How FMCG companies have managed profit & revenues in last 5 years

In the previous article we talked about the trends affecting the consumer behavior of the Indian FMCG market. This article talks about how the FMCG companies are adopting their strategies in the changing market dynamics.

For the purpose of our research we have picked up 12 major listed FMCG companies in India. We have compared their revenue growth rate and profit margin for the period of last 5 years. On plotting their 5 years revenue CAGR on y axis and 5 year avg profit margin on x axis, we can see clear group of companies.

The 1st quadrant on the top right is of the companies that are doing good both in Revenue growth and profit margin.

The 2nd quadrant on the top left consists of companies that are having high revenue growth but not focusing on profit margins. These companies are in high growth phase and hopefully will show profits in the future.

The 3rd Quadrant on bottom left is those companies which are doing poor in growth as well as profit margin.

The 4th Quadrant on bottom right is about those companies which have a healthy profit margin but their revenue growth is below median in the last years.

See the figure below for more details.

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?Let us try and analyze the reason why companies are in a particular quadrant. For this purpose, we have used 5 major pillars i.e., Product Portfolio, Channels, Market, Cost, Acquisitions.

In Product Portfolio category the major levers are

·???????Portfolio premiumization

·???????Entering into new categories

·???????Early investment in trends

In the Channels category the major levers are

·???????Expansion in multiple channels to drive revenues(D2C, Online, last mile partnership)

In the Market category the major levers are

·???????Expansion in Urban and Rural areas

·???????Expansion in International markets

In the Cost Category the major levers are the

·???????Intelligent commodity buying

·???????Outsourcing of non-critical function

·???????Intelligent supply chain

Now we will see how these parameters are responsible for When we look at the companies in the each quadrant.

High revenue- High profit margin

The companies in this segment?are known for their huge reach, successful international business, healthy product portfolio, large number of brands being market leaders in their respective categories, ?heavy focus on premiumization of product portfolio, successful expansion in the new channels and effective cost cutting measures, the products are deeply penetrated.

For example in case of HUL, they are present in skin care premium segment in form of Dove, Pears. In Haircare it is dove & Indulekha, tresemme & Lakme. They have also led successful premiumization in the detergent segment & recently acquired the Vwash brand for the premium beauty segment. Apart from that their premium portfolio drives as much as 3x more revenue than their normal portfolio.

Another example is of Marico where its brand Safola has 81% market share in the super premium refined oil segment, and it is also present in the premium segment of hair nourishment and grooming and skim care. In case of Nestle their premium portfolio contributed to 21% y-o-y growth to the domestic sales in FY20.

These companies have been known to bring out new products based on market trends. For example, Nestle has launched close to 90 products in last 5 years which contributed to 4.3% to the total sales in 2019.?Healthy, wellness, immunity, DIY cooking is seem to be a dominant trend that FMCG companies are catering their products to. HUL launched 15 product variations in Lifebuoy in 30 days in 2020. Marico launched products in ready to eat space, khada mix, healthy food under safola brand and

These companies are having market leadership in their respective categories. In case of HUL, it is number one in Skin cleansing, skin care, haircare, color cosmetics with 6 brands (dove, lux, pond’s, glow & lovely, clinic plus, lifebuoy) above 1000 cr.

These companies have extensive reach for example HUL has a massive reach of 8 million stores all over India. Marico has 5.3 million outlet reach. Britannia has 2.2 mil outlet reach. Also these companies have started dominating modern channels to reach customers. HUL has a D2C site Ushop, mykirana, Lakme India. Almost 10% of the demand is captured digitally and 30% of Lakme sales were through digital medium. Marico has increased its e-commerce share from 5% to 8% in FY21.

Marico has increased its rural penetration from 26% to 33% in FY21 and it believes that its direct reach in rural will be a source of competitive advantage. P&G to invest 500 cr in rural markets.

Companies have made successful acquisitions over the years to increase their competitiveness. Marico has made 13 acquisitions in last 14 years. Primarily being Nihar which was a competitor to parachute and Beardo which it aims to develop as a 100cr D2C brand. HUL has acquired Vwash, Boost, Horlicks, Indulekha brand over the last 5 years to increase their presence.

High Revenue- Low Profit

The companies in this quadrant are defined by high Growth CAGR for 5 years but less than median avg profit for 5 years. These companies are primarily focused on growth at the cost of profitability. Companies in this quadrant are known for their rapid expansion in channels, reach, acquisition of big brands, investment in technology, high volume of product innovation.

The companies in this quadrant are Tata consumer products limited and ITC(we have considered the FMCG division for our calculation).

In case of ITC, it is heavily investing in its product portfolio, It is present in 20 food categories and has 4 power brands. Its market leader brands like Aashirwad, Sunfeast, Bingo, Savlon under its portfolio. It has launched 120 new products in Fy20-21. The company is known to bring unique product innovation like Dark Fantasy (chocolate filled cookies), Bingo Mad angles (triangle shaped chips) etc. At the same time, it is successful in brand extension across category, ex- Ashirhwad atta expanded to Salt, Blended Masala, Ready to eat, ready to cook, organic etc. Also it is successful in brand extension within a category ex- Ashirwad. In case of TCPL the company has also started into Tata Sampann brand which is targeting pulses, spices, besan etc.

