FMCG Roadmap To 2020

Confederation of Indian Industry Since 1895
FMCG Roadmap to 2020

The Game Changers
Abhishek Malhotra Vikash Agarwalla Srishti Chaudhry
Prepared by
This Report has been prepared by Booz & Company Inc for the Confederation of Indian Industry (CII) Confederation of Indian Industry (CII), 2010 Disclaimer and Confidentialities All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means electronic, mechanical, photocopying, recording or otherwise, without the prior written permission from Confederation of Indian Industry (CII). While every care has been taken in data collection, analyses and compilation of this Report, CII doesnt accept any claim for compensation if any entry is wrong, abbreviated, cancelled, omitted or inserted incorrectly either as to the wording, space or position in the Report. Published by Confederation of Indian Industry, Northern Region Sector 31-A, Dakshin Marg, Chandigarh 160030 Tel: 0172-2602365/2605868, Fax: 0172-2606259 Email: ciinr@cii.in; Web: www.cii.in
CONTENTS
Message from Conference Chairman Executive Summary 1. Industry Context 1.1. 1.2. 1.3. 2.1. 2.2. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 3.9. 4.1. 4.2. 4.3. 7 4 6 Abbreviations and Acronyms
The FMCG Industry: Growth in the Last Decade Growth across FMCG Categories Growth across FMCG Players Industry Growth Drivers FMCG Roadmap to 2020 Accelerating Premiumization Evolving Categories Rapid Globalization Many-Indias 31 34 39 42 48 48 48 54 46 Growing Modern Trade Eco-consciousness Enabling Policies 16 22 28 10 12 13 14 7 7
2. Determinants of Industry Growth and Outlook for the Future
10
3. Megatrends Shaping the Indian FMCG Industry
Goldmine at the Bottom of the Pyramid
Game-changing Technologies
4. Implications for the FMCG Industry Industry Paradigms in 2020
Imperatives for the FMCG Industry Implications for Other Stakeholders 55 55
Endnotes
About the Authors
MESSAGE FROM CONFERENCE CHAIRMAN
The Indian FMCG industry is over INR 1300 billion in size. It touches the life of every Indian and therefore has perhaps the widest reach among all industries in India! The industry has tripled in size over the last 10 years, growing much faster than in past decades. This has been facilitated by the many changes in the Indian economic and industrial landscapereduced levels of taxation, easier import of materials and technology, reduced barriers to entry of foreign players, growing organizational maturity of Indian players, growth of media, and, of course, the growing afuence and appetite for consumption of the Indian consumer. The industrys potential to grow further and faster is awesome, given the low penetration of most categories and rising consumer incomes. Though many changes have taken place over the last 20 years, I believe the rate of change in the FMCG operating environment is set to accelerate. The waves of change will be propelled by government policy, channel customers, technological advances, leaders of social change such as NGOs, consumer behaviour and, of course, the players themselves. Change will therefore occur along many dimensions simultaneously, in a more compressed time scale at the intersection of these change vectors. This will produce signicant, if unpredictable, outcomes for the industry. Over the last 20 years, almost all FMCG companies have been riding the rising tide and almost all have prospered. That may, however, not hold true over the next 10 years. While the industry is set to grow at an even faster rate, in this round there could be as many losers as winners! Winners will discard archaic models which prioritize urban markets over rural and innovate more complex but vastly more insightful segmentation models. They will alter the dialogue with modern retailers and the emerging specialized trade channel customers in meaningful ways, to grow the market and earn protable market share. They will use technology to not just pare costs, but to create exible supply chains which can access more consumer segments and satisfy more consumer requirements. They will also use technology to both win more consumers and collaborate more intensely with consumers to create innovative products. Issues of sustainability will become far more central to their agendas. In this context, all stakeholders in the FMCG industry will nd this report by Booz & Company valuable. Booz has developed an excellent model to understand the forces shaping the FMCG industry and this model is supported by a strong analytical foundation. Several interesting conclusions ow from the application of this model which should inform many board room discussions as companies in India and elsewhere grapple with issues of the future. Industry associations and the CII FMCG committee will no doubt see value in this report, as they seek to inuence different stakeholders; and, of course, investors will vote with their money as they identify companies that reect a stronger understanding of these dynamics in their strategy and execution. Kannan Sitaram Chairman CII FMCG Forum 2010
EXECUTIVE SUMMARY
The Indian FMCG industry at INR 1300 billion (in FY2010) accounts for 2.2 per cent of the GDP of the country. Given the inherently essential nature of the products, the sector is more or less immune to recessionary pressures. The last decade has seen the sector grow by 11 per cent annually. Robust GDP growth, opening up of rural markets, increased income in rural areas, growing urbanization along with evolving consumer lifestyles and buying behaviours have all been drivers of this growth. Over the next decade, all the above drivers are expected to continue to impact the industry favourably. Based on discussions with industry experts as well as Booz & Company analysis, we believe that the FMCG industry will grow at a base rate of at least 12 per cent annually to become an INR 4000 billion industry by 2020. Additionally, if some of the factors play out favourably within an environment of enabling policy and easing of supply constraints, 17 per cent growth may be expected over the next decade, leading to an overall industry size of INR 6200 billion by 2020. FMCG consumption is becoming more and more broad-based, and has reached an inexion point where the growth can be expected to take off, following the traditional S-shaped curve witnessed across many markets. While on an average, the growth of the industry will be strong, it will not be uniform. Variations are likely across product categories, companies and locations. Based on our research and extensive interviews, we have identied nine mega trends across consumers, markets, and environments which will shape the industry by 2020.
1. Accelerating Premiumization: Continuous income growth coupled with an increased willingness to spend will push consumer up-trading and demand for higher priced, better quality (real or perceived) products. 2. Evolving Categories: Many consumers with rising economic status will shift from basic need to want based products. In addition, evolving lifestyle behaviour and emphasis on beauty, health, and wellness will see increased requirements for customized and more relevant products. 3. Goldmine at BOP: A signicant majority of the population in the country, especially in the rural markets, will become an important source of consumption by moving beyond the survival mode. This bottom-of-the-pyramid (BOP) segment will require tailored products at highly affordable prices with the potential of very large volume supplies. 4. Rapid Globalization: While many leading foreign multinational companies (MNCs) have operated in the country for years, given liberal policies, the next decade will witness increased competition from Tier 2 and 3 global players. In addition, larger Indian companies will continue to seek opportunities internationally and also gain access to more global brands, products, and operating practices. 5. Many Indias: Despite the complexities of our language, culture, and distances, the Indian market has largely been seen as a homogenous market. Increased scale and spending power will demand more fragmented and customized business models
(across products, branding and operating structures). 6. Growing Modern Trade: The share of modern trade will increase and may be expected to account for nearly 30 per cent of the total trade by 2020. This channel will compete with existing traditional trade (approximately 8 million stores which will continue to grow) and offer both a distribution channel through its cash & carry model as well as other avenues to interact with the consumer. 7. Eco-consciousness: Global climatic changes, dwindling natural resources, and growing ecological awareness of consumers are increasing emphasis on environmental concerns. The pressure on companies to go green is growing due to the involvement of various stakeholdersthe government (through policy), the consumers (through brand choice) and NGOs (through awareness and advocacy). 8. Game-changing Technologies: Increased relevant functionality coupled with lower costs will enable technology deployment to drive signicant benets and allow companies to deal with complex business environments. This will
be seen both in terms of efciencies in the back-end processes (for example, supply chain and distribution) as well as in the front-end (for example, consumer marketing). 9. Enabling Policies: Many government policies under consideration, if executed, can help create a more suitable operating environment. This will help boost both demand and supply. Demand will go up because of increase in income levels and spread of education and supply will be augmented by removal of process bottlenecks and boost in infrastructure investments. While some of the above trends can already be observed today, many are yet to break the existing paradigms. In addition, the conuence of many of these change driversconsumers, technology, government policy, channel partnerswill have a multiplier effect and magnify both the magnitude as well as the pace of change. As with any change that is disruptive in nature, there will be winners and losers. This transition from a stable and homogenous operating model to a dynamic, unpredictable and rapidly
changing operating model will have signicant implications for the industry and its stakeholders. To excel in this new model one will need to enhance current capabilities and build new ones to bridge gaps. In this new setup, FMCG companies will have six imperatives from a business strategy perspective: 1. Disaggregating the operating model 2. Winning the talent wars 3. Bringing sustainability into the strategic agenda 4. Re-inventing marketing for i-consumers 5. Re-engineering supply chains 6. Partnering with modern trade Stakeholders including government, retailers, NGOs, and investors will also need to play a key role in supporting the growth of the industry, while continuing to deliver on their core business and social mandates. In conclusion, the FMCG sector in India is poised for rapid growth in the next 10 years. Companies will need to evolve to better meet the rapidly changing consumer needs within an increasingly complex operating environment. The FMCG industry in 2020 will be larger, more responsible, and more tuned to its evolved customers.
ABBREVIATIONS AND ACRONYMS
FMCG GDP FY INR US$ NREGS APMA NFSA FDI MVNO TRAI OCB SSI NGO CSR MNC OTC SMS VAS MRP GST
Fast Moving Consumer Goods Gross Domestic Product Financial Year Indian Rupees US (American) Dollars National Rural Employment Guarantee Scheme Agriculture Products Marketing (Regulation) Act National Food Security Act Foreign Direct Investment Mobile Virtual Network Operators Telecom Regulatory Authority of India Overseas Corporate Body Small-scale Industry Non-governmental Organization Corporate Social Responsibility Multi-national Company Over the Counter Short Message Service Value-added Service Maximum Retail Price Goods and Service Tax
1 INDUSTRY CONTEXT
1.1. The FMCG Industry: Growth in the Last Decade The fast moving consumer goods (FMCG) industry1, which accounts for 2.2 per cent of Indias GDP, is expected to attain a size of INR 1300 billion by FY2010. Over the last few years the industry has witnessed a high rate of growth boosted by favourable macroeconomic conditions, increased rural incomes, a rising consumption-culture in India and a proliferation of consumer awareness campaigns.
The sector witnessed a robust yearon-year growth of approximately 11 per cent in the last decade, almost tripling from INR 470 billion in FY2001 to the current size. The last ve years have augured well for the industry with an annual growth rate of approximately 17 per cent since FY2005. Even in the meltdown years of FY2008 and FY2009, the FMCG industry witnessed sustained growth rates of 14 per cent and 11 per cent, respectively, demonstrating that unlike other sectors, this sector was relatively recession-proof (see Exhibit 1). 1.2. Growth across FMCG Categories The FMCG industry in India has grown rapidly and the growth rates across different product categories are good indicators of how the Indian consumer has evolved.
Within the category of food products, which accounts for nearly 45 per cent of the industry size, staple products like edible oils have grown at single digits given a high degree of penetration as well as established usage patterns. Fruit juices on the other hand have reported exponential growth, moving from near-zero levels in FY2000 to INR 9 billion at present. Similar trends are visible in the personal products category with skin-care creams outpacing the growth of more mundane product lines such as toothpaste. Increased incomes, changing social habits and growing awareness of healthier and packaged beverages have contributed to these patterns (see Exhibit 2, p. 8). 1.3. Growth across FMCG Players Three well-identied sets of players operate within a highly developed and intensely competitive landscape
of the Indian FMCG market (see Exhibit 3, p. 9): 1. Foreign players who are present through their subsidiaries such as Unilever, P&G, Nestle and PepsiCo. 2. Strong Indian players with established national presence such as Marico, Dabur and Godrej Consumer Products. 3. Regional or small domestic players, such as Ajanta, Anchor, CavinKare etc., who are present in a few regions of the country. Most of the foreign players such as such as HUL, P&G etc., have either established their presence or are actively looking towards
entering India through organic and/ or inorganic routes. Kraft Foods for example, has entered India by buying Cadbury; and Danone, the French dairy major is re-establishing its presence in the food processing market through its tie-up with Yakult Honsha, a Japanese probiotics major. There are also numerous Indian players who have established themselves in niche segments by developing differentiated products and positions and have thus become industry leaders. Dabur and Marico are entities which have established their brand of health supplements (Chyawanprash) and coconut hair oils (Parachute) through products intrinsically linked to the traditional
Indian psyche. These categories are therefore difcult to break into. Little wonder then that foreign MNCs have largely stayed away from these product segments. Apart from these, there are regional and small-scale FMCG players such as small tea producers and organic food producers, who mainly compete by offering low-priced products with similar looks or packaging compared to the bigger brands, to the right consumers typically based in rural areas or in small towns. These players with lower corporate overheads and clear focus on specic consumer requirements have a competitive edge over larger FMCG players.
Exhibit 2: Selected Category Growth

