FMCG companies on cost-cut drive

Source: Business standard, Dec 12, 2011

Mumbai: As inflation remains sticky and pricing power limited, fast moving consumer goods (FMCG) companies are adopting various measures to protect margins.

This includes input substitution, overhead management, rationalising personnel — all aimed at reining in expenditure.For instance, it is not uncommon for soap-making companies to replace palm oil, a key input, with rice-bran oil, when prices of the former hit the roof. Currently, palm oil prices are up nearly 10-15 per cent in comparison to the year-ago period. From January to now, palm oil prices have risen 17-20 per cent and continue to remain volatile, despite some softening during the second quarter.

Executives at Hindustan Unilever (HUL) and Godrej Consumer (GCPL), the number one and two soap-making companies, insist they do not follow this practice.

Says Tarun Arora, executive vice-president, marketing, GCPL, “Our soaps fall in the grade one category, where the percentage of total fatty matter (TFM) is high. We do not do this.”

TFM indicates how much fatty substance is contained in a soap. The higher the percentage of TFM, the better is the soap. But persons in the know say it is not uncommon for regional companies to be doing this.

For those wary of completely replacing palm oil in their soaps, there is an alternative, to replace a part of the palm oil requirement with fillers such as talcum powder. Further cost-cutting measures include using local fragrances as opposed to international ones. Personal care companies are not shying away from this, says Dalip Sehgal, managing partner, DS Consulting, who has worked earlier with both GCPL and HUL.

“This trend can be found with all products in skin care and hair care — shampoos, soaps, conditioners, deodorants, talcum powder, etc,” he says.

A way of life
For some companies, high inflation has also meant course corrections that are becoming a way of life. Coca-Cola India, for instance, has put a rigorous efficiency programme in place which involves not only bulk buying of key inputs, but also optimum utilisation of production lines by running larger batches and adopting a pre-sell model of distribution.

According to a spokesperson, the pre-sell model is something it has been doing of late to reduce freight costs.

“It involves taking orders beforehand so that your trucks can ply accordingly,” says the spokesperson.

This practice is being adopted by almost all beverage companies today, as they look to slash expenditure following volatile fuel prices. “Rather than plying your trucks every day, you make sure they run with orders in hand,” says the spokesperson.

Besides, firms are also increasingly looking at local sourcing to reduce dependence on costly imports. With the rupee at nearly Rs 52 to a dollar, local sourcing is the norm. PepsiCo, for instance, will undertake contract manufacturing of oats in India, besides potatoes which it has been doing for some time.

Coca-Cola is looking to extend its sourcing arrangement with mango pulp supplier Jain Irrigation to citrus fruits. Jain has begun a pilot project in Maharashtra for citrus fruits, where cultivation of the Brazilian variety of oranges is on.

Personnel
This remains amongst the tougher set of measures adopted by companies as inflation eats into profitability.

In recent weeks, Bangalore-based Britannia Industries had asked 42 employees to clear their desks, citing underperformance. Sehgal of DS Consulting says it is common for companies to demand greater productivity during times of inflation.

“This is the time when most systems and processes are under review. Companies are careful about recruitment and also seek greater productivity from their employees,” he says.

Most large and medium-scale FMCG companies do have appraisals in place to gauge performance. This gets more stringent during inflation and a consequent slowdown.

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