Both the companies are driving premiumization for their portfolio. In case of TCPL, has launched 6 variants of premium salt under its tata Salt brand in India. Premium portfolio contributed to 3.5% in fy 20-21 up from 1.8% in FY19-20. Tetley, teapigs are well established brands in premium segment.?It introduced Eight o’clock, premium international coffee, Tata Salt super lite(rs 53/kg) in the Indian market. It has introduced Himalayan Natural water, the premium water brand in UK. It has introduced 2 D2C brands Tata tea 1868 for luxury tea and Sonnets by Tata Coffee for luxury coffee.

ITC is also doing good in the premium segment. With 26% market share in the premium biscuit segment.?Dark Fantasy brand in the premium biscuit has been a huge success for ITC. Fabelle brand is in premium chocolate segment. At the same time, Sunfeast Farmlite, Sunfeast all-rounder are other brands launched in the premium segment and B naturals in the premium juice portfolio.

Both TCPL and ITC are focused on launching the products in the health, immunity space. ITC launched Ashirwad salt proactive for better heart health, Sunfeast farmlite digestive veda focused on immunity, Aashirwad nature’s super food focused on organic. TCPL launched Tata Tea Tulsi Green, Gold Natural Care as well as Tetley Immune- Green Tea that comes with added vitamin C in FY 20-21 in line with health and immunity trend.

Companies in these quadrants are rapidly increasing their reach. ITC has increased its export revenue by 2x since 2018. It has increased its store presence to 56.3 lakhs in India. It’s presence in e-commerce has increased up to 5% in FY 20-21. It has launched its own D2C site ITCstore which provides products under 45 categories and 11 cities with plans to provide to 14 cities. It is also providing orders via swiggy & Dunzo, and it is estimated the sales via online portal in the non-cigarettes FMCG business grew by 20% for the top 6 metros in April – May 2021.

TCPL is has increased its direct store presence in 10 lakh stores(as of Sept 2021). Share in ecommerce has increased up to 7.3% of sales (as of Sept 2021), a 153% increase yoy. Tata Sampann pulses & besan growth has been led by ecommerce since last 5 years. It is the top category in online channels. Institutional channels have grown by 144% yoy (as of Sept 2021) The rural distributors number increased to 3000.

Both companies have leverage M&A for their benefit. TCPL was formed as a result of merger of Tata Global Beverages and consumer business of Tata Chemicals. This resulted in bringing all the iconic Tata Brands like Tata Salt, Tata Tea, Tetley, Tata Sampann under a single umbrella. It has also acquired the Nourishco brand in the beverages category from PepsiCo. Acquisition of Kottaram Agro foods. Millet based food. Tata Soulful brand.

ITC on the other hand has used acquisitions as well. It acquired Savlon in 2015 to expand its non-cigarette FMCG portfolio and 1st purchase in the personal care segment. As of 2021 it has become 1000cr brand. It is planning to enter in every category and achieve a revenue of 1 lakh crore by 2030. ITC is acquiring brands with regional presence at low prices. It has acquired Nimyle,Nimyle is the second largest brand in the floor cleaning segment in West Bengal and Odisha while has recently entered the North and selling through e-commerce firms like Amazon and Big Basket. ITC also acquired the B Natural brand of packaged juices from Bengaluru-based Balan Natural Food and subsequently relaunched it with ambitions to overtake the top two firms, Dabur and PepsiCo. It last year acquired the once popular Charmis skin care brand from Colgate-Palmolive.

Low revenue-Low profit

The companies in this quadrant are defined by less than median Revenue CAGR and Less than median avg profit margin for the last 5 years. Companies in this quadrant known to have high promoter debt, for example in case of Emami which had a promoter debt of around 70% of the total promoter holding. Although it was brought down to 36% but it is still high. Similar situation was observed in Bajaj Consumer Care Limited which is now resolved.

Portfolio mix is also a subject of improvement for these companies. For example in case of Bajaj Consumer Care the company is dependent on its main product Bajaj Almond drop hair oil to drive revenue. Around 90% of the total revenue is drawn from this product. The company has launched other categories but they are still at a early stages of growth. Similar case is for Godrej Consumer Care which is unable to category development. It’s product portfolio is skewed across geographies. ?Emami is focused as a value driven brand and there is doesn’t has a deep emphasis on premiumization. It’s major brand also performed poorly in the last 5 years.

Channels to reach the customers has also been a critical factor for these companies. Emami has limited direct reach of 9.4 lakh stores which is less compared to the big players. More than 52% of the revenues in FY20 were from rural areas and a rural slowdown is another reason for the slow revenue growth. The company is trying to reduce its dependency on the wholesale channel (52% of the sales network in fy18). ?Exploring channels to reach the customer is low in these quadrant companies. For example, Emami e-commerce grew to 1.2% in FY20. Bajaj Consumer Care is 2.5% FY21. Majority of these companies are yet to make a significant investment in the D2C channel.

At the same time the international business is a sore point of companies. Emami & Bajaj Consumer care has very small international presence. While Godrej Consumer Care which has significant presence in international markets. It has been a source of pain for the company. It’s Indonesia Business is suffering slow revenue growth. In the middle east, Africa & US, in FY 17-20 the EBIDTA CAGR is -11% ?due to macro-economic conditions & liquidity changes.

In the next section we will talk about how the Indian FMCG companies can leverage the current trends to be future ready.