A Survival Playbook for FMCG Firms : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources, changes in industrial policy and their effects on industrial growth.

Key Phrases: FMCG sector, private consumption, steeply rising input costs, uncertain macroeconomic scenario, inflationary, cycle, Household and Personal Care, natural resource management, FDI, Consumer Protection Bill, Goods and Services Tax, Consumer Confidence Index.

Why in News?

FMCG Firms have to pursue cost efficiencies and new distribution models to deal with these uncertain times.

Context:

The FMCG sector, which was slowly recovering in the October-December quarter with 8 per cent median growth, is caught in a perfect storm:
- Muted private consumption,
- Steeply rising input costs and
- Uncertain macroeconomic scenario.
Let us elaborate on some of the challenges.

Steeply Rising Input Prices:

The industry is facing an unprecedented inflationary cycle driven by multiple factors such as
- Commodity cycles,
- Supply chain disruptions and
- Spike in crude prices given the geopolitical events.
The accompanying graphic shows inflation that the sector has faced on some of the key commodities.
This has forced companies to either increase prices over the last six months or plan hikes in the new financial year.
Most categories like food, personal and homecare have seen a 1020 per cent price increase.
This trend has manifested in the volume and value growth over the last few quarters where industry growth has been driven by price/ mix changes, and volume growth has trailed value growth by 500800 basis points (bps). Such a scenario is unsustainable in the long run.

Muted Private Consumption

The Economic Survey indicated that for October December 2021 private consumption was back to pre Covid levels with 7.6 per cent growth over the same period of 2019. However, the third wave and inflation led price increases may impact volumes and growth going forward.
The RBI’s Consumer Confidence Index is still in the pessimistic zone (63.1 February 2022). Confidence in recovery has sharply dropped by 6.6 per cent over the last two months. The survey also indicates that an overwhelming majority of the population (over 80 per cent) expects price rise to continue and will hence cut down nonessential spends to support pricier essential spending

Fast-moving consumer goods (FMCG) sector is the 4th largest sector in the Indian economy with Household and Personal Care accounting for 50% of FMCG sales in India. Growing awareness, easier access and changing lifestyles have been the key growth drivers for the sector.

Reimagine and Re-engineer

There is no silver bullet or a set playbook to manage these unprecedented times. However, based on past learnings from our own and other markets, we recommend a few strategies for organisations to reimagine and reengineer on multiple fronts in the near term.
Organisations need to build new muscle on pricing led growth. Taking pricing decisions at a deaveraged level — that is, by brand pack, geography and channel. They would need to develop a better understanding of consumer pathways — for example, with price change is the consumer likely to switch SKUs within the brand, move to another brand pack in your portfolio, move to competition or just reduce consumption in the category.
Organisations would need to take an integrated approach to spends in trade and consumer promotions whether done at the central or local level. This would also entail building new capabilities in analytics, consumer insighting, executing at the granular level, and making this a key priority for the senior leadership.
In our experience, a well-run NRM (natural resource management) intervention can unlock 200500 bps of profit and drive 1015 per cent growth.

Major Initiatives Taken by the Government to Promote the FMCG Sector in India

The Government of India has approved 100 per cent FDI in the cash and carry segment and in single-brand retail along with 51 per cent FDI in multi-brand retail.
The Government has drafted a new Consumer Protection Bill with special emphasis on setting up an extensive mechanism to ensure simple, speedy, accessible, affordable and timely delivery of justice to consumers.
The Goods and Services Tax (GST) is beneficial for the FMCG industry as many of the FMCG products such as soap, toothpaste and hair oil now come under the 18 per cent tax bracket against the previous rate of 23-24 per cent. Also, GST on food products and hygiene products have been reduced to 0-5 per cent and 12-18 per cent respectively.
GST is expected to transform logistics in the FMCG sector into a modern and efficient model as all major corporations are remodelling their operations into larger logistics and warehousing.

Way Forward:

While most organisations have some productivity improvement initiatives, given the inflationary trends, organisations need a step change in performance trajectory. This will require a “clean sheet” approach, next generation analytics tools and first principles thinking.
There is a need to rethink networks and supply chains, design products for consumer value, buy better and higher in the value chain and use new age models to variablise cost structures. Similarly, a zero-based approach, backed with the right tools, on indirect spends like IT, logistics, media and trade spends can result in efficiencies of 1015 per cent.
New age distribution models FMCG organisations have traditionally been driving overall distribution to drive growth. In these tumultuous times, there is a need to rethink the right mix of direct and indirect reach. Organisations need to rethink distribution models — the role of the distributor itself.
Can some part of the role be fulfilled more effectively and efficiently by leveraging innovations and technology in last mile logistics?
Additionally, efficiency of traditional distribution can be unlocked using artificial intelligence and data at a micro market level at scale to drive on ground efficiency.
These are indeed tough times for the industry. Navigating these uncertain times would require agility and building new muscle.