Neil George – MD, India and South Asia NIVEA
(ex-P&G, and many other FMCG companies in India and Overseas)
Though FMCG was part of essentials. All malls were shut. Online channels could not sell. So there were demand side issues
Supply side issues
After lockdown, most factories went into a shutdown.
Most warehouses also went into shutdown.
90% of shops were shut down during lockdown 1 and 2
So, every company had to start from scratch. Had to go to authorities and get approval. Large companies had resources. But most medium and small companies could not afford to get approvals from various authorities in many towns and districts. One had to get approval in each town separately where the company had operations.
80% of retailers had supply challenges. Most kirana were sourcing supplies at higher prices from wholesalers.
Shortage of staff - 25% of retailers in urban India said staff did not turn up.
100% had startup and staff issues.
50% had production capacity issues.
50% has cash flow issues.
Demand side contraction
Food and staples demand were stable. Some parts in foods like candies, chocolates, cigarettes, alcohol etc were not allowed to sell and in some categories number of stores were not open.
Net net, overall market data from Neilsons shows a steep demand decline. Spread uniformly across urban and rural.
April - FMCG demand down by 34% y-y and 37% m-m. Unprecedented in history of India.
Metro - (32%) y-y
Semi urban – (39%) y-y
Rural – (31%) y-y
Biggest contraction was in the West.
West had the largest number of containment zones. In addition to metro cities like Delhi, Gurgaon, Chennai.
Categories impacted the most - where people would have to travel outside their homes.
E.g candies, perfumes, soft drinks, cosmetics (not going to work, colleges, marriages etc), hair oils, confectionaries, agarbatties.
Categories that did very well
Cooking oils, dairy products, spices, snack categories, diapers, body washes detergents
Crisis itself differentiated companies that did well and that which did not do well
Portfolio of companies and where they were selling - say Amul, Nestle’s dairy products.
Food companies did well as they were essentials.
Portfolio where a large part of business was from Malls - large Retail with shops in malls, were severely impacted as malls were shut.
Down trading from premium products. - Hair oils.
Where companies had large inventory with retailers, their sales were affected.
Present scenario
In June - supply side disruptions are fewer. Most factories are up and running.
Problem is staff coming back. In many places, staff movements across states are significant.
e.g in Baddi in HP - employees travel from different state to work.
In many places , temporary staff keep coming in and out. Migrant labour issues.
More or less 80-90% capacity is back. Some variances are there.
Stores and distributors are opening up. So supply chain is restored. Except where there are imports and exports.
Demand side is where problem lies.
In some categories like foods, Demand is more or less back.
Non food sectors, still a problem. People are not going to offices, colleges are not on, people are not walking around – cigarettes, alcohol, soft drinks, beverages still significantly impacted.
Demand has shifted from large stores to smaller stores.
Movement to ecommerce is happening in a big way. Flipkart, Amazon, Nykka, Jio has expanded their on-line models to 200 cities.
DMart - also seeing on-line delivery going up.
Swiggys, Zomato, Dunzo seeing large increases.
When will things come back to normal?
Lot of retailers will have cash flow problems.
Will see enhanced M&A in the industry as many small companies will shut down owing to cash flow problems.
Categories
Bar soap Rs15,000cr
Detergent
Shampoos and Hair oils
Dairy
Beverages
FMCG growth tends to be 200bps above nominal GDP growth.
Lower for categories that have high household penetration.
Bar soap is 100% penetrated. Category growth is 1 1/2 -2%. However, shower gel and body wash are growing at 60-70%. But very small category as of now.
Premium detergent - higher growth.
Growth this year
Essentials - will come back
Non essentials - will have a big problem.
Seasonal category company - soft drinks - huge problem of lost sales. winter categories company will have less problems.
Inventory holding companies - low inventory cos will have less of a problem. Large inventory holding cos will face lot of problems.
Cos with out of home consumption will have problems. Like beer, cigarettes, soft drinks, camdies, chocolates etc.
Worst hit companies -
Non essentials are a big part of your portfolio, large summer consumption, and out of home consumption.
Beer, aerated drinks, candies (most of these companies have an expiry date of 3 months)
You will see a lot of inventory writeoff in current quarter.
Private labels -
FRL, D Mart, Reliance have private labels for selling in their stores.
FRL had sole licenced several domestic and global brands. Now the original brand owners are looking for alternate owners.
On the online space, Cos like Amazon, Flipkart, Big Basket, they are looking at lots of food brands.
Private label does very well under 3 conditions.
Category has to be very large. Very few categories can be created by private label brands.
No innovation required - like toilet paper, packaged foods, Plastic bags, etc.
Brands where brands are not playing in different price points. Private label guys will come at the Lower end of the market.
