The Hindu Business Line : FMCG unlikely to show value growth this year

THE fast moving consumer goods (FMCG) industry is passing through tough times. It not only registered negligible value growth in 2004 at around one per cent, analysts now expect that in 2005 this segment may fare no better. The year that has just begun could well be one where players try to consolidate volume gains while letting value stagnation continue for some time.

While the market registered healthy volume gains across some product categories last year due to hectic price realignments, this led to an acute margin squeeze, thus shrinking value growths. In fact, as per market analyst SSKI, price realignments in 2004 led to market share gains for organised players and the return of a near duopoly situation, with combined market shares of the top two players in most categories between 65 per cent and 70 per cent, at the cost of smaller, regional brands. SSKI found that market shares in personal wash (soaps), skin care, hair wash (shampoos) and bakery (biscuits and bread) of the top two players were between 65 per cent and 82 per cent.

Thus, regional brands that stormed the market in 2003, seemed to have lost ground last year due to the price cuts unleashed by large players. But will price cuts define the market dynamics once again this year? Says Mr S. Raghunandan, Vice-President, Sales, at Dabur India Ltd: "Price cuts will happen in those categories which are highly fragmented. Take for example biscuits, a category that is dominated by the unorganised sector. Here, smaller players will decide pricing for well known brands. Price cuts by players in those segments which have two-three dominant players appear unlikely."

But another factor that might compel some companies to think in terms of lowered prices is the savings they can generate by moving to excise-free zones. FMCG majors, including HLL, Colgate, DIL, Britannia, Nestle India and Marico have all made investments in expanding capacity in excise-free zones last year. Analysts say that these companies will have the potential to absorb further price cuts, if these are made.

Also, a survey by Assocham found that FMCG companies shied away from launching new products last year, preferring to rely on existing ones. "A quick glance at the FMCG sector suggests that every company worth its brand name is banking on either relaunching existing products or extending the brand into variants or extensions," it concluded.

Another analyst points out that price cuts last year were done after consumers realised that most FMCG products were over-valued. "But this perception has remained largely unchanged. So, now it is for companies to decide whether they can take a further margin squeeze or will the current inflationary trend push them to hike prices eventually."

The sector has already begun to witness sporadic price increases but whether this trend will be sustained is not known. Consumers are keeping their fingers crossed.

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