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What is fuelling growth in FMCG companies? - Views on News from Equitymaster
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  • Apr 11, 2012

    What is fuelling growth in FMCG companies?

    Clearly, India is growing in leaps and bounds. A new India is emerging.

    A few years ago, there were hardly any takers for packaged curds as most households set curds every night to consume it the next day. But now consumers not only buy branded curds, but also probiotic curds and flavoured yogurt. Who can forget the summer delight of freshly squeezed lemon juice that was prepared either at home or by street side hawkers? Now this can be enjoyed anywhere & anytime, thanks to its packaged avatar.

    In the past, fairness products for men were unimaginable. Today this segment is amongst the rapidly growing personal care segments. In other words, with rising consumerism in all categories (food, personal care, etc.), companies are identifying and targeting products that offer convenience, premium and luxury. In addition, the modern, organized retail offers consumers a huge array of products on its wide shelf space. These visible choices too further spur consumer demand.

    In rural India, the consumption pattern is slowly transforming from being experimental or occasional, to being an indulgent one. Nielsen, the reputed market research agency, tells us that consumer products like biscuits, edible oils, snacks, hair oils and shampoo are now witnessing faster growth in the hinterland. Rural India is calling the shots in more than half of the largest consumer good categories. In India, C.K. Prahlad's "Fortune at the bottom of the Pyramid" has been discovered.

    Innovation through new products and re-launches

    Sensing a huge potential, there has been an avalanche of new product offerings by companies in recent years. In 2010 alone, FMCG companies inundated the markets with more than 10,000 stock-keeping units (SKUs) in both food and non-food categories. An SKU implies a new product offering either by modifying the content or packaging. The sachet and the "five rupee" price point have been the demand drivers for rural or impulsive consumption. This has led to a spurt in product launches particularly in biscuits, snack foods, shampoos, hair oils and creams in this rapidly growing SKU.

    Domestic companies take a lead

    Innovations include research trials, marketing and promotions. Launching a new SKU, on an average, costs around Rs 80m-150 m. However, this has not deterred small companies. In this dynamic environment, instead of challenging multinationals in their core products, small companies find it easier to introduce innovations where they face no competition. Innovation has risk associated with it. So new ideas, often emerge at the fringes, and not from large companies which cannot afford to fundamentally change their paradigms and business models.

    In fact, it was Emami that first launched a fairness cream exclusively for men. After the cream became a huge success, MNC's such as Hindustan Unilever (HUL) and L'Oreal were compelled to enter this category. Moreover, Emami is reviving its over-the-counter healthcare business with a slew of brand re-launches along with a new distribution system, packaging and marketing. Other domestic companies have also been fairly successful in launching innovative products. Dabur has developed Oxylife Bleach and is applying for a patent. Oxylife Bleach was introduced and aimed to be sold to beauty parlours. Marico has launched low glycemic index rice 'Arise' for the diabetic population.

    Biggies follow suit

    Large multinational companies have recently woken up to the importance of innovation to woo, keep and expand its customer base. FMCG behemoth HUL had been tardy with new product launches. The company has been launching 70-80 innovations annually since 2009-10, more than it did in the entire decade. During the past one year, HUL has re-launched more than 50% of its product basket. HUL has launched 40 innovations in skin-care alone in 2010-11, paving its entry into new segments such as premium skin-lightening, hand and body lotion, male grooming and anti-ageing. All these products are being launched under existing skin care brands brands - Lakme, Ponds, Fair & Lovely, Vaseline and Dove. The company has also extended its renowned brands to emerging categories. - For example, Hamam has been extended to hand wash, Rin to fabric whitening and Rexona to deodorants. Biscuit major, Britannia has extended its brands to launch biscuits and snacks for health conscious and diabetics.

    Innovation is there to stay

    As per Nielsen, a successful innovation contributes to one fifth of the company's overall turnover by the second year of the launch. Innovations are the growth drivers and keep the company's iconic brands relevant with the changing times. Therefore even after a passage of time, brands such as Lux, Dettol and Lifebuoy have retained their brand equity.

    India is changing rapidly. With rising disposable income, a growing youthful middle-class and deepening rural penetration, innovation is the keyword to the future survival and growth of FMCG companies. For FMCG, innovation is the "new gold".

      Madhu Gupta (Research Analyst), Managing Editor, ResearchPro 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. Madhu contributes towards our small cap service Hidden Treasure.



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