Wednesday, January 2, 2013

New challenges for FMCG


Hindustan Unilever

It was a year with some high points. Despite hectic lobbying, the government refused to budge from its stated intent of standardising packs of fast-moving consumer goods ( FMCG), a move first notified in 2011. The norms were eventually implemented in November, nearly four months after these were supposed to debut.

The paradigm shift meant firms manufacturing products from 19 identified categories could no longer tweak with grammage as they earlier did when input cost pressures became unmanageable. The only concession was the exemption of small packs from the norms.

Typically, value packs, which fall in the Rs 1-10 price range, constitute 25-30 per cent of overall sales for an FMCG company. In the case of biscuits, it could be higher at about 55-60 per cent.

Analysts say the move not to standardise small packs will help companies since they act as recruiter packs, that is, entry-level products familiarising consumers to the brand. This is critical, they say, as introducing standard packs at the entry-level could lead to odd pricing, discouraging consumption.

While firms stand to gain with the exclusion of small packs, the bigger fallout of standardisation will be its impact on pricing. This will be on the watch list of most in 2013. "There will be an increase in the cost of beverages, cereals, edible oil, detergent, flour, salt and mineral water, among other categories. This is clearly an issue," says Gaurav Sharma, vice-president at consultancy Tecnova India. At a time when consumers continue to battle inflation, the likely impact on pricing hardly bodes well for them.

While 2013 brings with it new hope that interest rates will eventually go down, challenges abound. Harsh Mariwala, chairman and managing director, MaricoLtd, puts it simply: "I think growth in FMCG will take off with economic growth. In the last two quarters, there has been some pressure on volumes due to consumers cutting back on spends. It would be worth noting how things shape up in 2013."

This volume slowdown has affected companies across the board from Hindustan Unilever (HUL) to Marico. HUL saw volume growth come down to seven per cent in the quarter ended September from nine-10 per cent in the previous four quarters. Marico, too, saw its volume growth taper in brands like Saffola, which was down to six per cent from 13-14 per cent.

“There are challenges in the short term. Over the last few months, we have begun to see some slowdown in discretionary categories, where there is an opportunity for the consumer to defer the choice between today and tomorrow," Nitin Paranjape, managing director and CEO of HUL, had said at the time of announcing the firm’s second-quarter results in October. Predictably, as Marico’s Mariwala says, economic growth will be key to fuelling demand. But that remains a bit of a question mark at the moment with estimates suggesting otherwise. From about eight to 8.5 per cent growth levels that the Indian economy has seen in the past few years, estimates have now been pegged at about six to 6.5 per cent for the current financial year. Consumer companies are nervous that lower growth estimates will not kickstart sufficient demand for their products in the marketplace.


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