Executive Summary ........................................................................................................................................... Overview ........................................................................................................................................... Analysis of the FMCG Sector ........................................................................................................................................... Sector Performance ........................................................................................................................................... Indian Competetiveness and Comparision with World Markets ........................................................................................................................................... Recent Development in the FMCG Sector ........................................................................................................................................... Challenges Before FMCG Sector ...........................................................................................................................................

Executive Summary

As witnessed India has come up as one of the major emerging economies of the world in the recent years. Due to this enormous growth personal disposable income of consumers has increased to satisfy their lifestyle needs. This trend has proved to be beneficial to FMCG companies as they have been able to achieve high growth in their sales through increase in the penetration of personal products and get consumers to spend more on processed food.

FMCG market is something no one can overlook. Increased focus on farm sector will boost income of the rural population and provide more growth prospects for the FMCG companies. FMCG sector is also likely to benefit from growing demand in the market. Since the per capita consumption for almost all the products is low in the country, FMCG companies have extensive opportunities for growth.
Another aspect through which FMCG companies can benefit is that if they are able to change the mindset of the consumer i.e. if they are able to take consumers to branded products and offer new generation products. This would enable them to generate higher growth in near future.

FMCG sector is expected to grow over by 60%. That means it will translate into a annual growth of 10% over a 5 year period.

Products like, hair care, household care, male grooming, female hygiene are and chocolates and confectionary segments are likely to be fastest growing segments.
Though sector has witnessed slow growth from 2002-04, it has been able to make fine recovery since then.

It is suggested that companies which are well placed to tap the growth potential, have grater competitive advantages, are likely to gain market share and have strong financial marketing muscle. Going by these parameters HUL and ITC are clear winners. Britannia’s business strategy and its market innovativeness will enable it to gain both volume and market share. Improving cigarette volumes focus on filter cigarettes and its strong pricing power will enable ITC to register superior earnings in coming years.
It is also believed that in coming year’s food segment will maintain its performance compare to other segments. Lower penetration levels and higher presence of unorganized sector offer organized player an opportunity to demonstrate their brand power – this means huge potential for the segment to perform. However players striving to upgrade consumer habits rather change them are better placed since changing consumer habits mite prove to be risky and takes longer time.
Advertisement and sales promotion will continue to drive volume growth. FMCG players spend increasingly on this to reach consumer directly and efficiently.
Another aspect which has to be considered is that growth in organized retail will be beneficial to the FMCG industry as we expect organized retail to drive consumption of high end products. And its expected that FMCG sector wont be effected by retail sector as experience of most countries exhibits that private labels gamer a substantial market share only in food segment.

Overview

Products which have quick turnover and low cost are known as fast moving consumer goods. These goods are also popularly named as consumer packaged goods.FMCG is the fourth largest sector in Indian economy having total market size of Rs 60,000 crores. A major portion of the   budget of a household is reserved for FMCG products. Items in this category include all consumables that people buy at regular intervals.

A subset of FMCG are  fast moving consumer electronics which include innovative electronic products such as mobile phones , mp3 players , digital cameras , GPS systems and laptops. These are more frequently replaced than any other electronic product.
FMCG companies are equipped with intense distribution network. They spend huge sums to maintain their distribution network. New entrants who wish to bring their product in the national level needs to spend huge sum of money for promoting brands. Intense competition between the organized and unorganized segments is the other characteristics of this sector.

This sector is expected to grow over by 60% by 2010..

Structural Analysis of FMCG Sector

A consumer buys these products at least once a month. The sector consists of wide range of products such as shampoos, soaps, detergents, food products and so on. Characteristics of FMCG products are as follows: The products cater to usually 3 aspects: necessity, comfort and luxury. They meet the demands of entire cross section of population. Price and income elasticity of demand varies across the products and consumers. Individual items are of small value although all FMCG products put together form significant part of the consumer budget.

• Consumer spends little time on purchase decision. He never looks at the technical aspects rather brand loyalty or recommendation reliable dealer / retailer drive the purchase decision.
• Limited inventory of such products are kept by consumer and prefers to purchase them frequently as and when required by the consumer.

