Financial Daily from THE HINDU group of publications
Thursday, Jun 17, 2004
Industry & Economy - Personal Products
`Unrealistic pricing cause for FMCG sector woes'
Sindhu J. Bhattacharya
New Delhi , June 16
AFTER a massive slowdown in the FMCG sector last year, the Dabur India Chairman, Mr V.C. Burman, hopes that second consecutive good monsoon forecast for this year will change the industry's fortunes. He says two consecutive years of good rains should "significantly boost agricultural as well as rural incomes and expenditure".
However, many other players in the industry say that while the correlation between monsoons and increased FMCG sales may be valid up to a point, what the sector really suffering from is "unrealistic pricing". Unless companies continue to innovate and offer increased value to consumers, the fortunes of this "not-so-fast-moving" industry may not change much.
Says the Managing Director of Gujarat Cooperative Milk Marketing Federation, Mr B.M. Vyas, "Over the last four-five years, import duties as well as most raw material prices have come down. This has led to better inventory management and should have, in turn, meant lower prices for consumers. But most FMCG companies have shied away from passing on this price benefit to consumers. Thus, only those companies which charged realistic prices have benefited."
Take the case of Marico. The company was among the select club of FMCG majors, which reported a double-digit sales growth last fiscal despite the slowdown. Says the Chief Financial Officer, Mr Milind Sarwate, "The FMCG sector is somewhat insulated from vagaries of monsoons and other general economic indicators. But while two consecutive good monsoons should translate into increased sales, we must also understand that the FMCG category as a whole, lacks innovation and value offerings."
While Mr Sarwate is quick to point out that only 24 per cent of Marico's sales come from rural areas and, hence, it is not entirely pertinent to examine the impact of two successive good monsoons on the company's topline, he said rural welfare does trigger demand for goods, mainly for those products which are on the upper end of the value chain.
But while on the one hand, most FMCG companies are trying to improve their price-value equations for the consumer, soft drink companies Coca-Cola and Pepsi may actually be feeling the pinch with a second good monsoon.
While Coke declined to comment on the impact of good rains on the company's sales, the Pepsi's Executive Director - Exports, Mr Abhiram Seth, said, "In our category, early monsoons could actually have an adverse impact on sales." Last year, soft drink sales were up by over 25 per cent, he added.
However, even in the soft drink business, price correction has happened in terms of the Rs 5 pack size, which is bringing in desired volumes for the two companies.
And, even as the country's largest FMCG company, Hindustan Lever Ltd, does not want to make any comments on the impact of two good monsoons on the company's sales, it becomes increasingly clear that unless price-value equations are made more favourable to consumers, the sector would remain in doldrums.
Mr Burman has acknowledged in the latest annual report of Dabur India that last year was pretty dismal for the FMCG category despite good rains, saying "It is a fact that for the FMCG sector as a whole, the impressive growth in GDP and agricultural income in 2003-04 did not translate to a commensurate growth in sales. According to marketing experts, rural India is waiting for a second good year in succession before significantly ramping up consumption spends."
And Mr Vyas echoes this sentiment when he asserts that another good monsoon will translate into increased FMCG offtake only if the consumer is offered lower prices for better products.
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