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Market conditions may not cheer consumer goods majors

Latha Venkatraman
Shyam G. Menon

MUMBAI, Jan. 8

DESPITE market data indicating a marginal pick-up in demand for fast moving consumer goods (FMCG), the real picture for leading companies in the sector could continue to be lacklustre, analysts and industry sources said.

"The FMCG market may not be really out of the woods, except that some of the segments are doing better than others. In many product segments, growth numbers are still in single digit percentages. There is some semblance of a pick-up in consumer take-off but it would be too early to conclude there has been a turnaround," Mr Milind Sarwate, Chief Financial Officer, Marico Industries Ltd, said.

Reports quoting ORG-MARG data had the FMCG sector growing by a positive 4.45 per cent in November 2002. But several products are being sold with either price discounts or consumer offers.

On Monday, at the Sahkari Bhandar in Colaba, products from FMCG major Hindustan Lever Ltd (HLL) currently on a price discount include 150 gm Lifebuoy Gold (Rs 3 off), 75 gm International Lux (Rs 3 off), 125 gm International Lux (Rs 5 off) and 100 gm Lux (Re 1 off).

Consumer offers included one 200 gm Vim bar on two 250 gm Rin Supreme; one soap free on purchase of three Rexona soaps; 100 gm Surf on a four cake-pack of Lux; one soap free on purchase of three Hamams; three sachets of Fair & Lovely on purchase of 100 gm Vaseline and one Rin Supreme free with purchase of every 150 gm Close-up.

HLL was also offering cross company product mixes - a 200 gm Bru packet comes with one Cadbury's Dairy Milk; Red Label tea packet comes with Cadbury's Five Star depending on the size; 100 gm Lifebuoy comes with a small Amrutanjan.

According to its Web site, Colgate-Palmolive's price discounts and consumer offers include cross-company offers - 50 gm Colgate toothpowder is accompanied by 25 gm Tata Tea; 100 gm Colgate toothpowder comes with a 24-carat gold-plated pendant and one soap free on purchase of two Palmolive Glycerine soap.

There were offers on other products such as Rs 3 off on 150 gm of Mysore Sandal; Rs 3 off on 200 gm of Le Bon cheese and free Cadbury Dairy Milk on a 120 gm Le Bon cheese packet.

According to industry sources, the demand pick-up as seen in numbers is primarily because the previous year's offtake made for a low base. Besides, traditionally FMCG goods' sale is high during the October-December quarter because of festive season and the fact that urban households are flush with money from bonus payments.

Market conditions otherwise continue to be challenging, especially for leading companies, analysts said. Delving into the reasons for consumer offers and price discounts, Mr Nikhil Thakkar, analyst at Sushil Finance Consulting Ltd, felt year-end inventory pile-up for FMCG companies that follow a calendar year could be one of the causes.

Apart from price discounts and consumer offers, some of these companies are also offering higher margins to dealers. According to Mr Sarwate, a freebie-led approach can be cheaper as compared to advertisement, since the cost of the freebie will typically be less than their perceived value. But it is a question of time before the effect of a freebie-led campaign wears out. "A feel of the industry - we do not have the data - reveals that the proportion of sales and promotion in advertisement has risen and continues to be high, indicating that discounts and freebies are here to stay. This will certainly hurt companies as genuine demand creation will take a back seat. Besides, net realisation from the product will keep dropping," he said.

Mr Thakkar believes FMCG sales in volume terms may emerge higher, but the upturn will not be equally handsome in value terms. Further, industry sources say, the scenario does not appear cheerful for large FMCG companies dependent on rural India for driving sales.

According to Centre for Monitoring Indian Economy (CMIE), kharif foodgrain production is estimated at 90.6 million tonnes, down by 18.7 per cent over the earlier season. Oilseed production is down by 25 per cent, declines in both cases being a record figure.

Consequently, for leading FMCG companies, revival in demand has to be substantial for a significant change in their topline and bottomline. In fact, the signs of economic revival already seen in some sectors could force on FMCG companies the prospect of rising input costs even as price discounts in their finished products are hard to shrug off.

According to Mr Rahul Dhawan, Head of Research, SKP Securities, in such a scenario the priority at most FMCG companies would be to increase market share, sometimes at the risk of topline. "In a competitive market, it is essential for companies to retain their share, therefore discounts are the order of the day," he said.

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