Informist, Thursday, Jun 20, 2024
By Avishek Rakshit and Apoorva Choubey
KOLKATA/MUMBAI – Indian fast moving consumer goods companies are likely to keep facing stiff competition from regional brands, not only because entry barriers have been lowered for new players, but also due to the fact that consumers are now seeking more variety in products, and brand loyalty is proving to be elusive, said Anand Ramanathan, partner and consumer products and retail leader at Deloitte India. "There is enough and more local competition which will give all of these players a run for their money," Ramanathan told Informist in an interview.
Ramanathan's views differ from many analysts and industry watchers who believe regional players stand to lose market share to stronger pan-India companies. "Fragmentation and intensification of competition will sustain whether it comes from so-called regional brands, or the smaller direct-to-customer brands or from private labels of retailers," he said.
The days of monopoly and duopoly that large multinational FMCG companies have enjoyed in several product categories are over, as smaller players are chipping away at the market share of these mass consumption brands, he said. Another challenge that companies are facing is that consumers want variety, and that will make them experiment with other brands, he said. This is especially true for the food category, and Indian and regional food companies could fare very well because they are a lot closer to the consumers' taste, according to Ramanathan.
To combat this threat, consumer staples companies will need to keep innovating to bring new and better products to the market, while focusing on improving efficiency and finding new ways of capturing interest of the public, Ramanathan believes. Companies with definitive characteristics such as a diversified portfolio, comprising premium as well as mass products, having a balance between rural and urban sales, and a rich innovation pipeline, are well positioned for growth, he said.
On the whole, the outlook for the FMCG sector is looking up, driven by projections of a good monsoon and hopes of increasing investments in India which can push consumer demand higher, Ramanathan said. In the personal care category, the growth could be driven by volumes and new products, but achieving better volume growth in food products may be difficult, he said.
Below are edited excerpts from the interview with Ramanathan:
Q. There is a lot of optimism for the FMCG sector after the Lok Sabha elections. What is your view on the sector, particularly on the rural side?
A. It is expected that this year will be a normal monsoon and, hence, the kharif crop should be all right. Festive spending should be reasonably good as well. I think some of the indebtedness that happened in rural India after the COVID pandemic has now slowly recovered. And in the elections itself, a lot of cash got pumped into the rural economy. At least the mass FMCG branch should do well because a lot of them do depend a lot on rural sales.
Q. While rural consumption is expected to pick up, aren’t there challenges such as lower farm incomes and unemployment? So, how does the consumption theme play out in the backdrop of inflation in food items?
A. There's a lot of anecdotal talk about all of this, like unemployment, but the data doesn't really corroborate it. If you look at wheat prices and milk prices going up, it benefits the farmer. In fact, the challenge is when you don't have too much inflation, that's when the farmers really suffer.
Demand-supply mismatches will continue and demand will continue to outstrip supply. I think farming prices will improve because there's a lot more organised buying happening now. In the long haul, I definitely think that agri-business itself can only go up.
Q. To what extent can we attribute the elections to have contributed to the rebound in rural demand?
A. During elections, the demand for FMCG like beverages or food-related items goes up--that's a natural outcome. Particularly in rural locations, we saw growth but that may or may not sustain in the short term.
Q. And how do you see urban demand?
A. We are in the middle of an economic slowdown but India is one of the few bright spots where investment will continue to happen. I think this whole China-plus-one strategy will have an impact and manufacturing and services should continue to grow. So at least the services side of urban India should be fine along with tourism. I think the government will also look at things both from an infrastructure and agricultural standpoint, and government spending should sustain.
Q. What are the challenges that you anticipate for the FMCG sector in the coming months?
A. FMCG companies can't innovate without factoring in health and nutrition. Nutrition can be both an opportunity and a challenge. The other challenge for the large established listed players is competition. A lot of categories were like monopolies or duopolies, but now there is a large tail of brands coming in.
Another factor is that people want variety and it will make them experiment with other brands. So, companies need to think about how they will sustain brand loyalty.
