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Mr. Godrej on the FMCG sector - Views on News from Equitymaster

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Mr. Godrej on the FMCG sector

Dec 30, 2006

Adi Godrej – the name needs no introduction. As the man in charge of the Godrej Group of companies, he is well known. We caught up with Mr. Godrej to talk about the FMCG sector, and its prospects going forward. EQTM:  You have always been a believer that the FMCG sector has good potential in the long-term. And we have seen demand recovering in the last year or so. What is the market opportunity before us, looking five years ahead?

Mr. Godrej: The FMCG sector will continue to grow well as the economy will clearly continue to do well. The consumer is getting more and more affluent, which will accelerate growth. The sector will not only continue to grow, but the growth rate will become faster in times to come.

Besides the economy growing strongly, the other factor that has helped growth is the indirect tax reforms. The introduction of VAT around a year ago has aided the sector considerably, as small players, who could earlier evade taxes, have ended out of business. Further, five new states have implemented VAT from April 1, 2006 onwards. Also, with the introduction of Goods and Services Tax (GST) latest by April 1, 2010, it will certainly further add to the growth for the sector.

EQTM:  Give us a sense of the current consumption pattern in India and where do you see it heading in the next five years? Which segments do you foresee leading the way, i.e. soaps, detergents, packaged foods?

Mr. Godrej:  Consumption of FMCG products is across the board and across all categories. Growth is being witnessed in urban as well as rural markets and is not particularly rural centric. Also, It is geographically spread across the country.

Some categories such as soaps and detergents are already heavily penetrated, and hence going forward, these two categories will grow in single digits. However, under penetrated categories will grow faster in time to come. Growth rate will come from population increase, income increase and penetration increase. The lower the penetration of products, higher will be the growth rate.

EQTM:  Competition has and will continue to increase. In the fight for market share, how important is branding for FMCG companys?

Mr. Godrej:  Branding is extremely important for FMCG companies. It is the name of the game and is all about your offering. If a company makes a better offering, then the brand will be perceived to be more useful to consumers. However, it has never been seen that a totally unknown brand making a big offer and succeeding. If a big brand makes a good offer, it will be successful. The level of competition is the same today, as what it was five years back. However, the main strategic strength comes from differentiation, which could be price based, communication based or product based. Thus the barriers to entry are strong brands, strong technology and strong position. The most important challenge today is to keep the brand contemporary and strong as branding in FMCG today has become even more important than five years back.

EQTM:  What impact would a bad monsoon have on the FMCG sector?

Mr. Godrej:  The criticality of monsoon has become much less than in the past and will become less and less going forward. Although, it does influence the FMCG sector, but is no longer critical. Today, agricultural income to total GDP is down to only 18%, thus agriculture itself is not that important to the economy. Also, Kharif monsoon crop was earlier almost double the size of the irrigated crops. However, today it is exactly the opposite, the irrigated Rabi crop is double the size of the Kharif crop. Thus, this indicates that the influence of monsoon is much less. Further, agriculture proportion of rural income is diminishing considerably. Animal husbandry is rapidly increasing. Despite the worst monsoon in about 30 years in 2002, India’s GDP grew by 4.5%, but a similar case in 1970’s would have resulted in GDP falling by 10%!

EQTM:  Organised retail is currently a small percentage of total sales? How exactly will FMCG companies benefit from shifting from unorganised to organised sales? Do you see this shift happening at all? What arrangement do you have with retailers?

Mr. Godrej:  Organised retailing is currently 4% of total FMCG offtake, and is growing at 30% per annum, while general retailing is growing at 10% per annum. Going forward, the trend will be that share of organised retailing will increase, however this is going to be a slow growth of approximately 1% a year. Organised retailing will be an important factor only if their share accounts for 20%. Also, this 20% will need to have 1 or 2 large national players and not be divided between 50 different retailers.

Private labels, could affect branded players. However, typically worldwide personal care is not a very big contributor to private labels, and happens more so in food products, hence personal care and household care are not really affected. Modern retailing gives very good display for FMCG companies and impulse buying is very important. Modern retailing will benefit the FMCG sector especially in relatively up market products.

EQTM:  Are you satisfied with the pace of reforms that we are going through currently? What needs to be done?

Mr. Godrej:  One should never be satisfied with the pace of reforms. There is a lot more that can be done and a lot more that should be done. I think that the government has tackled reforms, especially in view of the political difficulties, and with the support from the outside, they have handled it very well. I think the fact that there is a constant pace of reforms, is exhibiting itself in a high growth for three years in a row now. So I think, they have done a relatively good job.

But clearly, India should reform more rapidly, in all directions, we need to globalise our economy, we need to liberalise our economy and we need to privatise our economy. There is no reason why government should be in business. It has not worked anywhere in the world. For politicians to agitate against privatisation to my mind is to agitate against India becoming a growth-oriented modern economy. So yes, faster pace of reforms will certainly help but I must give credit to the government. Considering the political difficulties, I think they have done a good job.

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