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Consumer Products companies - Building brands

Jun 14, 2000

The consumer product sector is the cornerstone of the Indian economy. Growth in the sector is highly linked to the GDP growth of the country. The Indian consumer product industry is dominated by MNCs such as HLL, Colgate P&G and Indian Shaving Products.The key to success in the industry is a unique brand identity created by the companies. Brand building is very crucial for companies, as consumers are reluctant to try unknown brands. Therefore companies spend huge amount on creating a brand value through high decibel advertisement cost. The advertisement to sales ratio for some companies is continuously increasing. Consider the example of Colgate. The company’s advertisement to sales ratio increased to 17.3% of gross sales in FY00 from 8% in FY96. However the company is able to maintain its operating margins due to the cost control measures initiated by it. So it is very important for the FMCG companies to keep it operating margins high enough to sustain the increase in the adspend.

Comparative financial ratio analysis
Particulars
(latest FY results)
HLLColgateP&GIndian
Shaving
Operating profit margin12.0%8.7%21.0%17.8%
Five year average10.4%13.6%16.1%17.1%
Net profit margin10.2%4.6%13.4%7.7%
Five year average7.8%6.8%9.4%6.3%
Advertisement to sales ratio7.1%17.3%7.8%9.1%
Five year average5.5%13.4%7.9%10.0%

Among the companies selected above, P&G Hygiene and Healthcare Ltd. (PGHH) has the highest profit margin with the advertisement to sales ratio at 7.8%. However P&G has three companies in India namely PGHH, P&G Home Products (PGHP) and P&G Distribution. The leading brands like Ariel, Head & Shoulders and Pantene are marketed under PGHP. So the promotional expenses might be diverted to the other two companies of P&G resulting in lower advertisement to sales ratio in the listed company PGHH.

The table indicates that the profit margins of HLL, PGHH and Indian Shaving have increased in the current year due to savings in raw material costs, packaging costs and reduction in the overhead costs. The companies will have to increasingly spend on brand promotion not only to maintain market share but also to sustain in the emerging scenario of removal of quantitative restrictions.

Comparative financial performance analysis
Particulars
(latest FY result)
HLLColgateP&GIndian
Shaving
Sales (Rs m) 101,420 11,212 4,683 2,500
Growth (%)7.0%12.3%6.3%28.3%
Operating profit (Rs m)12196981857446
Growth (%)20.0%16.9%14.5%39.4%
Net profit (Rs m)10695518559194
Growth (%)27.7%13.3%29.3%10.0%

The topline growth of most of companies is narrowing down due to increasing competition. The margins in the industry are lower, so the volume growth holds the key to success in the industry. Consumer product majors fight out in the market to reach out to the masses and compete with brands in similar product categories. The purchasing decision of the consumer is influenced by the brand perception. Therefore the companies would not be able to cut down their promotional expenses if they want to grow their revenues.

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