Fast Moving Consumer Goods (FMCG)

INTRODUCTION

Fast Moving Consumer Goods (FMCG)

FMCG are products that have a quick shelf turnover, at relatively low cost and don't require a lot of thought, time and financial investment to purchase. The margin of profit on every individual FMCG product is less. However the huge number of goods sold is what makes the difference. Hence profit in FMCG goods always translates to number of goods sold. Fast Moving Consumer Goods is a classification that refers to a wide range of frequently purchased consumer products including: toiletries, soaps, cosmetics, teeth cleaning products, shaving products, detergents, and other non-durables such as glassware, bulbs, batteries, paper products and plastic goods, such as buckets.’

Fast Moving’ is in opposition to consumer durables such as kitchen appliances that are generally replaced less than once a year. The term Consumer Packaged Goods (CPG) is used interchangeably with Fast Moving Consumer Goods (FMCG).Three of the largest and best known examples of Fast Moving Consumer Goods companies are NESTLÉ, UNILEVER AND PROCTER & GAMBLE. Examples of FMCGs are soft drinks, tissue paper, and chocolate bars. Examples of FMCG brands are Coca-Cola, Kleenex, Pepsi and Believe.

The Indian FMCG sector is an important contributor to the country's GDP. It is the fourth largest sector in the economy and is responsible for 5% of the total factory employment in India. It has a strong MNC presence and is characterized by a well established distribution network, intense competition between the organized and unorganized segments and low operational cost. Availability of key raw materials, cheaper labour costs and presence across the entire value chain gives India a competitive advantage. India needs around US$ 28 billion of investment in the food-processing industry.

The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential..

At the macro level, Indian economy is poised to remained buoyant and grow at more than 7%. The economic growth would impact large proportions of the population thus leading to more money in the hands of the consumer.

.Unlike the perception that the FMCG sector is a producer of luxury items targetedat the elite, in reality, the sector meets the everyday needs of the masses. TheLower-middle income group accounts for over 60% of the sector's sales. RuralMarkets account for 56% of the total domestic FMCG demand. Many of the globalFMCG majors have been present in the country for many decades. But in the lastten years, many of the smaller rung Indian FMCG companies have gained in scale.As a result, the unorganized and regional players have witnessed erosion in marketshare.

HISTORY OF FMCG COMPANIES IN INDIA

In India, companies like ITC, HLL, Colgate, Cadbury and Nestle have been a dominant force in the FMCG sector well supported by relatively less competition and high entry barriers (import duty was high). These companies were, therefore, able to charge a premium for their products. In this context, the margins were also on the higher side. With the gradual opening up of the economy over the last decade, FMCG companies have been forced to fight for a market share. In the process, margins have been compromised, more so in the last six years (FMCG sector witnessed decline in demand).

India - a large consumer goods spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on personal care products. The large share of fast moving consumer goods (FMCG) in total individual spending along with the large population base is another factor that makes India one of the largest FMCG markets.

Consumer expenditure on food at International level

Even on an international scale, total consumer expenditure on foodIn India at US$ 120 billion is amongst the largest in the emergingMarkets, next only to China.

CURRENT SITUATION

The growth potential for FMCG companies looks promising over the long-term horizon, as the per-capita consumption of almost all products in the country is amongst the lowest in the world. As per the Consumer Survey by KSA-Technopak, of the total consumption expenditure, almost 40% and 8% was accounted by groceries and personal care products respectively. Rapid urbanization, increased literacy and rising per capita income are the key growth drivers for the sector.

