Indian consumer goods industry resilient despite crisis - MTI Study

MTI Consulting’ recent study on Indian FMCG sector indicates that the overall demand is undeterred despite recent price hikes by FMCG firms.

Research indicates that the global economic slowdown has not impacted the earnings of consumer goods industry in India. The FMCG sector grew a double digit growth in the past nine months. The sector was expected to touch USD 25 billion by December 2008 end as opposed to USD 20 billion in 2007 despite the price increases.

During 2008 we saw retail prices of FMCG goods increasing by 10 per cent in line with inflation at a 13-year-high and firms such as HUL, Godrej and Marico met the rising input costs by raising prices. Due to increased demand of consumer goods from the rural markets, the outlook looks positive for firms in the quarters to come.

The price hikes have not yet affected the overall volumes of Indian FMCG firms and the main reason for this is the major demand from the rural and semi-urban markets, newer product lines and aggressive promotions.

According to the Associated Chamber of Commerce and Industry of India (ASSOCHAM), the rural market in India for FMCG products is growing much faster than the urban market and is estimated to be around 25 per cent of the overall market size and this aggressive penetration has led to a 30 per cent higher sales.

Steady revenue growth

Consumer spending for FMCG products remains robust in India and industry majors such as Hindustan Unilever (HUL), ITC Ltd, Britannia Industries, Colgate Palmolive, Nestle, Dabur and Marico have on an average posted a sales growth of around 19 per cent in the third quarter ending in December 2008. Overall the industry has been growing at a rate of 17-20 per cent.

Strategies in Tough Times

Companies such as Marico have been following a strategy of maintaining unit volume margin across most of its product lines. Industry majors HUL and Marico are coming up with sales promotional offers at least once or twice a year. Creating a healthy pipeline of new products as additional sources of growth has been a popular trend seen in the past one year.

HUL, Marico and Colgate Palmolive are pushing their products in the rural/semi-urban markets with the introduction of special budgeted products, lower priced packs which are helping them in terms of maintaining their volumes growth.

Global FMCG major Nestle has announced plans to invest around USD 120 million in India in 2009 and these investments are expected to go into new R&D, advertising and capacity building.

Improved product lines

Almost all major companies are coming up with novel product categories and a common trend that was seen in the past few years was that firms were introducing smaller packets of products (SKU’s) in food and edible oil category.

The product lines have been skewed in terms of sizes which are making inroads into the rural belts and the middle class homes, in turn seeing larger volumes of sales in the foods division.

Advertising expenditure

There has been notable increase in the advertising and media costs of the companies, with Godrej planning to increase its Advertising and Branding costs by around 35 per cent in 2010.

According to Adexindia, the expenditure of FMCG companies has increased by 18 per cent in 2008.

HUL spent 8.6 per cent of its net sales on advertising and promotions this quarter.

Looking ahead

The rise of the per capita income in the rural regions due to the higher farming output and government backed loans have fuelled the consumer spending against the decreasing volumes and margins seen in the urban region that is mainly affected by the financial turmoil and economic slowdown.

In the coming years we see FMCG majors trying hard to tap this blossoming demand from the rural and semi-urban markets of India by revising product lines, introducing cheaper products and increasing their distribution networks.