FMCG companies face the heat of a slowing economy

Mumbai: Heinz India Pvt. Ltd, the maker of Complan nutritional drink and Heinz ketchup, has exited its unprofitable business segments of biscuits, ready-to-eat packaged foods and talcum powder to focus on its core products as the economic downturn forces households to cut spending.

“The external environment is difficult and there is a general pressure on people’s budget,” said Seema Modi, managing director of Heinz India who came to the helm 18 months ago with a clear mandate to help key brands gain market share and to get out of unprofitable businesses.

The Indian subsidiary of US-based H.J. Heinz Co. has tightened its portfolio to focus on larger, profitable segments such as malted and milk beverage with Complan, cooling powder with Nycil, and glucose water and refreshments with Glucon D.

It has exited the ready-to-eat and ready-to-cook segments, biscuits and talcum powder where it had brands such as Kitchen Klassics, Complan Cream Biscuits and Nycil De-O Fresh talcum powder. For Heinz, its ketchup brand, the company is maintaining status quo, with not much advertising support.

“These segments are very tiny and distracting us from the big opportunity,” said Modi, while explaining that malted beverages make up a Rs.5,500 crore category and Glucose beverages and cooling powders are Rs.1,000 crore segments and offer a better return on investments for the company.

Between financial years 2006 and 2011 (May to April) Heinz India grew at an average of about 26% per annum. In FY12, the pace of growth declined sharply to 5%, said Modi who did not reveal the profit number or the latest numbers for FY13. Heinz India is a privately held entity and is not required to publish such information.

Heinz is not alone in trimming its product portfolio.

Faced with declining sales, a depreciating local currency, slowing economic growth, higher input costs and rising domestic competition, Nestle India Ltd also revisited its strategy to cater to more affluent Indians whose household budgets are relatively immune to the country’s rising inflation and faltering economy, Nandu Nandkishore, deputy executive and vice-president, Nestlé SA, told the Financial Times on 14 January.

Nestle India’s growth slowed from an average of 20% a year in the three years to 2011 to 8% in the third quarter of 2013. The maker of Kit Kat chocolate bars and Nescafe coffee powder also withdrew price-sensitive products such as the Rs.5 Kit Kat as it focused on profitability.

GlaxoSmithKline (GSK) Consumer Healthcare India Ltd, the maker of Horlicks malted milk drink, which had diversified into flavoured milk, nutribars and instant noodles under the Horlicks brand, is now no longer actively supporting these segments, according to the trade distributors and analysts.

The company has “taken off shelves NutriBar cereal bars, Horlicks flavoured milk, Lucozade sports drink and Glaxose-D glucose powder,” The Economic Times had reported on 13 September.

Earnings for the December quarter showed that GSK Consumer Healthcare is still finding it difficult to sustain both growth and profitability, as the company saw its operating profit margin decline by 23 basis points from the year-ago period. One basis point is one-hundredth of a percentage point.

Unilever Plc, the parent of India’s largest consumer goods company Hindustan Unilever Ltd (HUL), had also announced portfolio rationalization by about 40% on its portfolio of 50,000 stock keeping units, the Financial Times reported on 5 december.

Emerging markets contribute 57% of Unilever’s overall sales and HUL contributes 7% to the parent. The portfolio rationalization could have an impact on markets such as India as well, analysts said.

“Companies are back to focusing on profitability and focusing on the core after trying to get into adjacent categories in the last 5-6 years,” said Anand Mour, vice-president and consumer analyst, ICICI Securities Ltd.

India’s economic growth slowed to a decade-low of 4.5% in 2012-13 and averaged 4.6% in the first half of this fiscal year. The economy is expected to grow 4.9% in the fiscal year ending 31 March, the Central Statistics Office (CSO) said on 7 February.

Slowing economic growth caused the consumer packaged goods industry’s volume growth to contract for the first time in the September quarter. “FMCG (fast moving consumer goods) consumption has contracted by 0.5% in the third quarter of the calendar year 2013, over the same quarter in 2012. Though there was a growth of 6% in value terms, all of it was driven by unit value increases,” researcher Nielsen Co. said in a December report.

“High inflation and slow growth has impacted the segment growth as the consumer priority has now changed,” explained Chitranjan Dar, chief executive officer, ITC Foods, a unit of conglomerate ITC Ltd which has brands like Sunfeast, Yipee and Bingo.

This is temporary phenomenon, said Dhar while emphasizing that ITC had not changed its strategy and continues to support all its launches and was identifying new segments to enter as well. Last week, the company entered the health biscuits segment with FarmLite and is considering launching juices as well.

One issue, according to Anand Ramanathan, associate director at KPMG Advisory Services Pvt. Ltd, is that multinationals (MNCs) do not understand the Indian palate when it comes to food brands.

“We haven’t yet seen a successful MNC in the food space,” said Ramanathan, explaining that besides Maggi instant noodles from Nestle and Kurkure from PepsiCo India Holdings Pvt. Ltd, there had been no MNC successes to speak of in the Indian food market.

“Companies need to go bottom up and invest lot more into localization to cater to the Indian food market,” said Ramanathan.

To be sure, Heinz’s portfolio rationalization is in tandem with the parent’s strategy. Globally, the Pittsburgh-headquartered company is streamlining its operations following its takeover by Warren Buffett’s Berkshire Hathaway Inc. and private-equity firm 3G Capital in June last year. The company has eliminated 600 office positions in the US and Canada, The Wall Street Journal reported on 13 August.

Meanwhile, Modi expects 2014 to be a better year due to the various steps taken in the past two years; it also has two big launches planned that will help Heinz India gain momentum. The company is also relaunching Complan as the brand completes 50 years in India, 20 of them with Heinz.

Heinz had acquired Complan, Sampriti (a ghee brand), Farex, Nycil and Glucon-D from GSK Consumer in 1994 when it entered India. Subsequently, it sold the baby food brand Farex. Farex is now a part of Groupe Danone’s portfolio, marketed in India by Nutricia International Pvt. Ltd
source-india times
praveen sahrma
pgdm ist