Kirana stores, not e-commerce, will fuel FMCG growth in India, says Adi Godrej

In a good place.
In a good place.
Image: The Godrej Group
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Adi Godrej has seen it all.

The 74-year-old chairman of the Godrej Group, which sells everything from mosquito repellents and locks to furniture and real estate, has lived through the making of modern India, witnessing its transformation from a British colony to the world’s fastest-growing major economy. Today, his 119-year-old conglomerate records over $4.5 billion in annual sales (2015-16), and many of its products are household names.

But it hasn’t always been smooth sailing. As recently as last year, the group’s consumer goods business was hit following prime minister Narendra Modi’s decision to demonetise high-value currency notes, prompting Indian consumers to cut down on discretionary spending.

Nevertheless, Godrej is betting India will bounce back, helped by much-needed tax reforms and its growing segment of middle-class consumers. In an interview with Quartz, he spoke extensively about the government, reforms, particularly the upcoming goods and services tax (GST) regime, and a value-conscious market.

Edited excerpts:

What is your assessment of the impact of demonetisation?

There was cash shortage in November that affected consumer off-take (or consumer demand). (But) it corrected itself quite fast after remonetisation. By December, there was a fair pick-up, especially in our FMCG business. We ended the December quarter with sales that were around the same level as the same quarter of the previous year. So I think remonetisation has gone quite well.

Overall, do you think it was an effective move against black money?

Generally, I think it is good for the country. It will lead to much more financial liquidity in the banks. That will help economic growth in the medium-to-long term. The negative of the move was the shortage of cash, which has now been overcome.

Demand in the consumer goods market has remained tepid over the last few years. Will budget-2017 and other reforms such as GST push demand?

And now, I expect, post-July FMCG (fast moving consumer goods) growth will increase dramatically for several reasons. Stocks that were drawn down during the early phase of demonetisation are now being refilled. Most importantly, when the GST comes in by July it will have an extremely positive effect on GDP growth and on consumption. I think in 2017-18, growth in the FMCG sector could be anywhere between 5-10%.

With demonetisation, and now with provisions in the budget, the government has tightened the noose around the real estate sector. Can some correction in prices be expected?

I think the budget is neutral for the sector. Real estate will continue to lag until the GST starts. I don’t think real estate prices have come down. We have not reduced prices anywhere. There is no scope for prices to come down because margins have been poor in the last two years.

In 2011, the Godrej Group envisioned a 10×10 strategy. Where have you reached with that?

Yes, we (the group) would like to be 10 times our size, 10 years hence…both through organic and inorganic growth. In the last 2-3 years, we are a little behind that plan so we need to make up.

New business models, such as e-retailing, are changing consumption habits rapidly. What are you doing about this?

The biggest form of distribution for FMCG even today is a kirana merchant. Even modern retail is not too big in FMCG off-take. Kiranas will grow, at least for the near foreseeable future. The salience of the kirana off-take is gradually diminishing but it is still a major form (of retail in India). I don’t expect e-commerce to be a large part of FMCG offtake in this country, not in the near future. But all our products are available on e-commerce.

Can you tell us more about innovation at Godrej and the new ideas you are working on?

Yes, several things. We should understand that there are only three packaged (branded) categories that are fully penetrated in India—in other words, every household in India uses them. One is packed soaps, second is some form of washing detergent, and third is matchsticks. Everything else is under-penetrated; in other words, more houses could be using these products. So, one of our major endeavours is to ensure that in areas where we are leading positions, more and more households use that category.

One of the reasons why penetration of categories is low in India is that affordability is poor in Indian households. Therefore, if you provide certain products at a cheaper price-point, then consumption can increase quite a lot.

So will the market continue to grow for lower-priced products?

Oh, absolutely! And for many years companies will have to continue to focus on them (low-price products) because India is still a low-income country, and many people would like to use more categories of products only if they can afford them. For us, both upper and middle-class households are important; there is growing demand for value-added products as incomes rise, but there’s also growing demand for basic products.

What would you think the government should focus on to spur demand?

Once GST is in place, GDP growth will be good for us to catch up with targets and, generally, the country will do well. That apart, I think there are two or three things the government should pay a lot of attention to. (First) is to improve the ease of doing business. Unfortunately, in our country we’ve made everything overly complicated: too many permissions are required, too many areas where (the) government comes into play. So we need to simplify things.

Secondly, we need to reduce tax levels in the country. You see, most countries have realised that lower levels of taxes yield higher revenues. Because when you have lower levels of taxes, the economy grows well and that creates more revenues. So even now, there is great scope in reducing levels of taxes, and for the government to collect more revenues through higher growth.

Another area of focus should have been corporate taxes. They (government) had announced they would bring the corporate taxes down by 25%, but has not acted upon it.

How do you rate the Modi government so far?

I think they have done a good job, they are reform-oriented, they are free-enterprise oriented. I don’t like to comment on the effect on the business of any government because the objective of the government is not to aid business; it should be to aid growth.