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Wednesday, December 26, 2001

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FMCGs on the slow track in 2001

Aarati Krishnan

CHENNAI, Dec. 25

IT has been a sobering year for manufacturers and marketers of fast moving consumer goods (FMCGs). As the sluggish growth of 2000 gave way to stagnation and even a shrinkage of some FMCG categories, the marketing environment turned extremely challenging, even for seasoned campaigners such as Hindustan Lever Ltd (HLL) and Procter & Gamble (P&G).

What was more, the marketplace grew more crowded with new brands entering categories which were earlier the bastions of HLL, Colgate or P&G. While players such as Godrej Consumer and Colgate Palmolive rejuvenated old brands and kept up a hectic pace of new launches, Henkel SPIC and Dabur India also expanded their product basket into categories such as cosmetics and hair care products.

Grinding to a halt

In terms of demand, large, high penetration categories such as toilet soaps and detergent bars were worst hit in 2001, actually shrinking in value terms. Categories with relatively low levels of penetration, such as shampoos and skin creams managed a better showing, but they slowed nevertheless.

The explanation for this could be that categories with high penetration levels, such as detergents and soaps also depend to a great extent on rural demand. These probably felt the pinch from the sharp fall in farm incomes more keenly than categories which cater mainly to the urban consumer, such as cosmetics and branded staples. Industry majors advanced several explanations for the slowdown.

But the most plausible appears to be that the industrial slowdown and the near-crisis in agriculture combined to force consumers to tighten their belts and cut back on spending. The cutback in consumer spending manifested through three trends.

* Consumers downtraded: That is, they moved from higher-end products to lower-end products in an effort to save on their monthly grocery bill. This is evident from the fact that mid-priced and low-priced segments in soaps and detergents registered robust growth rates, while the premium segment faltered.

* Impulse products suffered while essentials managed higher rates of growth. Even in the slowdown, branded staple foods such as atta and salt managed to register superior growth rates, higher than that of perceived luxury products such as chocolates and ice creams.

* Low unit packs saw robust volume growth. Most FMCG marketers offered scaled-down versions of their products at convenient price points and these appear to have drawn in new consumers.

The Chik 8ml shampoo, the Clinic Plus bubble pack and Nestles Chocostik were some of the brands, which worked this year, and all of these are of low unit, low priced brands.

The marketing response

As the environment grew tougher, marketers responded by hiking adspends, rationalising their brand portfolios, changing the pricing strategies and resorting to high decibel promotional campaigns.

Buy less and save more

The success of the low unit pack concept in shampoos egged marketers on to try out low unit packs in most other categories. Malted drinks, soaps, detergents, lubricants, you name it, the product is now available in a sachet or low unit version.

Though there is nothing new about low unit packs as a concept, it was the pricing which was different this year.

In products such as shampoos, the low unit pack has been priced so that it costs less on a per millilitre basis than the larger packs. Further, while marketers have been taking price hikes on their larger pack versions, most brands have chosen to leave the prices of the low unit version unchanged, in an effort to woo new users.

In a new bottle

Packaging turned out to be one of the key modes of differentiation during the year. Companies used packaging both as a means to ward off the fakes in the grey market (which made a significant dent in the market) and as a USP to set a brand apart from the rest.

Bubble packs for shampoos (Clinic Plus), tamper proof containers for hair oils (Parachute), re-usable tetra packs for fruit juices (Real) were some of the innovations that worked.

Marketers also responded by changing their pack sizes to fit into convenient price points. This was most evident in the confectionery market, where both Cadbury India and Nestle India rolled out Rs.5 and Rs.10 versions of their major brands- Dairy Milk, 5 Star, KitKat, Munch and Perk.

It's the pricing

As consumers skimped on purchases of FMCGs, pricing turned out to be a crucial determinant of the success of a product. Almost all the brands, which grew at robust rates during the year, stuck to value-for-money pricing.

Among the new launches, Colgate Herbal toothpaste, Fairglow soap from Godrej Consumer, Nima soap from Nirma and Palmolive Naturals made market share gains.

All these brands were undoubtedly good ideas. However, they were also priced significantly cheaper than comparable products in their category. Similarly, the relatively healthy growth in the shampoo market was also the result of the impressive growth in offtake of sachets, which were again priced lower than the larger versions. In both soaps and detergents, it was the mid-priced category which registered the highest rate of growth.

Frenetic promotional activity

With competition heating up and new brands fighting for a foothold, promotional activity escalated into a free-for-all towards the end of the year. Hindustan Lever used a 1 for 3 (1 soap free for every three purchased) offer to rejuvenate its flagging Breeze soap and the success of this offer soon found many takers.

Towards year-end, most players in the soap market were offering freebies on at least one of their brands. This was followed by similar offers on the leading brands of toothpaste .The spate of offers has helped pep up volume growth for most brands. However, it is the coming year which will decide if these brands have retained the customers they wooed through promotional offers.

Financials

The difficult market was reflected in the financials of most FMCG companies in the first nine months of 2001.

For every company in the business, overall sales growth slowed in relation to the previous year. Most found it difficult to register double-digit growth rates.

The only exceptions were Nestle India, Cadbury India and Smithkline Beecham Consumer Healthcare.

However, FMCG companies were rather successful at ramping up their operating profit margins, thus managing respectable growth in their profits after taxes. In this companies were helped partly by benign input costs in the beginning of the year.

With commodities such as tea, coffee, edible oils and fats battered by excess supply, FMCG manufacturers had a relatively easy time in the beginning of the year.

But a few of the commodities have begun to revive of late and their impact on margins is yet to be felt.

The slowdown also nudged companies into rethinking their long-term strategies in the business. Hindustan Lever streamlined its operations and retrained its focus on just 30 `power brands out of its total portfolio of 110 and this appeared to yield results towards the end of the year.

Others such as Nestle India and Britannia worked out strategies to enter into new categories in order to pep up flagging sales growth rates.

While Nestle India forayed into processed foods, dairy products and bottled water, Britannia expanded into snack foods.

The first year of the millennium was a difficult year, no doubt.

But the slowdown has certainly had a few positive spin offs. It has forced most companies in the business to cut costs and ramp up operational efficiencies.

It has given the market leaders a taste of competition, shaking them into re-working their long-term strategies.

But most importantly, it has ensured that consumers of FMCG products got a good deal, with expanding choices, lower prices and more innovations in the market.

 
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