(FY2008-FY2010)
35% 24% 16% 8% Oils Biscuits 11% 26% 21%
Fruit Drinks Skin Care Toothpaste
Shampoo
Hair Oil
Source: IDFC Institutional Research, Euromonitor, Booz & Company analysis
Booz & Company analysed the sales and protability of approximately 100 listed FMCG companies across foreign MNCs and large and small Indian players. The high growth rate of the FMCG industry was reected in the growth rate of these players. Also, the
last decade saw a golden run for the Indian players who grew at a CAGR of 12 per cent in 2001-05 and 19 per cent in 2006-10. This compares handsomely with reported gures of 2 per cent and 16 per cent in the respective periods for the foreign MNCs.
While this has widened choices for consumers, markets are, on the downside, more fragmented. Players are offering multiple products within common categories resulting in brand erosion and decline in dominance.
Exhibit 3: Sales Growth FMCG Players
19% (CAGR) 17% 16%
12% 11% 9% 8%
2%
2001-2005
Player Average Foreign MNCs Large Indian Regional / Small Domestic
2006-2010
Source: CMIE, Booz & Company analysis of ~100 FMCG players
2 DETERMINANTS OF INDUSTRY GROWTH AND OUTLOOK FOR THE FUTURE
2.1 Industry Growth Drivers Having matured in a decade of tremendous economic growth, the Indian FMCG industry is now ready to sustain that growth and forge ahead. There are three key forces at work within and outside the industry which drive this development. 2.1.1. Developmental Cycle of the Industry Booz & Company analysis of consumption patterns across countries has revealed that most categories of consumer products tend to follow an S-curve of growth with the initial consumption driven by rich consumers and early adopters. At the trigger point though, the consumption becomes more wide-spread and then increases exponentially. Subsequently, the categories of consumer products mature as consumers move from a need-driven to a more want-driven consumption pattern as explained
by Rostows Stages on Economic Growth.2 The tipping point for exponential growth, however, varies across categories. At per capita GDP of US$ 7000, the basic consumption of staples as a proportion of total food consumption (measured by calories of intake), initially, tends to grow faster. For example, per capita consumption of wheat grows fast when GDP is US$ 2000-5000 per capita. However, the snacks category displays growth when GDP is in the range of US$ 4000-7000 per capita, though this rise occurs comparatively late. Socio-cultural norms and behaviours considerably impact both timing and growth patterns of various food categories. For example, Mexico reports high rates of snacking due to local food habits, while Latin America displays strong inclination for shampoos, which is driven not
Exhibit 4: Key Drivers of the FMCG Industry in India
GROWTH DRIVER
PAST GROWTH (2001-2010)
FUTURE GROWTH (2011-2020)
CONTRIBUTION TO FMCG TRANSFORMATION
GDP Growth
~7%
8-9%
Population Growth
1.5%
1.2%
~14% annual growth Per Capita Income Growth (disposable income) Womens participation 34% in 2010
>15% annual growth (disposable income) Womens participation closer to levels in developed nations (70%) 2.5% urbanization Similar age profile More up-trading in urban and rural areas GST FDI Right to Education Food Security
2.3% urbanization Lifestyle Changes ~60% people in 15-59 agegroup in 2010
NREGA Government Policy Farmer loan-waiver
10
only by the availability of water but also social norms related to personal hygiene. While the Indian GDP per capita is low, many Indian consumer segments which constitute rather large absolute numbers are either close to or have already reached the tipping point of rapid growth. This is true for many categories of consumer durables, beauty and wellness goods, such as, skin-care products and even edibles such as packaged beverages, all of which have reported signicantly faster growth rates. 2.1.2 Macroeconomic Factors Favourable macroeconomic drivers such as the growth in GDP, coupled with rising incomes, increased participation of women in the workforce and the tapping of the rural markets, are seen to be enabling growth in the FMCG sector (see
Exhibit 4, p. 10). These are elaborated upon below: The Indian economy is expected to overtake UK in the coming decade, with GDP growth ranging between 8-10 per cent.3 India is expected to reach Chinas current population gure of 1.4 billion by 2020. Per capita incomes supported by various government schemes and policies are expected to rise in both rural and urban areas. Participation of women in the Indian workforce is also likely to rise. Estimates suggest that if it increases to approximately 70 per cent (as in the developed nations), it will further boost GDP growth by 2-3 per cent. Favourable government policies such as the introduction of GST
can be expected to substantially decrease supply chain costs. Increased FDI in multi-brand retail may open up a large channel for sales. Other policy measures such as lower income taxes, the Food Security Act, Right to Education, infrastructure schemes etc have also acted as enablers of higher consumption. 2.1.3 Evolving Consumer Prole Lifestyle changes, a comparatively young population and greater willingness to spend more on better quality products are expected to boost the consumption-driven economy. Rural markets, given the current low penetration and high potential for up-trading are expected to bring about super-normal growth for FMCG companies. All these factors will combine to catapult consumer demand for FMCGs to newer heights (see Exhibit 5).
Exhibit 5: FMCG Growth Ladder
Demand Drivers
NEW CONSUMERS
INCREASING CONSUMPTION
UP-TRADING
UNFORESEEN FUTURE DRIVERS
Population growth Increasing penetration (access to rural areas, more coverage)
Increasing consumption in every occasion Increasing occasions of consumption GDP increased , incomes, younger population driving the above
Using premium, sophisticated products Increasing income, womens participation in workforce, lifestyle changes powering above
Supply Drivers
Modern Trade + Technology Investments + Regulations
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Young population (below age of 30 years) comprise 59 per cent population currently, and the composition is likely to remain similar over the next decade. This augurs well for the industry as the young have greater willingness to spend more. 2.2 FMCG Roadmap to 2020 Booz & Company analysis and discussions with industry experts indicate that the FMCG industry may grow at a base rate of at least 12 per cent annually to become INR 4000 billion industry in 2020. Additionally, if some of the positive factors play out favourably, it could even record a 17 per cent growth over the next decade, leading to an overall industry size of INR 6200 billion by 2020. These growth rates, however, depend on varying economic scenarios (see Exhibit 6).
Base Case models an As-Is scenario where the key assumptions are that GDP growth will continue at the same pace (of about 7 per cent) in the next decade and there will be no major change in regulations. Optimistic Case models a Transformation scenario where key assumptions are that GDP growth will touch 9 per cent in the next decade, and favourable changes in regulations (such as FDI in multi-brand retailing or rolling-out of the GST) will unlock industry potential. While the overall growth rates may be anticipated to lie in the 12-17 per cent range, many product categories are likely to grow much faster as consumer incomes increase, behaviours evolve and requirements change. In some areas one would
expect Indian FMCGs to follow well-established growth-evolution paths. However, in many product categories growth may be accelerated by the explosive economic rise, young consumer base and the inuence of the ubiquitous media. Some of that impact is already evident in a category like liquid hand-wash which has shown very strong growth driven by increased consumer awareness around personal hygiene specically for children. Given the nascent stage of development across many categories even supply-led actions can help trigger rapid growth. For example, many packaged food categories (such as soups, breakfast cereals, and fruit juices) have seen rapid growth rates driven by increased presence of modern trade.
Exhibit 6: Growth Scenarios of FMCG Sector

