Consumer goods companies seem to have their work cut out for them in the near future. While consumer demand is on the rise, sustaining margins is becoming increasingly challenging. Having healthy margins to keep the stock market happy but missing out on the investment needed to grab the enormous opportunity offered by India’s economics and demographics is a pyrrhic victory – as is having a healthy and high margin market share today at the cost of investing in brands. We are regrettably seeing more and more high market share, but jaded and eroded brands are unable to stand up to strong or reckless competitive pressure.

Per capita incomes will continue to rise across the board and all socio economic strata are well infected with the consumption bug. However, the fight for a share of the consumer’s wallet is more intense now than ever before. EMIs, pension plans, health insurance, entertainment, durables, air travel, coaching class fees, mobile phones, etc. all have to be accommodated in the consumer’s budget, and there isn’t enough money to fund them all fully. Many categories of packaged goods and consumer durables have fought this battle by not taking price increases even though input costs have risen. Not only have they held prices, they have also increased the performance / quality / features delivered at each price point, in order to gain market share at each other’s expense. Retailers have further skewed price-benefit equations in favour of customers by squeezing manufacturers on price and by using well-known brands as loss leaders to create footfalls for higher margin items. The government too has fuelled a general environment of reduced prices by steadily decreasing excise duties across the board for over a decade. The result? A very demanding Monster Consumer has been created. Monster Consumer expects that prices will keep going down in real terms and product quality and features will keep getting newer and better. (S)he also has also now learnt to wait for season sales so that the bargains can get even sweeter. Any increase in price sends him or her into a sulk of down-trading, further depressing industry margins.

“How to sustain margins while riding the growth wave”, was what a panel of CEOs said was uppermost on their minds, in the course of a panel discussion at Compass, a recent Economic Times conference in Mumbai. The mix of CEOs was eclectic – Perfetti (confectionery), Philips (consumer electronics and lighting), Globus (fashion retailer) and Marico (health and wellness / personal care and food) – but the theme was the same. Margins have been under pressure because input costs have gone up; but these cannot be passed on to the consumer. In addition, there is a rising cost of complexity, as the number of ‘mini Indias’ continues to grow.

Let’s begin with distribution. With the emergence of modern trade with its special characteristics, companies have no choice but to set up not only a separate sales force but also a separate supply chain to profitably sell to modern trade. Though modern trade still accounts for only a small percentage of the total market, in absolute terms it is large enough to merit special attention. More importantly, it serves a very attractive consumer segment of the richer and / or more sophisticated consumers, which no company can afford to lose. Traditional retail continues to be very important for the foreseeable future. It is the dominant means of market access, and requires to be served even better than before, because the explosion of new brands and variants, and SKUs has increased the retailers’ bargaining power. Gone are the days of pipeline stuffing and tying up his working capital so that your competitors get shut out. Gone also are the days when merely getting on to a retailer shelf ensured market share. Today, a lot more work needs to be done at the point of retail requiring active participation and support from retailers. It is not brute force but persuasive seduction in the form of better service to retailers that creates competitive advantage, but sadly, increases costs.

Another driver of cost of complexity is the increasing need for segmented strategies. The number of distinctive consumer segments is increasing, and the threat is very real that someone else will take them away from you by customising to exactly fit their requirements; while you have just one or two sizes to fit all, because your current business model delivers margins through economies of scale derived from mass manufacturing.

The panel concluded that working hard on the supply chain and making it more flexible yet more efficient was the big thrust needed to improve margins, and it was something that occupied their minds and time a great deal.

But what about the possibility of getting consumers to pay more? The prescription for doing this was clearly recognised by the panel. There is no instant karma here – increase innovation, invest in building brands and improve the total consumer experience is the mantra. Has Consumer India rewarded these in the recent past? All panelists were unanimous that it had. Can it be done for all categories including, say, the humble, impulse purchase, chewing gum? “Adding some functionality could do the trick”, was the answer from one of the panelists. What of shampoos and skin care? The revenue model needs to be changed or augmented, services could help, was another view from the panel. Certainly the same could work for consumer electronics too. But getting innovation and brands right (right, defined as being able to command a price premium from consumers) requires deep and continuous consumer understanding. And that costs money. Yet, market research agencies are being forced to offer consumer insight at throwaway prices because companies are refusing to pay more for better. The result is an impoverished industry, in the throes of talent flight and a lose-lose proposition for all.

Maybe it is time, as one panelist put it, to ask “what is a reasonable margin expectation to have for such businesses in this phase of growth, in an industry which has not invested enough in sustaining its future”?