Around 45% of the population in India is below 20 years of age and the proportion of the young population is expected to increase in the next five years. Aspiration levels in this age group have been fuelled by greater media exposure, unleashing a latent demand with more money and a new mindset. In this backdrop, industry estimates suggest that the industry could triple in value by 2015 (by some estimates, the industry could double in size by 2010).In our view, testing times for the FMCG sector are over and driving rural penetration will be the key going forward. Due to infrastructure constraints (this influences the cost effectiveness of the supply chain), companies were unable to grow faster. Although

companies like HLL and ITC have dedicated initiatives targeted at the rural market, these are still at a relatively nascent stage. The bottlenecks of the conventional distribution system are likely to be removed once organized retailing gains in scale. Currently, organized retailing accounts for just 3% of total retail sales and is likely to touch 10% over the next 3-5 years. In our view, organized retailing results in discounted prices, forced-buying by offering many choices and also opens up new avenues for growth for the FMCG sector. Given the aggressive expansion plans of players like Pantaloon, Trent, Shopper’s Stop and Shoprite, we are confident that the FMCG sector has a bright future.

COMPANY SALES RS CR

A&P SPEND RS CR

APR-SEP 2009

3 YEARS AGO

HINDUSTANUNILEVERDABUR INDIAMARICOGLAXOSMITHKLINECONSUMER COLGATE POLMOLIVEINDIA GODREJCONSUMEREMAMIARGO TECH FOODSJYOTHY LABS

8703159113899649551014400305250

113223417615614194753114

13.014.712.716.214.79.318.710.15.5

8.911.912.113.117.510.32.51.38.0

OVERVIEW OF INDIAN FMCG MARKET

India offers a large and growing market of 1 billion people of which 300 million are middle class consumers. India offers a vibrant market of youth and vigor with 54% of population below the age of 25 years. These young people work harder, earn more, spend more and demand more from the market, making India a dynamic and inspirational society. Domestic demand is expected to double over the ten-year period from 1998 to 2007. The number of households with "high income" is expected to increase by 60% in the next four years to 44 million households. India is rated as the fifth most attractive emerging retail market. It has been ranked second in a Global Retail Development Index of 30 developing countries drawn up by A T Kearney. A.T. Kearney has estimated India's total retail market at $202.6 billion, is expected to grow at a compounded 30 per cent over the next five years. The share of modern retail is likely to grow from its current 2 per cent to 15-20 percent over the next decade, analysts feel.

The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc

in India is low indicating the untapped market potential. Burgeoning Indian population, particularly the middle class and the rural segments, presents an opportunity to makers of branded products to convert consumers to branded products. India is one of the world’s largest producers for a number of FMCG products but its FMCG exports are languishing at around Rs 1,000 crore only.

Small-scale sector reservations limit ability to invest in technology and quality up gradation to achieve economies of scale. Moreover, lower volume of higher value added products reduce scope for export to developing countries. The FMCG sector has traditionally grown at a very fast rate and has generally out performed the rest of the industry. Over the last one year, however the rate of growth has slowed down and the sector has recorded sales growth of just five per cent in the last four quarters. Poor monsoon in some states, too is unlikely to help matters. Moreover, the general slowdown in the economy is also likely to have an adverse impact on disposable income and purchasing power as a whole. The growth of imports constitutes another problem area and while so far imports in this sector have been confined to the premium segment, FMCG companies estimate they have already cornered a four to 6% market share.The high burden of local taxes is another reason attributed for the slowdown in the industry At the same time, the long term outlook for revenue growth is positive. Give the large market and the requirement for continuous repurchase of these products, FMCG companies should continue to do well in the long run. Moreover, most of the companies are concentrating on cost reduction and supply chain management. This should yield positive results for them.

Indian FMCG Market Size(In US $ Billions)

(Source: IBEF FMCG Analysis)According to estimates based on China's current per capita consumption, the Indian FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominance of Indian markets by unbranded products, change in eating habits and the increased affordability of the growing Indian population presents an opportunity to makers of branded products, who can convert consumers to branded products.

FMCG Market ReviewFY 09 Result Highlights

ANALYSIS OF FMCG SECTOR

STRENGTHS:1. Low operational costs2. Presence of established distribution networks in both urban and rural areas3. Presence of well-known brands in FMCG sector

WEAKNESSES:1. Lower scope of investing in technology and achieving economies of scale, especially in small sectors2. Low exports levels3. "Me-too" products, which illegally mimic the labels of the established brands, narrow the scope of FMCG products in rural and semi-urban market.

