consumer goods industry

8/3/2019 Consumer Goods Industry

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Eat, pray, love innovationsFMCG sector raises product-launch capacity to benefit from high consumptionShamni Pande and Anumeha Chaturvedi Edition:June 12, 2011

"No one in my company ever says let's do this because X company is doing it," says Nadia

Chauhan-Kurup, 25, Joint Managing Director of the Rs 1,500-crore beverages heavyweightParle Agro. Is she boasting? Not at all. Parle Agro has successfully unleashed anarray of

new productsin recent years - with quirky branding too that captured both the mood and

the taste of the times. Think LMN, the bottled nimbu paani, or fresh lemon water, from the

organised segment that came out in 2009. Think Hippo which Parle launched last year - a

wheat-based, salty snack that is unlike any branded snack seen before in India.

And Parle Agro is not alone. Pepsi came up with Nimbooz and Aliva while Coke launched

Nimbu Fresh. In their search for new growth opportunities,fast moving consumer goods,

or FMCG, companies inundated the market last year with more than 10,000 new stock-

keeping units, or SKUs - split equally between food and non-food categories. (A new SKUimplies some kind of product innovation, either in content or packaging, ranging from a

minor tweak to a completely new offering.) Until recently, the Rs 130,000-crore FMCG

industry, which accounts for 2.2 per cent of India's national income, was not exactly known

for introducing new products. No longer. "Product innovation in FMCG sector has been

tardy in India, but has picked up pace in the last few years." says brand and strategy

consultant Harish Bijoor.

Geetu Verma, Executive Director, Innovation, PepsiCo India

The reasons for the change are obvious. The just-

concluded decade of high growth, raising per capitaconsumption to Rs 52,800 in 2010, has instilled a new

confidence and boosted consumption. According to a

McKinsey estimate, average household income in India is

set to grow from Rs 113,744 in 2005 to Rs 318,896 by

2025. India's gross domestic product, or GDP, is even

expected to overtake that of its former colonial master
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Britain in the coming decade. The demographic pattern - 59 per cent of India's 1.2 billion

people are below 30 - encourages innovation too. "Youth has greater willingness to spend

more," notes a report prepared by consulting firm Booz and Co for the Confederation of

Indian Industry.

The same people who earlier set curd every night to consume the next day now buy it

readymade from the store, where they have the option of the probiotic variety, as well as

flavoured yoghurt. "This is the next stage, where a large segment of the population has

moved up the value chain to becoming aspirants and thereby finicky in its choices.

Manufacturers are forced to offer more," says Bijoor.

Out of the comfort zone

Boundaries are shattering as companies diversify like never before. In 2008, FMCG giant

Hindustan Unilevermoved into consumer durables by launching a water purifier, Pureit.

Leading pharmaceutical group Zydus Cadila has entered the FMCG arena with its sugar-free drink Sugar Free D'lite and its table margarine, Nutralite. In May, the world's biggest

confectionary player, Perfetti Van Melle, with well known brands like Alpenliebe and Centre

Fresh, moved into the salty snacks category in India - which it has not done anywhere else

in the world - by launching Stop Not. "The salty snacks space offers us huge opportunities

and we are looking to shake up the market with very interesting products," says Sameer

Suneja, Managing Director, Perfetti.

GarnierFructisShampoo+OilProblem:Indianstraditionallyoil their hair

beforeshampooingitSolution: Aproduct thatcomb

Goodknigh

t AdvanceActiv PlusProblem:Release ofrepellant notsuffi cient tocombat

mosquitoesSolution: A gadget that allows
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Dabur's innovations include Oxylife Bleach - for which it

is awaiting a patent - that claims to release oxygen into

the skin. It is aimed purely at the 20,000-odd beauty

parlours in the country. Marico has launched a branded

rice, Saffola Arise, which it says has a low glycemic

index, or reduced carbohydrate content. "Most players

are constantly looking out for newer segments to get

into," says Raghavendra Rao, Consumer Markets

Analyst, Datamonitor India. "Companies typically come

up with solutions that address the growing health

concerns of consumers."

What prompted these radical departures, or disruptive

launches in industry parlance? It was clearly the

impetus to grab larger market share. In a fast-growingmarket, no company is content with just what it has.

