Business

Price cuts revive FMCG sector fortunes

NEW DELHI, JAN. 1. Plagued by downtrading and remaining in low growth captivity of 1.5 per cent for the past four years, the domestic fast moving consumer goods (FMCG) industry broke the sluggish syndrome and revived its fortunes in 2004 on the back of price-cut strategy.

Besides the price corrections, late revival of monsoon and the robust performance of the urban economy positively helped the Rs. 48,000-crore industry, which witnessed FMCG firms moving away from outsourcing to manufacturing by investing in excise-free zones.

The growth phase began in April when Procter and Gamble cut the price of its detergents, Tide and Ariel, by almost 50 per cent. Hindustan Lever Ltd (HLL) effected a similar reduction in the price of its best-selling detergent, Surf Excel. And the tactics clicked as detergent volumes grew 11 per cent this year. Later, the price war spread to the Rs. 1,200-crore shampoo market with HLL taking the lead in dropping the prices of its brands such as Clinic All Clear and Sunsilk by as much as 40 per cent. P&G, Dabur and other players followed suit.

In the backdrop of intense price cuts, brand building through advertising saw new heights as it was reflected in aggressive product promotions to attain higher sales.

"We have recorded strong double-digit growth in 2004, which saw a definite turnaround for the sector. And if rural demand stays the way it is now, the year 2005 will witness better growth," said Dabur India Executive Director, P. D. Narang.

Products, which registered major recovery in terms of higher sales included biscuits, beverages, toothpastes, shampoos, washing powder, skin creams and chocolates. The real improvement was seen in the July-September period and the next quarter, which recorded a growth of 5.1 per cent in value terms. Its impact will be so influential that it will propel higher sales of these consumer goods in 2005-06, a recent study by the Assocated Chambers of Commerce and Industry (Assocham) said, adding that the annual growth rate in the FMCG sector has not exceeded 2 per cent in the past three years.

The only cloud on the horizon for the industry was the spiralling cost of key inputs like sugar, wheat, edible oil and packaging material. For several FMCG companies, input costs shot up by as much as 15 per cent.

The beverage market grew by almost 10 per cent. Cola giants, Pepsi and Coke, revised prices of 200 ml and 300 ml bottles from Rs. 5 to Rs. 6 and Rs. 7 to 8, respectively, in August. In November, the two firms also raised the prices of the 500 ml plastic bottles from Rs. 15 to Rs. 18.

The industry continued to suffer from an unexpected corner, fake product makers. HLL claimed that it was losing close to Rs. 1,600 crores every year in revenue to counterfeit product makers while the Indian FMCG industry was suffering a loss of around Rs. 2,500 crores in revenue annually.

During the year, initiatives to drive the rural market such as ITC's e-choupal and HLL's Shakti gained momentum. The successful experiments also indicated the untapped potential of rural market. Besides, India emerged as a sourcing destination for global FMCG companies after proving itself in terms of quality and production capabilities.

If most part of 2004 was sluggish for the FMCG industry, the new year is set to start on an optimistic note. Except for HLL, firms such as P&G, Marico, Dabur, Colgate and Godrej have begun showing comparatively healthier bottomlines, signalling indications of revival.

Though Assocham has indicated that the FMCG industry will achieve a growth of 3-4 per cent in 2005-06, the critical challenge for most FMCG companies in the new year would be to manage the supply side as sharp swings in commodity prices are expected to impact profits like never before.

— UNI

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