The US recession may have put the breaks on India’s economic engine, but there is another growth story in the country that is beginning to pick up steam. After a long lull, the FMCG sector is making a comeback. Changing spending habits and rising rural incomes are driving the sector forward, opening new opportunities for both local and multi-national companies.
In the first 10 months of 2007, there were 251 product launches, including 28 new brands, compared with 191 for the same period of 2006. And while snacks and foodstuffs remain the category leaders, the recent upturn in the FMCG sector can in part be accounted for by the increased outlay on health and beauty products, particularly in urban markets.
“Indian consumers are getting more demanding and hybrid in their consumption patterns,” says Kai Boris Bendix, managing director of Nivea India. “They may want the cheapest atta and rice, but don’t mind splurging on muesli and cosmetics.”
This marks a distinct shift from previous spending. The growth of health products in India was particularly flat in the first half of this decade as people busied themselves purchasing big-ticket items such as mobiles and motorbikes. But now that many consumers have already upgraded, their income is being directed towards pampering themselves.
“Those FMCG categories that enable achievement and lifestyle look set to thrive in 2008, while those that offer traditional, basic needs of hygiene and protection will face pressure,” says Shripad Nadkarni, director of consultancy MarketGate. India’s FMCG market is under-penetrated in these categories, Nadkarni argues, giving ample scope for the introduction of new products.
Anand Shah, an FMCG research analyst at Angel Broking, says most FMCG companies are responding to the new demand by concentrating on developing a big theme and building a portfolio around it.
Nestlé, for example, has identified ‘health and wellness’ as its focus area, while local FMCG company Dabur is positioning itself around ayurvedic (a traditional Indian system of healthcare), natural and herbal products. At the higher price end, companies are leveraging health and wellness trends by focusing on providing ‘experiential’ and ‘higher order’ benefits rather than purely functional ones.
Rural demand
Changing urban purchasing preferences, however, only partly account for the rise in FMCG sales. Potentially more significant is the growing rural market. The estimated number of households using FMCG products in rural India has grown from 131 million in 2004 to 140 million in 2007, according to market research company IMRB.
Total FMCG spend in rural areas grew at 25 per cent last year compared with 2003, as opposed to 16 per cent for urban markets in the same period, although the average spends are still lower than the urban figures. “The per capita income growth in India is driving up consumer spends in rural areas as well as urban,” says Shah.
Poor infrastructure and limited media reach have in the past been major impediments in rural India, but as these improve, companies will get more aggressive, says Saugata Gupta, CEO of consumer products at cosmetics company Marico.
FMCG marketers are already busy devising new ways to reach the rural markets. According to Raj Kumar Jha, national director of knowledge at Xpanse Asia, the rural division of Starcom MediaVest Group, companies are relying less on outdoor advertising and have turned to either radio or TV and one-to-one contact programmes in rural areas.
For instance, ‘Fair & Lovely Vani’, the rural marketing programme for Hindustan Unilever’s whitening brand Fair & Lovely, aims to empower rural women to earn a livelihood, while at the same time improve the distribution and reach of its product.
After identifying villages for activation, the programme informs villagers about the company’s product through contests, paper chart presentations, live product demonstrations and usage basics.
This strategy focuses on educating retailers who serve as the mouthpiece for the brand, which works well in an environment where the majority of consumers purchase according to price rather than brand. Reckitt Benckiser has been following a similar line, educating retailers on how its long-duration Mortein mosquito coils can help prevent and save on costs to treat malaria.
Others companies are using social initiatives to make inroads. ITC’s e-Choupal initiative, for example, is an online service that primarily tells farmers the price at which ITC will buy soya or wheat that day.
However, it also doubles up as a distribution network through which the company can sell its products to the farmers. ITC anticipates the network will cover over 100,000 villages by 2012, representing over 15 per cent of rural India. Likewise, Hindustan Unilever’s Project Shakti, under which the ‘Fair & Lovely Vani’ programme is run, offers a range of mass-market products to self-help groups - local women trained in the basics of enterprise management. Armed with micro-credit, these women become direct-to-home distributors in rural markets. According to Hindustan Unilever, the Shakti model creates a win-win partnership between the product and the consumer, building a self-sustaining cycle of growth for all.
Despite the increase in rural spending, N Venkat, CEO of cosmetic group Emami, argues that the urban market will continue to dominate over the next eight to 10 years. However, if growth continues at current levels, it may only be a matter of time until the rural consumer gains parity with its urban equivalent.
New Players
But even as the rural and urban consumer markets expand, competition remains fierce, with MNCs like Unilever and Procter & Gamble facing the heat from local challengers. The clutter in the crowded FMCG space has further intensified with companies such as ITC, Beiersdorf and L’Oréal upping the ante. L’Oréal recorded 40 per cent sales growth in 2007, while Beiersdorf, which entered India only two years ago, has spread its reach to 150 cities and increased its product list to 44.
According to ACNielsen, Beiersdorf’s Nivea brand has already become number one in the men’s whitening category and number two in deodorants. “It will be easier for us to adapt to the evolving consumer and new market realities, since we carry no traditional baggage or mindset,” says Bendix.
Meanwhile, domestic conglomerate ITC, which until five years ago primarily focused on selling cigarettes, has diversified into shampoos and soaps, targeting both the premium and mass markets. It is also slated to enter the hand wash and deodorants categories. Shah says ITC has not been afraid of going overboard in spending marketing money to buy market share and is using its distribution clout, thanks to the surplus cash it generates through its cigarette business.
“While other companies have to focus on margins and profitability, ITC is ready to bleed,” says Shah. Even so, industry players believe ITC is spending disproportionately and a key issue for it will be sustainability.
With a market that up until now has relied heavily on product extensions, future success could depend on the ability to build new brands. “Once you saturate the market or leverage the potential of extension, then what do you do?” asks Shah, adding that overusing extensions can impact the brand perception and dilute brand equity.
With consumer wallets under pressure from various other sectors, FMCG companies will need to create compelling roles for their brands, beyond just functionality of product and memorable advertising campaigns. “If you don’t command rich mind-space, brands will be pushed into the commodity space,” says Nadkarni.