Q. For quite some time, large pan-India FMCG companies lost market share considerably to the regional players. But now they have started gaining it back. Do you think that regional players are going to fizzle out and large players are going to come back strongly?
A. Fragmentation and intensification of competition will sustain whether it comes from so-called regional brands, or the smaller direct-to-customer brands or from private labels of retailers. I think the days of monopoly and duopoly in product categories is going to change and all these little players will chip away some of the mass brands.
It's not that high an entry barrier in terms of coming up with a quality product even for a regional player. Those heydays of large multinational corporations where they would milk and skim the Indian market are gone. There is enough and more local competition which will give all of these players a run for their money.
Q. Given this context, do you think there is a need to change the way big companies are advertising nowadays?
A. Absolutely. Through our consulting engagements, we know that a lot of promoter-driven brands really buy media very well. They have an intuitive understanding of which creatives work and they're far more grounded. So, to that extent they are a lot more efficient.
Q. Do you expect advertising expenses as a whole to come down because of increased efficiency or will it go up?
A. There is not any broad answer to that. I think it's just the time to continue to spend 5-15% of their topline on advertising, depending on the category because India is still a growth market. But you will see a little shift in marketing going to below-the-line strategies from above-the-line approaches.
(Above-the-line or ATL is any form of marketing or advertising that is generally untargeted and focusses on brand awareness while below-the-line or BTL marketing has a much more targeted approach, usually with a very specific audience and goal in mind, such as impressions, clicks or conversions.)
Q. In the last quarter, we saw that it was personal care, which was mainly driving the FMCG growth rather than the food category. Is this the new normal that’s going to continue?
A. In foods, beyond a point, how much will you eat, even if you can afford it? Whereas in personal care, you might still go in for some discretionary spending on what you might not necessarily need. But because you have the income, you might still buy it. Therefore, personal care will continue to do very well as discretionary income grows. On other hand, you don't keep changing your food habits, but personal care has a lot of categories where there are fads appearing.
In the foods category, you will see at least the Indian and regional foods do very well because they are a lot closer to the consumer’s taste and, therefore, you will have regional players do a lot better than the pan-national kind of companies.
Q. So, would it be right to assume that regional FMCG companies are going to have a stronger growth rather than the pan-India ones?
A. There are a few well-run pan-Indian companies which cater to the requirements of each sub-region within a state. Rather than comparing regional with pan-Indian companies, I would say that companies with some definitive characteristics are well positioned for growth. These would be companies with a diversified portfolio, comprising premium as well as mass products, having a balance between rural and urban sales, and where the innovation pipeline contributes 10-15% to the topline.
Q. As most FMCG companies are now stressing on premiumisation, how does one become a differentiator and drive industry-leading growth?
A. Companies will need to look at smart manufacturing, cost optimisation, especially when it comes to water and power usage, sales force automation, and dealer management systems. These could all be differentiators.
A lot of players have invested in such areas after the pandemic but how well companies actually use analytics and automation to change their business is going to be one critical success factor. The second critical success factor is profitability of the new products, and thirdly, it is important that a company gets volume growth.
Q. Do you think that the FMCG industry is headed towards price-led growth or it will be volume play again?
A. We'll probably have to talk about the food and personal care categories separately. Beyond a certain point, achieving volume growth in food is difficult, because one is not going to eat more just because they earn more. Therefore, value growth becomes important for the food category.
On the personal care side, it's going to be a lot of innovation and there you can perhaps look at higher volume growth than what we've traditionally had because as incomes increase, people will have more width of consumption. I would be a lot more positive on volume growth on the personal care side rather than the food side.
Q. Given the recent cases of quality issues related to products such as spices manufactured by Indian companies, do you think that FMCG players need to take a hard look at improving their quality and overall environmental, social, and governance, or ESG, score?
A. The focus on improving environmental, social and governance metrics is critical in my view, as any sector which is driven by branding and marketing will have to factor in these parameters; it's core to the brand. If an FMCG company is about brand, they can't get away with poor ESG standards.
End
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Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2024. All rights reserved.
