Second Thoughts on the Indian consumer

The 1990s brought a flood of multinational corporations (MNCs) into India. The lure was the prospect of selling consumer goods to a 300-million-strong middle-class that was presumed to be starved of good quality products. After nearly a decade of operating in the Indian market, most companies are pausing to lick their wounds and figure out whether they are making any headway.

Today most MNCs, whether they are fast-moving consumer goods (FMCG) majors such as Heinz, Kellogg and Pillsbury, automaker DaimlerChrysler, or consumer durables makers Whirlpool and LG, would agree that they had stepped into unfamiliar territory without even a rudimentary roadmap.

Many of them completely misread the diversity of the Indian marketplace. While some such as LG and DaimlerChrysler have found their bearings in the Indian market and managed to taste some measure of success, others such as Heinz, Pillsbury and Kellogg continue to thrash about in the backwaters. Each of them has a different tale to tell, but their stories have a common thread as well. Most marketers:

* Overestimated the amount of premium customers were willing to pay for quality and the foreign tag.

* Mistook India for one, single, homogenous market, when in reality it is an amalgam of several regional markets with local preferences and tastes.

* Underestimated the efforts they would have to put in to create a strong distribution and retail chain.

The Kellogg's example serves to illustrate some of these points.

KELLOGG'S CEREALS: A CASE STUDY

In 1994, when global cereals maker Kellogg's waded into the Indian market with the uncompromising goal of changing Indian breakfast habits, few people were predicting an instant success. How, asked the pundits, was Kellogg's going to get Indians "" used to hot breakfast foods, and which more often than not varied vastly by region and community "" to switch to a cereal that is usually served with cold milk? And would they pay twice as much as they did for comparable products just for the privilege of consuming "phoren quality?"

Nearly eight years later, neither the doomsday predictions nor Kellogg's optimistic expectations have proved correct. With annual losses of Kellogg India Ltd pegged at roughly Rs 11 crore (a figure the company declines to substantiate), and with its Taloja (Maharashtra) plant operating at barely a sixth of rated capacity, Kellogg's can't be said to have succeeded. It is certainly not king of the breakfast table.

But it cannot be said to have failed either. The Centre for Monitoring Indian Economy (CMIE) estimates the breakfast cereal volumes in the country to have increased from 1,090 tonnes in 1994-95 to 4,380 tonnes in 1999-2000 "" a more than four-fold growth in five years. And Kellogg's enjoys a substantial 65 per cent share of the market, a fact marketing people believe could be close to the real figure.

The four-fold jump in volumes "" in a food category that is not indigenous to the country "" underlines the fact that Kellogg has played a key role in creating this market. It is on its way to changing at least urban India's breakfast habits "" at the upper end of the market periphery.

UNDER PRESSURE

But the problem is that volume growth had begun to tumble dramatically towards the end of the decade "" from between 50 per cent and 70 per cent since launch (admittedly on a small base) to just six per cent in 1999-2000. More up-to-date figures are hard to get since Kellogg's is a private company, with no need to disclose performance. However, what is clear is that the company has been forced to frequently run promotions and offer freebies to keep volumes up "" similar to what Nestle's Maggi noodles had to do in the late 1980s and 1990s to keep volumes up.

Having won markets the world over with its deep-pocketed strategy, Kellogg has hit a speedbreaker in India "" and is still trying to figure out why Indians are not gung-ho about its breakfast cereals. If cola drink majors Pepsi and Coca-Cola discovered that consumers are not thirsting for their products even after millions of dollars have been pumped into advertising and promotions in the country, Kellogg's in finding out that the effective market for its products may be much smaller than what the headline figure of 300-million consumers seemed to indicate.

Tougher times could lie ahead, as Kellogg India's parent, the US$ 6.9 billion Battle Creek (Michigan, US)-based cereal powerhouse Kellogg Co, faces a slowdown in its main markets "" in the US, the UK and Australia-New Zealand. Global CEO Carlos M Gutierrez, who was considered a key player in the initial success story in India, has indicated as much. "We have changed how we define success by measuring marketshare by dollars instead of by the volume of product sold," he had said while addressing global analysts earlier this year.

That means that the Rs 55-crore Indian outfit no longer has the luxury of its original 20-year target to make money and the US parent is unlikely to focus its energies on it in the immediate future even as Kellogg India managing director R. C. Venkateish insists that India is still an important market and that the parent company would give its Indian subsidiary all the support it needed.

The smoke-signals from the neighbourhood aren't all that propitious. Kellogg's recently closed its Malaysian and Chinese operations, and in India too the pressure to perform could intensify. One marketing guru claims that Kellogg India's "life support systems have been removed". Kellogg India faces a dilemma. Gutierrez's strictures on profitability are all very valid for developed markets, but in India Venkateish's challenge is to regain Kellogg India's initial momentum and generate volumes in the first place. And to do that, the company needs to splurge on advertising and communication. Margins can only follow this exercise.

