Indian Economy News

Online retail to boost revenues of consumer goods firms: UBS report

  • Livemint" target="_blank">Livemint
  • April 17, 2015

New Delhi: Consumer packaged goods companies such as Hindustan Unilever Ltd (HUL), Titan Co. Ltd and Colgate-Palmolive India Ltd stand to benefit as online shopping gains momentum in India, said a UBS report on Thursday, which forecasts that online retailers will contribute to around 6% of revenues for such firms by 2020.

Modern trade, which accounts for 8% of revenues, will see its share grow marginally to 8.5%, said the report.

As companies prepare for the growth of e-commerce, they are collaborating with distributors and charting out their strategies.

For instance, HUL has designated distributors supplying to grocery e-tailers, ensuring availability on the online platform. It has also extended the credit period to e-tailers, a move that should enable it to build relationships and ensure shelf space for its products, said the report.

Interestingly, HUL has reduced the proportion of its promotional spending on TV from 90% to 70% between 2012 and 2015, while increasing its digital ad spending. Digital advertising is more focused on target consumers and its effectiveness is easier to track.

Titan’s accessories, which contribute 20% of its revenues, and watches are popular buys online. The company is among the first to have strengthened its caveats with distributors to ensure that its online and offline prices are not too different by having punitive no-warranty or after-sales service clauses for products that are sold below their prescribed prices.

For Colgate, online retail will help improve its premium product distribution in the smaller towns, where direct distribution to supply multi-function toothpastes regularly is unviable due to inadequate demand density, the UBS report said.

Indian online consumers are deal-seeking value hunters but they not get deep discounts on their consumer staple purchases as trade margins are the lowest in the home and personal care goods sector at 12-17%, said the report. This leaves limited room for discounts. Therefore, convenience and the availability of niche products may be the only reasons to buy consumer staples online, said the report.

One of the biggest advantages of consumer packaged goods firms in India is their large distribution network as the country has about 8.5 million family-run unorganized stores and a maximum retail price-based price mechanism that leaves retailers with little pricing power. If retailing of consumer packaged goods evolves into a marketplace model, the distribution edge will remain as a distributor network would be an advantage, the report noted.

The Internet will influence a third of total sales in the consumer packaged goods sector in the next five years, said a study by consulting firm Bain and Google in February, which estimated the influence of the Internet will impact $35 billion worth of the sector’s sales as more users go online to research personal and home-care products.

Categories such as pasta, nappies, diapers, drink concentrates, tissues, wipes, kitchen towels and small appliances have high risk from online retailing, impacting brands such as Pampers, Rasna, Bajaj and Morphy Richards, said the UBS report, which also identified low- and medium-risk categories.

Medium-risk categories include noodles, feminine hygiene products, cheese, soups and snack bars, with brands such as Amul, Whisper, Knorr and RiteBite seeing an impact.

Meanwhile, categories including skincare products, baby food, gum, meal replacements and baby products are at low risk as consumers are highly loyal to the brands in the space, which include Johnson’s Baby, Cerelac, Fair & Lovely and Cadbury Dairy Milk, said the report.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.