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Innovation plus rural penetration: The success mantra - Views on News from Equitymaster
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  • Apr 21, 2001

    Innovation plus rural penetration: The success mantra

    Fiscal year 2001 (FY01) was not a very good one for the fast moving consumer goods (FMCG) sector. Though the sector continued to show bottomline growth, the turnover growth took a turn for the worse. FMCG behemoth, Hindustan Lever Limited’s (HLL), results are considered to be a mirror for the FMCG industry in India, as it contributes over 50 percent to the sector’s revenues and profits. Though HLL continued its growth in bottomline (23 percent), its turnover growth was a paltry 5 percent. This slowdown of growth in turnover probably sums up the happenings in the FMCG industry as a whole.

    It is widely believed that the FMCG sector is not affected much by inflation as the consumers continue buying essentials. But rising inflation in FY01 forced consumers to downgrade their preferences, which in turn put pressure on the FMCG companies’ margins. Added to that bad monsoons in some states resulted in lower incomes for rural India, which in turn affected their purchasing power. This was also responsible for the staid growth in turnover and consumer downgrading.

    A common pattern emerged in the FMCG sector during this period. Companies like HLL, P&G Hygiene and Healthcare and Nirma recorded dismal topline growth, but continued to show double-digit profit growth. However, household cleaning major, Reckitt and Coleman’s performance was a little more balanced. In FY01 it declared a 16 percent growth in turnover and a huge 52 percent growth in bottomline. Its performance remained consistent over all quarters. But all the above companies achieved bottomline growth by pruning their debt, which in turn reduced their interest burden. This reflected positively on the bottomline.

    On the other hand, their depreciation charges saw an upsurge. This is an indication that these companies were making new investments, underlining their confidence in the sector's future growth potential. These companies also took efforts to cut their operating costs, which resulted in improvement in their operating margins.

    This was one end of the spectrum. On the other end, relatively new companies like Henkel Spic India witnessed double-digit growth in turnover (11 percent in FY01). However, this growth was on a lower base and companies like these are just making their presence felt. In its fourth quarter ended December 2000, this company’s turnover too showed signs of a slowdown (up 1 percent only).

    Immense potential…
    Segments Market size Penetration
      (Rs bn) Urban Rural
    Toilet soaps 35 95% 85%
    Hair oil 6 90% 86%
    Hair shampoos 5 25% 8%
    Skin care 4 30% 7%

    These figures bring us to a few conclusions. Traditional consumer products like soaps, detergents and other toiletries are facing a glut and consumer downtrading. New types of branded consumer products like shaving equipment, household care products and cosmetics, which have lesser penetration, saw volume growth. In order to survive the slowdown in growth, companies looked at becoming more cost efficient by pruning debt burdens. The companies also looked at investing more money into new business streams and distribution networks for volume growth.

    India is seeing a dramatic shift towards prosperity in rural households. As per National Council for Applied Economic Research (NCAER) the lowest income class will shrink from more than 60 percent in 1995 to 20 percent in 2007. The higher income classes will more than double and hence rural markets for FMCGs will boom.

    So, though the slowdown in volume growth and its consequent effect on margins is cause for concern, from the above estimates it is clear that rural prosperity is here to stay. However, the near term concerns include the drought situation in some key states of India and also the roller coaster oil prices, which may hamper future growth.

    India’s rural markets are currently witnessing intense competition in almost all consumer product categories. Since urban markets are saturated in most categories, future growth can come only from deeper rural penetration. FMCG majors are aggressively looking at rural India since it accounts for 70 percent of the total Indian households.

    But going by the trends in 2000, it is clear that the Indian consumer wants to see a wider variety of products and only those companies who can spend on research and development to develop new products and optimally use their resources will gain in the long term. This could also mean that MNC parents of Indian subsidiaries (like HLL, Reckitt, P&G and Henkel) may introduce newer line of products and brands in 2001.



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