Insight June 12, 2009, 9:18AM EST

India: Strategies for Consumer Goods

To keep consumer goods flying off the shelves in India during the slowdown, companies have to focus on the right products at the right prices

By Ashish Singh, Mike Booker and Sandeep Barasia

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Heads didn't turn when Coca-Cola (KO) and Pepsi (PEP) hiked prices on some of their most popular beverages in India last fall. Even in the downturn, both companies have enjoyed double-digit volume growth. And despite projections that the world's second-fastest-growing economy will watch its 9% growth rate slow to 5.5% to 6% in 2009, India's makers of fast-moving consumer goods (FMCG) such as beverages, biscuits, and beauty aids historically have been somewhat insulated from economic slowdowns. Indeed, the FMCG industry in India is expected to register close to 15% growth in the financial year ended March 2009. But that doesn't mean FMCG companies in India—both multinational and domestic—can afford to be overconfident. The fact is, now is the time for them to keep their eyes on the ball.

How is the slowdown in the Indian economy affecting consumer-goods companies in India? For one thing, it is forcing them to focus on traditional retail channels like small mom-and-pop stores. It's no secret that India's modern-trade retailers are aggressively closing stores or curbing expansion plans. For example, Subhiksha, once the poster child for India's fledgling modern retail industry, shut down nearly all of its 1,600 stores this year in response to a crippling cash crisis. The 12-year-old retail chain says it is left today with just 50 employees on its rolls, compared with the 5,000 it had in September. As modern trade slows its expansion, it will be traditional retail and distribution networks—lower tech, lower cost, and smaller than their modern counterparts—that will become more important to consumer-products companies. This is especially true in rural areas, where consumer spending has remained particularly strong. In 2008, rural and semi-urban markets contributed almost 80% to FMCG growth.

Another distinct trend: Demand for high-end products is dropping. Indian consumers are still buying; it's just that they're avoiding the most expensive brands. That's why companies will need to become more sensitive to price by offering price reductions on existing products and introducing innovative new products at low price points for mainstream consumers. Hindustan Unilever realized in November 2008 that consumers are not seeing value in its Red Label 1-kilogram tea carton pack and moved to a pouch format, passing on a significant reduction in packaging costs to consumers.

An Opportunity to Build and Innovate

FMCG companies in India can use these trends to their advantage—and as a foundation for overtaking their competitors in the recession. Downturns provide opportunities to reorder industries; to come out ahead of the pack requires using recessionary trends to build and innovate. But it's important to have a clear and comprehensive strategy. For example, passing along cost reductions in anticipation of weakening demand may be little more than stopgap measures unless it's part of a broader plan.

FMCG companies in India are winning by systematically targeting four key areas to spur growth.

Customers: Focusing on only the right products
Mainstream consumers in India are still buying, but their needs are changing. So winning consumer-products companies are delivering innovative products aimed at addressing those changes. Consumers tend to eat out less frequently during economic slowdowns. McDonalds's (MCD) is trying to counter that by introducing a wider range of value meals and increasing what it spends to advertise its low-price menus.