FMCG growth: This decade and beyond, India will be to consumption, what China was in the previous two decades: Sanjiv Mehta

How has life changed for you? Does it still start with Wah Taj in the morning or a cup of Bru in the morning or has it changed now?
Sanjiv Mehta: It has always been Lipton Yellow Label, that is how it started.

Loyalties do not change.
Sanjiv Mehta: Absolutely.

But a lot has changed for the Indian consumer and the way the consumption basket has evolved post-Covid, there seems to be a big departure from what India was, where India is and where India is moving. What are your thoughts?
Sanjiv Mehta: I believe this decade and beyond, India will be to consumption, what China was in the previous two decades. We have all the fundamentals in place to see sustained growth, and not only in the GDP of the country. But if the GDP has to grow, consumption has to grow. No questions about it.

The good old comparison is FMCG means rural India. If rural India is not growing, FMCG will not grow. I am using the word legacy just to establish a point here. They have struggled in last two years when it comes to their volume growth. Why is that?
Sanjiv Mehta: It is very important to de-average and understand the numbers. Pre-Covid, we had a good beat. When you look at the construct of the headline growth, it consists of volume growth, price growth, and the mix that comes in. A company like HUL, historically, had been delivering volume growth in the ratio of about 65% to 70% of the top line. That is a very healthy ratio and that is how it ought to be.

Now, if you look at 2021, for the average, first the growth came down understandably because of Covid, and then the world had supply chain issues, geopolitical issues, and then unprecedented inflation. If you look at 2022 and 2023, the inflation in the whole basket of FMCG was to the extent of 9% and 11%. This is unprecedented. It did not happen in my eight years before Covid came in. And when you have this kind of inflation, it takes a toll on the volumes. The volumes in urban areas at one stage were flat and because the incomes in rural India are much lower, the volumes turned negative. Now that was a very natural reaction to the inflation that had happened. But if you were to look at a country and compare India with many other countries in the world, the headline growth of 8% in 23 was still very decent, very decent. That in many ways reflected the resilience of the economy. And if you come to 2024, the inflation which is there, has either worn out or in many cases, there was a negative inflation. The commodity prices went down. So, there has been a bounce back as far as the volumes are concerned. From minus 4% in rural areas, if you look at ‘24, the mid-June MAT numbers are back to 6% volume growth. That is a good bounce-back. If we consider the entire macro picture, I am not really very dismayed with what has happened to FMCD (fast-moving consumer durables) consumption. It could have been far worse. In many ways, it indicates a very astute management of the economy. When we were growing up during the oil shocks or even during the global financial crisis and its aftermath, just look at it, when the Fed said taper, the rupee crashed. Yes, this time, the rupee has been very resilient. The economy has been very resilient. When we were growing, we could not have even imagined that India could be the fastest-growing economy.

From fragile five, we have become top five.
Sanjiv Mehta: Absolutely, but more importantly, one has to look at it in a contextual perspective. There were the periods of 80s and 90s when Greenspan’s famous words, an era of great moderation. That was also a period when globalization was happening. There was a huge tailwind for China when it opened up the economy much before us. So, during the two decades, China grew brilliantly at 8% to 10% consistently over a decade and beyond.

Today, we are talking about a much tougher scenario. Yes, you are talking about inflation in the world. Supply-side disruptions are still happening. From a Middle East perspective, from a Houthi perspective, whenever there are raids on Red Sea, the sea lanes get disrupted, the prices go up. There is also much more parochialism. The globalization is not at the same pace as it was earlier. The global growth of the economy has come down to in the vicinity of 3%. The global trade is expected to bounce back to 2-3% from about one odd percent last year.

In this context, for three years, we have been delivering 8% growth with macroeconomic stability. The Current Account Deficit (CAD) is less than 1%. Gross NPAs have come down to 3% from double-digit, figures. Look at forex reserves and inflation. Could we have imagined India having inflation lower than many of the developed countries? I think all this augurs tremendously well. And sometimes we forget to look at the trends that are shaping India from a long-term perspective. Pre-independence, India used to grow at half a percent. In the first four decades, we laid down the fundamentals of industrialisation, of the new India from a perspective of IITs and IIMs and heavy industry, but we still grew at a very meager rate of 3.5%, out of which nearly 2% used to go in population growth. Look at the last three decades. We are talking about a 6.5% CAGR.

