Friday, November 21, 2008

The FMCG story: Good times are here

From shampoos to skin creams, they're flying off the shop-shelves. Fast moving consumer goods (FMCG) firms have been doing fairly good business for about a year now as consumers found they had had enough of televisions and music systems and were willing to pay more for their toiletries.

But few expected such a sharp rebound. AC Nielsen's retail sales audit numbers for August 2006, confirm that growth is robust -- sales growth y-o-y hit 24 per cent -- about a year back it was barely in double digits.
Of course, AC Nielsen's FMCG retail sales audit figures from July 2006 are based on a larger panel size that has led to better coverage of rural sales. As a result, the sales and market share data have undergone a change and are more reflective of the current market scenario.
But, the trend is reflected in the September quarter numbers too and the industry's relieved. Not so long ago, in July 2005 most firms were unable to pass on even basic cost increases and growth had plunged to under 3 per cent y-o-y. That's changing for many.
But the Street's not so sure Ironically, the BSE FMCG index has underperformed the Sensex over the last three months since August after outperforming the broad market between February and July. The culprits: Hindustan Lever and ITC. Since mid-May, HLL underperformed by about 19 per cent with the Street anxious about how it would manage input costs.

However, Sivasubramanian K N, senior portfolio manager-equity, Franklin Templeton Mutual Fund, believes that the outlook for the sector is promising. Says he: "The cyclical recovery appears to be underway with a combination of increasing incomes, improved marketing and innovation and better price-value equation."

Sivasubramanian adds that growth will depend on two structural drivers -- increasing penetration and consumption in rural areas and changing aspirational values of the urban markets. Both factors seem to be at work already.

Rural demand kicking in For the sector as a whole, the volumes in the September quarter are estimated to have grown at around 15 per cent y-o-y compared with 12 per cent in the June quarter.
While ITC was a star performer showing a revenue growth of 32 per cent y-o-y, HLL managed just under 14 per cent y-o-y for continuing businesses, while Colgate turned in a top line growth of 15 per cent y-o-y.
Britannia and Marico did better at 24 per cent and 26 per cent respectively, while Nestle too didn't disappoint at 16 per cent. With the economy in fine fettle and disposable incomes rising, consumers in urban India are clearly buying.
And rural demand is kicking in. Confirms Sunil Duggal, CEO, Dabur India, "Rural demand is much stronger this year and many of our SKUs (stock-keeping units), which cater for the rural population such as shampoo sachets, are doing much better. Thus, rural demand is now catching up with urban demand."
Observes Sanjay Sinha, head-equities at SBI Mutual Fund, "From what we understand, the rural market is growing at around 11-12 per cent while both together (urban and rural) are growing at around 8 per cent."
This is reflecting in the the AC Nielsen August numbers, which show that all the top-12 categories have grown in double-digits while two-thirds of the companies have seen a growth of over 20 per cent y-o-y.

Modern trade is chipping in: The increasing presence of large format retail stores in the metros, has also spurred sales, according to Milind Sarwate, CFO, Marico.
While sales through modern trade still form a very small percentage of overall sales, the growth through these larger stores -- on the low base -- is today much higher at around 20 per cent, than that through traditional grocery outlets.
While companies admit that margins on sales to organised retail are slightly lower, they realise that modern retail encourages growth because the interaction between a consumer and a product is far greater in the modern stores.

Says Sarwate, "Modern trade allows increasing visibility of good brands and encourages trials of new categories, and customers who are satisfied with a new product will make repeat purchases."
Clearly, the opportunity to make products more visible by creating special units or doing special promotions is leading to increased throughput. Going ahead, it could be a key factor in driving growth FMCG space because it's a good way to capture the wallet share of the consumer.
Observes Duggal, "Sales through this channel are growing three times as fast as through the regular channels. We expect exponential growth through modern trade from now on."

