Brand Bullies Bleed India's Boundless Consumer Market Potential

Subsidiaries of multinational consumer companies listed in India have reported tepid sales growth in recent years, which has also reflected in their share price performances. However, the most noticeable was the first quarterly sales decline reported by Colgate-Palmolive (India).

One may argue that the penetration of oral care is 100%, therefore there are limited opportunities for growth. The counter to that argument is that India's per capita consumption in consumer products, especially personal products, is nowhere close to global averages.

Take toothpaste, for example per capita consumption in India has risen from approximately 70 grams to 200 grams per year in the past two decades, which pales in comparison to the world average of 300 grams and leader Brazil at 700 grams. Coupled with the fact that India has a younger and growing population, this raises further questions about the tepid growth rates and the inexplicable decline in sales.

Further, the definition of category penetration needs understanding. Consumer research defines category penetration as the percentage of households (or individuals) in a defined population that have purchased a product within a specific category at least once during a given time period. This definition raises more questions than answers.

For example, an individual/family will be counted as penetrated if they buy toothpaste once in six months (or whatever the period is) but never use it! Penetration data shows only market reach, not depth. Two markets may have 100% penetration in a category, but in Market A, people buy once a year, and in Market B, they buy monthly. 

Per capita consumption on the other hand measures volumes consumed per person in a period, therefore encompassing how many people bought and how much or often they bought. 

Strategic Shift
But this isn't about definitions. It's about company strategy. Colgate is used as an example as it is easier to decipher with just one dominant category. However, this analysis should broadly apply across categories.

So as a global and country category leader what is Colgate doing to increase toothpaste consumption where there is potential to reach at least the world average which is about 50% higher than per capital consumption in India. The potential is large albeit at a lower price point because of the lower per capital income levels. One would expect the category leader to drive consumption through higher sustainable spends to drive repeatable, sustainable consumption, however the sales and margins trajectory over the past decade of Colgate India paints a different picture.

The above charts illustrate that the sales growth for India subsidiary in the recent years is not very different from the global parent though India arguably has more potential for growth and yet the company is more focussed on driving its margins. Colgate India has expanded EBITDA margins by about 10% points in the past decade which is about 9% points above the margins of its parent Colgate Palmolive. 

To put this is a consulting jargon, it appears that India is no longer a “Star” with high growth, high market share. but a “Cash Cow” marked by low growth, high market share for the company. The focus is clearly on increasing margins to drive profit growth. Colgate India’s compounded growth rate over past decade is 4% while profit growth in corresponding period is 10%; those numbers in the past 5 years are 6% sales growth and 12% profit growth. Those sales numbers have barely kept pace with real GDP growth of the country let alone the nominal GDP growth which should be the more appropriate measure.

Premium Over Volume
Colgate India is not alone; here are similar charts of Hindustan Unilever and Nestle India.

The trajectory of the sales growth is declining, while margins are inflated to historical highs and way above their respective larger global parents. 

So what this means? Perhaps India is not the growth market that everyone expects it to be. Maybe making money at bottom of pyramid is so tough that these companies have given up and focussing on the premium end. 

Maybe there is a premiumisation at play, where few who can afford are buying more premium products. Maybe the companies are price gouging customers as that’s the only way to grow the bottom-line in the short term. There could be many more reasons but the strategy is very myopic for sure. 

If these companies are not willing to invest in the long term development of the market, to educate the consumers, to add more value to consumers, to provide a ladder for upgrades and premiumisation but only focus on short term margins then those very margins will attract lot more competition. 

As Jeff Bezos said “your margins is my opportunity”. And as we have seen with many industries, in the long run there will be no sales, no margins and no business.