6250 (IN INR BILLION) Optimistic Case
17%
Base Case 2850 12%
17% 12% 1300 2300 4000
FY10E
FY15P
FY20P
Source: News articles, Booz & Company analysis
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3 MEGATRENDS SHAPING THE INDIAN FMCG INDUSTRY
CIIBooz research on industry evolutions in other markets and discussions with industry experts and practitioners helped identify nine key forces that will change the face of the industry over the next ten years. These trends may be categorized into three broad groups, based on their origins or sources (see Exhibit 7). However, their impact will be freely felt across multiple stages of the industry value chain. Consumer-related Trends: Changing demographic proles and evolving behaviour signicantly impact the way consumers consume and interact with products and services. Numerous and diverse consumers in India throw up an equally mind boggling diversity of consumption trends and patterns. At the same time, three prominent trends merit some discussion. The rst one is increasing premiumization which will see consumers trading up the price ladder in search of additional functionality or brand promise. Second, at the middle
of the pyramid, the evolution of consumption behaviour will be seen to lead to signicant changes within and across product categories. And nally, many companies will nd increasing value at the Bottom of the Pyramid (BOP) by serving products customized to specically meet the requirements of this large market. It may be said that there will be signicant scaling up at each step of the consumer incomepyramid to be able to justify independent commercialization of the business potential. Market-related Trends: These pertain to evolving geographical markets or channels for the FMCG players. The key trends within this segment will be the viability of sub-markets in India, growing organized retail and the increasing globalization of FMCG players. These players need to be conscious of such trends and adapt their products as well as go-to-market strategies as per their target markets.
Exhibit 7: Key Trends Shaping the FMCG Market in India
1 2 3
Accelerating Premiumization Evolving Categories
4 5
Rapid Globalization Many Indias Growing Modern Trade
ers
Goldmine at BOP
Ma
um
rke
ns
ts
Co
Environment
7 8 9
Source: Booz & Company analysis
Eco-consciousness Game-changing Technologies Enabling Policies
13
Environment-related Trends: These are inuenced by sociopolitical, legal, environmental and technological reprioritizing that is inevitable in a dynamic environment. Changing government policies, growing importance of sustainability, evolving media platforms and technology will compel FMCG players to adopt business strategies which keep the interests of communities and the environment in mind for inclusive development. 3.1. Accelerating Premiumization 3.1.1. Trend Description The motivation for buying premium products varies with consumer income. The rich are willing to buy premium products for their emotional value and exclusive feel, and their behaviour is very close to consumers in developed economies. They are well-informed about various
product options, and want to buy products which suit their style. The upper middle class wants to emulate the rich and trade up towards higherpriced products which offer greater functional benets and experience compared to products for mass consumption. Such products are often referred to as masstige products. The rising income of Indian consumers has accelerated this trend towards premiumization or consumer up-trading. The improved purchasing power of Indian consumers is supported by greater workforce participation among women and an increasingly younger earning population with higher consumer willingness to spend on lifestyle products. These factors will gradually combine to give considerable push to premiumization in the future, making it more
pronounced as compared to the last decade. The premiumization trend can be observed prominently in the top two income groups mentioned already, the rich with an annual income exceeding INR 1 million, and the upper middle class with an annual income ranging between INR 500 thousand and INR 1 million (see Exhibit 8). While these two income groups account for only three per cent of the population currently, it is expected that by 2020 their numbers will double to constitute seven per cent of the total population. By 2020 these groups will constitute large enough numbers to merit a dedicated business strategy that FMCG companies will do well to adopt and follow. As per estimates, the Rich will grow to approximately 30 million people in 2020, which
Exhibit 8: Household Distribution by Income and Profiles of Affluent Consumers in India
HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME
AFFLUENT CONSUMERS IN INDIA > INR 1 million (Rich) Rich: Spend high proportion on personal care, entertainment, etc.; want luxury and exclusivity
1% 2% 11%
2% 5%
INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles)
29%
Upper Middles: Have similar needs as the rich and purchase inexpensive brands of known companies
86% 64% < INR 0.2 million (Bottom of the Pyramid)
2010
2020
Source: McKinsey Global Institute, NCAER, Booz & Company analysis
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is more than the current total population of Sweden, Norway and Finland put together! Similarly, the Upper Middles will be a population of about 70 million in 2020, which is more than the current population of the UK. The Indian population is also quite young compared to those in developed economies. People in the age group of 15-44 comprise approximately 60 per cent of the population (see Exhibit 9, p. 16). There are multiple ways in which the burgeoning younger population is supporting premiumization. First, the prole of the young population reveals more actively employed people. This means, increased incomes available in households to spend on expendables. Second, young people tend to spend more compared to their parents and grandparents, and are easily attracted towards high-end products. Third, they are more exposed to the media and its inuences, specically new platforms such as the internet, mobile phones etc. Their awareness levels are higher, and they are better informed about developments around them.
Continued favourable age distribution is a driver for premiumization in the future as well. There are several examples of consumers up-trading to more premium products, as well as FMCG companies launching various products to capture the premium market: Dove, the premium personal and hair care brand from HUL, increased its market share from 0.1 per cent in 2005 to approximately 5 per cent in 2010 in the hair care products category. LOreal, with premium brands in cosmetics, hair care and skin care, has been growing rapidly in India with 7.5 per cent market share in cosmetics climbing up to the third position in this category. Similarly for hair colour, LOreal has occupied 20 per cent share of the INR 12 billion hair colour market with premium brands such as LOreal Excellence Crme and Garnier (a masstige brand).4 As a result, LOreals overall sales have doubled in the last ve years, and the growth trend is expected to continue.
P&Gs Olay (premium anti-ageing skin-care brand) captured 20 per cent market share within one year of launch in a category which grew ve times between 2007 and 2008. We expect that in the future, FMCG players will need to increase their efforts to cater to the ever-growing needs of consumers demanding premium products. 3.1.2. Possible Strategies for FMCG Players Going forward, those FMCG players who decide to tap into the premiumization trend will nd the need to align their business strategy to the pulse of the relevant consumer classes. Product Strategy: Premium products are intended to convey prestige or super-premium position that has aspirational value. People increasingly want products which are different, safe, and ethical with ingredients and/or features that have special and measurable benets. Indian FMCG players are likely to gain from investment in technology to develop and manufacture
Many consumers are likely to indulge in choice-driven consumption, which will increase demand for premium and super premium products in urban India. The middle and upper middle classes will be the chief contributors to this Mint, Dec 2009
15
such products in order to ride the crest. Marketing: For advertising prestige products, one may use special catalogues or niche print media, while for affordable premium products, the mass media may be harnessed for marketing campaigns. Depending on the positioning, the campaign may either emphasize and demonstrate effectiveness and benets of the product, or create an
emotional bond with the consumers by highlighting relevant messages, say, by establishing exclusivity for a top-end brand. Sales and Distribution: For selling premium products a high-touch or experiential and differentiated sales process may nd better alignment with the product strategy and overall business objective. For example, product demonstrations by salespersons or a trial run to educate
consumers about high efciency and other benets of the products may be devised. The quality of human capital deployed for sales and distribution will need to be enhanced signicantly through specialized training programmes if such a sales process is to be enabled. 3.2. Evolving Categories 3.2.1. Trend Description There are three ways in which a category can evolve.
Exhibit 9: Estimated Age Distribution of Indian Population, 2010
7%
14%
31%
0-14 Yrs 15-29 Yrs 30-44 Yrs 45-59 Yrs
20%
>60 Yrs
28%
Source: United Nations; Booz & Company analysis
16
First, as consumers needs change, they start purchasing more evolved and sophisticated products within a category, hence, the product offering must also transform to keep pace with demand trends. For instance, consumers have moved from toothpowders to toothpastes and are now also demanding mouth-wash within the same product category. Second, consumers start demanding customized products, specically tailored to their individual tastes and needs. Nowhere is this more apparent that in the differentiated demand for toothpaste depending on individual oral care needs. Third, driven by growing concerns about beauty, health, and wellness
supported by hygienic and healthier lifestyles, consumers shift towards personal grooming products which purportedly further these goals. Such, category evolution is primarily observed among the upper middle and lower middle income classes. While these consumer groups in India account for approximately 150 million people currently, their size is expected to increase to about 500 million people in 2020, which is approximately 1.5 times the current population of the US (see Exhibit 10, p. 18). Shift towards Evolved Products In the oral care category, consumer
preferences have shifted over time. While neem datun for brushing teeth was a common tradition earlier, it was replaced by the tooth powder in 1970s and 80s. The toothpaste emerged in late 1980s and 90s. Toothpaste penetration has increased from 50 per cent in 2005 to 55 per cent in 2010. Lately, in the oral hygiene category, supplementary products like mouthwash and sugar-free chewing gum have also seen increased acceptance amongst consumers.. The current penetration of mouthwash is 6 per cent and is growing at a rate of 35 per cent. Toothpowder has seen a decrease in penetration from 35 per cent to 30 per cent in the last 5 years. This trend is likely to pick up in the coming decade with a maturing economy
Lately, in the oral hygiene category, supplementary products like mouthwash and sugar-free chewing gum have also seen increased acceptance amongst consumers.
17
and increased sophistication in emerging consumer choices. An analysis of consumption patterns across economies shows that consumers tastes change as an economy matures. For instance, as per capita GDP rises, in the initial years, wheat consumption per capita rises as well. Larger number of consumers emerge from relative poverty to choose wheat over coarse grains. Then, as consumers start moving towards convenience products (such
as pre-mixes and processed foods) per capita wheat consumption starts to fall. Finally, it levels-off as consumers start demanding more product variety suited to their preferences. India is expected to follow a similar pattern of consumption across staple food products (see Exhibit 11, p. 20). Increased Product Variety Consumers are increasingly demanding customized products which are suited to their individual needs. Micro-segmentation for
product development and masscustomization for identifying different product variants is already underway. For instance, a decade ago, only a limited variety of products such as shampoos was available within a particular brand. Now most large players have launched many variants in accordance with hair types (oily / dry / normal), the seasons in which these can be used (winters / summers) as well as consumer categories, targeted separately at men, women, and children. P&Gs Head and
Exhibit 10: Evolving Needs of Middle Class Consumers in India
MIDDLE CLASS CONSUMERS IN INDIA > INR 1 million (Rich) Evolving Needs: Increasingly want sophisticated products in categories; desire products which improve their appearance and are good for their health; want products meeting their specific needs
1% 2% 11%
2% 5%
INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles)
29%
2010
2020
18
Shoulders brand which started with two variants in 1997 now boasts 11 variants to choose from. Mass-customization in India will intensify in the future with FMCG players proling the potential buyer by age, region, personal attributes, skin type, ethnic background, and professional choices. Microsegmentation will amplify the need for highly customized market research so as to capture the specic needs of the consumer segment targeted, before the actual product design phase gets underway. Increasing Beauty, Health and Wellness Concerns The beauty products market is expected to grow by 15-20 per cent in
the future, which is the direct result of the changing socio-economic status of the Indian consumers, especially the women. Better paying jobs and exposure to fashion and beauty trends prevailing in the developed world through the television and other media have resulted in changing tastes and choices. Middle class women are now more conscious of their appearance and are willing to spend more on enhancing it. Products such as colour cosmetics (growing by 46 per cent), sun care products (growing at 13 per cent) have latched on to this trends rapidly.5 Indian men are also becoming more conscious of their appearance, and several companies have been launching beauty and grooming products specically targeted at men. HUL has launched
Vaseline for Men, Emami came out with Fair and Handsome, and LOreal has launched Garnier Men Power Light products. As per estimates, the demand for in-salon skin care treatments by men is increasing by 40 per cent annually.6 Along with beauty products, there is an increased awareness about good health practices among consumers today. Sedentary lifestyles and unhealthy habits have led to the rise of lifestyle-related diseases such as diabetes and heart problems. Increased awareness of healthrelated issues has led to the demand for healthier products with lower calories, less sugar, more nutritional content, and with a greater
In the skin category, there have been over 1200 brands and variants launched in the last ve years alone. Even in a more developed category like soaps there have been over 800 brands and variants launched in the last ve years. Gopal Vittal, ED, Home and Personal Care, Hindustan Unilever Limited
19
proportion of natural ingredients. This trend has impacted the food and beverages category to a large extent, along with some other categories such as personal care, and fabric care. The market size of health drinks and health foods is about INR 50 billion currently and is expected to grow at approximately 10 per cent annually in future (see Exhibit 12, p. 21).
We have already witnessed heightened activity around health product launches by FMCG players, and this is only expected to increase in the future. Sugar Free Gold has been targeting health-conscious and diabetic people, and claims that it results in reducing intake by approximately 500 calories per day.
Marico launched Saffola Gold with LoSorb technology, which results in less oil absorption while frying. Nestle recently launched Maggi Dal Atta noodles, expected to provide dietary bres and protein, thus lending to a healthy meal. Recently multi-grain Maggi has also been launched.
Exhibit 11: Wheat Consumption Patterns
High
Wheat Consumption per Capita
Pre-mixes Bulk-flour Branded Flour/ Bakeries Segmented Food Processed Food Fast Food India China Brazil Specialized Bakeries
Drivers
COST
QUALITY
CONVENIENCE
CUSTOMIZATION
Source: United Nations; Booz & Company analysis
20
3.2.2. Possible Strategies for FMCG Players Innovations towards more evolved and sophisticated product forms, healthier variants of existing products, and enhanced product
portfolios to introduce a much larger variety suited to different consumer groups may provide critical tools for grappling with the dynamic Indian consumer landscape.
Evolved product forms of developed markets adapted to Indian requirements along with new product development leveraging the health platform will demand focused R&D and market research efforts.
Exhibit 12: Market Size and Growth in the Health and Wellness Space
GROWTH RATE (%) 2009 - 2012 24 22 20 18 16 14 12 10 8 6 4 2 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 APPROXIMATE MARKET SIZE (IN INR BILLION), 2009
Source: Businessworld publication, Marketing Whitebook 2010
Ayurvedic Medicines & Products
Alternative Medicines
FMCG Products Health & Food Drinks Skin & Health Care Dietary Supplements
21
During market research, greater consumer segmentation may be required to identify consumer needs and market potential. Manufacturing processes will need to be adapted to serve mass customization objectives. The supply chain, marketing and sales and distribution process may have to be redesigned to best reach the target
consumer segment. For example, using gymnasiums for selling health drinks or stocking of a product for a specic ethnic group near their residential area may be strategic targeting moves. Complex business models have to support ever widening product portfolios, variants, and products types straddling categories.
3.3. Goldmine at the Bottom of the Pyramid 3.3.1. Trend Description We have dened the bottom-ofthe-pyramid or BOP consumers as those who earn less than INR 200 thousand per annum per household. This group currently constitutes about 900-950 million people in India (see Exhibit 13). Unlike the middle class segment, which is rather urban,
Exhibit 13: Profile of BOP Consumers in India.
1% 2% 11%
2% 5%
> INR 1 million (Rich) INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles)
29%
BOP CONSUMERS IN INDIA Spend mostly on essentials, no / very limited demand for expensive lifestyle products
2010
2020
22
already well-served and competitive, the BOP markets are largely rural, poorly-served and uncompetitive. The second characteristic of BOP markets is that a lot of their basic needs are yet unmet: nancial services, mobiles phones and communication, housing, water, electricity and basic healthcare are lacking. Rural BOP population is estimated to be about 78 per cent of the total BOP population in the country (see Exhibit 14). The growth trends, issues and challenges in rural markets are somewhat different from those in urban areas. Income is largely
agricultural, which is dependent on monsoons. Supply chain is constrained by poor infrastructural development. However, government initiatives such as the National Rural Employment Guarantee Act (NREGA), increasing minimum support prices of crops, Sampoorna Grameen Rozgar Yojna, Pradhan Mantri Gram Sadak Yojana and Swarnjayanti Gram Swarozgar Yojana (with a total allocation of INR 535 billion in FY2010) are changing the rural landscape of India. Between FY2007 and FY2010 disbursement under NREGA has
increased from INR 125 billion to INR 390 billion. Minimum support price (MSP) of key crops such as paddy and wheat rose at a CAGR only 2 per cent and 3 per cent in the period FY2003-FY2007 but between FY2007 and FY2010, these prices have risen at attractive CAGRs of 18 per cent and 20 per cent respectively. These initiatives along with government-sponsorship of selfhelp groups have resulted in higher disposable incomes, greater womens empowerment and improvement of social indicators in the rural economy (see Exhibit 15, p. 24).
Exhibit 14: Rural and Urban BOP Population Distribution
Urban
22%
78% Rural
Source: IFC and World Resources Institute
23
It is heartening to note that by 2025, percentage rural population in the INR 200 thousand to INR 500 thousand category is projected to increase to 22 per cent from the present level of 3 per cent. Rural Growth Outpacing Urban Markets As a result of rising incomes, the FMCG market growth in rural areas at 18 per cent per annum has
recently exceeded that of the urban markets at 12 per cent. Products such as fruit juices and sanitary pads which had no demand in the rural markets earlier have suddenly started establishing presence. While the rural market comprises only 34 per cent of the total FMCG market currently, given the current growth rates, its contribution is expected to increase to 45-50 per cent by 2020 (see Exhibit 16, p. 25).
While most FMCG players have succeeded in establishing sufcient access to their products in rural areas, the next wave of growth is expected to come from increasing category penetration, development of customized products for these markets and up-trading rural consumers towards higher-priced and better products.
Exhibit 15: Promising Annual Income Levels and Social Indicators in Rural India
RURAL HOUSEHOLD INCOME DISTRIBUTION
145 3% 1% 0%
161 7% 1% 1%
167 2% 2% 22% 48% 100%

> INR 1 million INR 0.5-1.0 million INR 0.2-0.5 million
59% 46% 36% 22% 27%
59%
35% 50% 61%
INR 90-200 thousand
1981 2007
41% 2015
26% 2025
< INR 90 thousand
2005
Number of Pucca Houses
Below Poverty Line
Rural Literacy
Source: CII Rural Report, Consumer Lifestyles-India, Euromoniter, Indian Institute of Foreign Trade
24
While category penetration has increased in rural areas in the last decade, there is further scope to raise the levels to match urban penetration in the future (see Exhibit 17, p. 26). Blurring Urban-Rural Divide Rural women are now more brand-conscious and are shifting
towards brands used by their urban counterparts. They want quality products in their homes. The demand for branded healthcare products, branded processed food and beverages and toiletries is expected to grow in the future. Many local brands have been nding it difcult to grow in rural areas because of this
shift, thereby providing increased opportunities to the organized FMCG players to target this market with their products. This trend may eventually erase differentiation between the urban and rural brands, with the rural consumers increasingly demanding the same
Exhibit 16: Retail Growth in Rural and Urban India
20% 15% 10% 5% 0% 2003 -5% -10%