And the nominal growth is actually in double digits which is more important.
Sanjiv Mehta: Absolutely. Last year, India contributed about 17-18% to global growth, which is the kind of India’s contribution to the global economy it used to be before the Britishers came to India.

So, let us translate the big picture into specifics here. You spoke about volume growth and you are sounding reasonably confident that the turn in the FMCG volume growth is real. Let us see if India’s per capita moves from $2,500 to $4,000 and eventually $5,000, what happens to the consumption basket? How will it change?
Sanjiv Mehta: If I were to look at all the categories that we operate in as a country, none of them are close to maturity. Take tea. Nearly every household drinks tea or coffee, universally penetrated, but there is huge scope to up trade. Just look at green tea, for instance. The penetration is still very low. Infusions are still very low. Look at detergent powders, another category between, say, the detergent bars, soaps, and powders universally penetrated. But look at the penetration of liquids. It is again, yes, at a very low number, forget capsules.

So, the way I look at it, you could have growth in India through penetration, increasing consumption or frequency of consumption, and premiumization. And this applies to every category. Take oral care. Toothpaste or toothpowder. In rural India, still one in two Indians do not brush their teeth every day. If you look at urban India, only 20% of Indians brush their teeth twice a day. I remember the Philippines, when I used to be chairman of Unilever Philippines, after lunch, you go to the washroom, there would be a line of people brushing their teeth.

My dentist says the same. Brush your teeth at least once and maybe twice.
Sanjiv Mehta: This is still not happening in India. So, even in a category as basic as oral care, we need to increase the frequency of consumption. We need to move into night brushing. And here I am still not talking about, if you look at the unit dosage, very few people put the whole toothpaste on your strip of brushes, so that would again lead to a consumption increase. So, from every lens, penetration, frequency of consumption, consumption, and up-trading.

But specifically, why has HUL struggled with the industry average in the past?
Sanjiv Mehta: HUL’s top line in 2013 was Rs 25,000 crore. When I left the business 10 years later, it was bordering on Rs 60,000 crore.

That includes the acquisition?
Sanjiv Mehta: Also, divestitures. If you were to remove the net, instead of Rs 60,000 crore, it would be in the vicinity of Rs 57,000 crore. Even if you take this, there is an addition of Rs 30,000 crore, there is no other FMCG company in India, which even comes close to Rs 30,000 crore. The US will never grow at India’s level. But when the US, a $25-trillion economy, grows at 2%, it adds significantly more than what you would be adding at 6% on a $4-trillion economy.
I will give you another example. In my last year in HUL, which was the fiscal year ending March 23, HUL added Rs 8,000 crore as a delta turnover in the last year.

This is almost what Patanjali had three years ago.
Sanjiv Mehta: Rs 8,000 crore in India would be called a good-sized FMCG company. We talk about disruption. If you add together the total turnover of all the D2C brands, they would struggle to reach Rs 8,000 crore.

Do you see HUL coming back in terms of growth to India’s GDP number?
Sanjiv Mehta: No question. Over the years, running businesses of Unilever for 22 years, I have codified what it takes to make a great company. First is the mindset that you bring in. What I call the growth mindset. In many ways, this is very similar. This codification applies to a nation also. So, first is the growth mindset. In our Rs 30,000 plus crore, we had added Rs 10,000 crore of turnover from categories excluding acquisitions that did not exist before, like liquid detergents, green tea, fabric conditioners, premium skincare. In India, not only does one have to straddle the price-benefit pyramid, but also have to invest in market development, creating categories of the future.

The second axis of my troika of a high-performing company is distinctive capabilities that are hard to replicate. Let me pick two great examples. First is looking at India from a very different lens. At its core, it is about de-averaging India but very importantly, understanding the heterogeneity of Indian consumers. The tastes are different. The palate is different. The customs are different. The competitors are different. The per capita consumptions are different. Averaging India is a sin. You will never be able to play a big game. You can still operate in niches by averaging India. But if you want to be a national player, a big player, never average India.

When you took over as the chairman of HUL India versus the time your tenure finished in March 2023, you took margins to a different level. We spoke about top-line, but from a market standpoint, it was a firm march of margins north of 20 and it stabilised there. So, has Sanjiv Mehta rebooted the margin line for HUL permanently for many years?
Sanjiv Mehta: Look at it like this. Just like I have my troika of the high-performance company, there is a troika of value creation. It has to be first growth, second margin, and third capital velocity. We did not improve the margins by vacating the bottom of the pyramid. That would have been a very easy call. We did not vacate Wheel, we did not vacate Clinic Plus, we did not vacate the price points. Lifebuoy also. Our entire thrust was how to harness the collective wisdom and skills of thousands of HUL employees to remove non-value-added costs. So, we used to crowdsource ideas for efficiency and productivity improvement.