Fairness creams -
Fairness creams came up in 1975 in India. Today the category is Rs4000cr category today,
Picked up in India, and countries like Indonesia because of our love for our colonial masters. Fair color.
Also started to be used by men. When Emami launched its fair and handsome in 90s, Men’s fairness creams became a large category as they were earlier using their wife’s fairness cream. People were also using it as moisturizers.
Last two years, new generation is against fairness creams because of social media campaigns.
Last 18 months, almost every big brand ambassador is refusing to endorse fairness creams.
Now many companies are relaunching and rebranding these creams under different category.
Last week, Johnson and Johnson has decided to completely stop sale of this category.
Importance of ancillaries in FMCG
Different for different categories,
In premium skincare, raw material cost is a small percentage of its cost. Packaging sometimes smaller than raw materials.
In many cases, there is no single ingredient that dominates the raw material costs of the company.
Suppliers can be changed quickly.
Power of suppliers in skincare is limited.
Only exception is fragrance providers. This is the only attractive segment among suppliers.
Firminish and Zuvidan (Swiss owned) . They typically have 80% gross margins.
For many categories, demand will be back on track in 2021 and start to grow in 2022.
Because of our demographics, our market will continue to be strong.
Pricing of products in different emerging markets - mostly comparable prices across emerging markets for a similar products.
In some cases, product premiums may be different.
Default rates with distributors
India has large number of distributors for FMCG. They can be very large and cover a large territory.
Have a clear distributor ROI model. 18-24% ROI almost guarantee. Parent company will force you to be lean and mean.
If you are a local distributor managing small brand and territory, will be impacted in a post Covid scenario. First and second batch already happened in demonetization and then GST. Now the third crisis will unfold. Already saw 25% small distributors shut shop.
Another problems will come for consumers going online. Then you don’t need distributor model. You need only delivery models.
Small stores - lots of them are small family stores. No rent, or employee cost. Family run. They get credit and will survive.
Middlemen will face maximum problem as their operations are inefficient.
What happens to wholesalers?
Digital has impacted industries where there are lots of middlemen.
Say Real estate - builders, agents, . Directly connecting buyers and sellers.
Wedding brokers - all dead.
Disintermediation of inefficient channels - happening across the world.
Crisis will accelerate these shifts.
Companies that are best placed to do this
Companies starting from scratch. ID Foods, Paper Boats,
Bira - Amazon has got license to sell liquor in W Bengal. So can go to Amazon and sell liquor.
New age companies which don’t have a costly infrastructure can go and sell their products easily to ecommerce channels.
Amazon - marginal cost to deliver a product is Rs35-50 per package.
So companies that have large selling prices and ship something in small quantities will fare best. Say Rs500-1000 with size of say a 1 liter of water. Such companies will,succeed.
Personal. Care products, watches can succeed very well in online sales.
Organic products or Naturals
Biopic Rs1500cr
Kama ayurveda Rs400-500cr
Ayurveda is a part of the categories.
Ayurvedic space is a very large area where consumer growth is likely to be high.
Innovations
New categories which use no color or chemicals.
Most innovations in personal care comes from Korea.
Celebrities have been launching their own products.
Delivery models -
Subscription models - Razor company in the US. Also for diapers.
Specially targeted at individuals - makeup. You can send your skin color online and you can get it 3D printed and collect it from the store or get it delivered.
Reliance Retail –
large conglomerates business
Reliance Fresh
Reliance cash n carry
Playing in 3 areas
B2B, B2C and B2B2C
1. Kirana store - give a POS machine, manage inventory and supply them inventory. Testing outside Mumbai last one year.
From May 15th - Jio app. Works in 200 cities.
2. Order online. Stock gets licked from their shop and will get it delivered. Have teething problems and will get sorted out
3. Currently team of FB and Reliance team. Can place orders through WhatsApp.
Over a year, these three models will get integrated.
Can Industry get squeezed by dominant players?
Online Amazon and Flipkart are already very big. Reliance can catch up with them.
DMart
So will have a 4 player market. See 5-10 years before this market consolidates.
Why no large players entering the Dairy market against Amul like in other parts of the world.
Infrastructure setting up is very difficult.
Dairy is a very local business because of shelf life. So amount of time to take from supplier to consumer has to be very efficient.
Also dairy is a commodity business. Not much pricing power.
Apart of butter, none of the other categories have become big category. (Besides Milk). Amul has sales of about Rs1,000cr excl milk.
Opportunities in Distribution and ecommerce
Ocado UK company. Moved from. Grocery sale company to providing technology to Ecommerce companies.
Consolidation of the logistics space.
95% of trucks are individual owned.
Ecommerce space - warehousing, crates.
Packaging innovation. Lots of wastage in packaging of Ecommerce products. Need to look at reusable packaging. It will wipe out bubble wrap and cellophane amd corrugated box industry.