Horlicks, GlaxoSmithKline Consumer Healthcare, or

GSKCH's, well known health drink, for instance, holds

around 60 per cent of the market share in that

segment. "But we wanted to grow the market still

further, as there were new user groups whose needs

were either not being met, or those we did not realise

the need to reach out to," says Marketing Director

Shubhajit Sen.

Chander Mohan Sethi, Chairman, Reckitt

Benckiser India

The company launched a separate Horlicks drink for women in 2008.

This allowed it to rope in a new segment of consumers and today, the

new drink contributes almost 25 per cent to the Rs 1,600-crore Horlicks

brand. GSKCH followed up with Junior Horlicks biscuits, targetting

toddlers. "We are coming out with product innovations which will be healthy choices backed

by scientific research," says Sen. (See No Country for New Products) Dabur was equally

enterprising too, when it tweaked it successful Chyawanprash brand - a health tonic whose

formula is based on an ancient Ayurvedic text - to provide it in different flavours. "It was arisk, but it paid off. We were able to bring back young adults who were falling off our

consumption charts," says Praveen Jaipuriar, Dabur's Additional General Manager for

Marketing.

We are like that only

Innovation, no doubt, costs money. On average, launching a new SKU costs between Rs 8

consumers to increase the level ofrepellant release

ParachuteAdvansed Hot OilProblem: Coconut

hair oil congeals inwinter and cannot beextracted from bottleSolution: Uniquemix of oil that doesnot congeal and has

warming properties

DaburOxylifeBleachProblem:

Skin loses glow afterbleachingSolution: A bleachthat releases oxygenand restores glow


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crore and Rs 10 crore. "It could go up to Rs 15 crore in some cases. This includes the cost

of research trials, promotions and marketing budgets," says Sanjay Singal, General

Manager, Marketing, Dabur. Despite the expense, relatively smaller companies have not

only launched innovative products but also carved out new niches for themselves with

these, as well as forced multinationals to follow their example. Multinationals like HUL and

L'Oreal were forced to follow suit when health and personal care products major Emami

launched a new fairness cream exclusively for men, Fair and Handsome. "You can't say it's

easier for an MNC to innovate. An MNC has to develop a lot of local innovations." says

Geetu Verma, Executive Director, Innovation at PepsiCo India. "A lot of domestic

companies like Dabur and Marico are doing a phenomenal job."

Harish Bijoor, Consultant, Brand and Strategy

But MNCs are trying too. Apart from its water purifier, HUL has

expanded its chain of Lakme salons and even experimented with

laundry services in the past. L'Oreal is going desi with a vengeance.

"Our Garnier shampooplus-oil plays on the traditional habit of Indians

oiling their hair," says Shweta Purandare, Scientific Director, L'Oreal

India. "We have entered the eyeliner category with a non-smudging

kajal stick."

Research and development centres are the flavour of the season at focus group meetings.

Marico's Parachute Hot Oil was borne out of a discussion on giving away a heater with its

coconut hair oil as consumers faced the problem of the oil congealing during winters.

"While looking at ways to reduce the costs of a heater, we came up with the idea of hot oilinstead," says Sameer Satpathy, head of marketing at Marico's Consumer Product's

Business. The innovation bandwagon is also driving acquisitions. Companies are getting

into new segments by acquiring brands. "We know if we do not have a certain capability, we

can acquire it or even pay and get the best in the field to do the research for us," says

Dabur's Jaipuriar. Late last year Reckitt Benckiser, the world's largest maker of household

cleaning material, bought out Paras Pharmaceuticals, best known for its pain reliever Moov,

for Rs 3,260 crore. "Our existing strong platform in India combined with our parent

company's investment and innovation strength can build on the success which Paras

already enjoys," says Chander Mohan Sethi, Chairman of Reckitt Benckiser India. Similarly,

the Rs 6,000 crore Cargill India acquired the edible oil brand Sweekar from Marico. "Wethink Sweekar offers just the right platform to allow us to innovate.

