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Consumers are also choosing to put off their decision to buy big-ticket items such as cars and mobile phones until times are rosier.
However, one product category has bucked the gloom. Sales of soft drinks and aerated water are on fire with Coca-Cola and Pepsi, the big daddies of the business, leading the way. According to the latest industrial production figures, soft drinks and aerated water grew a staggering 65 per cent in December over the previous year.
The same trend is reflected in actual sales on the ground. Coca-Cola’s sales for 2012 grew 16 per cent with sales of its biggest brand, Coke, rising 33 per cent, despite the company raising its prices to offset costs. Soft drink companies raised retail prices by 20 per cent last year.
What’s leading to this runaway growth? Soft drink companies say they are reaping the benefits of three things that they did some years ago: steady investments even if it was a bad year so that they had the capacity ready to take advantage of an upside in demand, improving their distribution network and pushing sales throughout the year to reduce dependence on the summer months. This has resulted in higher volumes for the companies.
Un-hurt pockets
Low per capita consumption of soft drinks —only 12 bottles per person compared to the global average of 90 — is another factor that has worked in favour of the companies, as it insulates them from the effect of price correction on sales. Says a senior executive of one of the soft drink companies: “With such a low consumption an increase in price, from say Rs 8 to Rs 10, will not make any dent in a person’s overall consumption budget. That might not be true for tea or coffee which he or she drinks numerous times every day.”
The core reason for the high growth lies in the huge investments the soft drink makers and their bottlers are making every year. As much as $700 million to $1 billion is spent every year on expansion. In the next few years, Coca-Cola and Pepsi plan to invest $8-9 billion— virtually what the whole of the telecom industry paid for 3G spectrum. Few sectors can boast of that kind of investment on a continuous basis. The investment, obviously, is paying off. It has helped them in nearly tripling their manufacturing capacity in the last three years to over 1.1 billion cases annually. At the same time, they are also spending huge amounts on expanding distribution and building cold chains in order to take the product to small towns and even the rural markets. Soft drinks today are available in over 2.15 million outlets across the country, nearly a third of all the shops in the country. Three years ago, these were available in only 1.5 million shops. The country’s topmost FMCG company is present in in 4-5 million outlets.
The companies have also worked on keeping their beverages chilled — the key to drawing in new customers. For instance, in the case of Coca-Cola, the number of outlets with chillers have nearly doubled from 300,000 three years ago to 600,000 now. In the next five years, it wants at least 70 per cent of its 3 million retail outlets to serve the soft drink cold.
Decentralising manufacturing so as to lower freight costs and to reach more and more markets is part of their plans to boost sales. For instance, Manu Anand, CEO of PepsiCo, wants every consumer to get a soft drink from a plant that is within 200 kilometres from him.
There are other ways which soft drink makers are employing to cut costs. Some of them are now taking pre-sale orders from retailers before delivery. Earlier trucks loaded with beverages would go from outlet to outlet making on-spot sales. This has helped in matching demand with supply and saving freight on taking more bottles than required.
They have also worked on their biggest challenge: spreading sales across the year instead of depending on the peak summer months. Just three to four years ago, nearly 55 per cent of annual sales used to be in the peak season of April-June. However that has changed, the three months now account for about 30 per cent of the sales.
The change has been possible because soft drink companies have been pushing in-home and in- premise consumption. “That is why large pet bottles over 1 litre as well as party and family packs were introduced. The whole idea was to increase usage at home as part of breakfast, when friends come in or for children,” says a senior executive of a soft drink major. The gambit, of course, has worked because in-house consumption now accounts for 25 per cent of volume sales.
For FMCG companies, the lessons are pretty clear: invest not only in manufacturing, but also in deepening distribution in order to stay smart.