The key question is: why did Kellogg's falter after its initial successes? To be fair, one needs to emphasise that the company chose to enter an extraordinarily tough market. The casualty rate in the foods business is typically high "" sometimes as high as 80 per cent. With its breakfast cereals, Kellogg's didn't just need to address the usual issues of distribution, pricing and so on "" it had to change ingrained eating habits.

FOOD HABITS

The additional difficulty, as a food industry expert points out, was that, "In each of the other countries, food habits were similar across its length and breadth. But in India, they change every 100 kilometres." The breakfast table was no different "" idli-dosa was the staple of the south, dalia and parathas in the north. Moreover, these were considered more substantial and filling than any crispy cereal. That was because Indians, typically, treat breakfast as a lunch-like meal.

Price was another barrier. When it entered the Rs 4-crore market in 1994, Kellogg's corn flakes cost nearly twice as much as that of its sole domestic rival: Mohan Meakin's Mohun brand of cereals. A 450 gm pack of Kellogg's cost Rs 63; a 500 gm pack of Mohun's cost Rs 33. When Kellogg's introduced a 500 gm pack in 1996, it carried an even higher sticker price of Rs 80.

GLITCHES GALORE

Kellogg's explained this premium to consumers as the price of offering an international quality product "" the cornflakes were thicker and crisper than those offered by the local competition. It chose to reinforce this claim by differentiating its product with some formidably expensive packaging, which, it claimed, kept its flakes extra crisp. Packaging accounted for 45 per cent of the product cost in the early days.

Initially "" and despite the predictions of the sceptics "" the proposition proved reasonably credible. In 1995, Kellogg's first full year of operation, the American food giant managed to gobble up a 60 per cent share "" or Rs 9 crore (on an investment of Rs 75 crore in Taloja).

But this performance couldn't strictly be counted as a resounding success because the market remained abysmally small at an annual 1,000-and-odd tonnes. In other words, Kellogg's hadn't managed to grow the market enough.

The problem: the proposition that encouraged high initial trials "" the so-called international quality "" turned out to be a hindrance to further purchases among India's hyper-price-sensitive consumers. The price-value equation also collapsed for a reason Kellogg's should certainly have anticipated "" Indian eating preferences.

Kellogg's flakes can stay crisp only if they are consumed with cold milk. But Indians are well-known to be finicky about cold milk (it's mostly considered an antidote for acidity), and instead combined it with hot milk. As a result, Kellogg's flakes turned soggy "" just like the other cheaper variants.

Another issue was the taste. For all its fortification with iron and other minerals, Kellogg's cereal needed a dash of sugar to cut the blandness. But most Indians prefer a savoury rather than sweet breakfast.

The other problem was that Kellogg's didn't research the reason for the initial high trials properly. Instead, encouraged by the successes, the company accelerated its roll-out plans to 60 cities. What it didn't realise was that its successes in the Mumbai market were partly illusory. The six large local distributors in Mumbai, who were responsible for covering retail outlets, including chemists, general stores, grocers and supermarkets in the city, were actually shipping stocks to other cities as well. In effect, then, Mumbai was being over-supplied.

So when Kellogg's officially entered other new markets, the local distributors there took over, leaving Mumbai distributors with idle stock. Kellogg's packs are bulky and take up a fair amount of retail space; so Mumbai retailers cut back their off-take, leaving the company with a slowdown in its key market.

Meanwhile, Kellogg's competitors weren't sleeping. During this phase of distribution trouble, rival Mohan Meakins took advantage of Kellogg's efforts to expand the market by making its own push. Suddenly, Mohun's spruced up its packaging and increased its availability on retail shelves. Since it was cheaper, converts to a lighter breakfast tended to reach for Mohun's instead of Kellogg's.

In 1996, Kellogg's also realised that it needed to broadbase its appeal. First, it decided to cut back on packaging so that it could improve margins. In the first year, Kellogg's flakes came in laminated cartons. That's no longer the case. The thickness of the cardboard carton has also been reduced. Even then, it was clear that volumes were not growing fast enough. The problem was identified as one of reach "" 75 per cent of Kellogg's sales came from top retail outlets.

So in 1998, Kellogg's decided to expand its range (cornflakes and wheat-flakes) to chocolate-covered flakes, branded Choco-flakes. In that year, Kellogg's also decided to make the brand even more affordable by diversifying into biscuits. Conceived specifically for the Indian market, the biscuits were priced at a competitive Rs 5 and Rs 10 for 50 gm and 100 gm packs respectively.

The logic of the biscuit launch was that biscuits are easier to transport, stock and occupy less shelf space. Also, since biscuits tend to move quickly off the shelves, Kellogg's reckoned that this was a good way of keeping its relationship with the trade alive.

In August of the same year, Kellogg's also tried to Indianise its offerings with a sub-brand of corn flakes called Mazza (Fun). Launched in three flavours "" mango-elaichi, coconut-kesar and rose "" a 60 gm pack retailed at Rs 9.50 and a 240 gm pack at Rs 36.