It is a premium brand and its consumers would be willing to pay more for a specific health

benefit," says Siraj A. Chaudhry, Chairman, Managing Director, Cargill India. Yet innovation

does not always work. Many initiatives are taken, only a few succeed. Marico's debut

attempt at a salty snack, Saffola Zest, for instance, had to be withdrawn within a year of its


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launch in 2009. GSKCH's flavoured, packaged milk drink Chill Dood, also in 2009, flopped

as well.

Quick Entry, Exit

"Companies need to show speed in introducing new products and variants. But they should

also respond fast and drop product lines and variants that do not perform," says Y.L.R.

Moorthi, professor of marketing at the Indian Institute of Management, Bangalore. "Often

organisations are quick with the first but slow with the second. That is how they get saddled

with non-performers." Moorthi also feels the real challenge is to keep upgrading existing

products, keeping them contemporary and relevant. "It is because the companies

concerned could do this with age-old soap brands like Lux, Lifebuoy and Pears that they

remained market leaders for decades," he adds.

Nadia Chauhan-Kurup, Joint Managing Director, Parle Agro

"The contribution of innovation to a company's top line ranges

between 0.1 to 10 per cent in the first launch year, and is in the rangeof 0.1 to 20 per cent in its second year," says Banoja Acharya, Vice

President, BASES India at the market research firm, The Nielsen

Company. (Nielsen's BASES services help clients achieve growth

through new product innovations.) And that only holds if the product

is a success.

"Who cares about how much money a company has spent on

technology or research? Eventually the consumer must like what is

being offered. It has to fill a need - at the price he can afford," concludes Ajeet Singh Karan,

Partner, Baring Private Equity.

Ring in the new to ride the boursesFMCG firms are steady market performersRajiv Bhuva Edition:June 12, 2011

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The economic downturn of 2008/09 hit every sector under the sun, but some were less

affected than others. One such sector was fast moving consumer goods, orFMCG, which

remained a relatively safe haven for investors. The reason is apparent - in the FMCG

sector, there is no cyclicity involved. FMCG scrips rarely soar, but they do not fall steeply

either. (The same is true of pharmaceutical stocks.) The demand for these goods may not

be entirely immune to market-moving factors like GDP growth, inflation or interest rates, but

it is not wholly dependent on them either. People will keep buying soap and toothpaste, for

instance, or medicines, even if the prices shoot up. Thus FMCG and pharma stocks are

termed 'defensive stocks'.

In India too, FMCG scrips appeared relatively sluggish when the markets were booming

from late 2006 to early 2008. But, all through the financial crisis and even thereafter, FMCG

scrips have either performed better than, or been neck and neck with, the broader BSE

Sensex.

But there are leaders and laggards too within the FMCG space.

What sets the former apart from the latter? Brand equity obviously

brings higher revenues and profit, but innovation makes a big

difference too. Driving brand equity helps companies build long-

term success stories. For instance, sustained investment over the

last 25 years in Nestle's Maggi, a household name, has led to the

creation of a brand worth about Rs 800 crore.

However, innovation matters just as much. "Innovation is what sets

apart the best consumer companies from the average ones in the

long term," says Manish Jain, FMCG analyst at Nomura India.

A strong innovation-led approach is critical to the long-term success

of a consumer company. It is not only the Maggi brand, but also

constant innovation that has seen a company like Nestle India's price to earnings, or P/E,

multiple expand manifold over the last 10 years (See Stock Taking). Compare this to, for

instance, Hindustan Unilever, whose P/E multiple has contracted on the back of less

successful strategies around innovation. "Innovation is an important growth driver," agrees

Vijay Chugh, Director of Research at Ambit Capital.

Chugh, who tracks the sector, believes innovation is a necessity now with global

competition entering in a big way.

"The track record of successful innovation is equally important," says Abneesh Roy, analyst

at Mumbai-based Edelweiss Capital. Roy too cites Nestle India - the most expensive stock

in the FMCG space - noting that the company's instant pasta became segment leader in

India in just one year with 70 per cent market share. "This is the quickest Nestle's has got to

Stock TakingFMCG scripsoutperformed the Sensexduring the slowdown...

