Michael Fernandes is the Mumbai-based senior engagement manager with the international management consulting firm McKinsey & Company. In a rare interview with Neeraj Jha of FE-Thinktank, Fernandes offers his views on the Indian FMCG industry. Excerpts:Is the FMCG concept vague? Is it possible to define it?
The most comprehensive FMCG definition would include packaged food, personal hygiene products commonly known as dry commodity products and, tobacco and spirits. In India, there has never been a strong definition of the FMCG sector. This is sad. For, if you consider the comprehensive definition, FMCG becomes India’s second largest industry in terms of sales, the tax it pays and the number of employees. There has never been any effort to try and aggregate the whole sector.Why is the FMCG concept so narrow in India?
One, the focus has always been on intermediate products. Two, the FMCG sector has always been looked upon as an MNC preserve, a high-price sector. People tend to associate FMCGs with luxury goods. No one seems to be bothered about these misconceptions. Why, the FMCG sector does not have a minister when practically every other sector has one.
Do you see this FMCG concept changing in India?
Globally, the FMCG sector has been successful in selling products to the lower and middle income groups, and the same is true in India. Over 70 per cent of sales is made to middle class households today, and over 50 per cent is in rural India. Centrality, which the sector has missed all these years, is returning with liberalisation. So, people have begun to realise that the FMCG sector may not be all that bad. The stockmarket boom also helped in its own way.
There seems to be some definitional confusion with the FMCG sector now being called the PMCG sector, packaged mass consumption goods sector. Your views?
True. There is greater emphasis on packaging and branding today. Realisation that packaging and branding can add value both to consumers and manufacturers is growing today. Packaging can help not only in reducing perishability but can also influence the entire value chain.
Is the FMCG sector growing?
Growth in the FMCG sector has been below potential. It is only in personal care and hygiene sub-segments that there has been an explosion of players. The FMCG sector is yet to see the next level of innovations. Stronger local product ranges are not there except in a few product categories such as fairness cream and hair oil. Marico is now moving towards innovations and value-additions. Its anti-dandruff oil is a good example. Not much has happened in the ayurvedic side either.
Despite a history of 115 years, why isn’t Dabur a match to Hindustan Lever?
It is a tough question to answer. Perhaps, it is to do with the fact that Hindustan Lever figured it out quite early that it had to play a solid game and was willing to take bets. Not just that, Hindustan Lever has been able to respond to marketplace changes and competition much faster. Look at Hindustan Lever’s approach, right from day one the approach has been that of a market leader. Not many players, be it MNCs or domestic, have that.
How do you explain this phenomenon?
Very few MNCs looked at India aggressively. Most MNCs consider India as an extra-tough market, where the need to localise is greater. Regulatory environment too was not conducive. The market itself was not open. Opportunities were not enough. Of all the sectors, FMCG has been the slowest to reform. If you look at the agriculture sector, it is still grey. It is still a separate sector with linkages not strong enough. Perhaps cotton could be the only exception.
Not just that, most of the goods produced go to the public distribution system and there are local pulls.
FMCG is not all about marketing and advertising. How important is product conceptualisation for FMCGs?
Internationally, a brand has always followed a proposition and not the other way around. No amount of fancy and glitzy advertising will do the trick. A product should be locally-relevant and affordable. Conceptualising a product is 90 per cent of strategising.
Do you justify Indian FMCG companies spending as much as five to 12 per cent of their revenues on advertising?
Adspends in India are not really out of line with global standards. Moreover, you should appreciate that advertising is necessary to increase awareness in the brand and product category levels. Then there are functional ads, which talk about the value of innovation that has gone into a product. Advertising is also necessary to induce changes in consumer behaviour.
What has been the role of strategising in the domestic FMCG success stories?
Clearly, Nirma has been a strategy-play. Call it a superb consumer insight or a flash of brilliance, Nirma has been successful in upgrading the product being used by the mass of consumers,in packaging it and in offering brand value. Nirma has used their advertisements as vehicles to support that. Marico has been successful in some sectors and its health proposition has worked quite well. Manikchand is another smart play, in usage of sachets to drive distribution.
Nirma has shown the MNCs that there is a huge untapped potential in India. Why then the MNCs, with the exception of Hindustan Lever, were not interested in India pre-liberalisation?
MNCs are rational business entities. They have always weighed Indian opportunities against those outside. It was not easy doing business in India then and thus it made little sense for them to make huge investments in India.
Domestic FMCG players should have exploited such a situation to their advantage. They would have had a headstart. Why were they not interested?
Yes, there should have been more local players in the FMCG industry. Today, we have a large number of small fragmented players. Take food products for instance. There are just few brands such as Pillsbury, Annapurna and Captain Cook.
And the Indian players are largely unrepresented. Big business houses such as the Tatas and the Birlas have never bothered to look at the sector seriously, as it was never given a priority status.
Do you see mergers and acquisitions happening in the Indian FMCG industry?
Yes. Certainly, there will be a few mergers and acquisitions in the Indian FMCG industry. But, they will be sector-specific. I think we have still got a large enough canvas in the FMCG industry for all companies to continue to exist. FMCG players will have to choose the option of exit, they cannot be forced to do so.
How serious is talent-poaching in the Indian FMCG industry?
Hindustan Lever has already felt the pinch. Indian FMCG marketeers are considered the best for maketing in India, and many have global reputations. As other industries realised the need to market to consumers, they turned to the FMCG sector for recruits. They have been poached by companies from sectors such as telecom, textiles and auto. The Indian FMCG sector should be prepared to see more talent-poaching soon.
What trends do you see emerging in the Indian FMCG sector?
The unorganised FMCG sector in India will see a slight shift downwards. So will the unprocessed sector. Small-scale players will still remain and they are not going to vanish overnight. Ten years from now, they will all be there. But, the Indian FMCG landscape will be more MNC-oriented, especially in personal care. Stronger MNC players are bound to emerge. In food, both domestic players and MNCs in the Indian FMCG industry will expand their pies substantially, and we are likely to see emergence of large players. There will be an increase in volumes driven by lower prices in the case of organised retailers, due to their superior cost structure. This has been the experience in most emerging markets, such as Poland and South East Asia. However, PMCG companies need to ensure strong brand pull which allows them strong negotiating power over retailers and enables them to avoid margin erosion due to discounts.