Informist, Thursday, Jun 20, 2024
By Avishek Rakshit and Apoorva Choubey
KOLKATA/MUMBAI – Indian fast moving consumer goods companies are likely to keep facing stiff competition from regional brands, not only because entry barriers have been lowered for new players, but also due to the fact that consumers are now seeking more variety in products, and brand loyalty is proving to be elusive, said Anand Ramanathan, partner and consumer products and retail leader at Deloitte India. "There is enough and more local competition which will give all of these players a run for their money," Ramanathan told Informist in an interview.
Ramanathan's views differ from many analysts and industry watchers who believe regional players stand to lose market share to stronger pan-India companies. "Fragmentation and intensification of competition will sustain whether it comes from so-called regional brands, or the smaller direct-to-customer brands or from private labels of retailers," he said.
The days of monopoly and duopoly that large multinational FMCG companies have enjoyed in several product categories are over, as smaller players are chipping away at the market share of these mass consumption brands, he said. Another challenge that companies are facing is that consumers want variety, and that will make them experiment with other brands, he said. This is especially true for the food category, and Indian and regional food companies could fare very well because they are a lot closer to the consumers' taste, according to Ramanathan.
To combat this threat, consumer staples companies will need to keep innovating to bring new and better products to the market, while focusing on improving efficiency and finding new ways of capturing interest of the public, Ramanathan believes. Companies with definitive characteristics such as a diversified portfolio, comprising premium as well as mass products, having a balance between rural and urban sales, and a rich innovation pipeline, are well positioned for growth, he said.
On the whole, the outlook for the FMCG sector is looking up, driven by projections of a good monsoon and hopes of increasing investments in India which can push consumer demand higher, Ramanathan said. In the personal care category, the growth could be driven by volumes and new products, but achieving better volume growth in food products may be difficult, he said.
Below are edited excerpts from the interview with Ramanathan:
Q. There is a lot of optimism for the FMCG sector after the Lok Sabha elections. What is your view on the sector, particularly on the rural side?
A. It is expected that this year will be a normal monsoon and, hence, the kharif crop should be all right. Festive spending should be reasonably good as well. I think some of the indebtedness that happened in rural India after the COVID pandemic has now slowly recovered. And in the elections itself, a lot of cash got pumped into the rural economy. At least the mass FMCG branch should do well because a lot of them do depend a lot on rural sales.
Q. While rural consumption is expected to pick up, aren’t there challenges such as lower farm incomes and unemployment? So, how does the consumption theme play out in the backdrop of inflation in food items?
A. There's a lot of anecdotal talk about all of this, like unemployment, but the data doesn't really corroborate it. If you look at wheat prices and milk prices going up, it benefits the farmer. In fact, the challenge is when you don't have too much inflation, that's when the farmers really suffer.
Demand-supply mismatches will continue and demand will continue to outstrip supply. I think farming prices will improve because there's a lot more organised buying happening now. In the long haul, I definitely think that agri-business itself can only go up.
Q. To what extent can we attribute the elections to have contributed to the rebound in rural demand?
A. During elections, the demand for FMCG like beverages or food-related items goes up--that's a natural outcome. Particularly in rural locations, we saw growth but that may or may not sustain in the short term.
Q. And how do you see urban demand?
A. We are in the middle of an economic slowdown but India is one of the few bright spots where investment will continue to happen. I think this whole China-plus-one strategy will have an impact and manufacturing and services should continue to grow. So at least the services side of urban India should be fine along with tourism. I think the government will also look at things both from an infrastructure and agricultural standpoint, and government spending should sustain.
Q. What are the challenges that you anticipate for the FMCG sector in the coming months?
A. FMCG companies can't innovate without factoring in health and nutrition. Nutrition can be both an opportunity and a challenge. The other challenge for the large established listed players is competition. A lot of categories were like monopolies or duopolies, but now there is a large tail of brands coming in.
Another factor is that people want variety and it will make them experiment with other brands. So, companies need to think about how they will sustain brand loyalty.
