Urban markets still underserved by packaged goods firms

Source: LiveMint.com, Aug 09, 2016

Mumbai: Makers of packaged consumer goods may be better off increasing their focus on the metros rather than chasing growth in rural India, where two consecutive years of drought have taken a heavy toll on purchasing power.

That’s because urban markets are still underserved, according to data from market researcher Nielsen. Biscuits, for instance, are available only in 75% of the stores in the top eight metros of the country, according to the data for the fiscal year ended 31 March. This dropped to 68% for the other metros.

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In the case of branded edible oil, the availability is only about one in three stores in top eight metros, compared to one in four stores in smaller metros.

A metro is defined as a city with at least one million population. There are 53 such cities in India, according to Census 2011 data, and they account for about a third of the branded consumer packaged goods consumption.

“The common belief is that metros are saturated. However, there are clear pockets of opportunities when you break metros into base metros and smaller metros,” said Vijay Udasi, senior vice-president, Nielsen India.

Consumer packaged goods firms have blamed rural distress, stemming from the back-to-back droughts, for their anaemic growth in the last two years.

Hindustan Unilever Ltd (HUL) and Dabur India Ltd said their sales volumes grew only by 4% in the June quarter because of the rural slowdown. Sales in rural India used to grow at twice the pace of urban areas.

Makers of packaged consumer goods could have compensated for some of the slack by expanding their penetration in larger cities.

An average Indian living in the top eight metros consumesRs.6,500 worth of packaged consumer goods every year, according to Nielsen. For a person living in other metros, this drops to Rs.4,800 but is still more than four times the average rural per capita consumption of Rs.1,100. So, distribution in the top cities becomes an important growth driver for packaged consumer goods.

“For the top 10-15 consumer packaged product companies, reach is not an issue for them.

These companies have to focus on how to drive the consumer to upgrade and buy more, which actually is about throughput per store,” said Anand Mour, consumer goods analyst at ICICI Securities Ltd.

To be sure, some larger companies have already increased their metro focus.

For instance, Dabur India, the maker of Hajmola candy and Real juice, has rolled out a distribution plan called project 50/50 to improve volumes in the top 130 towns which contribute half its urban sales.

Under this plan, Dabur is taking steps, such as separating distribution teams for wholesale and retail, so that it can improve sales efficiencies and service quality.

Similarly, Marico Ltd, maker of Parachute hair oil and Saffola cooking oil, has focused on expansion in the top six metros in the last year and is now looking at the next top 13 metros to add 20,000 stores, said its managing director and chief executive office Saugata Gupta.

Gupta said that Marico products were available in 4.6 million stores in fiscal 2016.

Britannia Industries Ltd expects the Seventh Pay Commission payouts to boost urban growth in the coming year. “The urban opportunity is about identifying gaps in our portfolio and building our sales and distribution in the Hindi belt,” said Varun Berry, managing director at Britannia.

The Hindi belt consists of central India, Rajasthan and Uttar Pradesh, where the company has traditionally been weak due its low share in the value products segment, even as companies like Parle Products Pvt. Ltd and local rivals have a stronger presence.

According to Nielsen data, the overall number of stores in urban India is increasing 4% annually and reached about 9.4 million at the end of 2015.

Although most packaged consumer goods firms are expanding their reach, their penetration (availability in stores) hasn’t kept pace, said Nielsen’s Udasi.

Raising the urban penetration also makes sense, given that migration from villages is driving population growth in the cities.

In Mumbai, for example, this would mean increasing penetration in developing suburbs, like Chembur and Vikhroli, as well as areas under Brihanmumbai Municipal Corporation (BMC), also known as Municipal Corporation of Greater Mumbai, areas, extending beyond Vashi, Dahisar and Thane.

“These are the pockets of consumption, which need to be developed with better availability of the consumer packaged goods,” said Udasi.

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