FMCG sector set to revive

Barring price wars among the leaders, nothing marked the FMCG sector.

The fast moving consumer goods (FMCG) sector, which was beginning to be derisively referred to as the SMCG industry (slow moving consumer goods) as it didn't exceed a flaccid 1 to 1.5 per cent growth rate in the past four years, began to witness a slow revival in 2004. The revival was not without its share of pain though as companies in the sector resorted to price cuts, small packs, and offering freebies to push products.

Detergents and shampoos saw the maximum action as Procter & Gamble (P&G) and Hindustan Lever (HLL) went to war with each other with discounts to cut each other's market share. P&G began by slashing prices of detergent brands Ariel and Tide by 50 per cent in March 2004 and was able to improve its market share in the detergents market to 10 per cent by October 2004 against 6 per cent in October '03 (source: AC Nielsen). HLL, while asserting that price cuts were unsustainable, followed suit and cut prices of its best-selling detergent Surf Excel. The slashed prices stay to this day while detergent volumes have grown by 11 per cent.

Next HLL initiated a price war in shampoos with its 'buy-one-get-one-free offer,' that effectively offered a discount of 25 per cent. However, P&G and other players refused to follow suit and instead P&G began focusing more heavily on its' Rejoice shampoo and even launched a new variant of Pantene with a promise to stop falling hair.

Analysts say the Rs1,000-crore shampoo industry grew between 10-15 per cent in volumes in 2004 largely due to price cuts and small packs.

Despite price cuts, freebies and promotional offers by Hindustan Lever (HLL), the company's brands together lost market share in terms of volume as well as value in 2004. The major gainer in terms of market share was, which improved market share to 20 per cent in October '04 against 16 per cent in October '03 in shampoos. Subsequently HLL tried increased its advertising budget by more than 25 per cent and introduced a half-dozen new creams, soaps, and detergents. These moves helped stop market share erosion, but hit earnings.

Industry experts said while the market for shampoos grew by 10 per cent over the whole year, the last three months saw a growth of 11.5 per cent.

Indian FMCG companies like Dabur and Cavinkare for the first time found themselves under severe pressure as MNCs went on price slashing spree. S. Raghunandan, vice president, sales, Dabur India, said that the pricing tactics of multinational companies had put pressure on the Indian brands. He said in previous years the price value-equation was in favour of Indian brands but this trend was reversed in 2004. Some companies responded with their own price cuts, but these came late in the year and could not match those of the multinationals.

Market research agency ORG data revealed that brands like Vatika, Dabur Anmol, Ayur, Chik and Nyle together lost 2.3 percentage points in volume terms whereas the value gain was merely 0.1 percentage points during January-October.

Future shampoo price cuts may be in the offing since many companies including HLL, P&G, Dabur and CavinKare have set up facilities in excise-free zones.

Such aggressive price cuts also saw companies investing heavily in brand building and aggressive product promotions through advertising to attain higher sales.

The small packs strategy
Apart from price cuts, small packs priced at Rs5 - in recent times even Rs3 - have been changing the rules of the FMCG market. For companies, small packs in the long run do not make sense, as they prove unprofitable.