FEATURES OF FMCG BUSINESS
FMCG have wide distribution network and they sell their products directly to the consumers. Major features of this sector include the following:

DESIGN AND MANUFACTURING

• Low capital intensity: most of the products in FMCG require minor investment in plan and machinery and other fixed assets. Low working capital is required as most of sales are done on cash basis.
• Technology: technology required for manufacturing is easily available and is simple. Modifications and improvements rarely change the basic process.
• Third party manufacturing: manufacturing by third party vendors is very common. Benefits associated with third party manufacturing includes:
• Flexible production and inventory planning
• Flexibility in controlling labor cost
• Logistics- sometimes it is essential to get certain products manufactured near the market.

              
                  MARKETING AND DISTRIBUTION
Major features of marketing function includes the following

• High initial launch cost: new products requires large amount of investment in product development, market research, test marketing and launch. Creating awareness for a new brand requires enormous initial expenditure on launch advertisements, free samples and product promotion. Launch costs are as high as 50-100% of revenue in the first year. For established brands advertising expenditure varies from 5-12% depending on the category.

• Limited mass media option: the challenge associated with launch initiatives is that few mass media options are available. TV reaches 65% of the urban consumers and 35% of the rural consumer. Alternatives like wall paintings, vieodes, special packaging becomes an expensive but required activity associated with successful FMCG.
• Huge distribution network: India is a home for six million retail outlets including 2 million in 5,160 towns, and 4 million in 627,000 villages. Super markets virtually do not exist in India. This makes logistics for especially new players very difficult. Critical factors for success are the ability to build, develop and maintain a robust distribution network.

COMPETITION
Significant presence of unorganized sector - factors that enable small, unorganized players with local presence to flourish include the following.

• Basic technology for most products is fairly simple and easily available
• The small scale sector in India enjoys exemption/low rates of excise duty, sales tax etc.
• A highly scattered market and poor transport infrastructure limits the ability of MNC’s and national players to reach out to remote rural areas and small towns.
• Lower overheads due to limited geography, family management, focused product lines and minimal expenditure on marketing.

All of the above assessment will lead to the conclusion that FMCG is not structurally attractive industry to enter.

Analysis of FMCG Sector

Strengths:

• Low operational costs
• Presence of well established distribution networks both in urban and rural areas.
• Presence of well known brands in FMCG sector.

Weaknesses

• Low scope for investment in technology and reaping economies of scale.
• Low export levels.

Opportunities

• Untapped rural market
• Large domestic market
• Rising income levels i.e. increase in purchasing power of consumers.

Threats

• Removal of import restrictions resulting in replacing of domestic brands
• Slowdown in rural demand
• Tax and regulatory structure

Sector Performance

INCOME LEVEL The data shows that a FMCG sector has shown enormous growth from the period 2002-08, total income of FMCG sector has increased from Rs 85243.6 crores to Rs 129904.78 crores, which means an increase of 52.4%. Though there has been a decline in income after 2007, it was Rs 134028.94 crores in 2007 and decreased to Rs 129904.78 in 2008. But despite of this decrease FMCG sector income data shows immense growth and profits in this sector.

PBDITA (profit before depreciation interest, tax and amortization) As per operating income are concerned data shows that there has been overall increase in total operating income from period 2002-08. As already mentioned FMCG requires huge distribution network therefore huge expenditure is required. The total operating income has increased from Rs 7584.55 crores to Rs 13549.49 crores in 2008, an overall increase of 78%.

PROFIT AFTER TAX Now if look at PAT i.e. profit after tax it has also increased from Rs 1762.74 crores to Rs 6247.01 crores. This shows that how fast FMCG sector is growing and if it continues on this path then by 2010 FMCG will grow upto Rs 92, 100 crores.

Though from above data we can see that period from 2007-08 show declines in all areas i.e. Income, expenditure and PAT. All this shows that FMCG sector is poised for further growth because of the emerging opportunities and  strong fundamentals developing in the economy. Therefore there is need for strong government action for helping the industry to achieve lower cost ,improved quality and better performance in the competitive environment.
This also shows that future growth will come from newer segments such as the youth and increased penetration in rural sector.
Packages of fiscal incentives provided by various state governments like Himachal Pradesh and Uttaranchal have encouraged companies to set up manufacturing facilities in these areas. Some companies setting up units in backward areas are:

• Britannia Industries                    . Colgate Industries                    . Dabur Industries
• Godrej Consumer Products         .  Hindustan Uni Lever                 .  Marico Industries

With 12.2% of the world population in villages of India, the Indian rural FMCG market is something that no one can overlook. Increased focus and improvement in the farm sector will boost rural incomes which in turn will provide more growth prospects for FMCG sector. In addition to this better infrastructure facilities will improve their supply chain. Some of  the major  companies of Indian FMCG Sector which will contribute to this high growth are:

• The companies mentioned above are leaders in their respective sectors. The personal care category has largest number of brands that 21 inclusive of lux, lifebuoy, fair and lovely , Vicks and ponds. 11 out of these 21 are HUL brands aggregating Rs .3, 799 crores or 54% of the personal care category. Cigarettes’ account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone account for 60% volume market share.

