Buy your way to growth in India

For consumer products companies, right capabilities will aid scalability

When it comes to growth potential in consumer products, few markets can match India. A population of 1.3 billion, a fast-growing middle class, rising income levels and rapid urbanisation have put India at the top of growth plans of almost every global firm.

However, firms have found it tough to turn the potential into growth, especially those who don’t understand local nuances. One can argue that the success rate of organic innovations by big companies hasn’t been high. Therefore, they are likely to take the mergers and acquisitions (M&A) route to boost their growth in India, not least because of the following factors.

Regional differences

One of the biggest misconceptions is that consumers across India are the same. The reality is the opposite. There are significant regional differences — tastes, needs, consumption and spending habits. A product that is highly successful in north India may not take off in south. This makes it difficult for companies to scale a product across India. Even local firms have grappled with this issue, with many leading brands being unable to replicate their success from one region to another. The largest brands have 60-70 per cent of sales coming from just two regions.

Homogenisation of tastes and habits is starting to happen. However, it is limited to specific things. Jeans are popular in all regions but kurtas are not. Another key factor is, homogenisation is happening among youths, who do not control the majority spend in consumer products, not yet.

Organic innovation risk

This has increased the risks for organic innovation — companies developing their own products to cater to a specific set of consumers.

There is a long gestation period between product’s development and it becoming a household name. In India, this is even more complex. Companies not only need to develop product capabilities, but also need to build brand equity and go-to-market strategies to suit each region.

This is time-consuming and has the risk of not delivering returns in the short term. With many large global consumer firms being listed ones, this can lead to shareholder pressure for better returns. As such, many are taking the inorganic route of acquiring local brands to foster growth.

Valuation conundrum

Firms looking at the M&A route face another key hurdle — fair valuation.

The government’s pro-reform, pro-foreign investment and anti-corruption agenda has seen the global investor community turn to India, boosting the stock markets. The BSE Sensex index has risen over 40 per cent since 2014, resulting in the valuations of companies rising substantially.

This isn’t surprising. When investors put money in a company’s stock, they are betting on the future. The future for consumer products does look bright in India. However, looking at their performance and returns many Indian companies need to justify their valuations. This is where companies looking to acquire them face a conundrum: Buy them at current valuations and improve their performance and profitability to justify the price, or wait for the valuations to fall to realistic levels? They are likely go with the first option, because with India’s booming economy, surging middle class and ready-to-spend young population, a wait-and-watch policy won’t be an option for too long. So, shopping around for the right capabilities that add muscle to your future might be the best investment.

Else the scalability of your current products and business models might turn out to be more expensive.