Innovation and FMCG industry in India

Background

The Indian FMCG market has slowed down in growth for sometime. From a growth rate of excess of 12 percent in early 90’s, it has registered only 4.4 percent odd so in the last five years.
In the last five years , the GDP has grown by a CAGR of close to 6 percent at real prices. So FMCG business is not even growing at the pace of the domestic economy. One would have thought that in a country where penetration and consumption are still low by international standards, this industry catering to basic necessities would have registered higher growth. But in the last decade sectors like telecom and durables have grown spectacularly but not FMCG.

The reasons for the slow growth have been discussed and debated endlessly. Primarily a) The housing, telecom and durables sectors had a latent demand which ensured explosive growth. b) The easier and cheaper availability of credit supported this growth. c) The consumers started spending more on products of these sectors and had lesser money for FMCG products and so downgraded in FMCG.

To counter this, most companies have got into a battle of market share and aim to differentiate themselves on trade reach or advertising efficiency. The route to winning has been believed to be better distribution, operational improvements or outflanking the competition on pricing and promotions. However on hard evidence, these directions have delivered incremental growth and also not helped in exploding the categories.

Failure to exploit trends

In general however, the sector has been unable to exploit the key demographic and sociological trends of the last decade. Within the sector, the companies which have done so have reaped dividends.

The most significant demographic trend in the recent years has been that Indian consumer is getting younger. The average age of the population is amongst the lowest in the world. The youth has far more purchasing power than before and a different attitude towards life in the post-liberalisation era. So sectors which have captured this trend in products and communication have grown like lifestyle apparels, shoes or even trendy watches. In FMCG , Perfetti has done well growing at more than 30% CAGR in the last decade by mainly focussing on youth with hip products and edgy communication targeted at them..

The second important trend has been that families have become increasingly nuclear and urbanised. This has necessitated the need for convenience foods and saving of time. One outcome of this has been the restaurant boom. But convenience foods are yet to take off more due to issues of taste and right price rather than cultural factors. Largely, the industry has missed the bus here.

The other major trend of higher consumption potential due to both rising incomes and increasing consumer base hence has anyway not translated into corresponding growth.
Any sector or company which wants to grow spectacularly has to exploit the inherent potential in the above three defining trends a)Younger population with a different attitude b)Need for convenience and c)Increasing consumption potential. The visible and existing models of behaviour and organisation and strategy in most FMCG companies do not suggest that they are trying to ride these trends and hence it is difficult to anticipate any major change of trend in performance.




Criticality of Innovation

So the sector needs to look at significantly different ways to participate in India’s boom. It need not be dependent on the monsoons or minor price-cuts to drive its growth. These new ways should exploit the key demographic and economic trends. The companies cannot depend on existing products and communication strategies to drive their business. And only new and innovative ways in the sector can rapidly leverage these broad trends for growth.

The other industries have seen spectacular growth due to innovations which have exploited these trends. Some of them which have changed the rules of the game are a) The consumer financing boom changed the way durables could be bought b) The technological changes leading to crash in rates of calls and equipment altered the way cellular telephony is perceived and experienced.

Similarly in FMCG, innovation as played a key role in the outstanding growth of some companies. Frito lay has experienced spectacular growth with an innovative product Kurkure. The caps in sachets by Colgate, the introduction of “lite oils”, the sachet revolution by Cavincare have fundamentally altered the rules of the game and delivered spectacular growth to the companies.

But for most companies, innovation though important, is not a key strategy in performance. There is no premium on innovation. The companies remain hostage to analysis and stability. The R and D centres are not the leading edge departments. The structures do not support innovation. The cultures encourage conformity. Innovation is not on the agenda of most senior managers where as it needs to be the prime driver for their performance.

It is important to realise that the innovation will play the most critical role in rescuing the industry from lack-lustre performance. It is also important that this percolates to every level of the organisation. The processes starting with appraisals, brainstormings and feedback loops have to be in place. The innovation has to be across all dimensions starting with product development, distribution, communication, people strategies and manufacturing. It needs to be pervasive and a very powerful element in the fabric of the organisation.


It is time the industry moved to innovations as the prime platform to ride on the broader social and economic trends .