Consumer product companies are increasingly turning to insourcing or in-house production for premium categories, sensing a growing need to have greater control over quality. While contract manufacturing or outsourcing remains a cost-effective method of handling production, insourcing is also gaining ground.
The move is also linked to the need of doing away with costly imports at a time when the rupee is depreciating fast. From August to now, the Indian currency has depreciated by over 20 per cent, crossing the 54-mark to the dollar today.
Companies admit that limiting imports is important when currency fluctuations are severe. Firms such as Procter & Gamble (P&G), L'Oréal and Wipro Consumer Care are all opting to insource or produce in-house those goods that require stringent quality control. The trend is no different with consumer durable companies.
Almost all firms — barring Sony, which continues to import — are ramping up capacity to manufacture products at their own factories. LG, for instance, earmarked Rs 800 crore for the 2011 calendar year as capital expenditure. This was used mainly to enhance capacity at its existing units, says Y V Verma, chief operating officer. Samsung pumped in Rs 350 crore to triple production at its mobile phone unit in Noida this year, says a company spokesperson. As for Panasonic, it is in the midst of a Rs 1,400-crore capex programme that will see the Japanese major set up a plant in Haryana, says the firm’s director, marketing & sales, Manish Sharma.
As international companies make a beeline for India thanks to its large consuming class, existing firms say it is important for them to ensure loyalty for their brands. “This is only possible when the product is best in class,” says Anil Chugh, senior vice-president, Wipro Consumer Care. This point is endorsed by most marketers including Hindustan Unilever (HUL), P&G, Godrej Consumer (GCPL) and Nivea. Says Dalip Sehgal, managing partner, DS Consulting, who was earlier with HUL and GCPL: “In a competitive marketplace, what differentiates one brand from the other is the quality aspect. For premium products, this is all that counts.”
HUL’s Dove range of products, for instance, have been able to make a dent, say market experts. This is because of the perception of these being superior thanks to the investment in quality by the consumer goods major. At a time, when moisturising cream was never used in soaps, HUL launched Dove bars over a decade ago on the one-third moisturising cream promise. This premise has been extended to allied products such as shampoos, deodorants, conditioners, face washes and body washes over time.
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According to FMCG analysts Shirish Pardeshi and Aniruddha Joshi from brokerage Anand Rathi, firms with a strategy predicated on an up-trading by consumers will gain in the next few years.
A recent study by Boston Consulting Group says annual consumer spends will more than treble to Rs 191 lakh core ($3.6 trillion) in the next decade as opposed to Rs 52,470 crore ($990 billion) now.
This will trigger uptrading in categories such as food & staples, children’s products, personal care and health and wellness among others. Some experts also point to consumer electronics as a category that will see significant uptrading. The trends are already visible. Despite inflationary and interest cost pressures, flat panel TVs as a category has grown by about 50-60 per cent this year. Smart phone sales, on the other hand, have more than doubled this year over last year.