So, 20%, 23-24% is a new normal for HUL now?
Sanjiv Mehta: Absolutely.

Which are the categories in India that are called mature categories that will grow in single digits? Which are the fast-growing categories and which are the categories that are at an experimental stage where you say, okay, I think this change is happening?
Sanjiv Mehta: I would again like to correct you. No category is matured. There is growth opportunity everywhere. It is only the lens that you apply that will unlock the growth. So, look at detergents 10 years earlier. You would have come to the same conclusion that it is difficult to grow and difficult to improve margins. Look at the story of HUL on detergents. Completely changed the margin paradigm. This could be done everywhere. But if I have to look at, say from a global lens and ask myself, which are the segments that will compare to, say, more developed countries that are at a very nascent level where the penetration is also very low? Of course, there are segments, like liquid soaps. We say, nahane ka sabun (Bathing soap). So, it is a very matured category. But look at liquid body wash. Single-digit penetrations. And your experience for a consumer of using a liquid body wash is far superior to a bar soap. And it lends itself to that experience. The richness of lather, the delivery of perfume, the lingering smell. All that comes in beautifully. Someone might say toilet soap is a penetrated category. There is huge room to grow. But if I were to look back, say beauty and well-being.

Coming to food, a very small part of the entire food consumption is packaged food. That again, we will have to do the Indian way, cater to the Indian palate, and Indian taste, and then growing the food segment.

One change which has happened is suddenly quick commerce is becoming big. And when I speak to some of your peers, they are now giving us data points that quick commerce is accounting for nearly 5% to 7% of their total business. What is HUL’s strategy and how important is quick commerce for them?
Sanjiv Mehta: I would not like to talk about it because I do not have a remit for HUL, it would be wrong for me. But let me give you a perspective. And more importantly, give you an idea about how India will evolve. India will be a multi-sectoral growth story. For India to grow at a sustained level of anywhere between 7% and 9%, an aspirational figure, India will have to grow. Of course, IT services is on a good rhythm. India will have to grow manufacturing, and agriculture. I will come back to agriculture in a while.

India’s story will be very different from the Asian tigers, which were just an export-led growth. India will have to have a different story. If I look at the channels today, the biggest channel still is general trade. It will account for about 70% of the total trade and millions of mom and pop stores and retailers dotting the landscape. Then, there is modern trade, which will be in the vicinity of 15%. Then, there will be institutions which would be about 4-5%, and then e-commerce – between 7% and 10%. Within that, there is quick commerce.

Now, quick commerce for the sheer benefit it gives, is bound to grow at a faster pace. The sustainability of e-commerce would depend on the unit economics. If they are able to sustain, if they are able to bring in unit economics, then it would become a sustainable thing for the sheer convenience it gives you. Today’s housewife or the houseman does not need to plan consumption like earlier generations. Jab khatam kiya, order kar diya, aa gaya (They order once the item gets over.) But can quick commerce be successful in villages of UP and Bihar? Unit economics will never work. In India, even after 10 years, the biggest channel will still be general trade. Its share will come down. I would still believe it would be over 50% after 10 years, but it will be highly digitized general trade.

So, the digital kiranawala is the future of India?
Sanjiv Mehta: Absolutely. And we must also remember that why as a country we need the kiranas to succeed. A simple math. There are about 10 million stores. There would be about two persons, the owner and another person working on an average. You are talking about 100 million people whose food on the table comes thanks to the kirana store. Even from a social perspective, India has to ensure that these kirana stores survive and they will survive because India is not going to be the story from mom and pop stores to supermarkets, to the big box stores, to the e-commerce, a classical evolution. No.

So, India is not what happened to America, let me put it this way…
Sanjiv Mehta: Of course not. Absolutely. The relevance of big box stores in India is restricted to certain places. Even today, if you look at the modern trade format, it is the supermarket format which would be growing at a faster pace as compared to the big box stores. Hamare ghar chote hote hai, (Our houses are small). In Mumbai traffic, going out to the suburbs, filling up your dickey with goods and coming back, does not happen in India. India’s trade evolution is again going to be a different story.