OPPORTUNITIES:1. Untapped rural market2. Rising income levels i.e. increase in purchasing power of consumers3. Large domestic market - a population of over one billion4. Export potential 5. High consumer goods spending

THREATS:1. Removal of import restrictions resulting in replacing of domestic brands

2. Slowdown in rural demand.3. Tax and regulatory structure

STRUCTURAL ANALYSIS OF FMCG INDUSTRY

Typically, a consumer buys these goods at least once a month. The sector covers a wide gamut of products such as detergents, toilet soaps, toothpaste, shampoos, creams, powders, food products, confectioneries, beverages, and cigarettes.

Typical characteristics of FMCG products are: -1. The products often cater to 3 very distinct but usually wanted for aspects - necessity, comfort, luxury. They meet the demands of the entire cross section of population. Price and income elasticity of demand varies across products and consumers.2. Individual items are of small value (small SKU's) although all FMCG products put together account for a significant part of the consumer's budget.

3. The consumer spends little time on the purchase decision. He seldom ever looks at the technical specifications. Brand loyalties or recommendations of reliable retailer/ dealer drive purchase decisions.

4. Limited inventory of these products (many of which are perishable) are kept by consumer and prefers to purchase them frequently, as and when required.

5. Brand switching is often induced by heavy advertisement, recommendation of the retailer or word of mouth.

DESIGN AND MANUFACTURING

1. Low Capital Intensity - Most product categories in FMCG require relatively minor investment in plan and machinery and other fixed assets. Also, the business has low working capital intensity as bulk of sales from manufacturing take place on a cash basis.

2. Technology - Basic technology for manufacturing is easily available. Also, technology for most products has been fairly stable. Modifications and improvements rarely change the basic process.

3. Third-party Manufacturing - Manufacturing of products by third party vendors is quite common. Benefits associated with third party manufacturing include (1) flexibility in production and inventory planning; (2) flexibility in controlling labor costs; and (3) logistics - sometimes it’s essential to get certain products manufactured near the market.

MARKETING AND DISTRIBUTION

Marketing function is sacrosanct in case of FMCG companies. Major featuresof the marketing function include the following: -

1.High Initial Launch Cost - New products require a large front-ended investment in product development, market research, test marketing and launch. Creating awareness and develop franchise for a new brand requires enormous initial expenditure on launch advertisements, free samples and product promotions. Launch costs are as high as 50-100% of revenue in the first year. For established brands, advertisement expenditure varies from 5 - 12% depending on the categories.

2. Limited Mass Media Options - The challenge associated with the launch and/or brand-building initiatives is that few no mass media options. TV reaches 67% of urban consumers and 35% of rural consumers. Alternatives like wall paintings, theatres, video vehicles, special packaging and consumer promotions become an expensive but required activity associated with a successful FMCG.3. Huge Distribution Network - India is home to six million retail outlets,including 2 million in 5,160 towns and four million in 627,000 villages.Super markets virtually do not exist in India. This makes logisticsparticularly for new players extremely difficult.

FORCOSTING OF FMCG COMPANIES

Markets all over the world have been on a roll in 2003 and the Indian bourses are no exception having gained almost 60% in 2003. During this period, while there are sectors that have outperformed this benchmark index, there are also sectors that have under performed. FMCG registered gains of just 33% on the BSE FMCG Index last year. At the macro level, Indian economy is poised to remained buoyant and grow at more than 7%. The economic growth would impact large proportions of the population thus leading to more money in the hands of the consumer.

Changes in demographic composition of the population and thus the market would also continue to impact the FMCG industry. Recent survey conducted by a leading business weekly, approximately 47 per cent of India's 1 + billion people were under the age of 20, and teenagers among them numbered about 160 million. Together, they wielded INR 14000 Cr worth of discretionary income, and their families spent an additional INR 18500 Cr on them every year. By 2015, Indians under 20 are estimated to make up 55% of the population - and wield proportionately higher spending power. Means, companies that are able to influence and excite such consumers would be those that win in the market place.