Source: Edelweiss, IDFC Securities, Booz & Company analysis
Rural
Urban
2004
2005
2006
2007
2008
2009
25
products as urban consumers in the next decade. Cheaper brands will however co-exist for products with wide price differentials between local brands and well-established brands. For products with narrower price variations, some amount of up-trading can be expected. However, the affordability of branded products will remain a challenge for BOP consumers. For higher-end brands, consumers in this
segment will want price points which are affordable and within their budget and hence demand smaller SKUs. 3.3.2. Possible Strategies for FMCG Players FMCG players with an eye on rural volumes could gear their innovation, manufacturing and rural supply chain processes towards small-volume units of products which the rural consumer can afford. Shampoos in sachets are a
good example of the success of such innovation. Given the large number of BOP consumers, the top line will need to be volume-based rather than valuebased. Hence, a different business model will need to be devised by the FMCG companies. Some dening features of such a business model are outlined below. This is, however, not an exhaustive list.
The corporate sector has realized that the next growth in its business will come from the rural sector. Rural is a much discussed topic in boardrooms Pradeep Kashyap, Founder and CEO, MART
Exhibit 17: Rural and Urban Penetrations - A Comparison
RURAL PENETRATION (%) CATEGORY 2001 2009 Headroom for growth
URBAN PENETRATION, 2009 (%)
Toothpaste Skin Cream Dish Wash Shampoo
32 20 12 16
45 33 16 46
75% 32% 60% 62%
Source: IDFC Securities, Edelweiss, A.C. Nielsen, Booz & Company analysis
26
HUL Brand-Building Initiative Khushiyon Ki Doli s HUL has initiated a rural campaign called Khushiyon Ki Doli. The objective of the campaign is to create awareness and engage with the masses through technology. Vehicles equipped with LCD TVs, DVD players, small generators etc roam rural habitations, mainly targeting housewives. A range of HULs product commercials are played ranging from Surf Excel to Huggies Diapers. HUL organizes games at the end of the campaign distributing sachets of various products as prizes. HUL is also engaging with local retailers in rural areas on purchase of merchandize or new sale of stocks.
Innovative products customized to local tastes available at affordable price points. Effective and attractive product packaging that enables convenient use and storage. Effective mix of multimedia marketing strategies to create a buzz; unconventional partnering with NGOs and local governments to inuence the inuencers, educating consumers around attributes and functionality of products. Ensuring access to typically rural or remote consumers through new and low-cost ways of distribution given the inadequate supply chain / logistics infrastructure in these areas. An entrepreneur driven model would be an appropriate example.
Increasingly, the rural consumer will demand the same product as the urban consumer and there will be convergence. Sunil Duggal, CEO, Dabur India
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3.4. Rapid Globalization 3.4.1. Trend Description The Indian FMCG industry has a very competitive landscape, with three sets of players: the global players or foreign MNCs, the large Indian players, and regional or small domestic players. Increasing globalization has important ramications for foreign MNCs as well as large Indian companies with pan-India presence and
sometimes, small international footprints as well. Many foreign FMCG multinationals have established themselves on a rm footing in India. Examples include Unilever which has been present in India since the 1930s, P&G, which established its presence through its Vicks brand in the 1950s, and Nestle, which commenced operations in the late 1950s.
In the recent past, India as one of the fastest growing economies in the world has attracted foreign MNCs who see it as a key market. With a spurt in reverse innovation foreign MNCs are leveraging India as an innovation hub; consumer research happens rst in India, and then, products are taken to other markets. Several foreign FMCG majors have headed for India with the purpose
With a spurt in reverse innovation foreign MNCs are leveraging India as an innovation hub; consumer research happens rst in India, and then, products are taken to other markets.
28
Popularly Positioned Products Nestle plans to build a dedicated R&D centre in India, which is expected to commence operations by mid 2012. The centre will focus on developing Popularly Positioned Products, which can meet specific needs of consumers belonging to lower income groups, and provide high-quality and nutritional foods at affordable prices. These products are also expected to be sold in other countries. Second, Nestle plans to broaden its product portfolio in India, and has been evaluating the option of entering the breakfast cereals market, a nascent but fast-growing category by leveraging its strong cereal brands such as Nesquik, Cheerios etc.
of acquiring experienced talent, and deploying them in similar markets elsewhere. Companies are seeking senior management experience in handling a diverse and complex market such as India, to crack other markets by sharing ideas which have worked before. Unilever for example, has deployed senior resources from India to East Europe, Africa, and South-east Asia, where it expects to see the next wave of growth.
Companies are seeking senior management experience in handling a diverse and complex market such as India, to crack other markets by sharing ideas which have worked before.
29
There are numerous instances of foreign FMCG attention to India: Kraft Foods acquired Cadburys in 2009 to establish a foothold in developing countries such as India. Ferrero Rocher is planning to expand presence in India in the confectionary segment. Many foreign MNCs are contending to acquire Paras Pharmaceuticals, a domestic player with strong brands in OTC and personal care categories. French cosmetics major LOreal is planning to enter the deodorant segment which is growing at 30 per cent annually. GSK Consumer has recently expanded into the noodles and biscuits market in India through its agship brand Horlicks. We can expect the foreign FMCG MNCs already operating in India to
focus on the Indian business even more strongly and develop their Indian subsidiaries as a signicant contributor to global business by increasing penetration of existing products, while introducing greater variety, broadening category portfolios and developing new brands and innovations. The multinationals not present in India can be expected to look for entry opportunities in terms of organic or inorganic expansion in the future. Apart from foreign MNCs in India, there are numerous large Indian players which have started establishing global footprints to diversify their business risks and tap the growth potential in other countries. Initially, Indian FMCG players expanded outside India to either target the Indian diaspora in specic countries or to hedge against increasing competition within India. Traditionally, the same product portfolio was taken to other countries. However, increasingly FMCG companies have been acquiring international FMCG companies with
strong brands to widen their product portfolio, thereby sharing brands between India and the global markets of the acquired company. In the future, many Indian domestic players are expected to evolve into mini-MNCs and therefore will need to develop customized products to target the local populations in international markets (see Exhibit 18). Examples of Hedging against Domestic Competition Godrej Consumer Products Ltd. took its hair colours and Fairglow soap to the UK targeting the Indian population residing there. Dabur International exports products to over 60 countries, targeting the Indian diaspora in those countries. Examples of Brand Sharing Godrej acquired Keyline Brands (a UK-based FMCG player) in 2006, which enabled it to enter the skin care segment using Keylines brands. It introduced the latters
Exhibit 18: International Growth of Indian FMCG Players

STAGE 1 Hedging against Domestic Competition STAGE 2 Brand Sharing STAGE 3 Targeting Local Populations of Other Countries
Organic growth Target Indian diaspora of other markets with existing product portfolio Exports / limited channel reach
Inorganic growth by acquiring international companies with strong FMCG brands Broadening brand / product portfolio for all target markets Increased sales and distribution as distribution channels are augmented through acquisition
Organic growth after establishing presence in other markets Behaving as a multinational and developing customized products for local populations of global markets
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brands such as Erasmic (shaving products) and Cuticura (talcum powder) in India. Dabur acquired the Turkish FMCG company Hobi Kozmetik Group this year to strengthen its presence in the Middle East and North Africa. Hobi Kozmetik is present in the personal care market and sells a wide variety of hair care and skin care products under the brands Hobby and New Era in 35 countries. Its brands also enjoy signicant market shares in their respective categories. As Hobis brands complement Daburs portfolio, they give Dabur a strong platform in new product categories in India (by introducing Hobis brands) and new markets (leveraging Hobis established presence). Marico acquired the skin care company Sundari LLC, and two aromatic soap brands in Bangladesh. Wipro acquired the marketing rights for Chandrika soap in India and other SAARC countries. As Chandrika is the second largest selling brand in south India, this was seen as aligning with Wipros strengths in markets like Andhra Pradesh, where its soap brand Santoor was already the market leader. Examples of Targeting Local Populations of Other Countries Emami bought a manufacturing facility in Egypt this year. This acquisition was seen to be consolidating its presence in Africa, a fast growing market which contributed about one-third to the companys international business. The plant is expected to serve as a regional manufacturing base for the Middle East, Europe, and African markets. Also, international
business accounted for 20 per cent of Emamis turnover in FY2010 and this is expected to grow further. Godrej has introduced sandalwood and ayurvedic variants of Godrej No. 1 in British super-markets which has helped it attract the British Afro-Asian population which has a high demand for ethnic-Indian products. Maricos skin care services brand, Kaya, recently acquired aesthetic skin care business of Derma Rx, a company providing skin care services. Derma Rx operates three centres in Singapore and one in Kuala Lumpur, with consumer base of approximately 37,000. This is expected to help Marico establish its presence in the market for skin care products in Singapore. It may also open Kaya clinics in the country. 3.4.2. Possible Strategies for FMCG Players Going forward, we expect the larger players in India to marry the best of global practices with the Indian operational nuances (regulations, channel mix, consumer preferences etc) in their business models. Foreign MNCs will bring in global business models and products to India, adapt them to Indian tastes, develop products in India and market them to similar geographies internationally as well. Large, Indian FMCG players will learn nuances of operating in other countries in managing new retail channels and different regulations and bring back these best practices to India. Also, Indian MNCs will now have to develop organization designs that are geared towards a geographically-diversied model. Indian players integrating with acquired companies successfully
would need to retain the human capital to ensure continuity and understanding of the characteristics of the local market. They would need to ensure that while acquiring a company, there is either an absence of or very limited overlap with the acquired brands. This helps avoid the elimination of one brands share by another. Companies would need to institutionalize best practices between various markets. In fact, expansion into new geographies may help companies to identify new trends which could occur in other markets. For example, changing consumer preferences in one country may be replicated in another market with a time-lag, which can be captured by a geographicallydiversied business. Companies with presence in developed nations with a high share of organized retail may also be able to apply their learning in India. Indian players developing into international organizations will have to follow global standards in terms of governance, people processes, etc. 3.5. Many-Indias 3.5.1. Trend Description Spanning an area of 3.3 million square kilometres, India is a vast country with 29 states. Language, eating habits and sartorial styles vary by region, or state, and ethnic group. Increasingly, FMCG players are realizing that India is not a homogenous market but consumer preferences vary signicantly. Second, certain states present higher growth potential in certain categories necessitating a focussed business strategy to drive growth. Recently, the BIMARU states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh
31
have been responsible for tremendous growth in FMCG compelling players to look at these states more closely. It has become imperative for FMCG players to grow regional in their thinking and move towards an increasingly decentralized operating
model in India. Given the large Indian population, consumers within a state provide FMCG companies sufcient scale to form dedicated organizations for individual regions or states. By 2020, Maharashtras GDP will exceed that of Greece, Belgium, and Switzerland, and Uttar
Pradeshs economic size will exceed that of Singapore and Denmark (see Exhibit 19). So, having a dedicated rm for Maharashtra or Gujarat can prove to be a realistic and protable proposition.
Exhibit 19: Some Indian State GDPs Compared to Select Country GDPs
GDP PPP IN 2020 (IN INR BILLION) 25,000
20,000
15,000
10,000
5,000
0 Maharashtra UP Andhra Pradesh WB Gujarat Greece Belgium Switzerland Singapore Denmark
Note: Extrapolation of 2001-2009 Growth Rates Source: IMF, CIA World Factbook, Booz & Company analysis
32
Buzz Around the BIMARUs BIMARU contributes 35-45 per cent of our sales. These states are not BIMARU for us; we would be BIMARU without them. Aditya Agarwal, Director, Emami Group of Companies Godrej is planning to increase marketing spends and distribution network in these states. These states consume 17-18 per cent of Godrejs products. We expect it to go up to 25 per cent in a years time. A Mahendran, MD, Godrej Consumer Products Ltd Apart from the youth factor, what makes BIMARU important is that the consumers here are brand-loyal. The diaper category has seen 43 per cent growth in UP in FY2010 over the previous year. Anil Chugh, Senior VP Wipro Consumer Care and Lighting , Varying Consumer Preferences As consumer preferences differ across regions and states, companies may be well-advised to follow a regional strategy in terms of product ingredients, positioning, marketing campaign, and channels. Historically, we have seen some examples of regional adaptation of business strategies by companies: HUL launched Brooke Bond Sehatmand for low-income consumers to compete against regional tea companies such as Wagh Bakri, Girnar and Sapat. Sehatmand was specically meant for down-trading consumers in Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Chhattisgarh. HUL also launched brand Ruby, specically for the Karnataka market. HUL launched a regional detergent brand in Punjab called Chokra which is present in two or three districts of the state. Several players adapted beverage avours to local tastes, while tobacco players customized blends to regional preferences Dabur registered strong double digit growth in BIMARU states in FY2010 and expects that to continue. Dabur rolled out special rural focussed sales initiatives in BIMARU states. Rural distribution reach was stepped up in many high potential districts, penetrating to villages of lower population strata. George Angelo, EVP Sales, Dabur India
33
We expect this trend of launching different product variants in different regions / states to continue in the future. 3.5.2. Possible Strategies for FMCG Players Strategizing for Growth Centres Bihar, MP, Rajasthan and UP together comprise 36 per cent of Indias population, and 40 per cent of Indias youth. However, their cummulative contribution to FMCG consumption is only 24 per cent, which shows sufcient room for growth. Further, per capita income in the four states has started growing at 13 per cent, exceeding the national average growth rate. Hence, going forward, the Indian FMCG sector can expect to see signicant growth from BIMARU. For players to take full advantage of this potential, a separate strategy will have to be devised for such regions with greater resource deployment and more focused product and sales initiatives. Other Strategic Tools Overall, decentralization or regionalization will become an increasingly important theme for
FMCG players. They will need to identify and achieve clarity on their strategy in each state targeted. Product Strategy: FMCG players need to ensure that brands which do well in specic regional markets do not lose out due to their focus on national brands. For example, for HUL, Hamam leads in Tamil Nadu, Rexona leads in Andhra Pradesh and Sunlight detergent leads in West Bengal and Kerala. However, lack of focus on these individual brands has led to loss of market share in these specic markets. Marketing Strategy: Marketing strategy and expenditure may vary with states, their position in the market, and growth trajectories. Also, the positioning will have to be better adapted to consumer preferences. Supply Chain Strategy: Sales and distribution structures, investment in logistics and warehousing among other facilities cannot remain inexible across states. Competitive Strategy: Competitive strategy of national players will also need to watch out for regional players which have better customized products for a particular region. Organization Design: Going
forward, FMCG players may need to decentralize their organizational design, with separate R&D and strategic planning operations for different states. 3.6. Growing Modern Trade 3.6.1. Trend Description Historical Growth of Organized Retail No strategic exercise is complete without a business strategy for the retail sector, as the FMCG industry depends on retail for consumer sales. While Indias retail sector has been growing at over 7 per cent annually, a large proportion of it is unorganized retail in the form of scattered momand-pop stores which require a very resource-intensive distribution process in terms of manpower and logistics. Also, volume per retail store is very low. However, modern trade or organized retail has created a concentrated (high volume) channel for distribution by FMCG players. Second, the share of some consumer product categories such as processed food and beverages is also expected to grow rapidly within organized retail, which makes the latter a very crucial contributor to the industry. Modern trade is still at a nascent stage in India; the share of modern
34
trade in retail last year was only about ve per cent. However, it has been growing very rapidly displaying approximately 25 per cent annual growth (see Exhibit 20). Several formats exist within modern trade and organized retail, such as, hyper marts, supermarkets, and
cash-and-carry (which is essentially organized wholesaling). While supermarkets have the highest share in terms of the number of stores (approximately 85 per cent of total modern trade stores in 2009), hyper marts account for the highest area (approximately 70 per cent of the total area under modern trade). Cash-and-carry is still nascent
with only about eight stores in 2009. In a large and growing market such as India, we expect existing formats to evolve and new formats to come up in the future, driving the growth of various FMCG categories. Local Indian players have been experimenting with different
Exhibit 20: Organized Retail Penetration in Select Economies
(% OF TOTAL RETAIL) 81.0%
85.0%
55.0%
40.0% Organized retail has grown at 24% CAGR over the last 4 years but significant headroom exists 4.8%
30.0%
20.0%
3.1% India 2005
India 2009
China
Indonesia
Thailand
Malaysia
Taiwan
US
Source: IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis
35
business models with mixed success. The Future Group is one of the prominent players in this space and operates more than 1000 stores with different formats such as Big Bazaar (hypermarket), Food Bazaar (supermarket), Central (urban mall), futurebazaar.com (online shopping portal), home town (home furnishings), and Aadhar (rural retailing). The economic slowdown dented the growth of organized retail during 2008 and 2009. Lower footfalls resulted in lower sales growth
and margins contracted as retail expansion had been nanced through debt and the interest rates were now rising. There were also increasing funding constraints. However, growth has picked up again and expansion plans are now being announced. Future Growth Modern trade is expected to grow very rapidly in the future with its share in total retail projected to reach 11 per cent by 2014 and 30 per cent by 2020 (see Exhibit 21). This growth will be supported by:
High economic growth: GDP is expected to grow at 8-10 per cent in the future, boosting growth in all sectors. Increasing incomes: Incomes are expected to continue to rise which should further drive convenience shopping. Increasing urbanization: Organized retail will continue to increase presence in Tier 1 and Tier 2 cities, which are growing faster than metros.
Exhibit 21: Modern Trade Penetration
(% OF TOTAL RETAIL) 30.0%
11.0%
4.8%
2009
2014E
2020E
Source: IBEF, Booz & Company analysis
36
Improving infrastructure: The government is increasing its thrust on improving infrastructure. A recent example is the construction of the Golden Quadrilateral, a dedicated freight corridor which will result in improved supply chain efciencies. Future Trends in Modern Trade This analysis has tried to capture the ongoing and future trends within modern trade which are expected to impact the FMCG industry. Among these are a focus on supply chain management for improved
protability, emergence of private labels, expansion of modern trade beyond metros and the rise of cashand-carry business in India (see Exhibit 22). Focus on Supply Chain Management: Organized retailers are going to be increasingly interested in reducing time-to-market. To achieve this, it will be important to invest in inventory management and related technology for capturing sales data, forecasting demand and generating automatic replenishment.
Decreasing inventory levels will also require strong backward integration with distributors or manufacturers. Retailers will also need to optimize logistics further in terms of warehousing and transportation etc. For this it will be imperative to increase supplier collaborations. Emergence of Private Labels: Private labels or products manufactured and marketed by retailers, have been growing in India as they are very attractive to retailers for three reasons:
Exhibit 22: Organized Retail Industry Trends

