium categories

A number of FMCG companies have entered niche or premium categories. These categories provide scope for market development and growth. Dabur is developing toothpaste for sensitive teeth and plans to launch the product by March 2014. The company gets the major share of its revenues from the low priced Babool toothpaste and the mid-range Red toothpaste. Oral care forms 17% of Dabur's overall revenues.

Dabur has also forayed into the light hair oil (LHO) by launching almond hair oil. This category is the second largest after coconut oil and is growing faster than the overall hair oil market. Bajaj Corp leads the LHO market with a 54% market share.

To benefit from growing demand for LHO, Hindustan Unilever (HUL) has launched its super-premium range of hair oils under the Dove Elixir brand. These hair oils are priced four times higher than existing brands in the LHO market. HUL wants to create a new sub-category and extend the moisturizing property of Dove to premium end of the hair oil market through this range. India is the first market where the Elixir range has been launched.

Is this trend sustainable?

Companies that benefit from niche valued added products call it a 'premiumization strategy'. This can get hit, in the short term, with consumers down trading (buying lower priced products) due to high inflation. However, its long term potential remains intact. This is because growing income has been fuelling consumption. As per AC Nielsen, rising disposable income and high aspirational levels have led to value vaulting. In value vaulting, consumers move up the value chain after a threshold level of penetration rather than increase consumption. This phenomenon has been further catalyzed by the modern trade channel. Currently, modern trade contributes 9% to overall FMCG sales in India.

The lines between popular and premium segments have diminished due to value vaulting, as per the Nielsen study. No wonder that even villages have been enamoured by value added products. More and more rural consumers are buying branded juices, health food, facial bleaches, sanitary napkins and feminine hygiene products. These products were once considered to be the domain of urban living. Rural sales of baby diapers and sanitary napkins surged by 150% and 74%, respectively in the last two years. Overall FMCG sales in rural India grew by a steep 150% in this period.

Therefore with demand from both urban and rural markets picking up, the premiumization strategy is here to stay.

Madhu Gupta

Madhu Gupta (Research Analyst), ValuePro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages.

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