The Indian FMCG market has been divided for a long time between the organized sector and the unorganized sector. While the latter has been crowded by a large number of local players, competing on margins, the former has varied between a two-player-scenario to a multi-player one.

Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a handful of global players, India's Rs.460 billion FMCG market remains highly fragmented with roughly half the market going to unbranded, unpackaged home made products. This presents a tremendous opportunity for makers of branded products who can convert consumers to branded products.

However, successfully launching and growing market share around a branded product in India presents tremendous challenges. Take distribution as an example. India is home to six million retail outlets and super markets virtually do not exist. This makes logistics particularly for new players extremely difficult. Other challenges of similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a structurally unattractive industry in which to participate. Even so, the opportunity keeps FMCG makers trying.

STRATEGY OF FMCG COMPANIES

COMPETITIVE STRATEGIES FOLLOWED BY FMCG COMPANIES IN INDIACompetitive Strategy consists of move of companies in order to attract customers.With stand competitive pressures and strengthen an organization’s market position.The main objective of Competitive Strategy is to generate a competitive advantage,increase the loyalty of customers and to beat competitors.

Five main competitive strategies are:· Overall low cost leadership strategy· Best cost provider’s strategy· Broad differentiation strategy· Focused low cost strategy· Focused differentiation strategyHere competitive strategy varies from sector to sector and company to company. Thus, it is not easy to predict a single or to find a single strategy for the whole sector. When we come on to FMCG Sector main strategies lay behind market strategies, cost, and quality strategies. Here in this report you are going to get information about such type of strategies of FMCG giants.

Critical operating rules in Indian FMCG sector

• Heavy launch costs on new products on launch advertisements, free samples and product promotions.

• Majority of the product classes require very low investment in fixed assets• Existence of contract manufacturing• Marketing assumes a significant place in the brand building process• Extensive distribution networks and logistics are key to achieving a high level of penetration in both the urban and rural markets• Factors like low entry barriers in terms of low capital investment, fiscal incentives from government and low brand awareness in rural areas have led to the mushrooming ofthe unorganised sector• Providing good price points is the key to success

Competition

1. Significant Presence of Unorganized Sector - Factors that enable small, unorganized players with local presence to flourish include the following:2. Basic technology for most products is fairly simple and easily available.3. The small-scale sector in India enjoys exemption/ lower rates of excise duty, sales tax etc. This makes them more price competitive vis-à-vis the organized sector.4. A highly scattered market and poor transport infrastructure limits the ability of MNCs and national players to reach out to remote rural areas and small towns.5. Low brand awareness enables local players to market their spurious look-alike brands.6. Lower overheads due to limited geography, family management, focused product lines and minimal expenditure on marketing.

COMPETITION MARKET SHARE

POWER BRANDS, THE NEW FMCG MANTRA

Three men, one voice. Indian fast moving consumer goods companies like HLL, Godrej Consumer Products Limited and Marico Industries are completely sold on the concept of "power brands".

But in their rush to put their best brands forward, are these big companies indanger of overlooking the potential offered by some of the also-ran brands?

It's been almost five years since these three FMCG giants opted to manage theirbrand portfolios on the basis of the power brand strategy. How have they fared?And what does the future hold?