Focus on Supply Chain Management Emergence of Private Labels
Expansion beyond Metros

Rise of Cash-and-Carry
37
First, they help retailers to improve protability as the margins for private labels are higher (30-35 per cent on average) compared to the manufacturers brands. Second, they help retailers to create differentiation between competitors as they are unique to their stores. Third, the emergence of retailing as a specialist function and the growth of multiple retailing have helped retailers push manufacturers towards greater margins. Experience has shown that the retailers who most consistently exceed expectations are rewarded with higher average sales, more repeat business, and invaluable goodwill. All these are critical stepping stones on the journey to sustainable loyalty.
Further, penetration by private labels in India is quite low compared to other developed countries (see Exhibit 23). Due to all these factors, it is expected that private labels will become a major threat to FMCG players in the future. Expansion beyond Metros: Organized retailers have started expanding their presence from metros to smaller cities. For example, Big Bazaar had 44 per cent of its stores outside the top 19 cities in 2009. There are plans to open stores in Tier 1 and Tier 2 cities in Tamil Nadu as well. Similarly, Lifestyle is planning to expand its base across 22 cities by FY2013. This further implies that modern trade will become increasingly important for FMCG players as a major channel not
just in metros, but in other cities as well (see Exhibit 24, p. 39). Rise of Cash-and-Carry: Several foreign, organized retailers have been increasing their presence in the cashand-carry business in India. Metro was one of the rst to enter India in 2003. It targeted kirana owners, hotels, restaurants and catering services through ve outlets across Bangalore, Mumbai, Hyderabad and Kolkata. Wal-Mart entered the cash-and-carry business through a joint venture with Bharti Enterprises under the brand name Best Price. It has three stores in Punjab currently and plans to expand to 10-15 stores over the next few years. Similarly, Carrefour is expected to set up its rst cash-and-carry store in Delhi. Cashand-carry is expected to provide an alternative channel to FMCG players
Exhibit 23: Private Label Share in Overall Organized Retail Sales

46% 40% 35% 29% 27% 21% 20% 11% 20%
Switzerland
UK
Germany
Spain
France
Australia
USA
India
World Average
Source: Technopak, Booz & Company analysis
38
in the future. However, whether cashand-carry would form a signicant chunk of total sales is a question given that all foreign retailers are eyeing the retail opportunity and waiting for multi-brand FDI in retail to open up. 3.6.2. Possible Strategies for FMCG Players With increasing importance of modern trade, channel segmentation is expected to become crucial for FMCG players, along with the adoption of a greater collaborative approach with the most important channel partners. With the emergence of private labels, the retailer-manufacturer relationship will come under greater pressure. FMCG players will need to become primary suppliers to top retailer-partners by leveraging their position as market leaders. They may also have to provide special discounts. Second, to prepare a
better value proposition to retailers, they will also need to shift their role from transaction to advisory and help in category development, joint promotions etc. The need for FMCG players to improve execution in terms of merchandising in the top organized retail accounts and invest in technology to gain insights into consumer behaviour and purchasing patterns will signicantly increase in the future. 3.7. Eco-consciousness 3.7.1 Trend Description What makes sustainable business practices essential? Increased ecosustainability of business will be extremely important for FMCG companies in the future. Global climatic changes and the growing scarcity of natural resources have already led to increased concerns about the environment. The pressure on companies from key stakeholders
to be environmentally responsible is gradually on the rise. Various stakeholder responses to ecoconcerns are showcased below. Government: India is committed to reducing carbon emissions by 25 per cent by 2020 and the government has been imposing stringent environmental norms on companies. Also, many states have enacted legislations such as the ban on plastic bags to further the cause. Consumers: Concern for the environment has changed the purchasing behaviour of consumers. An Edelman survey of 6000 global consumers conducted between August and October, 2008 found that 87 per cent believed it was their duty to contribute to a better environment. Media and NGOs: Environmental activists and journalists are
Exhibit 24: Percentage Share of Retail Presence Across Different Cities, 2009
Number of Stores 113 27 18 45 100% 26% 67% 30%
Top 4
61%
49%
Planning to open Stores in T1/T2 cities in Tamil Nadu
9% 35% 33% 39%
31% 9% 11% Pantaloons 22
5 to 15 16 to 35 Others
Big Bazaar Number of Cities 58
Shoppers Stop 9
Lifestyle 8
Planning to open 45 stores across 22 cities by FY13
Source: Technopak, news articles, Booz & Company analysis
39
becoming increasingly vocal in their protests against companies which have been polluting the environment or not engaging in judicious use of resources. Some NGOs routinely monitor and track the CSR efforts of FMCG companies in India, driving awareness and importance of such initiatives (see Exhibit 25). Competitors: Some FMCG companies have started pioneering sustainability efforts. For example ITC has been publishing an annual report on sustainability and has also conducted sustainability audit of businesses and subsidiaries. HUL has been focusing on ensuring sustainable practices in business. Nestle has initiated pollution-free waste disposal at manufacturing plants, while Dabur has been focusing on reducing energy consumption, increasing renewable
energy and plans to become carbon positive in the next few years. Such measures are forcing other players to also involve themselves considerably in driving green practices. Channels: Some of the global modern trade players have mandated sustainability requirements from their suppliers. Wal-Mart has been at the forefront of such initiatives. Such practices will soon be implemented in emerging markets like India. Investors: Foreign investors have also been driving the sustainability agenda in the companies they invest in by benchmarking with global practices. Some of the top sustainability issues worldwide have also been identied for the FMCG industry in India. The
most important of these are packaging, water-use, harmful emissions and the impact of products on health. These have been detailed below: Packaging: Primary and secondary packaging costs typically constitute approximately 8-10 per cent of the total cost base for most FMCG players. A signicant proportion of packaging is polymer-based and non-biodegradable. It has been observed that for essential commodities such as milk, the packaging issue is not given much importance by the consumers or regulators; while for products such as snacks, packaging sustainability has attracted more attention. Hence, FMCG players should take a closer look at their packaging cost-base and try to eliminate or reduce the quantity of packaging material used and upgrade to biodegradable packaging materials.
Exhibit 25: Karmayog CSR Rating of FMCG Companies Across India

DISTRIBUTION OF FMCG COMPANIES ACROSS CSR RATINGS 25 0% 20% 7% 27% 28% 4% 20% 23% 26%
5 4 3
41 2%
43 2% 5%
48%
44%
44%
1 0
2007
2008
2009
Performance of FMCG companies is improving but many are still in the lowest bracket
Note: 5 is the best rating and 0 is the worst rating on CSR performance Source: Secondary research, Booz & Company analysis
40
Harmful emissions: This is a problem area for FMCGs given these are logistics-intensive businesses that also release greenhouse gases during their manufacturing processes. Since fuel scarcity in the future is likely and transportation is a major GHG culprit, companies should strive to make transportation more efcient and encourage usage of renewable energy through use of hybrid vehicles for transportation. Water utilization: With depleting groundwater and scarcity of fresh water, FMCG companies should resort to water-efcient technologies during manufacturing, and recycle used water. Health impact of products: This is a big concern for both consumers and the government. It has been observed that increasingly, consumers are reading through the nutritional information on products, and becoming more conscious of the harmful impact of categories such as snacks and fast foods. The FMCG industry needs to lead by example in this case and shift towards healthier products. Others: FMCG players should partner with suppliers which provide green (organic) raw materials, drive the usage of renewable energy sources and more energy efcient technologies such as CFL for lighting up ofces and factories. Business Sense in Driving Sustainability Adopting green technology and processes has also started making economic sense for companies. The following points enable better understanding of how this has worked:
Rising costs of resources: Costs of doing business will increase, especially in areas dependent on natural resources. Many commodities have seen a high degree of price volatility and long-term forecasts indicate sky rocketing costs of natural resources. Affordable Green Technology: Cost-effective green technologies are emerging, as is the supporting ecosystem comprising of researchers, regulators and other such personnel facilitating and supporting their development. Commercialization further ensures the protability, or at least the economic feasibility, of green initiatives. For example, the widespread adoption of solar energy systems had long been hampered by the high cost of photovoltaic (PV) cells per kilowatt-hour compared with other energy sources. But as the price of traditional energy skyrocketed, low-cost thin-lm technology became increasingly commercialized and this has begun replacing rst-generation crystalline silicon PV installations today. As solar energys cost per kilowatthour continues to drop, it is estimated that a larger proportion of the population will adopt this. Impact on top-line and bottomline: More and more business leaders are recognizing the fact that going green can have a dramatic effect on their companies nancial results. To capture this value, they use green programmes to eliminate waste and drive efciency throughout the enterprise and, in more advanced cases, to create top-line growth by bringing new product offerings to market. An example lies in organic foods. Also,
Wal-Mart has decided to sell only concentrated laundry detergents, which require less packaging and space for transport and storage, saving fuel and transportation costs while driving a green initiative. Increasing Commitment Levels for Sustainability Since the forces driving sustainability are compelling and enduring, every company should incorporate sustainable business practices. This is not a business choice but a prerequisite, particularly for major FMCG companies. More and more companies realize that if they dont address the green challenge in a rigorous way, their costs will increase over time, their reputations in the market will suffer, and they will miss some of tomorrows most valuable market opportunities. The three levels of sustainability based on the commitment levels of companies are described below (see Exhibit 26, p. 42). Responsible Green: This is the leastevolved level of green business, and is characterized by a limited and legalistic approach to sustainability. Companies that pursue green at this level are focused on projects and initiatives designed to ensure compliance with environmental laws and regulations in the locales in which they operate. They also respond to the green demands of value chain partners (suppliers or retailers) they cannot afford to lose. At this level, companies dont develop capabilities which support green, and may not even have a dedicated environmental function. However, some managerial attention is required for awareness of ever-changing regulations and market conditions. Also, some investments may be required to prove compliance in terms of tracking and reporting. Most of the Indian companies are at this level of sustainability.
41
Efcient Green: These companies approach sustainability with an internal focus, and strive to simultaneously reduce environmental impact, lower costs, and enhance operating efciencies. They can take the form of a simple e-mail message asking ofce workers to voluntarily turn off their computers before leaving work or entail a rigorous effort to reduce waste by redesigning products. They can feature dedicated efforts and signicant investments, but typically they deliver relatively short-term payback. The key is to balance the investmentsin resources, systems, and assetswith the likely payoff. Continued focus of senior leadership on costs and efciency savings provides signicant support for sustainability initiatives. Differentiated Green: Differentiated green companies pursue green in a strategic way throughout the
value chain of the business and in a variety of new businesses and business opportunities. Going for green at the differentiated green level requires signicant investments of time, effort, and capital. The company can expect to obtain long-term paybacks in terms of more efcient operations, and increased market share vis--vis competitors. 3.7.2. Possible Strategies for FMCG Players Going forward, FMCG players will need to make a choice in terms of their sustainability effortseither they choose a defensive or a proactive approach. They can either wait for the regulations to evolve and compel them towards adherence to sustainability norms, or grab the opportunity and start building a sustainable business model to drive business advantage in the future. Including sustainability as a core business strategy and driving sustainable elements throughout
product lifecycle through product innovation, investment decisions, or marketing can go a long way towards creating a sustainable FMCG business. 3.8. Game-changing Technologies 3.8.1. Trend Description Technology, an all-pervasive factor, is signicantly impacting all facets of business. In the FMCG sector, technology facilitates front-end processes of business by creating consumer awareness, enables efcient sales and distribution and runs backend processes like market research, generating shopper insights, gathering business intelligence, supply chain management etc. It is believed that in the future, FMCG players will need to signicantly increase their investments in technology and use it to derive competitive advantage. Technology at the Front-End Technology options for creating consumer awareness and promoting sales have proliferated in the last
Exhibit 26: Levels of Commitment to the Environment
Differentiated Green (Usage of sustainability to drive Efficient Green (Selective investment to drive Efficiencies) Responsible Green (Compliance)
Pursue green sustainability initiatives which focus on regulatory compliance Could be either government driven ...or value chain partner driven (supplier / retailer) Leverage green to identify cost reduction / efficiencies Companies can leverage lean principles to attain this level This should be the base minimum for all companies as there is significant money on the table (both cost and revenue) which can be achieved Elevate Green Strategy to a core strategy, and not just a CSR initiative Use the green lens over the product life cycle, considering the environmental impact through the entire value chain Integrate Green Messaging into brand positioning and messages Manage trade-offs explicitly across growth, cost, sustainability, risk and service
competitive advantage)
Source: Booz & Company Going for Green: A Capabilities Approach to Environmental Opportunity, Dec 2009
42
decade, with increased adoption of broadband the evolution of social networking sites as major media platforms, and the growth of value-added services on mobiles. An increasingly young population coupled with increased participation of women in workforce have lent support to the adoption of new consumer favouring technologies. While print and television account for 86 per cent share in advertising at present, internet advertising has grown at approximately 30 per cent annually. The Indian youth is spending most of their time at the television and on the Internet. As per estimates, Google products account for 30 per cent of online time spent by Indian consumers (see Exhibit 27). Four platforms or technologies which could play a major role in consumer
awareness in future have been detailed below: Social Marketing: Social marketing sites such as Facebook, Orkut, Twitter, Linkedin etc are becoming increasingly popular, especially among the youth. Facebook for instance has approximately 14 million Indian users at present. Similarly Linkedin, aimed at creating a network of professionals, has about 3 million users and India is one of its fastest growing subscriber bases. Several FMCG players have started targeting social networking sites for creating brand awareness. Capital Foods has reported 30 per cent growth in revenue over the past six months attributing its growth to the advertising campaign it launched on Facebook. Amul has 52,000 fans on Facebook and heavy trafc of discussions on its community page. Perfetti Van Melle has appointed
Isobar to manage its digital image on Facebook and Twitter. Benets: Social networking sites provide a low-cost alternative to traditional channels or ofine business networking events which involve signicant marketing expenses. The sites are interactive and create a viral effect reaching out to a community of users who are interacting with each other. Leveraging social marketing sites for co-creation and sales: FMCG players can also leverage these sites for engaging with consumers on product design and sales imperatives. Apparel brands such as Benetton, Wills Lifestyle, Pantaloons and Van Heusen are tapping social networking sites as design centres driving efforts of co-creation with end-users. The
Exhibit 27: Media Channels Consumption by Youth

