MNCs leave domestic FMCG players by the wayside

“A younger population, a growing and aspiring middle-class, rising disposable incomes and increasing rural wealth has made India one of the world’s most sought-after FMCG consumer markets for multinationals.”

It has been acutely visible over the last three years. Multinational companies in India, in the fast moving consumer goods (FMCG) space, have been able to deliver higher returns on investment compared to their Indian peers.

Be it Hindustan Unilever, Nestle or Colgate-Palmolive, with returns of over 95 per cent, 110 per cent and 150 per cent, respectively, on an average, these multinationals have been able to grasp more than an understanding of the regional nuances of the market and have delivered, and not just on the investment front.

How did this happen? How did these foreign entities manage to make considerable inroads into the Indian market, leaving domestic FMCG players by the wayside?

“Businesses that can meet the needs of India’s aspiring middle class, keep price points low to reflect the realities of Indian incomes, and adapt to a fast changing market environment have found substantial rewards in India’s rapidly growing FMCG market,” said Manik Das, analyst with a broking firm.

He said that an international parent’s stronger brand equity, premium products, and the fact that they can add localisation to their FMCG products and leverage international expertise, have combined to give MNCs a competitive edge over domestic players.

Inching their way across the Indian market for the past 20 years, FMCG multinationals managed to take great strides in the 1990s and during the turn of the millennium, which coincided with the opening up of the Indian economy and whetted consumer appetite for international brands.

Though for several years multinationals had been intent on building brand loyalty with new consumers, they could do this more easily by tapping into the rising aspirations of the middle class with an appetite for international brands. As consumer goods consultant Mandeep Arora pointed out, “Domestic consumption is and will continue to remain the biggest and the most resilient pillar of India’s growth story in the coming years. A younger population, a growing and aspiring middle-class, rising disposable incomes and increasing rural wealth has made India one of the world’s most sought-after FMCG consumer markets for multinationals.”

LONGSTANDING GROWTH

Take the case of Unilever, whose Indian business started more than a century ago when British soap maker Lever & Company introduced the Sunlight brand. India is now Unilever’s third largest market, accounting for about eight per cent of sales.

On average, its products command a 40 per cent market share in India, higher than in any other country where it operates, according to market estimates.

Moreover, as growth in Europe ebbs, Unilever has also sought greater control of its Indian counterpart. Developing markets (read India) are to account for more than 90 per cent of its annual sales growth this decade.

Analysts attribute a significant part of the success to the Indian company’s continued focus on delivering low-cost products. For example, in the case of washing powder Wheel, an in-depth analysis conducted last year had the firm streamline its operations. Costs along the supply chain were reduced by direct sales from the factory to retail distribution.

In FY13, Hindustan Unilever’s (HUL) soaps and detergents segment contributed 49.3 per cent to total revenues. Within this segment, Surf Excel, Rin and Wheel continued their dominance in the fabric wash category. Lux, Dove and Lifebuoy are still HUL’s top brands in the personal wash sub-segment.

As an analyst from Destimony pointed out, “Strong distribution channels in the organised and unorganised retail sector has enabled HUL to manage inventory levels and reduce transportation costs. The company has built a clear distribution advantage with its product reach in 6.4 million outlets, which include direct reach to around two million outlets.”

HUL has over 35 brands spanning 20 distinct categories, including soaps, detergents, shampoos, skin care, toothpastes, cosmetics, tea, coffee, packaged foods, ice cream and water purifiers, enabling the company to be a part of the everyday life of millions of consumers.

And that is just one multinational company in the FMCG space.

MINOR HURDLESS

It has not been smooth sailing all the way though. Over the past few years, multinationals have been battling for market share, be it Procter & Gamble, PepsiCo, Coca-Cola or L'Oreal. Unilever’s CEO Paul Polman even declared the Indian arm an ‘under-performer’.

The Indian unit of American consumer goods giant Procter & Gamble (P&G), which makes the Ariel and Tide detergents, posted record losses for the year ended March 2013 as its sales grew the slowest in five years.

P&G Home Products posted a loss of Rs 481.5 crore for 2012-13, its third consecutive loss and the highest so far.

The company, however, managed a 24 per cent increase in sales at Rs 4,826.5 crore, better than rival HUL, which was also battling dwindling sales. HUL’s aggressive discounts failed to lift sales volumes for the fifth consecutive quarter, with the company saying the slowdown in growth could last until the end of the fiscal year.

Analysts said that Unilever was forced to cut prices by up to 18 per cent for some products in India in April.

The losses appear to have not deterred the parents though, who are banking on India’s long-term growth potential.

In several FMCG product and market categories, the Indian consumer market could account for more than 20 per cent of global revenue growth for MNCs in the next decade. In other words, the future of many FMCG multinationals depends on their ability to succeed in India.

However, with consumer incomes squeezed by wages that have not kept pace with inflation in cities and drought-like conditions affecting those living in agricultural areas, could the next decade or so see the rise of home grown FMCG majors? Watch this space!