TOP 10 FMCG COMPANIES IN INDIA

1. Hindustan Unilever Ltd.2. ITC (Indian Tobacco Company)3. Nestlé India4. GCMMF (AMUL)5. Dabur India6. Asian Paints (India)7. Cadbury India8. Britannia Industries9. Procter & Gamble Hygiene and Health Care10. Marico Industries

RELATED TO TWO COMPANIES HUL & ITC

HUL (Hindustan Unilever Ltd.) This Company is earlier known as Hindustan Lever Ltd. This is India’s largest FMCG sector company with all type of household products available with it. It has Home & Personal Care products, and also food and Water Purifier available with it. According to Brand Equity, HUL has largest no of brands in most trusted brands list. 16 of HUL’s brands featured in AC-Nielson Brand Equity list of 100 most trusted brands in 2008 in an annual survey. For the entire year ending March - 2009 net turnover of company is Rs. 20’239.33 Crore which is 47.99% higher than 31st December 2007’s Rs. 13675.43 Crore driven mainly by domestic FMCG’s with net profit stood at Rs. 2’496.45 Crore.

Products of HUL are: Annapurna; Ayush; Axe; Breeze; Bru; Brooke bond;Clinic; Dove; Fair & Lovely; Hamam; Liril; Lux; Pears; Ponds; Pepsodent; Pureit;Rexona; Rin; Sunlight; Surfexcel; Vaseline; Wheel.

ITC Limited

This Company was earlier known as Imperial Tobacco Company ofIndia Ltd. It is Currently headed by Yogesh Chander Deveshwar. Company mainly operates in the industry like Tobacco, Foods, Hotels, Stationary and Greeting Cards with the major products constitutes Cigarettes, packed foods, hotels, and apparels. For the entire year ending Mar-2009 the turnover of company is at Rs. 15388 Crore which is 10.3% higher than previous year’s Rs. 13947.53 Crore, driven mainly by robust 20% growth in non cigarette FMCG business with net profit stood at Rs. 3324 Crore.

ANALYSIS OF BOTH COMPANIESHUL & ITC are major companies in FMCG market in India. When we compare both companies on the basis of their strategies i.e. , their competitive strategies in the present market. When we look at the present segment breakup for both of the

companies then we came to know that their different products vary too much in the market.

HUL ITCHindustan Unilever (HUL) is the largest pure-play FMCG company in the country and has one of the widest portfolios of products sold via a strong distribution channel. It owns and markets some of the most popular brands in the country across various categories, including soaps, detergents, shampoos, tea and face creams.

ITC is not a pure-play FMCG company, since cigarettes is its primary business. It is diversifying into nontobacco. FMCG segments like foods, personal care, paper products, hotels and agri-business to reduce its exposure to cigarettes.

Performance After stagnating between 1999 and ’04, the company is back on the growth track. In the past three years, till 2008 HUL’s net sales have witnessed a CAGR of 11%, while net profit has posted a CAGR of 17%.

Performance After stagnating between 1999 and ’04, the company is back on the growth track. In the past three years, till 2008 HUL’s net sales have witnessed a CAGR of 11%, while net profit has posted a CAGR of 17%. Despite diversification, ITC’s reliance on cigarettes is still huge. The tobacco business contributes 40% to its revenues, and accounts for over 80% of its profit. This cash-generating business has enabled it to take ambitious, but expensive bets in new segments and deliver modest profit growth.

HUL Segment Breakup

ITC Segment Breakup

SOLUTION OF FMCG COMPANIES

WHAT SHOULD THE FMCG PLAYERS DO NOW?

They should not only price their products competitively, but also offer their rural prospects maximum value for money spent. Certainly, reaching out to 3.33 million retail outlets is an uphill task. The only way out for Indian FMCG players: put in place an

aggressive cost structure that would enable them to offer low-price and value-for-money products. But then, FMCG is a low-margin business with a high cost of raw materials. Consider the case of Marico: its material cost works out to a high of 59 per cent on sales. Therein lays the rural marketing paradox.However, customer-centric and market-savvy FMCG companies have always chased prospects when they perceive there is a latent demand. For instance, Hindustan Lever's Rin, Surf and Lux are available even in India's most obscure villages. Hindustan Lever had given shape to its rural strategy a few years ago when it perceived that its urban market was shrinking due to an industrial slowdown. It’s Operation Bharat that focused on personal care products made the most out of surging rural incomes. The result was there for all to see. The company has been able to clock in double-digit profits every three years and log in double digit revenues every four years. Britannia with its Tiger brand of biscuits and Colgate-Palmolive with its low-priced and conveniently-packaged products designed for the rural masses have been other pioneers in rural marketing.