Pricing power makes a comeback: The recent price hikes announced by FMCG majors indicate that they are able to pass on the increased input costs. HLL has taken one of the biggest price increases in recent times covering nearly 30 per cent of its domestic FMCG portfolio.
It has raised prices by 2-20 per cent on products such as soaps -- Lux and Lifebuoy, laundry care -- Surf and Wheel, skin and oral care -- Pepsodent and the weighted average price hike across all categories would be about 1.5 per cent. At Dabur, the increase has been 3-4 per cent on an average over the last nine months.
The HLL management indicated after the results that it had taken a judicious increase in prices and would continue to do so to cover raw material costs, in other key categories, such as skin care and shampoos.
The others are not far behind. Says Hoshedar K Press, executive director and president, Godrej Consumer Products (GCPL), "We have started raising prices in a staggered manner as we supply fresh stocks to dealers and on an average the increase would be between 6-8 per cent for soaps. For hair colour though, we are not upping prices yet."
At Marico, Sarwate says Parachute has been selling at the same price for about 20 months now but prices of Saffola are up.
Observes Sivasubramanian, "The recent price hikes reflect the continued cyclical turnaround that the sector is witnessing. Revenue growth has been encouraging in recent times on increased demand and appropriate product positioning, and these price hikes should help companies experience higher margins through better price realisation."
Indeed, consumer down-trading (buying cheaper products in the same category) seems to have almost come to an end and money which was being diverted to aspirational products is now coming back to household and personal care products.
Observes Press, "It's true that down-trading is being reversed and I feel that even if prices go up, it would not impact demand because the environment is favourable."
Agrees Duggal, "Price hikes have been necessitated by raw material cost increases but we don't expect that to affect demand." Godrej's Press believes that the soaps category could continue to grow at 15 per cent over the next couple of years.

Margins on the mend:
Companies such as Marico managed to improve margins by about 485 basis points to 16 per cent in the quarter while HLL's OPM was higher by 50 basis points at 13.1 per cent. Thanks to the changing product mix, away from cigarettes, ITC's OPM lost around 400 basis points.
Not everyone managed to tide over the cost inflation though: Britannia's operating profit margin crashed to just over 5 per cent from 14 per cent in Q2 FY06. In a highly competitive environment, Britannia was not able to pass on the higher input costs. Nestle too saw margins dip 80 basis points y-o-y to 19.7 per cent.
Industry watchers believe that with volumes kicking in, companies will look to increasing market share and while they may take price increases, it is likely to be limited to the extent of cost inflation in inputs.
Explains Duggal, "Few firms are likely to risk losing market share in a growing market and will keep a close watch on their competitors' price lists."
However, what they are more likely to do is to improve the product mix and try to push higher value-added products, which would pull in better margins. That way even if volumes were to remain stagnant or taper off somewhat, the improved product mix would cushion margins.
In fact, D Sundaram, director, finance, HLL, mentioned after the results that gross margins had improved in the September quarter thanks to a better product mix.
For instance, two high-end ranges were introduced in Ponds, and in laundry wash a new variant of Surf was launched. Duggal, however, believes that with rural demand being so robust, companies would also try to offer new price points at the lower end.

"Companies are unlikely to use pricing as a tool to enhance margins," he observes. Says Templeton's Sivasubramanian, "The mass market can contribute to a major chunk of volumes in the future as consumption of goods increases and many companies are realising the importance of creating a good mix of volumes."

SBI Mutual's Sinha feels that should there be a softening of input costs, companies will also not roll-back prices which will help boost margins.

Valuations are not cheap:
Sumeet Budhraja who tracks FMCG at Edelweiss believes that while stocks may not be cheap, there could be a 15-20 per cent upside from current levels, over the next three to four quarters.
"The inference from our interaction with managements is that the growth momentum is sustainable and that together with some price hikes, it should help margins sustain or move up by about 50 basis points," says Budhraja.

Sinha, however, feels that much of the upsides, stemming from good volumes, are already factored into the prices. "A re-rating of the sector will happen only if there are signals that margins are expanding," he observes, adding that "the stocks are now a defensive play and evenly valued."

Adds Sivasubramanian, "On a relative basis, valuations appear to be reasonable compared to the broad markets and as earnings visibility improves further, we could witness increased interest in the sector that offers an exposure to the consumption boom in India over the coming decades."

:- Shobhana Subramanian ( )

Emerging market opportunities for Global Retailers - ATKearney

The annual A.T. Kearney Global Retail Development Index™ (GRDI) was designed to help retailers make strategic investments in exciting new markets. Now in its eighth year, GRDI ranks the top 30 emerging markets on a 100-point scale—the higher the ranking, the more urgency there is to enter a country. Results for the 2008 Index, highlighted in the figure, indicate that retailers must be more pragmatic with their market entry strategies. The credit crunch and higher cost of capital mean large-scale expansions on multiple fronts will be difficult to sustain. Indeed, the tough—but familiar—world of global retailing is transforming into a tougher, more unfamiliar, but resolutely more global market.