(AGE-GROUP OF 13-35 YEAR OLDS, 2009) MINUTES / DAY 100 90 80 70 60 50 40 32 30 20 10 0 Newspaper Magazine TV Radio Internet 0 100 44 60 70 200 250 98 MILLION YOUTH 300
150
50
Average Time Spent
# Youth Utilizing Channel
Source: National Book Trust-NCAER Survey 2009 across ~400 villages and ~200 cities, secondary research, Booz & Company analysis
43
contributions from users on various features ranging from colour, textures to designs are welcomed. Also, some players such as ITC are seen pushing their online sales for Wills Lifestyle through their member community on Facebook. However, given the nascent nature and untested efcacy of social marketing, it will be prudent to use it complementarily with other ofine channels for a holistic engagement. Mobiles as a Major Platform for Consumer Engagement: Mobile phone penetration in India has been increasing at approximately 75 per cent annually for the last ve years. Mobiles can be a very powerful platform for consumer engagement given their extremely wide reach. The number of mobile users is expected to reach 900 million by 2014. Given the advent of 3G, value-added services will get increasingly enhanced. Increasing Popularity of Mobile Advertising: Given the advantages such as direct and personalized communication, and a high access to rural consumers who accounted for more than 100 million subscribers in 2009, mobile advertising is seen to be gaining popularity. Marketing Campaigns on Mobiles: Several FMCG players have started creating marketing campaigns for mobile phones. Cadbury came up with an interactive campaign which allowed students to check their exam results using Reliance India mobile service. If the student passed, he got an SMS congratulating him saying Pappu Pass Ho Gaya along with the exam result and this encouraged him to celebrate the moment with a Cadbury Dairy Milk Chocolate. Similarly, Coca-Cola started a
contest titled Sprite Kholega to Bolega in which all Sprite bottles would have a code number printed under the crown. When this code was sent as an SMS to a designated phone number, the buyer could win free talk-time ranging between INR 50 and INR 5,000, and other mobile freebies. Advent of 3G: Historically, the mobile has attracted low advertising expenditure because of its format of advertisingsimple text SMS or basic pictures. However, 3G will enable rich media content and video transmission over the phone. About 100 million users are expected to have 3G handsets in 2012-13 up from the current 20 million users. With 3G, advertisers would be able to subsidize the cost of downloading rich media content by subscribers. For instance, a song from a new Bollywood lm could be put up for download with an advertisement of a soft drink company as a pre-roll or a mid-roll. Consumers could download this song for free while the soft-drink company would pay for the download. Approval for Mobile Virtual Network Operators (MVNO): Recently, the Telecom Regulatory Authority of India (TRAI) has created the pathway for MVNOs to operate in India. Their entry can be expected to accelerate the growth of mobile advertising in future, as they are dependent on VAS and advertising to differentiate themselves from other service providers. MVNOs provide mobile phone services by buying airtime from existing telecom operators, which they then market by leveraging their brand and distribution network. MVNOs can even offer the entire mobile service for free if the subscriber
opts to receive a certain number of ads per week. Blyk for instance is an MVNO in the UK which sells mobile network for free by giving customers free airtime in exchange for accepting up to six advertising messages per day. Blyk generates all of its revenue from advertisers and ensures that it has a user base that advertisers will pay a premium to reach. Online Advertising: FMCG players have been increasing their focus on online advertising with expenditure on the medium growing approximately 57 per cent annually between 2006 and 2009, with further 30 per cent annual growth expected in the future. This is also in line with the expected increase in broadband penetration in India from approximately 3 per cent at present.7 Leading FMCG companies such as HUL, P&G, Cadbury and Tata Tea have been ramping up their online advertisement budget for specic brands. For instance, HUL created an online campaign with its Sunsilk Gang of Girls, while Tata Tea came up with Jaago Re and Lipton launched Stay Sharp. At present, FMCG players spend only 1-2 per cent of their marketing budget on online advertising. This is expected to increase to 10 per cent in line with global trends in the next few years. Globally, as companies use the online medium for enhancing brand awareness, the advertisements become more interactive. For example, in the US Pepsi runs online contests for Pepsi Max and Doritos wherein consumers can upload 30-second commercials about Max/Doritos. There is online voting on these advertisements and awards of up to US$ 5 million are given to winners. The internet can be a very powerful medium to target specic consumer
44
segments such as students who comprise of approximately 30 per cent of total internet users and urban professionals. Growing penetration of credit cards in the economy will also boost online purchase. At present, credit card penetration in India is just 2-3 per cent, while in the developed markets it is 10-12 per cent. Advertisements in Gaming: The gaming industry in India, though nascent, is INR 18 billion in size, and is growing at approximately 40 per cent annually. A growing young population, increasing affordability of goods due to higher disposable incomes and low price of hardware and content (with game download prices coming down), proliferation of developers and publishers and growing awareness through internet and social media are some of the factors leading to growth of this industry. Some FMCG players have already started testing waters in the gaming advertisement world. Cadbury has a Tetris-like game where bars of chocolate are the building blocks, while AXE, HULs deodorant for
men, has partnered with Zapak for creation of Axe Inxtinct for the brand to stay on top of its consumers minds. The size of gaming advertisement in India was INR 9 billion in 2009. It is expected to grow three times in the next three-four years. Though the penetration of gaming is low compared to mass media such as television and print, it is a powerful tool for the marketers as the engagement level with the consumers is quite high. Technology at the Back-End FMCG players can leverage technology for driving greater efciency in various back-end processes. By deploying datacapturing technologies at pointsof-sales, players can understand consumer purchase behaviour. Similarly, for gathering business intelligence on competitors leveraging technology at the retail end is becoming common practice. Supply chain management also has tremendous potential for driving efciencies through tools of demandforecasting, production scheduling, inventory optimization, logistics planning etc. Several FMCG players
have been investing in technologies for back-end processes. Coca-Cola has invested in customized wireless hand-held devices for its sales persons. The devices have wireless receipts of the list of customers to be visited and other customer details. They also allow transmission of activity reports back to the ofce. Sales people can now spend two more hours of quality time with retailers due to this technology. HUL has an internet-based supply chain management system which connects it to the redistribution stockists. This focuses on primary sales (HUL to stockists) and secondary sales (stockists to retailers) along with enhanced communication and has enabled release of inventory reduced eld force time by 50 per cent, and ensured full time availability at retail outlet (see Exhibit 28). Wal-Mart globally has radiofrequency identication tags incorporated into products in stores which perform the same functions as bar-codes thus enabling access to historical and geo-spatial details of the product. These are widely used in supply chain management
Exhibit 28: IT-enabled Supply Chain Management at HUL
Planning Hub
Product Flow
Supplier
Manufacturing Plant
C&FA
Distributor
Kirana
IT Systems
Central Unify
Distributor Mgmt System
Hand-held Device
Dispatch Daily
Production Plan-weekly Dispatch Daily
Sales Stocks Prices Invoicing
Availability Stocks Sales
Source: HUL CLAS Conference Investor Presentation 2008, Booz & Company analysis
45
for improving efciency of inventory tracking, cutting cost of documentation, and enhancing efciency of scheduling through geopositional tracking. 3.8.2. Possible Strategies for FMCG Players Leveraging technology across the value chain of product innovation, manufacturing, sales and distribution, and marketing can help FMCG players derive various benets in terms of designing better products and becoming cost-efcient on the one hand, and expanding the market through better engagement with consumers on the other. FMCG companies can capture better consumer insights by deploying various technologies at point-ofsales and involving consumers in co-creation processes through online channels. Inventory management systems, handhelds for capturing data, production planning tools and vendor management tools could be used by FMCG players to derive supply chain efciencies. Various new platforms such as internet, mobile, and media such as gaming have widened choices for marketers. However, marketing efforts will need to account for the specic consumer segment being targeted. For efcient marketing, companies need to focus on the concept of return from marketing investments or the top line growth achieved per marketing rupee spent. 3.9. Enabling Policies The FMCG industry is regulated comparatively lightly and in spite of tremendous competition, the government acting as the watch dog, limits its role to prescribing product norms to protect consumers interests (regulation on MRP, Prevention of
Food Adulteration Guidelines and other such), and to providing specic incentives to priority industries. The Indian Government has enacted several policies and Acts aimed at fostering the development of the FMCG industry. The government has also been enacting several measures to drive inclusive growth of the economy by targeting the economically and socially weaker sections and creating a platform to bridge the gap between the poor and the rich. 3.9.1. Facilitating Growth of FMCG Players: Supply Side Factors Historically, the government has introduced policies aimed at attaining international competitiveness through reduced duties, automatic foreign investments and food laws. Some positive regulatory triggers for the industry are mentioned below: Food Processing and Agro Industry Recognized by the government as priority sector, industrial licensing exemption is extended to almost all products in this category. Automatic investment approval and up to 100 per cent foreign equity is allowed in the industry. For organized players, excise duty benet for 10 years from commencement of a unit is offered. Pricing benet for unorganized players has been reduced with favourable tax scheme for organized players, especially for biscuits, noodles, cigarettes. Exports 100 per cent export-oriented units can be set up after government approval. Foreign Direct Investment Automatic investment approval (including foreign technology agreements within specied norms), up to 100 per cent
foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food processing sector except malted food, alcoholic beverages and those reserved for small scale industries (SSI). Within retailing, FDI is allowed in single-branded retailing (up to 51 per cent), and in cash-andcarry / wholesale business (up to 100 per cent). 3.9.2. Facilitating Consumer Demand The government has been playing a signicant role in driving inclusive growth of Indian consumers through direct measures such as decreased tax rate and raised salaries (the Sixth Pay Commission was lauded for its recommendations in this direction) which enable greater disposable incomes to be available to the consumers, as well as indirect welfare measures through employment generation, provision of education, providing food security etc. Increase in Disposable Incomes Income-Tax rates have been decreasing. The tax rate for income of INR 0.6 million is down from 27 per cent in FY2003 to 9 per cent in FY2011. Rise in salaries of government employees through the Sixth Pay Commission. There have been payouts of INR 400 billion since 2008. Rise in Rural Incomes Rural expenditure by the government has increased from INR 230 billion in 2006 to INR 830 billion in 2010. The farmer loan waiver scheme and the National Rural Employment Guarantee Scheme (NREGS) have driven increasing incomes in rural areas (NREGS provided employment to
46
approximately 50 million homes in FY2010). Increasing Awareness Right to Education is expected to result in increased awareness among consumers which will drive quality-consciousness among them. As per The Right of Children to Free and Compulsory Education Act 2010, every child in the agegroup 6-14 will be provided eight years of elementary education, and any cost which prevents a child from accessing school will be borne by the State, which will have the responsibility of enrolling the child, and ensuring attendance and completion of eight years of schooling. 3.9.3. Areas for Regulatory Intervention However, there are some areas in which the government needs to come out with appropriate regulations, such as introduction of GST, opening of FDI in multi-brand retail, and stricter norms to curb counterfeit products. These are expected to have a signicant impact on how the FMCG sector performs in the coming years GST: The government is expected to implement GST in the near future. This would help to replace the multiple indirect taxes levied on consumer products (by central and state tax authorities). There will be several benets of implementing GST. A uniform and simple tax would help in reducing prices of consumer products due to a more efcient supply chain. Currently, FMCG players have warehouses in every state to avoid certain taxes, which results in a higher
cost of operation. Also, logistical delays can be avoided with the elimination of multiple levels of taxes, and mitigation of differences in tax structures across states. Consumption would grow with reduced prices. Tax collections from the FMCG industry will also increase with increased tax compliance and broad-basing of products and services for which the tax is levied. FDI in Multi-Brand Retail: At present, no FDI is allowed in multibrand retail, which is preventing global retailers such as Wal-Mart and Carrefour from establishing their retail operations in India. It has been seen that in developed markets, large organized retailers have brought huge benets to consumers by lowering the total cost of supply chain operations. Going forward, the government is expected to change the FDI policy for multi-brand retail in India, to allow more competition in the sector. Counterfeit Products: Counterfeit products pose a serious threat to the growth of FMCG industry. As per estimates, counterfeit goods account for 10-15 per cent of the total size of the FMCG industry. To the exchequer, these result in a loss of INR 45 billion. The government is expected to come out with more stringent policies to enforce Trade Mark and Copyright Laws to protect the rights of consumers and FMCG companies. Revamping Agriculture Products Marketing (Regulation) Act (APMA): As per APMA, food processors are not allowed to buy directly from farmers. As a result, many intermediaries are involved
in the supply chain. This creates, rst, a monopolistic environment in which the farmer does not have any say in determining the price. Second, the intermediaries, who are fragmented, do not invest in modernizing the supply chain and the warehousing infrastructure remains poor. Logistics, specically for perishable raw materials such as fruits and vegetables are ignored which results in huge wastage of produce, or sub-standard products which do not meet international standards. Third, food processors have to pay a higher price for procurement, as the raw materials go through several layers of intermediaries. To avoid this, all the state governments are expected to come out with a policy to allow FMCG players to directly source agricultural raw materials from farmers. National Food Security Act (NFSA): This is expected to ensure that the basic needs of the rural poor are satised, and they can have a better lifestyle by spending on discretionary products. The NFSA will require the government to provide 35 kg of foodgrain at INR 3 per kg to almost everyone (barring the rich) in one-fourth of the poorest blocks of the country, and will cover 40-50 per cent of the people in the rest of the country. Ramping Labour Laws: India has archaic and inefcient labour laws, with strictly dened norms for work hours, over-time, contract employees etc. These result in inefcient operations for manufacturers. The government needs to modernize the labour laws to enable FMCG manufacturers to improve their efciency and lower costs of production.
47
4 IMPLICATIONS FOR THE FMCG INDUSTRY
4.1. Industry Paradigms in 2020 The FMCG industry in 2020 will be characterized by: Large Size: The Indian FMCG industry in 2020 is expected to reach a size of INR 3700 billion INR 5200 billion. As a major contributor to economic growth in the next decade it will contribute close to 3 per cent of the GDP. Increased Product Complexity: The market for FMCG products is becoming increasingly heterogeneous with evolution of different consumer segments which have very different needs. One product will not be able to successfully target all consumer segments and companies will have to make very difcult choices. They will either focus on one / a few niche segment(s) or straddle various consumer segments with a basket of product variants. Evolving Consumers: Consumers are becoming more aware about products and associated functions / benets. They are taking out time to learn more about the products they should choose. This trend therefore can be expected to change buying behaviour and consumption patterns signicantly and rapidly. Increased Competitive Intensity: Competition in the industry is expected to further intensify with regional players targeting national expansion, and more global players targeting the Indian market. Channel Evolution: The channel choices in the industry are expected to widen with increasing penetration of organized retail and internet / B2C commerce. While FMCG companies will need to develop a detailed sales and marketing strategy for these
channels, they will have to renew focus on traditional trade which will continue to retain its position as the dominant channel. Environmental Concerns: With increasing pressure from government, NGOs, and consumers for efcient and prudent use of environment and natural resources, the FMCG industry will need to signicantly increase its efforts to drive sustainability as a core business strategy. Signicant among these factors are those that can force a complete break from existing paradigms. In addition, the conuence of these change driversconsumers, technology, government policy, and channel partnerswill have a multiplier impact and magnify both the magnitude as well as the pace of change. As with any transformational change here too there will be winners and losers. Many product categories will grow rapidly (30-40 per cent annually) given fast adoption rates across large market. Other categories may mature and slow down to single digit growth rates. Similarly, the competitive intensity will increase signicantly. There will be an urgency to grab a share of what will, in ten years, be amongst the largest consumer markets of the world leading to a proliferation of products and services. New leaders will emerge by leveraging tailored business models, relevant products, nimble marketing, fast time-to-market, and efcient supply chains. 4.2. Imperatives for the FMCG Industry The transition from a stable and homogenous operating model to a more dynamic, unpredictable and rapidly changing operating
48
environment will have signicant implications across stakeholders. The movement of consumers in and out of categories, the changes to the structure of consumption across segments and the co-existence of seemingly conicting attitudes to consumption will create a level of complexity and challenge never seen before. Winning in this new world will require enhancing current capabilities and building new ones to bridge gaps. In our view, in this new world, FMCG companies will have six imperatives from the perspective of business strategy. 4.2.1. Disaggregating the Operating Models FMCG players are facing divergent choices at each link of the value
chain depending on their business offering and the target market. Very different business models are required for targeting the premium segment, the middle class, and bottom-of-the-pyramid consumers. Business operations too differ when consumers of different age-group / regions / genders are targeted. FMCG companies will need to build capabilities across the value chain for the specic consumer segment which they target. Strategies of targeting consumers belonging to different income classes are illustrated below (see Exhibit 29). Hence, going forward, FMCG companies will need to manage an increasingly complex operating model depending on the set of choices they make in terms of target market, product offering, extent
of decentralization (region / state) and extent of globalization. In the operating model design, companies will also need to drive efciencies in time-to-market and ensure that decision rights are properly dened to ensure quick decision making in reaction to changing consumer trends. For those who operate across a spectrum of markets and segments, it will be crucial to evaluate where they should disaggregate their business models in order to deal effectively with both new as well as mature segments. They will also need to gure out areas where scale and integration can give them more advantage. This will have implications on the way all aspects of the business, from distribution to marketing to the supply chain are congured (see Exhibit 30, p. 50).
Exhibit 29: Divergent Choices in FMCG Business