Q. For quite some time, large pan-India FMCG companies lost market share considerably to the regional players. But now they have started gaining it back. Do you think that regional players are going to fizzle out and large players are going to come back strongly?
A. Fragmentation and intensification of competition will sustain whether it comes from so-called regional brands, or the smaller direct-to-customer brands or from private labels of retailers. I think the days of monopoly and duopoly in product categories is going to change and all these little players will chip away some of the mass brands.
It's not that high an entry barrier in terms of coming up with a quality product even for a regional player. Those heydays of large multinational corporations where they would milk and skim the Indian market are gone. There is enough and more local competition which will give all of these players a run for their money.
Q. Given this context, do you think there is a need to change the way big companies are advertising nowadays?
A. Absolutely. Through our consulting engagements, we know that a lot of promoter-driven brands really buy media very well. They have an intuitive understanding of which creatives work and they're far more grounded. So, to that extent they are a lot more efficient.
Q. Do you expect advertising expenses as a whole to come down because of increased efficiency or will it go up?
A. There is not any broad answer to that. I think it's just the time to continue to spend 5-15% of their topline on advertising, depending on the category because India is still a growth market. But you will see a little shift in marketing going to below-the-line strategies from above-the-line approaches.
(Above-the-line or ATL is any form of marketing or advertising that is generally untargeted and focusses on brand awareness while below-the-line or BTL marketing has a much more targeted approach, usually with a very specific audience and goal in mind, such as impressions, clicks or conversions.)
Q. In the last quarter, we saw that it was personal care, which was mainly driving the FMCG growth rather than the food category. Is this the new normal that’s going to continue?
A. In foods, beyond a point, how much will you eat, even if you can afford it? Whereas in personal care, you might still go in for some discretionary spending on what you might not necessarily need. But because you have the income, you might still buy it. Therefore, personal care will continue to do very well as discretionary income grows. On other hand, you don't keep changing your food habits, but personal care has a lot of categories where there are fads appearing.
In the foods category, you will see at least the Indian and regional foods do very well because they are a lot closer to the consumer’s taste and, therefore, you will have regional players do a lot better than the pan-national kind of companies.
Q. So, would it be right to assume that regional FMCG companies are going to have a stronger growth rather than the pan-India ones?
A. There are a few well-run pan-Indian companies which cater to the requirements of each sub-region within a state. Rather than comparing regional with pan-Indian companies, I would say that companies with some definitive characteristics are well positioned for growth. These would be companies with a diversified portfolio, comprising premium as well as mass products, having a balance between rural and urban sales, and where the innovation pipeline contributes 10-15% to the topline.
Q. As most FMCG companies are now stressing on premiumisation, how does one become a differentiator and drive industry-leading growth?
A. Companies will need to look at smart manufacturing, cost optimisation, especially when it comes to water and power usage, sales force automation, and dealer management systems. These could all be differentiators.
A lot of players have invested in such areas after the pandemic but how well companies actually use analytics and automation to change their business is going to be one critical success factor. The second critical success factor is profitability of the new products, and thirdly, it is important that a company gets volume growth.
Q. Do you think that the FMCG industry is headed towards price-led growth or it will be volume play again?
A. We'll probably have to talk about the food and personal care categories separately. Beyond a certain point, achieving volume growth in food is difficult, because one is not going to eat more just because they earn more. Therefore, value growth becomes important for the food category.
On the personal care side, it's going to be a lot of innovation and there you can perhaps look at higher volume growth than what we've traditionally had because as incomes increase, people will have more width of consumption. I would be a lot more positive on volume growth on the personal care side rather than the food side.
Q. Given the recent cases of quality issues related to products such as spices manufactured by Indian companies, do you think that FMCG players need to take a hard look at improving their quality and overall environmental, social, and governance, or ESG, score?
A. The focus on improving environmental, social and governance metrics is critical in my view, as any sector which is driven by branding and marketing will have to factor in these parameters; it's core to the brand. If an FMCG company is about brand, they can't get away with poor ESG standards.
End
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Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2024. All rights reserved.