Indian Competetiveness and Comparision with World Markets

The factor’s which make India a competitive player in FMCG sector are the following:

Availability of raw materials
Since India is blessed with diverse agro- climatic conditions, there is a large raw material base for food processing industries. India leads in the production of livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of rice, wheat, fruits and vegetables. The availability of these raw materials gives India the location advantage.

Labor cost comparison India is a labor intensive country where cost of labor is very low and is lowest in the world      after china and Indonesia. Low labor cost gives the advantage of low cost production. Many MNC’s have established their plants in India to outsource for domestic and export market.

Presence across value chain

Indian companies have presence across value chain of FMCG sector. This gives India more competitive advantage.

Recent Developments in the FMCG Sector

FMCG sector is registering an upward trend in growth and this growth story will continue because of the positive budget. However there are certain barriers which curb the growth of this sector. Indirect taxes constitute no less than 35% of the total cost of the consumer products-the highest in Asia.   Some steps taken in budget 2007-08 for FMCG sector are:

• Reduction of duty on edible oil will have positive impact on Marico.
• Full exemption of excise duty on biscuits priced at 50 rupees or less per kg for ITC, Britannia and Parle.
• Reduction of custom duty on food processing machinery and their parts from 7.5% to 5 %
• Reduction on excise duties on food mixes 16% to 8% to nil is positive for ITC.
• Development of rural infrastructure is on high which is essential for FMCG companies because it is a big market for FMCG. Better infrastructure will improve the supply chain.
• Exemption of free samples and displays from the purview of FBT will be beneficial for FMCG companies because they spend huge amount of money on advertising and brand building.

Negative impact of budget 2008-09 on FMCG sector
The impact of 2008-09 budgets can prove to be negative for FMCG sector since excise duty on cigars, cheroots and cigarillos has been increased from 30% to 60%. This will increase the price of the cigarettes which in turn will put pressure on the sales growth of the companies producing cigarettes and will be negative for ITC Godfrey Philips India.

Challenges Before FMCG Sector

At macro level Indian economy will be equanimous to remain resilient at 8.5% growth. This economic growth would impact large number of population, thus leading to more money in hands of the consumer. Changes in the demographic composition of the population and thus market will continue to impact the Indian FMCG industry.
One of the major challenges which FMCG has to face is rural marketing.  Rural India is vast with immense opportunities. 70% of Indian population resides in rural areas and these can bring in much needed volume and help FMCG companies to achieve higher growth. This should be a melody for FMCG companies who have reached saturation point in urban India.

The focus is on rural sector is not only because they are large in number but also that they are becoming richer day by day. This is shown by statistics given by National Council of Applied Economic Research (NCAER):   Lower income group is expected to shrink from over 60% 1996 to 20% by 2007 and higher income group is expected to rise by more than 100%.

Rural India sounds attractive but FMCG companies have to face difficulties in order capture this segment. One major difficulty which will arise would be that most FMCG players do not have critical size for going out for rural marketing.

One of other major problem which FMCG faces is distribution

 The following measures might result in reduction of distribution problems:

• Reducing supply chains cost by reducing intermediaries:

Organized retail chains have set up systems for inventory management and quick servicing, thereby offering, the opportunity for company supplier to reduce distribution cost by reducing intermediaries and supplying directly to warehouse retail chain.

• Increasing sales by driving channel width

The relative shares of grocers to FMCG sales have dropped from 50% in early 1990’s to 35% in late 1990’s.

FMCG market remains fragmented with unpackaged and unbranded products. This presents tremendous opportunities for makers of branded products who can convert consumer to branded products.
The boom has also been fueled by reduction in excise duties, dereservation of small scale sector and enormous efforts of the personal care companies to tap the potentials of the segment of middle class through product and packaging innovations.

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