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top position in its global history," he says. Though Sunfeast was already present in the

instant pasta space when Nestle entered, the former has not been able to make much room

for itself. Given Nestle's larger spend on research and development, Roy believes smaller

companies cannot make a very big difference. "However, small companies can use their

innovation capabilities to lead in niche spaces," he adds.

Innovation need not always mean new products. It could mean new packaging or ingenious

pricing. For instance, the move to sachets has been a big positive for FMCG companies,

roping in a large, new section of buyers and enabling penetration into non-urban markets.

Jain also cites GlaxoSmithKline Consumer Healthcare India, or GSKCH, as another

company that has reaped the rewards of innovation. Its P/E multiples expanded

significantly, from 16 times in 2007 to 32 times now, as it changed track from being a purely

malted beverage company to include other products such as instant noodles, energy bars

and drinks in its portfolio.

Unlike in the pharma sector, however, no FMCG innovation can transform the fortunes of acompany. A strong innovation pipeline in an FMCG company excites investors, but they

wait for long-term consumer reaction. The timelines are more stretched for FMCG

companies; they need to keep investing in marketing to ensure buyers come back, says

Jain of Nomura India.

"For a new product to meaningfully contribute to revenues and profits, it has to grow at a

fast clip for a number of years," he adds. "It can be a very different story for pharma

companies, where one new drug, if successful, can double the company's existing revenues

in a matter of years." Jain cites the example of the Rs 400-crore oats market in India.

Marico Industries launched Saffola Oats in June 2010 and it has already become a Rs 30-crore brand. But the product still has a long way to go before it starts contributing

meaningfully to the Rs 2,061 crore revenues of Marico.

Invariably, FMCG companies bringing in regular innovations command better valuations

than their not-so innovative peers. "The innovators always tend to trade at much higher

valuations, as a strong innovation pipeline gives investors more confidence about the long-

term health of the company," says Jain.

Again, in India, within the FMCG space, food companies trade at much higher valuations

than those in the home and personal care space, as the former tend to have a strongerinnovation pipeline. For instance: In the last four years, P/E multiples of Godrej Consumer

Products has increased from 27 to 32 times whereas that of Britannia Industries more than

doubled from 29 to 62 times.

"Commercial innovations drive growth. Valuations respond to growth and profitability,"

concludes Chugh of Ambit Capital.
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Tough deal for new productsInnovations fail to help some FMCG companies in perishingShubhajit Sen Edition:June 12, 2011

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Innovate or perish has become a rallying call amongFMCGcompanies of late. However,

most innovations perish rapidly post launch. It seems a Sisyphean task for organisations -

launching innovations at great costs only to face failure. Even when some innovations make

no financial sense at launch, they get characterised as 'strategic' by the senior

management, only to be dragged to an unnecessary painful death. In this litany of failures,

emerge a very few successes. They are spoken about in conferences and presentations as

best practices to be emulated. Others (especially consultants) give various examples from

Europe and the United States about 'how to innovate successfully'. Everyone, it seems, is in

search of the formula to innovate successfully.

Shubhajit Sen

It is difficult to drive successful innovations in India consistently. This

is because of structural differences in our operating environment.

Despite significant advances in research techniques, the industry's

rate of success has not improved - primarily owing to faulty,

nonrational decision making in organisations.

AC Nielsen data reveals how difficult it is to make innovations

succeed in India. In 16 FMCG categories, new stock keeping units, or

SKUs, launched in the previous year contributed only 1.6 per cent market share in Year 1,growing to 3.6 per cent in Year 2. This share achievement was distributed across 100 plus

launches. On an average, each new launch managed a turnover of Rs 4 crore in Year 1

rising to Rs 10 crore in Year 2. Any practising marketer would know that the marketing cost

of a new launch far outweighs this paltry return. This slow buildup of innovation sales is also

reflected in the time it takes an FMCG innovation to touch the milestone turnover of Rs 100

crore - the modal time is five years. In most FMCG categories, an overwhelming market
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share - sometimes approaching 75 to 80 per cent - is cornered by brands and variants that

have been in market for over 15 years. This contrasts with the West, where in many

categories, innovations control around 33 per cent market share.