GRDI 2008 country attractiveness

Click the image to enlarge.

The top retail markets in 2008 are as follows:

Vietnam: the shackles are off. Vietnam stole the spotlight this year from the regional behemoths, India and China, with its recently deregulated retail markets. Vietnam is one of the few remaining single-party Communist countries. The country’s leaders are eager to follow China’s blueprint for growth by attracting foreign investment.

India: the retail freeway gets bumpy. For the first time in five years, India’s ranking drops from first to second place in the Index but the country remains among the most attractive markets for global retailers—although they continue to be frustrated by government regulations.

Russia: retail moves into second-tier cities. Russia slips one place to third on the Index. Record high prices for crude oil and natural gas—its main exports—and strong domestic demand are contributing to a booming economy. Russia is especially attractive to foreign retailers experiencing sluggish growth in their domestic markets. Moscow and St. Petersburg are still the most favored destinations, but retail continues to expand into second-tier cities and industrial regions.

China: consumer spending surges. Although China has dropped from number three to number four in this year’s Index, its strong GDP growth makes it one of the fastest-growing economies in the world. Consumer spending has more than doubled since the mid-1990s and is growing rapidly in the large southern and eastern cities.

Overall: Asia grows up. Asia has turned a corner this year. Asian markets have held their own despite the economic turmoil affecting most developed markets such as the United States, Japan and Europe. GDP growth across the region remains strong and will probably top 7 percent on average.

What’s in Store for the Rest of 2008? 
This year is shaping up to be a turbulent one for global retailers—the credit crunch may have started in the United States, but it has quickly spread around the globe, creating financing woes for existing and expanding retailers. Although the European markets have fared better so far, this scenario cannot last long given the level of turmoil across the Atlantic. As a result, 2008 will be a landmark year for visionary retailers that differentiate their companies from the competition by expanding into new emerging markets. For large mass market retailers, the message could not be more clear: expand or perish.

( Source: ATKearney )

Saturday, November 1, 2008

Methodology for selecting the 2008 BCG 100

The Boston Consulting Group generated the 2008 list by using a detailed screening process based on rigorous selection principles. For the earlier, 2006 report, it had looked at 2004 financial data; this time it had the benefit of additional data from fiscal years 2005 and 2006. First, it selected a set of rapidly developing economies (RDE) in which to find the challenger companies. The BCG started with 30 countries ranked according to size of GDP, value of exports, and amount of outbound foreign direct investment. From these rankings, it chose a set of 14 RDEs: Argentina, Brazil, Chile, China, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand and Turkey.

Then an initial master list of more than 3,000 candidate companies that are based in these countries was compiled. This list drew on a variety of local company rankings, such as the top 500 companies in India selected by Business Worldmagazine and the top 500 companies in Brazil selected byExame, a Brazilian business magazine. Having amassed this large candidate pool, an international BCG research team from Brazil, China, Eastern Europe, India, Mexico and Russia, together with a panel of senior BCG experts in Asia, Europe, Latin America, Russia, and the US, conducted a rigorous three-step triage process.

In step one, it ensured that the selection included only companies that are truly RDE-based, omitting foreign joint ventures and the RDE-based subsidiaries of multinational corporations. In step two, the BCG homed in on those players with 2006 revenues of at least $1 billion, a threshold believed to be generally necessary to drive a serious globalisation campaign. “We allowed ourselves some flexibility on this criterion; four companies on our final list fell short of the $1 billion threshold. We included them because their revenues are fast approaching this level and because we felt that they merit inclusion on the basis of other criteria,” says the BCG report.

In step three, it scored the major globalisation credentials of the remaining companies using five criteria: the international presence of the company as indicated by its owned and operated subsidiaries, sales networks, manufacturing facilities, and R&D centres; the major international investments pursued in the past five years, including mergers and acquisitions; the company’s access to capital for financing international expansion, whether through free cash flows, stock markets, or other sources; the breadth and depth of its technologies and its intellectual-property portfolio; and the international appeal of its existing offerings and value propositions

( Source: the hindu business line )