DISTRIBUTIONOne of the age-old problems that FMCG has been facing not only in India but globally is that of distribution. Integrating operations with your distributors and channel partners is a Herculean task. Few ways to reduce pain involved in this link:

· Reducing supply chain costs by reducing intermediaries – Organized retail chains have set up systems for inventory management and quick servicing, thereby offering the opportunity for a company/supplier to reduce distribution cost by reducing intermediaries such as wholesalers/distributors and supplying directly to the warehouse of retail chain.

· Increasing sales by driving channel width - The relative share of grocers to FMCG sales has dropped from over 50% in the early 90's to 35% in the late 90's. On the other hand the contribution of chemist outlets and paan outlets has been increasing. This has been a result of both SKU's (sachets) and hardware (mini dispensers) being specifically designed to facilitate entry to these outlets and increase consumer interface.

BRAND MANAGERS TO BUSINESS MANAGERSTough market situations and a more aware and savvier demanding consumer have necessitated that yesterday's Brand Managers be transformed into Business Managers who understand consumers and can innovate and be flexible to move with the consumer. Gone are the days when brands could be made to gallop with a big budget media plan, a generous dose of below-the-line and above-the-line activities and constant promotions and schemes in the market. Consumers who have become demanding yet inscrutable in terms of attitudes, outlook, moods and behavior have rendered conventional Brand Management tools obsolete.

Salient featureThe FMCG sector is a key component of India’s GDP and is a significant direct and indirect employer. It is the fourth largest sector in the economy and is responsible for

five per cent of total factory employment in the country. The sector also creates employment for three million people in downstream activities, much of which isdisbursed in small towns and rural India. Unlike the perception that the FMCG sector is a producer of luxury items targeted at the elite, in reality the sector meets the every dayneeds of the masses, across the country. Low-priced products contribute the majority of the sales volume and lower income and lower middle income groups account for over 60 per cent of the sector’s sales. Moreover, rural markets account for 56 per cent of total domestic FMCG demand and FMCG outlets reach more villages than any other basic facility such as primary schools or bus facilities. The FMCG sector has several other salient features. It has strong links with agriculture and 71 per cent of sales come from agro-based products; it is a significant value creator with a market capitalisationsecond only to the IT sector and it is a key contributor to the exchequer. In 1998-99, it accounted for eight per cent of total corporate tax; six per cent of central excise revenue and seven per cent of state tax revenues.

ConclusionThe FMCG sector has traditionally grown at a very fast rate and has generally out performed the rest of the industry. Over the last one year, however the rate of growth has slowed down and the sector has recorded sales growth of just five per cent in the last four quarters. The outlook in the short term does not appear to be very positive forthe sector. Rural demand is on the decline and the Centre for Monitoring Indian Economy (CMIE) has already downscaled its projection for agriculture growth in the current fiscal. Poor monsoon in some states, too, is unlikely to help matters. Moreover, the general slowdown in the economy is also likely to have an adverse impact on disposable income and purchasing power as a whole. The growth of imports constitutes another problem area and while so far imports in this sector have been confined to the premium segment, FMCG companies estimate they have already cornered a four to six per cent market share. The high burden of local taxes is another reason attributed for the slowdown in the industry At the same time, the long term outlook for revenue growth is positive. Give the large market and the requirement for continuous repurchase of these products, FMCG companies should continue to do well in the long run. Moreover, most of the companies are concentrating on cost reduction and supply chain management. This should yield positive results for them.

REFERENCE

http://www.coolavenues.com/know/mktg/competitive-strategies-2.phphttp://www.rediff.com/money/2005/nov/15spec.htmwww.hll.comwww.itc.comwww.insightory.comwww.oppapers.comhttp://www.indianmba.com/Faculty_Column/FC448/fc448.html