FMCG VALUE CHAIN
Offering/Market
R&D
Supply Chain
Manufacturing
Marketing
Sales & Distribution
High investment in R&D
Managing imported ingredients/products Out-bound logistics customized as per customer preferences
Premium Product for the Affluent
Product with high efficacy, using breakthrough technology
Large variety, customized solutions Low production
Targeted media - niche magazines, brochures, etc. Branding to create differentiation
High-touch model company-owned outlets High service dedicated sales force Low-touch model with focus on expanding reach Discounts/promotions to drive penetration
Low investment in R&D
Standard Product for Mass Consumption
No customization
Ensure availability of products at point-ofsales through efficient inventory management
Few unit sizes Mass production
Use of mass media TV, national newspaper
High investment in R&D
Customized Product for BOP Market
Low-cost no-frills adapted to local preferences
Achieve low cost through partnerships/alliances
Customized to produce smaller SKUs Low-cost driven by shared facility/low rentals/high utilization
Use of local media outdoor advertising (banners), NGO volunteers
Shared Channel Local people used for sales
49
4.2.2. Winning the Talent Wars With accelerating growth in the sector in terms of more products, brands, categories, geographies of operation etc, the demand for human capital is going to increase signicantly. Also, higher quality of talent will be required to deal with the increasingly complex Indian market. Two key areas of emphasis will be attraction of the best available talent and ensuring development and retention of the acquired talent. With increasing employment choices available to students, the FMCG industry is likely to face a talent crunch in both acquisition and retention. In colleges, students prefer high-paying jobs which require deskwork rather than physically strenuous sales jobs in FMCG companies. As a result most of the bright students do not even apply to FMCG companies. For instance, in one of the Indian
Institutes of Management, while 30 per cent students took up marketing jobs from campus in 2003, the number decreased to 15 per cent in 2010. With new industries scaling up and offering more attractive value propositions, this percentage will continue to reduce. Talent scarcity is expected to intensify in the future, and the industry will need to devise an attractive employee value proposition for bright graduates to acquire quality talent. Retention is equally important as traditionally, the industry has continuously lost key talent to other growing / high-paying industries such as telecom and the nancial sector in the absence of suitable rewards and recognition. A key challenge will be to maintain employee loyalty, hence companies will need to focus on employee segmentation to disproportionately reward the top-
performing employees (with monetary and non-monetary incentives) along with quick career progression. 4.2.3. Bringing Sustainability into the Strategic Agenda While the other stakeholders, consumers, government, and channels, will need more time to prepare for driving the sustainability agenda, FMCG players will need to proactively start building a sustainable business model to drive competitive advantage in the future, instead of simply complying with stipulations and regulations. The principles which can help FMCG companies achieve this are: 1. Sustainability as a Core Business Strategy: Sustainability should be an integrated element at the core of the overall strategy of a rm. The products should be green, they should be marketed as green,
Exhibit 30: Key Challenges in the Future Operating Model
One company vs. multiple Increasing complexity in frontend and back-end technology Avoiding duplicity across businesses Technology Structure separate companies for different target markets Very different levels of control and decision rights
Ensuring knowledge sharing / transfer across portfolios Knowledge People Building workforces (value, mass, premium) with very different capabilities Managing different business processes Leveraging synergies across businesses / portfolios Processes Different human capital management processes
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and a substantial portion of the companys revenue should be come from the sale of green goods. To achieve this, sustainability must be on the agenda of the senior leadership, established as a cultural trait within the company, driven across the organization. 2. Sustainability in Product Innovation: FMCG players should embed green in their innovation efforts. Because sustainable initiatives require new ways of looking at problems, companies could leverage innovation and new product development best practices to support their green initiatives. 3. Using the Sustainability Lens throughout the Product Lifecycle: Companies should view the entire product lifecycle through a green lens. They should seek cradle-tocradle lifecycles in which products or their content can be used again and again with zero waste. A good example is Nikes idealistic longterm vision of sustainabilityto design products that are fully closed loop: produced using the fewest possible materials, designed for easy disassembly while allowing them to be recycled into new products or safely returned to nature at the end of their life. 4. Sustainability Driving Major Decisions: The implications of companies choices in terms of environmental impact should be assessed and the trade-offs involved in all major decisions, including sustainable programmes (renewable energy sources and recycled materials, energy efciency and material yields) should be weighed against risk, cost, growth, and service/ quality. PepsiCo has incorporated sustainability as a criterion in its capital expenditure lter. All capital expenditure requests over
INR 5 million must include a review of the sustainability issues and opportunities surrounding the request. 5. Integrating Sustainability into Marketing and Messaging: Companies should develop consistent messaging about their sustainability efforts and incorporate them into their communications at all levels. In this way, they attract and inform stakeholders, including customers, employees, investors, and regulators. The sustainability index for consumer products that Wal-Mart has announced is a good example of how sustainable initiatives can be structured and communicated in ways that bolster corporate credibility. Similarly, PepsiCo India has annual reporting on sustainability as a part of its global initiative, with impetus on reducing water and electricity consumption, and improving packaging. 4.2.4. Reinventing Marketing for i-Consumers Deep consumer understanding and interaction has always been at the heart of the FMCG sector. Going into the future, marketing will need to target individual consumers who want customized products, as well as consumers who are spending more and more time online, hence the term i-consumers. Many companies periodically engage with consumers through surveys, focus groups, test markets, product testing and other mechanisms. Similarly FMCG companies have been signicantly large users of advertising mediums (print, television and outdoor) to communicate with their consumers. In the rapidly evolving environment it becomes more critical to know, respond to and communicate with the consumer.
Across the globe, companies are migrating away from traditional paid advertising towards below the line media and marketing programmes that put them in direct contact with consumers. In India, new platforms have emerged in the form of mobile phones; with planned investments in broadband there will be signicant increase in online usage. This shift is giving rise to a new generation of customized marketing platforms, transforming the way in which consumers experience advertising and establish relationships with brands. Digital marketing platforms will be a big part of this strategic shift. They will redene what it takes to succeed in building brands and reaching customers. Companies will need to use emerging technology in new assets such as databases, websites, and branded content. They will need to develop new analytical models to measure the effectiveness of media spending. They will also need to manage the integration of advertising planning, media buying, promotions management, and other tasks currently handled by multiple agencies. Companies that build these capabilities will nd that their marketers can play a more strategic business role. Yesterdays marketing organizations used to stick to tactical functions to support strategic decisions that had already been made. Tomorrows marketing leaders will help set the strategy for major advertising, promotions, and public relations campaigns, and serve as growth champions in the development of brands, products, and new businesses. Over the next few years, FMCG marketers will look to shift their creative and media strategies to fully capitalize on the online opportunity and make digital media a bigger
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priority in their brand strategies. In India, mass marketing through traditional print and television will continue to play a role in driving increased awareness, but marketers will need to develop their presence in interactive channels that not only drive greater brand awareness but also enable new insights into consumers. 4.2.5. Re-engineering Supply Chains8 As consumer behaviour shifts across segments, re-engineering the supply chain will be critical to stay abreast of these changes and reach an increasingly fragmented customer base. Supply chains are already under pressure to deliver at lower costs and offset generally rising costs for raw materials and energy. This pressure may intensify even further as governments (either nationally or at the state or city level) put a price on carbon emissions and establish new regulations on waste. Changing tax laws with the implementation of GST would lead to simplication and more uniformity. Todays supply chains were built on yesterdays blueprints, in a world where low energy and transportation costs, cheap labour, relatively inexpensive raw materials, complex tax laws and scarce environmental regulations were xed assumptions. The supply chain of the future, by contrast, will have to be leaner, greener, and more tailored to manage increasing complexity. This will require three key actions: Rethink product and packaging formulation: Companies will need to consider their choices in product design and process technologythe inherent drivers of cost, sustainability, and risk. What ingredients are used, how
much packaging is required for the nished product, and what changes in material choice or manufacturing process would reduce material and energy usage would be important decision points. It is essential to understand the economics of product and process choices before considering supply chain changes. Small changes to such inherent factors can create large market and cost impacts. Restructure the supply chain network and footprint: Once product and process choices have been reconsidered, the supply network needs to be realigned to balance cost, service, risk, and sustainability in meeting market demand. Changing regulation, specically GST, as well as new areas of demand acceleration, such as eastern India, will need to be incorporated. The challenge for manufacturers is to make the right footprint trade-offs not only for today but also for an uncertain tomorrow. Successful companies will build more exibility and adaptability into their networks with investments in technologies and assets that can react to changes in demand as well as variability in factors like labour costs and energy use. Realign the role of suppliers and third parties: In an environment of increased uncertainty, close collaboration between supply chain partners has become more important than ever. Pressures felt by manufacturershigher material costs, sustainability requirements, supply and demand imbalances, product safety issues, resilience and environmental concernsare shared by suppliers. Today, the role played by suppliers has gone well beyond merely providing raw
materials. Now suppliers routinely provide a broad set of materials and services. They also participate in product development efforts by sharing ideas as well as making investments in new processes and technologies. 4.2.6. Partnering with Modern Trade Modern trade is still at a nascent stage in India. The share of modern trade in retail last year was approximately ve per cent. However, it has been growing very rapidly since at approximately 25 per cent and is likely to contribute nearly 25 per cent of the total retail sales in India, becoming a very critical partner. This will be more critical for many categories which even today derive signicant sales from this channel given the consumer base. FMCG companies and retailers have started on a somewhat adversarial note. Uncertainty about the business models (store formats) as well as consumer reactions coupled with traditional mistrust have been contributors to this uncomfortable partnership. Negotiations over price, promotional support, and marketing budgets, among other persistent areas of disagreement, often result in damaged relationships and minor gainsonly to have the ghts resume the following year. For more than a decade, retailers and suppliers in many developed markets have tried to learn to collaborate more and move beyond the old zerosum games. Their initiatives have included assigning captains to work with each other on ways to drive category growth and forming industry groups (such as Efcient Consumer Response and Collaborative Planning, Forecasting, and Replenishment) that pursue supply chain optimization. Yet despite all the hard work, only partial success has been achieved.
52
Retailersupplier partnerships have failed primarily because buyers tend to view their value in a limited way: purely as a means of extracting lower prices or extra-promotional dollars from FMCG suppliers in their yearly negotiations. Buyers often walk away from a negotiation feeling successful, unaware that their victory may well have been compromised by the failure to address issues that could have much more impact on retailer and supplier prots, such as in-store availability. The shelves are still not fully stocked, and what seemed like a highly protable days work is actually only a slightly larger share of a smaller pie. The nascent stage of modern trade in India provides FMCG players and also the retailers with a unique opportunity to learn from global models and get to a win-win position at a faster rate. The benets of collaboration include: Revenue-margin enhancement: Working jointly to harness complementary skills and apply the knowledge needed to grow a category can be a win-win proposition. This effort can be as simple as linking the suppliers consumer insight to the retailers proper process improvement. A wide range of supplier-related processes can be improved by more collaborative retailersupplier relationships, including promotion planning and execution, demand forecasting, and stock replenishment. One of the best sources of information for improving these processes is the retailers pointof-sale data. Supply chain improvements: More efcient distribution, streamlined inventory, increased product availability, and improved merchandising operations are all
within the reach of collaborative retailersupplier relationships as well . Moving from a supplier to a partner will require FMCG companies to pay careful attention to how they structure their relationship. They may reap rich rewards if they were to: Generate a full basket of possibilities, but home-in on a few prioritized opportunities that are critical to both businesses. Establish an open dialogue, but ensure that the terms of all agreements are explicitly dened upfront. Create transparency by sharing benets, costs, and information openly, but build in appropriate condentiality measures. Set both short- and long-term agendas with supply partners to capture value quickly but still pursue the big ideas. Gain top-level support, but stay focused on the execution. Be more open with all suppliers, but choose collaboration partners wisely. 4.3. Implications for Other Stakeholders While FMCG companies will have to signicantly change to meet the requirements of the evolving industry, this will also have an impact on the entire ecosystem and other stakeholders. We have broadly divided the stakeholders in the FMCG industry into these ve entities FMCG players, government, retailers, NGOs and investors. Each of these stakeholders will need to play a key role to support the
growth of the industry towards a win-win situation for all (see Exhibit 31, p. 54). 4.3.1. Government The FMCG industry supports many social objectives and plays a key role in driving economic growth by providing signicant direct and indirect employment opportunities, making vast contributions to the exchequer, and supporting growth of agriculture through backward linkages. The government has taken several steps towards inclusive growth of the FMCG industry by supporting the demand growth, which should be continued in the future. However, on the supply side, there are a few areas which need regulatory intervention to unlock the breakthrough potential of the industry. These include implementation of GST which can save FMCG companies from multi-layered taxes and drive long-term efciencies in supply chain; allowing FDI in multi-brand retail which will enable large global retailers to bring best-practices to India; enforcing regulations to curb counterfeit consumer products which will signicantly reduce economic loss to the industry; revamping the Agriculture Products Marketing Act to allow food processing players to buy directly from the farmers; and revamping labour laws to drive efciencies among FMCG manufacturers. 4.3.2. Retailers As discussed earlier, retailers and FMCG players have a symbiotic relationship and need to co-operate with each other for smooth operations and growth enhancement. Both traditional retailers and organized retailers will need to collaborate with the FMCG players for driving breakthrough growth in the sector. They should focus on
53
co-investment in technology and improvement of infrastructure. For the traditional retailers, better infrastructure is required at the pointof-sale which ensures uninterrupted electricity, IT infrastructure for capturing sales and collection. For the organized retailers, while the focus has to be on increasing efciency and driving differentiation, investment in supply chain and greater partnership with suppliers for the overall category development will be required to derive long-term economic benets. Also, organized retailers and FMCG players can share talent and best
practices, while driving overall FMCG growth. 4.3.3. NGOs NGOs which act as the guard rails of the FMCG industry can have a major role to play in driving sustainability efforts. Going forward, NGOs would need to act aggressively as the sustainability gatekeepers, and increasingly monitor and track the industry to ensure that best-practices are highlighted and sustainability agenda is not ignored. Secondly, NGOs can indirectly continue to enable expansion FMCG offtake into
rural markets, acting as nancial enablers by giving credit to small retailers / entrepreneurs and through other measures. 4.3.4. Investors Global as well as domestic investors should seriously consider the Indian FMCG industry for future investments given the highly attractive market. Also, along with market expansion, investors will need to monitor FMCG companies, tracking their expenditures to ensure that the bottom-line growth matches / exceeds the top-line growth.
Exhibit 31: FMCG Industry Stakeholder Map
FMCG Players
Government
Retailers
NGOs
Investors
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Endnotes
1
The FMCG industry has been defined to include these categories: food products, personal care, oral care, fabric care, hair care, OTC products and baby care. The size of the industry has been estimated through retail sales, and the growth rates indicate nominal growth of the industry, and include both the organized and unorganized FMCG industry. Conversion of 1US$ = INR 45 has been used in the document.
2 According to Rostow, it is possible to identify all societies, in their economic dimensions, as lying within one of five categories: the traditional society, the preconditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption. 3
Goldman Sachs projections LOreal Deutsche Report, MSN News. Source: Euromonitor http://www.thehindubusinessline.com/2010/04/20/sories/2010042053960500.htm Booz & Company, Bring Mass Broadband to India: Roles for Government and Industry, 2010. Booz & Company, Next Generation Supply Chains, 2009.
About the Authors Abhishek Malhotra is a Partner with Booz & Company and is based in Mumbai. He leads the Consumer, Media & Retail work for the firm in India. Abhishek has 13 years of consulting experience with Booz and his main focus has been business transformation and operations strategy with experience in consumer, media, retail and industrials products. He has participated in engagements in Asia, Australia, Europe, and North America. Abhishek received his MBA from the Indian Institute of Management, Ahmedabad, India and his BE in Electronic Engineering from Punjab Engineering College, Chandigarh, India. Vikash Agarwalla is a Senior Associate with Booz & Company and is based in New Delhi. He works as a part of the Consumer, Media & Retail practice of the firm in India. He has over 7 years of management consulting experience and his main focus has been business transformation and operations strategy with experience in consumer, media, retail and industrials products. Vikash received his MBA from the Indian Institute of Management, Lucknow, India and his BE in Mechanical Engineering from Delhi College of Engineering, Delhi, India. Srishti Chaudhry is a senior consultant with Booz & Company and is based in Gurgaon. She has experience in growth, financial planning and business transformation aspects of consumer products, energy and healthcare industries. Srishti studied business management in the Indian Institute of Management, Ahmedabad.
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FMCG Roadmap To 2020 - The Game Changers

