Barring price wars among the leaders, nothing marked the FMCG sector.

The fast moving consumer goods (FMCG) sector, which was beginning to be derisively referred to as the SMCG industry (slow moving consumer goods) as it didn't exceed a flaccid 1 to 1.5 per cent growth rate in the past four years, began to witness a slow revival in 2004. The revival was not without its share of pain though as companies in the sector resorted to price cuts, small packs, and offering freebies to push products.

Detergents and shampoos saw the maximum action as Procter & Gamble (P&G) and Hindustan Lever (HLL) went to war with each other with discounts to cut each other's market share. P&G began by slashing prices of detergent brands Ariel and Tide by 50 per cent in March 2004 and was able to improve its market share in the detergents market to 10 per cent by October 2004 against 6 per cent in October '03 (source: AC Nielsen). HLL, while asserting that price cuts were unsustainable, followed suit and cut prices of its best-selling detergent Surf Excel. The slashed prices stay to this day while detergent volumes have grown by 11 per cent.

Next HLL initiated a price war in shampoos with its 'buy-one-get-one-free offer,' that effectively offered a discount of 25 per cent. However, P&G and other players refused to follow suit and instead P&G began focusing more heavily on its' Rejoice shampoo and even launched a new variant of Pantene with a promise to stop falling hair.

Analysts say the Rs1,000-crore shampoo industry grew between 10-15 per cent in volumes in 2004 largely due to price cuts and small packs.

Despite price cuts, freebies and promotional offers by Hindustan Lever (HLL), the company's brands together lost market share in terms of volume as well as value in 2004. The major gainer in terms of market share was, which improved market share to 20 per cent in October '04 against 16 per cent in October '03 in shampoos. Subsequently HLL tried increased its advertising budget by more than 25 per cent and introduced a half-dozen new creams, soaps, and detergents. These moves helped stop market share erosion, but hit earnings.

Industry experts said while the market for shampoos grew by 10 per cent over the whole year, the last three months saw a growth of 11.5 per cent.

Indian FMCG companies like Dabur and Cavinkare for the first time found themselves under severe pressure as MNCs went on price slashing spree. S. Raghunandan, vice president, sales, Dabur India, said that the pricing tactics of multinational companies had put pressure on the Indian brands. He said in previous years the price value-equation was in favour of Indian brands but this trend was reversed in 2004. Some companies responded with their own price cuts, but these came late in the year and could not match those of the multinationals.

Market research agency ORG data revealed that brands like Vatika, Dabur Anmol, Ayur, Chik and Nyle together lost 2.3 percentage points in volume terms whereas the value gain was merely 0.1 percentage points during January-October.

Future shampoo price cuts may be in the offing since many companies including HLL, P&G, Dabur and CavinKare have set up facilities in excise-free zones.

Such aggressive price cuts also saw companies investing heavily in brand building and aggressive product promotions through advertising to attain higher sales.

The small packs strategy
Apart from price cuts, small packs priced at Rs5 - in recent times even Rs3 - have been changing the rules of the FMCG market. For companies, small packs in the long run do not make sense, as they prove unprofitable.

Yet, at present nearly all consumer goods are available in small packs right from facial creams to shampoos, detergents, tea, coffee and chocolates. For consumers small packs make a great deal of sense as they cost a lot less than their large counter-packs across all FMCG categories and offer consumers a chance to try out the products before graduating to larger packs. Some buyers purchase premium products such as expensive creams or shampoos for occasional use. Without satchets such buyers might not have bought the product.

Research reveals that on an average the unit price of large packs is twice that of sachets and it almost seems as if large packs subsidise satchets. HLL for instance charges a premium of nearly 90 per cent on 500gm of Surf Excel family pack, on the same comparable size in sachets while P&G sells a 500gm pack of Tide at a premium of 80 per cent to sachets on a comparable basis.

This can be rationalised as plastic / glass bottles cost more than sachet packaging; companies follow a penetration pricing strategy for sachets but have higher margins on the bottles. Sachets account for nearly 70 per cent of shampoo sales.

Shampoo were the first products to be offered in sachets, though at the time large bottles worked out to be more economical. Today the reverse is true. For instance Vatika shampoo's 8ml sachet costs Rs2, while its 50 ml bottle comes for Rs25. With this kind of difference available more and consumers are making the shift to satchets.

Despite this, a larger number of consumer goods categories, are being offered in satchets simply to drive consumption and prevent downgrading that has been the bane of FMCG companies in India for the past four to five years.

Industry insiders say companies find the Rs5 price point viable because of consumer buying behaviour. Many consumers are not concerned so much about size as about price.

The Rs5 affordability strategy of cola makers Coca-Cola and Pepsi led to a 10 per cent increase in the size of the beverage market. However the year 2004 was not a particularly good one for cola majors. The pesticides controversy continued to persist in hurting sales of both Coca-Cola and Pepsi well into 2004, and the companies abandoned the 'affordability' strategy due to a severe margin squeeze and raised prices in the second half of the year. However, the Rs5 strategy managed to expand the consumer-base for soft drinks from 160 million in 2002 to 240 million in 2004, a two-year period during which the Rs5-price point remained in force.

The Coca-Cola India president and CEO, Sanjiv Gupta, says, "The first half of this year has been good but growth has not been what it was in the same period last year. We continue to make money on Rs 5 pricing but now the quantum of money I make per bottle is squeezed."

This squeeze, brought about by a two per cent cess and higher input costs, forced cola companies to hike prices by a rupee each on 200 ml and 300 ml pack sizes.

The year also saw the companies increasing focus on non-CSD business, Coca-Cola extending Georgia Gold hot beverage brand to more towns and cities while PepsiCo has been experimenting with a host of new flavours in the snack division besides launching different packs and varieties of packaged fruit juices under brand name Tropicana.

However, the packaged water business of both the cola companies witnessed slower-than-expected growth.

As per figures by market research agency AdEx (division of TAM Media), Coca-Cola India reduced its advertising spend on packaged water brand Kinley between January and August 2004 by 20 per cent as compared with the same period in the previous year while Pepsi's spends were also down by about 8 per cent till July. Pepsi's adspend recovered after that month and its total advertising budget increased by over 12 per cent between January and August 2004.

In terms of new launches, Coke launched Coke Vanilla, whereas Pepsi launched its global sports drink Gatorade.

According to industry observers, the Rs5 price point also helps branded FMCG categories battling fakes from the unorganised sector. The FMCG industry in particular HLL, continued to suffer from fake product makers. HLL claimed to be losing close to Rs1,600 crore every year in revenue to counterfeit product makers while the Indian FMCG industry is said to be suffering a loss of around Rs2,500 crore of revenue annually.

The negatives for the industry during the year were the spiraling costs of sugar, wheat, edible oil and packaging material as these shot up by as much as 15 per cent. Companies found a way to beat this by reducing the gram size of packs without reducing prices.

The FMCG sector also received a boost by government led initiatives in the 2003 budget such as the setting up of excise free zones in various parts of the country that witnessed firms moving away from outsourcing to manufacturing by investing in the zones.

ASSOCHAM has indicated that the FMCG industry will achieve a growth of 3-4 per cent in 2005-06. However, FMCG companies will face the challenges of sharp swings in commodity prices, expected to impact profits like never before.