Today, Mazza does not feature on Kellogg's breakfast buffet. Marketing pundits feel that the failure of Mazza was more to do with the taste of the product "" many consumers thought these were too outlandish (mango and elaichi?). As for biscuits, retailers in Mumbai say they don't sell much. Kellogg's officials insist that the company has "a strong and growing presence in the premium end of the biscuit market" but there is nothing in independent market research to corroborate this. Choco-flake volumes are also said to be low "" though the margins (40 per cent) are higher than those on corn flakes (25 per cent).

Biscuits and chocolate flakes were not the only occasions when Kellogg's experimented with extensions and variants. In 1994, apart from corn flakes, it also had wheat flakes and basmati flakes. Today, except for corn flakes and a minimal presence of wheat flakes, the basmati variant has been erased from the menu.

Those associated with Kellogg's say that the launch of biscuits was a bad idea. "The move to introduce biscuits shifted the focus from cereals to biscuits, which is not a profit-making proposition. The rationale was not understood even by the people within the system," says a former employee.

Consultants attribute Kellogg's bad luck with variants to its original pricing sins. "The initial pricing created the image of an expensive, not-for-me, westernised brand. So naturally, the consumer was wary of taking a look at the variants," says one.

Eventually with pressure on costs and declining global markets, Kellogg's lost focus of its initial reason for entering India. "Kellogg's was in a bind whether it should grow the category or focus on its brands," says a senior marketing professional.

All this took a toll on revenues. Under normal circumstances, this wouldn't have been a major cause for concern. After all, it took 28 years for Kellogg's to break even in Mexico and two decades to do so in Japan. But with the new pressures, Kellogg's now has to grapple with the contradictory pulls of expanding volumes and holding costs.

Advertising outlay has already become a casualty. After splurging nearly Rs 25 crore on advertising in the initial three years, spends have dwindled to Rs 3 crore to Rs 4 crore. This after announcing a Rs 8 crore outlay for 2001.

This, in turn, has resulted in sporadic efforts at advertising Kellogg's. For instance, in 1999, under "Project Red Alert", Kellogg's fortified its cereal range. Called Iron Shakti to address the problems of iron deficiency in children, sales increased by 17 per cent, say company sources. Yet, the campaign was discontinued because though it "did boost the brand, but it was not enough to sustain it, as there were no significant new users," says a company source.

Then again, in January this year, the company started outsourcing its marketing. This is something most multinationals did, but in Kellogg's case many experienced sales people left and the new ones took time to learn the crucial issue of category building.

Venkateish insists that the cutbacks don't impinge on Kellogg India's performance. He says: "In the cereal market, Kellogg's is the clear leader with over three out of every five cereal kilos sold in the country being Kellogg's and over three of every four cereal rupees spent being on Kellogg's cereals. The cereal market has grown due to the efforts of the company."

But at Rs 37.60 crore from sales of 2,630 tonnes of cereal in 1999-2000 (according to CMIE figures), these volumes are not big enough to sustain the company. Former employees and market observers unanimously believe that the company will only grow volumes in India if it invests in advertising and promotions, charges the right price, and has a compelling proposition to be put on the breakfast table.

MORE CHALLENGES AHEAD

Today, Kellogg's is trying to expand its market once again. In April 2001, the company started test marketing a fighter brand called Sunrich in Kolkata, a market that is considered a Mohun stronghold. Priced at Rs 65 for a 500 gram pack, this carry bag costs Rs 2.50 less than the similar-sized Mohun pack.

And propelled by the "Iron Shakti" gains, the company has decided to focus on two brands "" cornflakes and Chocos and target children because food habits are less set among this age group.

Earlier, its communication for basic cornflakes used to address mothers "" who took umbrage at the suggestion that the elaborate breakfast they prepared for their families was unhealthy.

But pricing remains a premium in its mainline products. This has seen Kellogg's raise its price bar in the Indian market. It recently increased the price of its 475 gm cornflakes pack from Rs 90 to Rs 110, a move that could cause it problems unless its communication campaign works. After all, cereals account for 80 per cent of Kellogg India's turnover. Of this, cornflakes alone notch up revenues of 40 per cent.

Among Kellogg's future plans for India include the launch of Keebler Cookies, Cheez-It Crackers and Special K Cereal "" from the $ 1.3 billion Keebler Cookies and Crackers which Kellogg acquired in 2001. Cookies and crackers are among the fastest growing categories in countries such as the US and the company expects this trend to catch on in markets such as India soon.

Globally, Kellogg is sceptical of surpassing its 10 per cent growth in annual profits and claims that it will be less than half in the coming years. Already it has announced global layoffs. And Gutierrez has said that Kellogg's turnaround won't happen overnight. He called 2001 a year of transition, 2002 a year of acceleration and 2003 a year of momentum. In such a scenario, Kellogg India has more than its share of challenges on its plate.

(This article was published in the April 2002 issue of Indian Management)