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FMCG Roadmap To 2020 - The Game Changers

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Confederation of Indian Industry Since 1895

2. Determinants of Industry Growth and Outlook for the Future

3. Megatrends Shaping the Indian FMCG Industry

Goldmine at the Bottom of the Pyramid

4. Implications for the FMCG Industry Industry Paradigms in 2020

Imperatives for the FMCG Industry Implications for Other Stakeholders 55 55

About the Authors

FMCG Roadmap to 2020

MESSAGE FROM CONFERENCE CHAIRMAN

FMCG Roadmap to 2020

FMCG Roadmap to 2020

FMCG Roadmap to 2020

ABBREVIATIONS AND ACRONYMS

FMCG Roadmap to 2020

FMCG Roadmap to 2020

Exhibit 2: Selected Category Growth

35% 24% 16% 8% Oils Biscuits 11% 26% 21%

Fruit Drinks Skin Care Toothpaste

Source: IDFC Institutional Research, Euromonitor, Booz & Company analysis

FMCG Roadmap to 2020

Exhibit 3: Sales Growth FMCG Players

19% (CAGR) 17% 16%

Source: CMIE, Booz & Company analysis of ~100 FMCG players

FMCG Roadmap to 2020

2 DETERMINANTS OF INDUSTRY GROWTH AND OUTLOOK FOR THE FUTURE

Exhibit 4: Key Drivers of the FMCG Industry in India

PAST GROWTH (2001-2010)

FUTURE GROWTH (2011-2020)

CONTRIBUTION TO FMCG TRANSFORMATION

2.3% urbanization Lifestyle Changes ~60% people in 15-59 agegroup in 2010

NREGA Government Policy Farmer loan-waiver

FMCG Roadmap to 2020

Exhibit 5: FMCG Growth Ladder

UNFORESEEN FUTURE DRIVERS

Population growth Increasing penetration (access to rural areas, more coverage)

Modern Trade + Technology Investments + Regulations

FMCG Roadmap to 2020

Exhibit 6: Growth Scenarios of FMCG Sector

Base Case 2850 12%

17% 12% 1300 2300 4000

Source: News articles, Booz & Company analysis

FMCG Roadmap to 2020

3 MEGATRENDS SHAPING THE INDIAN FMCG INDUSTRY

Exhibit 7: Key Trends Shaping the FMCG Market in India

Accelerating Premiumization Evolving Categories

Rapid Globalization Many Indias Growing Modern Trade

Eco-consciousness Game-changing Technologies Enabling Policies

FMCG Roadmap to 2020

Exhibit 8: Household Distribution by Income and Profiles of Affluent Consumers in India

HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME

86% 64% < INR 0.2 million (Bottom of the Pyramid)

Source: McKinsey Global Institute, NCAER, Booz & Company analysis

FMCG Roadmap to 2020

FMCG Roadmap to 2020

Exhibit 9: Estimated Age Distribution of Indian Population, 2010

Source: United Nations; Booz & Company analysis

FMCG Roadmap to 2020

FMCG Roadmap to 2020

Exhibit 10: Evolving Needs of Middle Class Consumers in India

HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME

86% 64% < INR 0.2 million (Bottom of the Pyramid)

Source: McKinsey Global Institute, NCAER, Booz & Company analysis