New Delhi: In a year marked by high inflation and skyrocketing commodity prices, 'price hike' was the name of the game for the Indian fast-moving consumer goods (FMCG) sector in 2011, even as they consolidated businesses acquired in the past.

Unlike the previous year, mergers and acquisitions took a backseat and cost-efficiency was a focus area to sustain strong volume growth this year.

Companies took greater interest in penetrating into rural areas and boosting the consumer sentiment, while 'premiumisation' was a key strategy employed during the year to tap the growing middle-class segment.

Amid the tough environment, Coca-Cola committed a USD 2 billion investment in the country over the next five years, primarily to enhance its manufacturing capacities. This is
almost the same amount it has invested in India since its entry in 1993.

"The greatest challenge for FMCG companies this year was managing inflation and the high volatility of currency and other commodities. Companies have managed this through a combination of effective cost management and price increases," Dabur India Chief Executive Officer Sunil Duggal said.

During the year, most leading FMCG companies, including Hindustan Unilever (HUL), Procter & Gamble, Reckitt Benckiser, Godrej Consumer Products (GCPL), Marico and Dabur, hiked prices of their products by as much as 10 per cent.

As a result, major soap brands, including HUL's Lux, Lifebuoy and Pears and Godrej's Cinthol and Godrej NO.1, saw an increase in their prices. Companies said soaps were the
most impacted category because of high palm oil prices, a key ingredient in the product.

Despite the price hikes, experts said the sector was able to sustain a volume growth of 9-10 per cent, thanks to the focus on affordable and small pack sizes. In addition, companies also talked about widening their premium products portfolio to tap the high-end of the segment.

"Volumes remained strong despite the challenges. Input costs were stiff throughout the year and most players came up with low price points, affordable range and lower SKUs by reducing the grammage (weight) with the semi-urban and rural population in mind," India Infoline Research Analyst Vanmala said.

Despite the challenges, according to a report by industry body FICCI, the Indian FMCG market is expected to grow at rate of 10 per cent over the next 10 years and reach a size of Rs 4,13,000 crore (USD 92 billion) by 2015 and Rs 6,65,000 crore (USD 148 billion) by 2020.

It is at present estimated to be worth about Rs 2,60,000 crore (USD 58 billion), contributing 4.8 per cent to the GDP.

According to another report by Nielsen, the FMCG market in rural India alone is set to grow more than 10-fold to USD 100 billion over the next 15 years.

The study attributed the growth to the smaller packaging options in rural India, with premium brands usually associated with urban areas growing nearly twice as fast in rural India.

The study said for most FMCG companies, rural India is now contributing more to their growth than urban areas do.

However, FMCG companies said their margins were under pressure because of high input costs. Consequently, companies looked for ways to manage their spend on activities such as
marketing and other operations.

"Inflation is biting... and is putting pressure on our operating models," Reckitt Benckiser (India) Chairman and Managing Director and Regional Director (South Asia) Chander Mohan Sethi had said.

Global beverage and snacks major PepsiCo said it had to formulate cost-efficient ways like "taking out non-value cost to consumers on every area of supply chain to minimise the price increase".

While there was less activity on the mergers and acquisitions front during the year, Godrej Consumer Products (GCPL) continued with its expansion spree, acquiring a 51 percent stake in African hair-care firm Darling Group, with plans to increase the stake in the next five years.

Meanwhile, Jyothy Laboratories (JLL), which sells fabric wash brand 'Ujala', bought out German firm Henkel AG & Co's 50.97 per cent stake in Henkel India for Rs 118.7 crore.

Subsequently, JLL announced an open offer for another 20 percent stake at an estimated cost of around Rs 96 crore.

Some of Henkel's brands include Henko, Mr. White, Pril, Fa, Neem and Margo. The acquisition marked Jyothy Lab's entry into the personal care, fragrances and dish wash categories, among others.

Despite high inflation and foreign exchange fluctuation, beverage giants PepsiCo and Coca-Cola continued with their growth story in India, registering robust double-digit volume growth in the country.

To further boost its presence, Coca-Cola committed a USD 2 billion investment in the country to enhance its manufacturing capacities and infrastructure. The US-based company said it will continue to invest on long term opportunities in India. Since its re-entry into India in 1993, Coca Cola has pumped over USD 2 billion into the country.

The company said India is one of its most important growth markets and the investment is being made as a part of the company's 2020 vision of doubling system revenues globally. "We believe in the long-term opportunities in India. We are excited about the opportunities and we are committed on the USD 2 billion investment plans for the next five years," Coca-Cola India President and CEO Atul Singh said.

Given the current uncertainty, FMCG companies are likely to take cautious steps in the new year as they try to maintain the growth momentum in the days ahead.

"Further headwinds are coming in the next year in the form of further volatility in currency, inflation above acceptable levels and elections in key states. These will determine the state of the economy and we look up to the new year with cautious optimism," Dabur's Duggal said.

Agencies