bb india strategies for consumer goods

8/9/2019 BB India Strategies for Consumer Goods

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India: Strategies for

consumer goodsBy Ashish Singh, Mike Booker and Sandeep Barasia

To keep consumer goods flyingoff the shelves in India beyondthe slowdown, companies haveto focus on the right productsat the right prices


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Copyright 2009 Bain & Company, Inc. All rights reserved.Content: Editorial teamLayout: Global Design

Ashish Singh is the managing director of Bain & Company, India, and MikeBooker leads Bain's Asia-Pacific Consumer Products and Retail practices.Sandeep Barasia is a partner in the India office and a member of the Retailand Consumer Products practices.


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India: Strategies for consumer goods

To keep consumergoods flying off theshelves in India beyondthe slowdown, com-panies have to focuson the right productsat the right pricesHeads didnt turn when Coca-Cola and Pepsihiked prices on some of their most popular

beverages in India in late 2008. Even in thedownturn, both companies have enjoyed double-digit volume growth. And despite projectionsthat the worlds second-fastest-growing economywill watch its 9 percent growth rate (for20052008) slow to 5.56 percent in 2009(see figure 1), Indias makers of fast-movingconsumer goods (FMCG) such as beverages,biscuits and beauty aids historically have

been somewhat insulated from economicslowdowns. (See figure 2, 3 and 4.) Indeed,the FMCG sector in India registered 10 percentsales growth for the quarter ending June 2009.But that doesnt mean FMCG companies inIndiaboth multinational and domesticcan afford to be overconfident. The fact is,now is the time for them to keep their eyeson the ball.

How is the slowdown in the Indian economyaffecting consumer-goods companies in India?For one thing, it is forcing them to focus ontraditional retail channels like small mom-and-

pop stores. Its no secret that Indias modern-trade retailers are aggressively closing storesor curbing expansion plans. For example,Subhiksha, once the poster child for Indiasfledgling modern retail industry, shut downnearly all of its 1,600 stores this year in responseto a crippling cash crisis. The 12-year-old retailchain says it is left today with just 50 employeeson its rolls, compared with the 5,000 it had

Source: GDP growth rates from Euromonitor, EIU, IMF; Forex rate from Bloomberg; Political risk from EIU

0

2

4

6

8

10%

2009 GDP growth forecast

China

10.0%

India

8.0%

Vietnam

7.3%

Indonesia

6.5%

Thailand

5.6%

Malaysia

5.4%

Philippines

4.9%

OriginalGDP forecastRevisedGDP forecast

Figure 1: Growth is exp ected to slow down across all emerging Asian economies


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in September. As modern trade slows itsexpansion, it will be traditional retail and dis-tribution networkslower tech, lower costand smaller than their modern counterpartsthat will become more important to consumer-products companies. This is especially truein rural areas, where consumer spending hasremained particularly strong. In 2008, ruraland semi-urban markets contributed almost80 percent to FMCG growth.

Another distinct trend: Demand for high-endproducts is dropping. Indian consumers arestill buying; it's just that theyre avoiding the

most expensive brands. That's why companieswill need to become more sensitive to price byoffering price reductions on existing productsand introducing innovative new products atlow price points for mainstream consumers.Hindustan Unilever realized in November 2008that consumers are not seeing value in its RedLabel 1-kilogram tea carton pack and movedto a pouch format, passing on a significantreduction in packaging costs to consumers.

An opportunity to buildand innovate

FMCG companies in India can use these trendsto their advantageand as a foundation forovertaking their competitors in the recession.Downturns provide opportunities to reorderindustries; to come out ahead of the packrequires using recessionary trends to buildand innovate. But its important to have a clearand comprehensive strategy. For example,

passing along cost reductions in anticipationof weakening demand may be little morethan stopgap measures unless its part of abroader plan.

FMCG companies in India are winning bysystematically targeting four key areas tospur growth.Note: Recession year = 1991 recession, 10 year average revenue

growth calculated from 1989 1999 for China, India, Indonesia,Thailand, Malaysia, Vietnam and Philippines

Source: S&P Compustat; Factiva; OneSource; Euromonitor

Real estate mgmt& development

Consumerservices

Banks

Telecommunications

Commercialservices

Energy

Tech hardware& equipment

Sotware& services

Semiconductors

Insurance

Media

Diversifiedfinancials

Capitalgoods

Transportation

Food& staples

Healthcare

Food &

beverage retail

Automotive& components

Retailing

Utilities

Consumerdurables

Household &personal productsPharma& biotech

Difference in revenue growth duringrecession year vs. 10 year average

0.5 0.4 0.3 0.2 0.1 0.0

20

49

17

17

14

12

11

10

10

10

9

7

7

7

7

7

7

6

6

5

4

1

Figure 2: Consumerproducts and retail aregenerally less affected during downturns


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launches has the potential to increase its oper-ating complexity. Those added costs could reverseany revenue gains. Just as recessions are a goodtime to introduce new products for a changingconsumer, its also a time to reduce complexityby pruning unprofitable product lines or toreconsider the need for high-end products ata time when shoppers want better value.