The reason for this difference is the market structure - the retail trade. Our trade is

fragmented in nature. AC Nielsen data indicates that innovations take a longer time toachieve comparable levels of distribution against launches in markets that are modern trade

driven. Also, peak distribution levels at the end of Year 2 are lower. As is obvious, a lower

distribution linearly dampens trial rates for innovations from reaching their true potential.

The second issue with a fragmented trade is that traditional shoppers not only have to fit in

a new product buy within a pre-determined shopping trip and an allocated budget but also

need to remember the new brand name to ask the retailer for it. This is a very different

scenario from a shopper in a modern trade who has a higher shopping budget, may come

across a new product while walking past the shelves and has a chance to reach out for it -

all leading to a higher probability of a trial.

Supporting this hypothesis is the market share data across categories in India where new

launches and newer brands have a higher share in modern trade than in traditional trade.

The competitive structure across most categories reveals very different market shares in

modern trade. Better pre-launch work preparation can mitigate some of these issues, but

there are other challenges. Most organisations rely on some pre-launch volumetric research

to not only inform their launch planning but also optimise the launch package. However,

post launch success rates have not improved dramatically and it has become popular to

blame research agencies. Companies are equally to blame for this.

Many marketers consider a project successful if the derived volume meets initial targets and

any one or two of key underlying criteria (e.g. differentiation and value, to name two) beat

norms. However, they forget that if all four of the criteria are not met, the probability of in-

market success falls below 50 per cent. The issue is one of education; but the bigger issue

is by the time a milestone research is completed, the project is infused with so much

organisational energy and emotion that there is a strong tendency to clutch at any good

news - even if rationally, you should take a different decision.

Given the various issues - pre-launch and in-market - outlined above, does it make sense to

revert only to traditional marketing and sales interventions to drive top line sales? While inthe short run, this gives better financial returns, it prevents an organisation from

participating in new areas of growth, precludes the possibility of new streams of future

revenue, and arguably prevents strong brands from being seen as modern and

contemporary - putting at risk the entire brand franchise.

One strategy to balance this tension is by approaching innovations with a portfolio mindset.


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Any risky investment benefits from spreading the risks across a portfolio of assets with

differing risk-return profiles. You could approach innovations by continuously evaluating the

value of your innovation portfolio - the pipeline. Evaluate if the portfolio is balanced - in

terms of project size - balancing large, risky projects with many small, less risky ones.

Spread the risk across different types of innovations, where the project is driven by enteringa new category or creating a new one, or a balance of small, incremental flavours or new

pack launches. Balance low-margin projects with high-margin projects. Ensure there is a

steady stream of projects spread across time frames. By managing a portfolio of assets, it

becomes easier to kill dud projects before their launch and also kill innovations that do not

perform in the market.

The blended metrics of the innovation portfolio can achieve a better financial profile -

balancing top line growth with bottom line returns better than a singular focus on individual

innovations. This will require an organisational restructuring - in terms of allocation of

resources as well as identifying of competency gaps for the human resources department tofocus on for training and development. It could also lead to organisational restructuring

where dedicated teams can focus on early stage ideation for long-term innovations.

Following some of these principles has helped GlaxoSmithKline Consumer Healthcare, or

GSKCH, in India. One key outcome has been a significant diversification of our portfolio

where the over 100-year-old Horlicks, despite growing at its fastest rate ever, contributes to

only half of our business - down from 67 per cent in 2002. And our innovations have helped

GSKCH become one of the faster growing FMCG companies in the past two to three years.

In conclusion, innovations are a key driver of growth. However, the track record ofinnovations is dismal. While organisations can improve their odds with better discipline pre-

launch, the structure of our market makes it difficult for most launches to succeed.

Organisations will benefit from working within the 'law of averages' and construct a portfolio

of ideas that spreads the risk rather than get trapped by the 'fewer, bigger, better'

syndrome. And beware any wise man who says that he has a formula for delivering

successful innovations consistently in India.

The author is Executive Vice President, Marketing, GlaxoSmithKline Consumer Healthcare

India

Target: Top of the pyramidPreeti Khicha / Mumbai August 10, 2011, 0:46 IST Business Standard


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Food brands are trying to make products, which were earlier seen as occasional indulgence, to become a part ofthe regular shopping basket.

