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FMCG majors diversify to stay afloat

06-December-2004
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FMCG majors diversify to stay afloat

The fast moving consumer goods (FMCG) sector appears to be in the diversification mode. Whether it is DS Group's foray into confectionery, Himalaya Drug Company's foray into baby care products or Marico Industries into functional foods — FMCG companies are trying every trick in the book to emerge from the present downside pervading this sector.

Take the case of Delhi-based DS Group. Known primarily for its tobacco business, the company has recently entered into a 30:70 joint venture with Lotte Company Ltd of Japan to manufacture a host of confectionery items, including gums, candies and even ice creams. This joint venture has been forged despite the fact that Lotte is already present in the country by virtue of its acquisition of the erstwhile Parrys Confectionery Ltd. Also, the tie-up comes at a time when existing players are complaining of inflexible price points and rising input costs, which lead to squeezed margins and little sales growth.

The President of DS Group, Mr Ashok Aggarwal, told Business Line, "We have diversified into confectionery because of our immense distribution strength, in terms of pan shop channels and general merchants. Today, the key to success in the FMCG sector is distribution strength."

Says Mr Sunil Alagh, former Managing Director of Britannia Industries and an industry veteran, "Companies think of diversifying into new categories and products typically because growth in the core business is slowing down or with the intention of leveraging their existing brand equity. Diversification into new products and categories could be one of the ways to generate growth."

Then, Dabur India Ltd's entry into the skin care range is also noteworthy. The company had, some years earlier, tried its hand at the same business by forging a joint venture with an Italian major but the `Samara' range of products had to be withdrawn.

Says the Vice-President (Sales), Mr S. Raghunandan "We understand the skin care business, so our entry into it is not a diversification into an unrelated product area. Dabur's re-entry into skin care can at best be called a brand extension." He said Samara was perhaps a brand ahead of its time and was targeted at the upper end of the market. So this time, the company has decided to enter the market via the value-for-money brand, Anmol.

Recently, ITC Ltd indicated it was keen to expand retail business. According to reports, it is likely to enter the soaps and detergents segments to expand its FMCG portfolio. The company recently notified the stock exchanges of its intention to amend its memorandum of association to allow it to diversify into newer areas.

Analysts agree that while this trend of FMCG companies diversifying to open up new growth avenues was a welcome step, it should have been taken long ago. Mr Nikhil Vora, Vice-President of SSKI Securities, said that the FMCG sector had been characterised by the lack of diversification and expansion into new product categories earlier. "This trend of companies entering new product areas is a welcome step, but the pace of diversification needs to pick up, gather momentum."

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