The downturn is also an opportunity to spurgrowth from core customers in big traditionalproduct segments. Consumer-products companyMarico is trying to get consumers to use itsParachute brand of hair oil more frequently

by promoting the traditional habit of oil mas-sage, hoping to gain from category expansion.There are lessons here for other traditionalproduct sectors like toothpaste, soaps andshampoos, which have witnessed modest vol-ume growth in the past.

Customers: Focusing on only theright products

Mainstream consumers in India are still buying,but their needs are changing. So winningconsumer-products companies are deliveringinnovative products aimed at addressing thosechanges. Consumers tend to eat out lessfrequently during economic slowdowns.McDonalds is trying to counter that byintroducing a wider range of value mealsand increasing what it spends to advertiseits low-price menus. Dominos introduceda pizza priced at 30 rupees (64) for the Indian

market, a first of its kind. Meanwhile, becauseconsumers are showing a preference for snacksin smaller units, Nestl introduced Kit KatMinis in India, a product it sells elsewhere.

But in the race to introduce new products toserve changing consumer needs, its importantto be selective. Each new product a company

Source: Bloomberg, S&P Compustat; Factiva; OneSource; Euromonitor

0

100

200

300

400

Indian indices (January 2004 = 100)

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Nov08

BSE FMCGSlow rise:

Jan 04 May 06FMCG Index: 1.8xSensex: 1.8x

Dramatic rise: May 06 Dec 07FMCG Index: 1.2xSensex: 2.0x

Downturn: Jan 08 Nov 08FMCG Index: 0.8xSensex: 0.4x

BSE Sensex

Figure 3: Recently, FMCG in India hasbeen much less volatile than the overall economy


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Costs: Selling at a price consumerscan afford

Shoppers are clamoring for prices they canafford, and with dropping commodity prices,many companies are passing along cost reduc-tions. Thats what Hindustan Unilever did withLifebuoy, its leading soap brand, which is partic-ularly popular in rural India. In January 2009the company reduced the price from 13 rupees(28) to 12 rupees (26) on 90-gram bars. Evena 1-rupee price cut can be significant in a countrywith a per capita income of $710. Meanwhile,companies such as Godrej Consumer Products

and Nestl India are taking other steps thatwill allow them to reduce prices aggressivelywhile making sure margins arent erodedmoves such as improving supply chains byshifting suppliers, ensuring theyre not caughtwith excess inventory as consumer demandfluctuates, and looking for ways to reduceoperating costs.

For purveyors of premium products, costsbecome even more criticalIndias consumers

just arent willing to pay high prices. Thereare three routes for companies hoping to avoidoverpriced goods: acquire a less expensive brand,price products more carefully and launch newvalue-focused brand extensions, such as differentpackage sizes. Dove shampoo in India success-fully introduced a 3-rupee (6) sachet in 2007that now accounts for more than 30 percent of the brands hair-care sales. The sachet waslaunched before the downturn, as part of astrategy to reach lower-end consumers.

Channels: Shifting to traditional stores

In urban India, consumer-products companiesare realizing the importance of traditional trade.Hindustan Unilever, Marico and Dabur allhave programs that give mom-and-pop storesin Indias cities the same type of discounts onbranded goods that are commonly provided to

modern retailers. In exchange, the consumer-goods companies get point-of-sale visibility anddominant displaythe goal is to tap the largeloyal customer base that's typical of big-citymom-and-pop outlets.

Winning companies are doubling down ontraditional trade in rural areas, too. Right nowconsumer demand for fast-moving consumergoods is holding up well in rural Indiaandthe regions represent a major opportunity. Forexample, more than 40 percent of all purchasesof biscuits, a household staple in India, takeplace outside of urban areas, according to

Bain & Company research. Success in ruralareas starts by establishing the right productmix for local stores, adapting promotion, andensuring a tight focus on route-to-market man-agement. Thats why Clinic Plus, HindustanUnilevers leading shampoo brand, is aggres-sively targeting its half-a-rupee sachet to ruralconsumers through extensive trade promotions.

Competition: Investing ahead of the pack

Staying in front means investing for the futureahead of the competition. Consider the movesby Marico. Building on its core business of healthy foods, Marico has expanded its Saffolacooking oil brand to include extensions suchas Saffola foods for diabetics and Saffola Zestbaked snacks. While the Indian company beganthe brand-extension strategy before the down-turn, it hasn't let the economic turbulencecurtail its efforts. The moves also help detractnewcomers from establishing strong positions

in the downturn.

For consumer-products companies in India,moving up in the downturn means focusing onselling only the right products, becoming morestrategic about pricing, following consumersto where they shop and investing ahead of thecompetition to strengthen a core market seg-ment or help make the most of a new one.

Source: Bloomberg, S&PCompustat; Factiva;OneSource; Euromonitor

FMCGequityindex

Marketequityindex

Country

53%62%China

39%60%India

30%59%Indonesia

27%54%Thailand

12%40%Malaysia

63%65%Vietnam

41%49%Philippines

Perform a nce YTD a s ofNovember 20, 2008

Figure 4:Asian FMCG stocks

have fallen less thanthe market in thepast year


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