Detergents: An expensive wash

Aarati Krishnan

IN 2001, the market for fabric wash products was in better shape than that for personal wash products. However, this is not to say that the market was bubbling.

Estimates suggest that in the first eight months of 2001, the market for detergent cakes/bars shrank 5.5 per cent and that for the washing powders expanded by just 2.4 per cent. The growth rates of both categories were lower compared to 2000. In 2000, the market for detergent bars saw a positive growth rate of 2.5 per cent, while that for detergent powders, which grew at 8.1 per cent, sustained the historical growth rate in this segment.

With the penetration levels for the category already high, the fabric wash market has not seen such scorching growth rates for several years now. But the key problem this year was that companies found it difficult to push through price increases, especially at the lower end of the market.

This exerted pressure on the players which restricted themselves to the low- and mid-priced segments and set off a renewed skirmish between traditional rivals Hindustan Lever and Nirma. During the year Hindustan Lever managed to snatch back some market share it had ceded to Nirma in 1999 and 2000. After a spate of aggressive relaunches of its newly anointed "power" brands, Surf, Rin and Wheel, the growth in its fabric wash portfolio outpaced that of Nirma, especially in the second half.

Room for growth

Unlike the market for personal wash products, that for fabric wash products is fragmented, with a sizeable unorganised sector. Laundry soaps and washing bars made from vegetable oils still account for around 7 lakh tonnes of the 23 lakh-tonne market, with the rest accounted for by synthetic detergents. Detergent cakes/bars continue to account for around 40 per cent of the synthetic detergent used, while powder accounts for the rest.

Washing powders are categorised into four price segments - compact (selling prices at over Rs 120 per kg), premium (Rs 90-120 per kg), mid-priced (Rs 25-90 per kg), and economy (less than Rs 25 per kg). Industry estimates suggest that the compact, premium and mid-priced segments together account for just 20 per cent of the market in volume terms and 35 per cent in value terms. It is the economy segment that makes up the lion's share of the market.

Therefore, though the penetration level for detergents is quite high, players point out that there is considerable scope for growth. One, there is scope for volume expansion by converting laundry bar/cake-users to higher-priced powders. Two, there is scope for value growth by upgrading users of low-priced detergents to mid-priced and premium brands. But this has not happened quite as expected, especially with the economy slowing down.

Hopes belied

Two consecutive years of poor agricultural performance in 1999 and 2000 and a sharp fall in agricultural commodity prices has apparently forced rural consumers to cut back on spending, even on FMCGs. The steadily worsening industrial climate has probably forced urban consumers to economise as well. In 2000 and 2001, this impacted the consumption of most FMCG products, especially those with high rural reach. This is reflected in the shrinking sales of detergent cakes/bars, which are the key fabric wash products used in the rural areas, by 5.5 per cent in the first eight months of 2001. This is likely to have impacted Hindustan Lever and Nirma for whom detergents cakes account for a significant share of the revenues.

Washing powders scraped together positive growth of 2.4 per cent in the first eight months of 2001. But growth rates here were probably salvaged by price increases on the mid-priced and premium brands, rather than by expanding offtake. Thanks to the difficult marketing environment, detergents in the economy segment have been forced to leave pricelines unchanged over the past 18 months (see accompanying story), which is to have impacted overall sales growth.

Outlook

Over the longer term, given the relatively small size of the premium segment, the fortunes of the industry will continue to hinge on a pick-up in the low-priced segment of the detergents market. This is especially true of large players such as HLL and Nirma, which dominate the market. The crucial trigger for the economy segment would be a resurgence in the rural economy, especially in farm incomes. With both the South-West and North-East monsoons bringing satisfactory rains, especially to the drought-affected areas, there is cause for optimism on this score.

From the investment standpoint, fresh exposures can be avoided in Nirma given the uninspiring showing in terms of topline and bottomline growth this fiscal. Hindustan Lever has made considerable progress in its fabric wash business over 2001, making market share gains on almost all its brands towards the end of the year. However, at Rs 214 the stock is stiffly valued in relation to its peers. It trades at a price earnings multiple of around 37 times the latest earnings. The Henkel Spic stock appears to offer reasonable potential for capital appreciation. But given the difficulty that any small player would face in challenging established market leaders the size of HLL and Nirma, investments in the stock could take time to pay off.