The Challenges of Managing Single Digit Growth
The
result season is upon us and for the FMCG industry, more so for the larger
players, growths have dropped to low to mid single digits. For a decade or more
many of these companies were clocking a happy growth in the mid-teens, and now
for the past two years, and this year (2015-16) especially, the growths are
much lower.
For the FMCG players, it’s like having gotten used to driving at a good speed
on the expressway but now having unexpectedly come face to face with a rough
and unmade road. Not like driving on the expressway at all.
Two questions come to mind. The first – is this a passing phase or something more long term? The second question is whether the organization is equipped to adjust to and meet the challenges of driving on the rough road.
Is this bumpy section a small stretch? And if so, how small? Can the driver shift gears from the even to the uneven smoothly enough? Different skills are required for each terrain.
There is a lot of talk about future growth, from the Finance Minister to the average analyst. Is this hype?
For FMCG companies there are a few indicators to keep in mind.
Consider the Gini Index, the measure of a country’s income distribution. This has worsened for India, moving from 32.60% in 1993-94 to 37.00% in 2009-10 and there are no signs of the trend changing. Inequality is increasing, and unfortunately the advantages of economic growth has not benefitted the poorer sections, not as much as a few rich.
The percentage of total wealth owned by the rich has actually increased in India. If in the year 2000 the top 10% of Indians owned 65% of the total wealth, in 2014 it is as much as 75%. And we all know from economic theories that the wealthy do not spend all of their incremental money on consumption.
How much more shampoo can you get the rich to consume?
As for the middle classes, consider the change in share of wallet. Two big costs that the housewife is fighting to balance in her household budget are the increased cost to keep the family healthy and the galloping cost of her children’s education. Health and Education. Two essential things that families spend on once they have enough.
Health costs in India have grown exponentially over the past decade, increasing by 176% (NSSO figures) over the past 10 years. Hardly any Indian consumers have access to insurance, and that is why the impact of this on the household budget can be deadly.
Education is a highly valued commodity in India and the housewife does not want to scrimp on this spend. In fact, India is one of the few countries in the world where the housewife spends twice on education. Regular fees and tuition fees. These costs have gone through the roof. An ASSOCHEM survey puts the increase in private tuition fees at 35%. 12 years ago (2004) around 50% of families put their children through private tuition. You can imagine what the figure is like today. (2014 article by K Sujata).
This is not about good or bad, but from a consumption point of view this means
that there is less incremental money for the poor to spend. Well, at least not
as much as it should be in an ideal situation.
The impact of just these three factors (and there are others) on discretionary income and therefore growth rates in consumption of day to day FMCG products is worth mulling over.
What leaders have to ask themselves is this: Can we see the smooth road ahead across this patch? And even if we can, does our organization have the ability to adjust to a different mind-set? The “expressway mode” to the “rough road mode”. Quickly enough.
It requires a different skill-set and it’s not easy. Consider that the bulk of work force in most organizations, has worked and grown in organizations with a culture of high growth. Quite used to a mid-teen growth level of around 15%. They have witnessed the exponential growth of telecom, airlines, and housing, to name just a few sectors.
During
review time, the first question that they would have had to answer in the first
week of every month would in all likelihood have been “how much have you
grown?” whether it is sales or production. They are used to being measured
predominantly on high growth oriented metrics. Nothing wrong with that, but a
point to note is that some organizations themselves have had processes and
strategies that have been geared towards high growth.
But when growth slows a different mind-set should ideally kick in.
The conversation needs to change. For example, an equally important question that the CEO could ask front line sales manager would perhaps be about range availability, not just growth percentage. This is not to say that growth percentage is not to be talked about.
A simple aspect like market share gain will take on a different texture as will the attention to efficiencies, whether it is marketing cost efficiency or channel efficiencies. All it means is that a lot of different questions should be asked with equal emphasis.
It’s like ensuring that you have the option of a 4WD ready on a sedan and that the driver knows how to use that particular type of gear shift. And it will be those organizations who can manage this transition smoothly who will succeed.
The shift in the Gini Index tells us that there is a disproportionate amount of action and therefore possibilities in the way we can market to the rich. This requires a very different mind-set to succeed. But that is another story.
First published June 2016