(ex-P&G, and many other FMCG companies in India and Overseas)
Though FMCG was part of essentials. All malls were shut. Online channels could not sell. So there were demand side issues
Supply side issues
After lockdown, most factories went into a shutdown.
Most warehouses also went into shutdown.
90% of shops were shut down during lockdown 1 and 2
So, every company had to start from scratch. Had to go to authorities and get approval. Large companies had resources. But most medium and small companies could not afford to get approvals from various authorities in many towns and districts. One had to get approval in each town separately where the company had operations.
80% of retailers had supply challenges. Most kirana were sourcing supplies at higher prices from wholesalers.
Shortage of staff - 25% of retailers in urban India said staff did not turn up.
100% had startup and staff issues.
50% had production capacity issues.
50% has cash flow issues.
Demand side contraction
Food and staples demand were stable. Some parts in foods like candies, chocolates, cigarettes, alcohol etc were not allowed to sell and in some categories number of stores were not open.
Net net, overall market data from Neilsons shows a steep demand decline. Spread uniformly across urban and rural.
April - FMCG demand down by 34% y-y and 37% m-m. Unprecedented in history of India.
Metro - (32%) y-y
Semi urban – (39%) y-y
Rural – (31%) y-y
Biggest contraction was in the West.
West had the largest number of containment zones. In addition to metro cities like Delhi, Gurgaon, Chennai.
Categories impacted the most - where people would have to travel outside their homes.
E.g candies, perfumes, soft drinks, cosmetics (not going to work, colleges, marriages etc), hair oils, confectionaries, agarbatties.
Categories that did very well
Cooking oils, dairy products, spices, snack categories, diapers, body washes detergents
Crisis itself differentiated companies that did well and that which did not do well
Portfolio of companies and where they were selling - say Amul, Nestle’s dairy products.
Food companies did well as they were essentials.
Portfolio where a large part of business was from Malls - large Retail with shops in malls, were severely impacted as malls were shut.
Down trading from premium products. - Hair oils.
Where companies had large inventory with retailers, their sales were affected.
Present scenario
In June - supply side disruptions are fewer. Most factories are up and running.
Problem is staff coming back. In many places, staff movements across states are significant.
e.g in Baddi in HP - employees travel from different state to work.
In many places , temporary staff keep coming in and out. Migrant labour issues.
More or less 80-90% capacity is back. Some variances are there.
Stores and distributors are opening up. So supply chain is restored. Except where there are imports and exports.
Demand side is where problem lies.
In some categories like foods, Demand is more or less back.
Non food sectors, still a problem. People are not going to offices, colleges are not on, people are not walking around – cigarettes, alcohol, soft drinks, beverages still significantly impacted.
Demand has shifted from large stores to smaller stores.
Movement to ecommerce is happening in a big way. Flipkart, Amazon, Nykka, Jio has expanded their on-line models to 200 cities.
DMart - also seeing on-line delivery going up.
Swiggys, Zomato, Dunzo seeing large increases.
When will things come back to normal?
Lot of retailers will have cash flow problems.
Will see enhanced M&A in the industry as many small companies will shut down owing to cash flow problems.
Categories
Bar soap Rs15,000cr
Detergent
Shampoos and Hair oils
Dairy
Beverages
FMCG growth tends to be 200bps above nominal GDP growth.
Lower for categories that have high household penetration.
Bar soap is 100% penetrated. Category growth is 1 1/2 -2%. However, shower gel and body wash are growing at 60-70%. But very small category as of now.
Premium detergent - higher growth.
Growth this year
Essentials - will come back
Non essentials - will have a big problem.
Seasonal category company - soft drinks - huge problem of lost sales. winter categories company will have less problems.
Inventory holding companies - low inventory cos will have less of a problem. Large inventory holding cos will face lot of problems.
Cos with out of home consumption will have problems. Like beer, cigarettes, soft drinks, camdies, chocolates etc.
Worst hit companies -
Non essentials are a big part of your portfolio, large summer consumption, and out of home consumption.
Beer, aerated drinks, candies (most of these companies have an expiry date of 3 months)
You will see a lot of inventory writeoff in current quarter.
Private labels -
FRL, D Mart, Reliance have private labels for selling in their stores.
FRL had sole licenced several domestic and global brands. Now the original brand owners are looking for alternate owners.
On the online space, Cos like Amazon, Flipkart, Big Basket, they are looking at lots of food brands.
Private label does very well under 3 conditions.
Category has to be very large. Very few categories can be created by private label brands.
No innovation required - like toilet paper, packaged foods, Plastic bags, etc.
Brands where brands are not playing in different price points. Private label guys will come at the Lower end of the market.