Mainstream food brands, which have long milked the bottom of the pyramid to drive volumes, are now eyeing thetop end to build value.

Last month, Hindustan Unilevers coffee brand Bru stepped up its regular brewportfolio by bringing to market Bru Exotica, a super premium coffee in threevariants: Brazil, Columbia and Kilimanjaro. GlaxoSmithKlines Horlicks toobolstered its premium credentials with the launch of Horlicks Gold at a 30 per centpremium to the base variant, in select markets across India. Horlicks Gold is anenriched version of the regular Horlicks with better taste and aroma.

In India, premiumisation in the FMCG space is not new but has largely been drivenby personal care and household care brands, claims an IMRB study. Industry

observers say this is because the perceived value of a personal care brand is much higher than food brands.Categories like anti-aging and toothpaste for sensitive teeth are niche areas which personal care brands haveexploited to drive premiumisation. It is only now that food companies are more actively latching on to the trend and

the reasons are many.

Leave aside the rise in disposable income in the metros, changing lifestyles and health awareness are drivingdemand for better quality foods. With the increasing availability of such foods through stores like Godrej NaturesBasket and Future Groups Foodhall, the Indian consumers exposure to premium food is growing. Thus it is nosurprise why mainstream food brands are enhancing their portfolios with renewed vigour.

There are other reasons too.

KPMG analyst (consumer) Anand Ramanathan believes that as categories get more saturated, marketers have tolook at new ways to micro-segment the market for incremental market shares. The scout for higher margins in thewake of commodity inflation is putting pressure on companies to innovate.

Others are simply protecting themselves in the wake of competition from imported brands. As Future Brands (foodand FMCG) President Devendra Chawla points out, For brands which have built a large consumer franchise in themass segment, launching a premium variant allows them to retain their loyal set of consumers who are emotionallyattached to the brand but want to trade up to products with higher order benefits. It also allows companies to bumpup the aspiration value of their brand, thus enhancing their overall brand equity.

Experts say the focus on health, which has been used by most companies as a launch pad for their premiumranges, will continue to drive the trend in the near term. For example, last month Agro Tech Foods premium edibleoil brand Sundrop brought to market its most expensive edible oil in a new spray format - Sundrop SlimLite cookingspray targeting consumers that seek greater health and convenience. Marico which has been test marketingSaffola Arise, (its premium basmati rice) took the brand national in February last year.

Biscuit majors too have jumped onto the premiumisation bandwagon and are using both taste and health todifferentiate. Britannia Industries, ITC Foods and Parle Products have all scaled up their portfolios with premium

variants. As Parle Products group product manager Mayank Shah says, Until four years ago, only 15 percent ofour turnover from biscuits came from premium products. Today that number stands at 50 per cent. While thepremium and super-premium biscuit category is still small, Shah is confident that in the next few years, products,which are now seen as occasional indulgence, will become a part of the regular shopping basket.

In confectionary, Cadbury is driving premiumisation through indulgence. As the market leader in India, Cadburythought it was its responsibility to grow the category by launching premium variants. Cadbury Silk, an India-specificinnovation was launched last year and has already garnered a market share of 3.8 percent since launch. Though,Cadbury director (snacking and strategy) V Chandramouli observes the trend will be confined to large cities andwill trickle into smaller towns in the next few years.


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Communication is key when driving premiumisation. It should help create a wow factor so that consumersunderstand the rationale behind paying extra for a premium product, notes Chandramouli. This is particularlyimportant as mainstream food brands are competing with imported brands which have the country-of-origin effectto their advantage. As ITC Foods CEO Chittaranjan Dhar cautions, for a premium product to succeed it mustprovide a differentiated experience. The objective is to go beyond a one -time trial and sustain loyalties in the longrun.

Chandramouli of Cadbury adds, It is important to make significant investments in modern trade through activationsand in-store displays to convey the premiumness. This is where many companies lose out. Investments in thesupply chain are also vital. Cadbury, for instance has reworked the entire supply chain (mainly cold chain facilities)to ensure the creamy and smooth taste of Dairy Milk Silk is not compromised.

Though it may be a while before premium variants are a gold mine for food companies, brands seem to bereadying their portfolios for the future consumer.

consumer goods industry

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