MSMEs reap benefits from investments in brand-building

The demonetisation of high-denomination currency notes has resulted in a liquidity crunch and a short-term dip in retail consumption. CRISIL believes that in times of turbulence such as this, micro, small and medium enterprises (MSMEs) that have invested in brand creation and have good recall with customers tend to outperform their peers. 

A majority of MSMEs rely on word-of-mouth publicity to garner more clients, and do not invest in brand creation. However, CRISIL’s analysis, based on 2014-15 financials of 550 MSMEs operating in retail sectors such as fast moving consumer goods, readymade garments, household durables and footwear, reveals that those with innovative marketing strategies were able to command premium pricing, given greater visibility and acceptance.

About 90 per cent of the sample that spent adequately on marketing (3-3.5 per cent of cost of sales), clocked an operating margin of nine per cent and a compound annual growth rate of 24 per cent in sales, compared with 7.5 per cent and nine per cent for those with limited spend. 

Moreover, MSMEs which invested in brand-building at the product development stage displayed a competitive edge and higher growth trajectory. Of those that invested in brand creation, 60 per cent had turnover in excess of Rs 5 crore.

“The compounding benefit of product acceptance and branding over three to five years is immense, as these MSMEs will report 50 per cent higher net cash accrual, leading to strong financial flexibility to create future assets,” says Manish Jaiswal, Business Head-SME Ratings, CRISIL.

Meanwhile, the MSME ministry’s recent initiative of providing up to 90 per cent subsidy for Scheduled Caste and Scheduled Tribe entrepreneurs for availing credit rating will offer additional incentives to these units to market themselves.