Fairness creams -
Fairness creams came up in 1975 in India. Today the category is Rs4000cr category today,
Picked up in India, and countries like Indonesia because of our love for our colonial masters. Fair color.
Also started to be used by men. When Emami launched its fair and handsome in 90s, Men’s fairness creams became a large category as they were earlier using their wife’s fairness cream. People were also using it as moisturizers.
Last two years, new generation is against fairness creams because of social media campaigns.
Last 18 months, almost every big brand ambassador is refusing to endorse fairness creams.
Now many companies are relaunching and rebranding these creams under different category.
Last week, Johnson and Johnson has decided to completely stop sale of this category.
Importance of ancillaries in FMCG
Different for different categories,
In premium skincare, raw material cost is a small percentage of its cost. Packaging sometimes smaller than raw materials.
In many cases, there is no single ingredient that dominates the raw material costs of the company.
Suppliers can be changed quickly.
Power of suppliers in skincare is limited.
Only exception is fragrance providers. This is the only attractive segment among suppliers.
Firminish and Zuvidan (Swiss owned) . They typically have 80% gross margins.
For many categories, demand will be back on track in 2021 and start to grow in 2022.
Because of our demographics, our market will continue to be strong.
Pricing of products in different emerging markets - mostly comparable prices across emerging markets for a similar products.
In some cases, product premiums may be different.
Default rates with distributors
India has large number of distributors for FMCG. They can be very large and cover a large territory.
Have a clear distributor ROI model. 18-24% ROI almost guarantee. Parent company will force you to be lean and mean.
If you are a local distributor managing small brand and territory, will be impacted in a post Covid scenario. First and second batch already happened in demonetization and then GST. Now the third crisis will unfold. Already saw 25% small distributors shut shop.
Another problems will come for consumers going online. Then you don’t need distributor model. You need only delivery models.
Small stores - lots of them are small family stores. No rent, or employee cost. Family run. They get credit and will survive.
Middlemen will face maximum problem as their operations are inefficient.
What happens to wholesalers?
Digital has impacted industries where there are lots of middlemen.
Say Real estate - builders, agents, . Directly connecting buyers and sellers.
Wedding brokers - all dead.
Disintermediation of inefficient channels - happening across the world.
Crisis will accelerate these shifts.
Companies that are best placed to do this
Companies starting from scratch. ID Foods, Paper Boats,
Bira - Amazon has got license to sell liquor in W Bengal. So can go to Amazon and sell liquor.
New age companies which don’t have a costly infrastructure can go and sell their products easily to ecommerce channels.
Amazon - marginal cost to deliver a product is Rs35-50 per package.
So companies that have large selling prices and ship something in small quantities will fare best. Say Rs500-1000 with size of say a 1 liter of water. Such companies will,succeed.
Personal. Care products, watches can succeed very well in online sales.
Organic products or Naturals
Biopic Rs1500cr
Kama ayurveda Rs400-500cr
Ayurveda is a part of the categories.
Ayurvedic space is a very large area where consumer growth is likely to be high.
Innovations
New categories which use no color or chemicals.
Most innovations in personal care comes from Korea.
Celebrities have been launching their own products.
Delivery models -
Subscription models - Razor company in the US. Also for diapers.
Specially targeted at individuals - makeup. You can send your skin color online and you can get it 3D printed and collect it from the store or get it delivered.
Reliance Retail –
large conglomerates business
Reliance Fresh
Reliance cash n carry
Playing in 3 areas
B2B, B2C and B2B2C
1. Kirana store - give a POS machine, manage inventory and supply them inventory. Testing outside Mumbai last one year.
From May 15th - Jio app. Works in 200 cities.
2. Order online. Stock gets licked from their shop and will get it delivered. Have teething problems and will get sorted out
3. Currently team of FB and Reliance team. Can place orders through WhatsApp.
Over a year, these three models will get integrated.
Can Industry get squeezed by dominant players?
Online Amazon and Flipkart are already very big. Reliance can catch up with them.
DMart
So will have a 4 player market. See 5-10 years before this market consolidates.
Why no large players entering the Dairy market against Amul like in other parts of the world.
Infrastructure setting up is very difficult.
Dairy is a very local business because of shelf life. So amount of time to take from supplier to consumer has to be very efficient.
Also dairy is a commodity business. Not much pricing power.
Apart of butter, none of the other categories have become big category. (Besides Milk). Amul has sales of about Rs1,000cr excl milk.
Opportunities in Distribution and ecommerce
Ocado UK company. Moved from. Grocery sale company to providing technology to Ecommerce companies.
Consolidation of the logistics space.
95% of trucks are individual owned.
Ecommerce space - warehousing, crates.
Packaging innovation. Lots of wastage in packaging of Ecommerce products. Need to look at reusable packaging. It will wipe out bubble wrap and cellophane amd corrugated box industry.
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