FMCGs tread new paths for higher profits

03 Oct,2011

By Ratna Bhushan


Consumer product makers such as Heinz India, Perfetti Van Melle and Glaxo SmithKline Consumer are entering product segments that offer higher profitability to offset pressure on margins due to volatile commodity prices.


Heinz India, known for its ketchup and Complan milk drink, plans to foray into cornflakes. Rival GlaxoSmithkline Consumer Healthcare, maker of Horlicks milk food drink, too may target the breakfast table.


“With the huge pressure on margins, the attempt is to diversify into areas where profitability can be improved, besides reducing dependence on volatile commodity fluctuations,” says GSK Consumer MD Mr Zubair Ahmed.


It’s for the same reason that Dabur, maker of Real juice and Chyawanprash, plans to launch car fresheners and aromatic candles under the Odonil brand, and Parachute hair oil maker Marico will foray into body lotions.


That’s not all. Sugar confectionery maker Perfetti Van Melle is piloting packaged potato chips and salty snacks under its Stop Not brand, and biscuits maker Britannia is giving final touches to a multi-city rollout of its baked snacks brand Time Pass after test-marketing it in Bangalore.


Everyone wants to hedge risks and reduce reliance on a few mainstay products that depend heavily on certain commodities. Most consumer products companies have taken a hit on their margins due to rising raw material costs over the past 10-12 months. Crude oil prices too went up over 30% in the first six months of the year. Companies have raised prices by 5%-10% and initiated several measures to cut costs to deal with rising costs. While some input costs have started softening, companies say it is too little and that pressure on margins continues.


Analysts say the firms have no option but to diversify – because they can’t risk increasing prices of their bread-and-butter products beyond a point, particularly in mass-market categories where competition is intense. “Competitive intensity has gone up significantly in the past 12-18 months; companies are looking at ways of getting a foothold in emerging categories,” says Mr Gautam Duggad, research analyst at financial services firm Prabhudas Liladher.


So companies are adopting a flanking strategy and stepping into more profitable and fast-growing categories even if they are unfamiliar.  “Some of the categories could be small but the idea is to develop and nurture them for 5-10 years so they can add to topline in the long-term,” says Mr Duggad.


India’s largest retailer Future Group President – Food & FMCG Mr Devendra Chawla expects emerging categories such as beauty, anti-ageing, health, nutrition foods and wellness to attract big investments. Brands are also offering differentiated products with functional benefits because they can be sold at a premium, he adds.


“Highly penetrated categories like soaps and detergents will also witness margin expansion by upgrading consumers, for example, from plain detergent to machine wash; dish-wash powders and cakes to liquid; and shaving cream to foams and gels,” Mr Chawla says.


Companies say brand extensions help increase brands’ popularity, shelf space and marketing efficiency.  “Brand extensions not only help increase rate of acceptance and trials by consumers but also maintain efficiencies on advertising and promotion expenditures,” says Dabur India CEO Mr Sunil Duggal.


GSK Consumer seems the most aggressive. In the past six-eight months, the British firm-synonymous with Horlicks for decades-has added Sensodyne toothpaste and Lucozade sports drink to its portfolio.  Last year, it extended Horlicks to instant noodles called Horlicks Foodles. GSK Consumer’s Ahmed says the move helped increase the brand presence on the shelf.


Perfetti Van Melle is testing packaged snacks in parts of Punjab, Karnataka and Andhra Pradesh. Unlike confectionery where margins are wafer-thin and price points are restricted largely to Rs 1, 2 and 5, the company would have more leeway to experiment with different price points within snacks.


Hair oil and edible oil maker Marico will extend its two-decade-old coconut hair oil brand Parachute to body lotion and other skincare products subsequently, riding on the brand’s purity and value-for-money attributes.  Marico’s bottom line depends to a large extent on coconut oil costs, while biscuit maker Britannia’s margins rely heavily on costs of atta and sugar. Heinz, on the other hand, which has also forayed in breakfast mixes, has been dependent on Complan.


All of them would want to reduce over dependence on a single product or commodity. Analysts, meanwhile, warn that while some category extensions are logical, others may fizzle out. “Companies have to look at avenues of growth but the investments need to be sustained,” says Baring Private Equity Partners’ Head (Investments), FMCG, Mr Keshav Misra. “And not all experiments succeed; some work, some don’t.”


Of course, there have been several failures in the past. Kellogg’s foray in biscuits had bombed many years ago, and in the late-1990s GSK’s Aquafresh toothpaste and fruit drink called Ribena did not work.


Source:The Economic Times

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