'Our stand-out performer has been Africa'
Abha Bakaya / Priyank Lakhia, Hindu Business Line, 26 October 2015
While a deficient monsoon has cast a shadow over the revival of rural demand, some of the FMCG majors have posted robust growth in profit margins on the back of lower commodity and input prices. Speaking to Bloomberg TV India, Godrej Consumer Products Ltd (GCPL) Managing Director Vivek Gambhir explains how FMCG majors have managed to beat the slowdown with a multi-pronged strategy.
What are the critical factors that helped boost volumes?
We have been very happy and pleased with our overall volume growth number — it’s up 9 per cent. In insecticides and hair colours, our volume growth was in double digits whereas in soaps it was in the mid-single digits. This has been a result of continued focus on innovations that seems to be working and continued efforts in making our distribution system much stronger.
Can you take us through the way the margin pictures panned out as well? What kind of growth in various segments have we seen in terms of way the margins have panned out? And, more importantly, what’s the outlook, going forward?
As you mentioned, we have seen significant improvements in gross margin and in spite of increasing marketing investment, this has flown to very good EBIDTA growth. On the gross margin front, about two-thirds of the improvement came from benefits in lower commodity costs.
So we have clearly benefited from lower raw material prices but what is comforting is that about one-third of the benefits came from some of the cost reduction programmes that we are running and also an improvement in our sales mix.
Our insecticides and our hair colour businesses are more profitable and as those businesses are growing faster than our soaps business, we are seeing a gross margin improvement from that as well.
We are hoping to continue seeing improvements in gross margins in the second half of the year as well.
While some of the commodity costs seem to be bottoming out a little bit, we are still quite hopeful — given the base of cost that we are sitting on — that you will see improvements in gross margin in third and fourth quarters as well.
I want to get a sense of ad spends as well. How much are you concentrating there? How much of this is organic?
Our advertising and promotions (A&P) ratio as a percentage of sales was 11.2 per cent in the last quarters. That number was about 12 per cent the quarter before. But, as a percentage of sales, A&P growth was about 28 per cent versus the similar quarter the previous year.
What about the international business?
International business is about 47 per cent of our overall business now. On a constant currency basis, international growth was 18 per cent though we did see the adverse impact of currency translation. Within international, the stand-out performer has been Africa, with an over a 33 per cent growth. Latin America and UK have also done very well.
Indonesia has been a challenge. Our Indonesian business has significantly outperformed the FMCG industry in that country. But Indonesia is going through a slowdown. So in that sense the business has been adversely impacted.
I am still hopeful that you will see a recovery in the Indonesian business in the second half of the year. But any gaps in Indonesian performance will hopefully be more than met by a stronger performance in our Africa business.
Are there similar hopes for the domestic business as well?
We are definitely seeing a gradual uptake in urban demand and, as you rightfully pointed out, I think the worry has been more on the rural side. Fortunately, we are much more urban skewed. So, more than 70 per cent of our business is from urban India though we do rely on rural to be a very important growth vector in the future.
So the outlook for the second half of the year will depend a little bit on what happens to rural growth. But we still remain hopeful that as the economic environment improves and if the macro economy is stronger in the second half of the year, that should hopefully lead to better FMCG demand.
We are hopeful that the second half of the year will be better than the first half of the year.