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Q&A: Sunil Duggal, CEO, Dabur India

'FMCG will grow faster than GDP'

Bhupesh Bhandari  |  New Delhi 

Sunil Duggal

The fast-moving consumer goods (FMCG) industry has in the last few years grown on the back of a robust farm sector. This year, there has been excessive rainfall in most parts of the country, and deficient rainfall in a few. What does it mean for the FMCG business? How will it impact the prices of farm commodities? CEO tells Bhupesh Bhandari. Excerpts:

How does the rural market look at the moment?
It looks very strong. Products that earlier didn’t have any relevance to the rural market have suddenly become relevant — sanitary napkins, fruit juices, etc. If you go to small-town India, though the infrastructure is as bad as it was 20 years ago, the change on the ground is apparent in terms of consumer behaviour, particularly in women — the way they dress, their view of life, their consciousness towards looking good and feeling better. That bodes very well for cosmetics, health care, food and beverages and toiletries. Modern trade has begun to gain a foothold there. This will accelerate the growth of products that were earlier irrelevant. The change is here to stay, inflexion points have been reached.

But the competitive intensity to grab the share of the wallet of the rural consumer is also going to rise. Almost all companies have realised that the rural markets can no longer be ignored. The multinational corporations (MNCs) that were very loath to go to rural India have now realised that they have to go there. It will take them a long while to do that because the terrain is difficult, and logistics and supply chain issues are complex.

What is the feedback from your frontline staff in the light of the good rains in most parts of the country and scanty rains in some parts?
By and large, with the exception of a little excess rainfall in west Uttar Pradesh and a little deficient rainfall in parts of Bihar and West Bengal, it has been a very good monsoon. The kharif crop will be a record one. Harvesting has begun in some parts and it promises to be a bumper crop. This will fuel demand. So, by all logic, we should see a substantial amount of consumption in rural areas. There is a spin on the story that much of this consumption in the years when agricultural growth has been very high has actually not gone into the so-called nondiscretionary items like what we make; it has gone into discretionary items. It is not that when are flush with funds they will buy more toothpaste; they will buy more durables. So, there is no guarantee that the extra income will be funnelled into staples, though there is a likelihood of that happening.

Which are the pockets where demand is not so strong?

I think there have been patchy rains in some parts, but I don’t think it is widespread or serious. Overall, we will see an increase in demand in the consumer space. Whether that demand will gravitate to the higher-end consumer durables or lower-end staples is a million dollar question. There is every reason to believe that it could be spread across both. But it’s hard to predict outcomes because in the past the demand has been diverted towards value-added products. When farm incomes shrink, like they did last year, the demand continues be steady in the staple non-discretionary space. In the longer term, demand will certainly accelerate and there will be a substantial increase in consumption in the two- to five- year horizon.

It seems you have seen up-trading in such markets.
Yes, there is up-trading. are gravitating towards brands. A lot of the so-called rural brands are finding it a little bit difficult to grow. And are gravitating towards brands that are used by well-off urban consumers. But there is still a price-point game. Even for the more expensive brands, people want price points that are acceptable. They are ready to trade off lower grammage, but they want those Rs -10, Rs -5 and Rs -1 price points. The challenge before us in manufacturing processes and rural supply chain is to provide consumers value and brands they want, at prices that are acceptable.

What about commodity prices?
That’s an area of concern. Commodity prices have been pretty high. I don’t see the trend reversing itself. The reason for that is while the output will be high, so will the demand. And that will keep prices high. Inflation may level off to single digits, but it is still likely to remain in high single digits.

Sugar is a huge commodity for you…
Sugar is the big one. And there are also edible oil, paraffin and plastics. As far as Dabur is concerned, the impact is not so big because we are not dependent on any one commodity. We have a huge basket because of the variety in our portfolio. So, I don’t think one commodity can hurt us very badly. Even in the days when sugar prices were above Rs 40 a kg, we had bought ahead so we were sitting on low prices. Sugar is just three to four per cent of our material consumption.

What’s the outlook on sugar and edible oil prices?
Edible oil is looking aggressive. Sugar, we are hopeful, will be contained below Rs 30 a kg, which is very satisfactory from our point of view. Edible oil is a little bit of a concern. Groundnut and coconut oils are showing very bullish trends. They are not likely to soften as we expected on the back of a good monsoon simply because the consumption is driving higher prices.

So there is no need to hedge in sugar?
We have hedged ourselves in certain commodities, particularly in edible oils; perhaps not so much in sugar because we did not see any significant rise in prices. But, in edible oil, we are hedged. Perhaps we are not hedged sufficiently because we expected prices to drop by the end of the year. But our positions will cover us till November.

Can you increase your prices in the buoyant market?
We can. The economy is buoyant and the propensity of the consumer to pay more is definitely there. So, we have the ability to raise prices. But there is the possibility of disruptive competition keeping a ceiling on prices. This brings us to my earlier point that India is becoming a very attractive playground for multinational corporations. Some of them may be tempted to gain market share quickly or get market access through disruptive pricing.

Do you think FMCG growth will be higher than growth this year?
It will definitely be higher. I see it in low teens, as against high single-digits for the economy. Typically, in a situation like this, the growth has been ahead of growth, except for a couple of years in the earlier parts of this decade when for some strange reasons it lagged growth. Growth could even be in the mid-teens. Once the crop reaches the market, which it soon will, that could fuel demand. The baseline growth is now 10 per cent. In some years of this decade, it had come down to as low as three to four per cent. Can we do 15 per cent? It’s a difficult call. From our side, we try to outperform the market.

Companies have followed a dual price and brand strategy — one for urban markets and the other for rural markets. With up-trading in rural markets, is there a convergence of price points and brands?
I personally think that barring a few products and categories, the division between urban and rural brands is going to disappear. Increasingly, the rural consumer will demand the same product as the urban consumer and there would be convergence. The so-called cheap rural brands will continue but they will exist only when there is a very sharp difference in prices between the rural brands and the urban brands. Where prices are less different, consumers could up-trade to the urban brand.

How is Dabur going to respond to the expected spike in demand?
We are building our capacity to take care of any upward movement. We are not increasing inventories at the moment because it is too early to take a call. But we are keeping enough slack in our manufacturing to be able to ramp up production in case the demand cycle turns for the better. We are geared to show up to 20 per cent growth if the demand exists. The first indications will start coming by Diwali.

First Published: Fri, October 15 2010. 00:33 IST