"Challenges before the Indian FMCG Sector &Designing a Blueprint for Future"

- by Amritanshu Mohanty *

Part - I

Markets all over the world have been on a roll in 2003 and the Indianbourses are no exception having gained almost 60% in 2003. During thisperiod, while there are sectors that have outperformed this benchmarkindex, there are also sectors that have under performed. FMCG registeredgains of just 33% on the BSE FMCG Index last year.At the macro level, Indian economy is poised to remained buoyant and growat more than 7%. The economic growth would impact large proportions of the population thus leading to more money in the hands of the consumer.Changes in demographic composition of the population and thus the marketwould also continue to impact the FMCG industry.Recent survey conducted by a leading business weekly, approximately 47per cent of India's 1 + billion people were under the age of 20, andteenagers among them numbered about 160 million. Together, they wieldedINR 14000 Cr worth of discretionary income, and their families spent anadditional INR 18500 Cr on them every year. By 2015, Indians under 20 areestimated to make up 55% of the population - and wield proportionatelyhigher spending power. Means, companies that are able to influence andexcite such consumers would be those that win in the market place.The Indian FMCG market has been divided for a long time between theorganized sector and the unorganized sector. While the latter has beencrowded by a large number of local players, competing on margins, theformer has varied between a two-player-scenario to a multi-player one.Unlike the U.S. market for fast moving consumer goods (FMCG), which isdominated by a handful of global players, India's Rs.460 billion FMCGmarket remains highly fragmented with roughly half the market going tounbranded, unpackaged home made products. This presents a tremendousopportunity for makers of branded products who can convert consumers tobranded products. However, successfully launching and growing marketshare around a branded product in India presents tremendous challenges.Take distribution as an example. India is home to six million retail outlets andsuper markets virtually do not exist. This makes logistics particularly for newplayers extremely difficult. Other challenges of similar magnitude existacross the FMCG supply chain. The fact is that FMCG is a structurallyunattractive industry in which to participate. Even so, the opportunity keepsFMCG makers trying.

Part - II

At the macro-level, over the long term, the efforts on the infrastructure front (roads, rails, power,river linking) are likely to enhance the living standards across India. Till date, India's per capitaconsumption of most FMCG products is much below world averages. This is the latent potentialthat most FMCG companies are looking at. Even in the much-penetrated categories like

soaps/detergents companies are focusing on getting the consumer up the value chain. Goingforward, much of the battle will be fought on sophisticated distribution strengths.

Structural Analysis Of FMCG Industry

Typically, a consumer buys these goods at least once a month. The sector covers a wide gamutof products such as detergents, toilet soaps, toothpaste, shampoos, creams, powders, foodproducts, confectioneries, beverages, and cigarettes. Typical characteristics of FMCG productsare: -

The products often cater to 3 very distinct but usually wanted for aspects - necessity,comfort, luxury. They meet the demands of the entire cross section of population. Priceand income elasticity of demand varies across products and consumers.

2.Individual items are of small value (small SKU's) although all FMCG products puttogether account for a significant part of the consumer's budget.3.The consumer spends little time on the purchase decision. He seldom ever looks at thetechnical specifications. Brand loyalties or recommendations of reliable retailer/ dealer drive purchase decisions.4.Limited inventory of these products (many of which are perishable) are kept by consumer and prefers to purchase them frequently, as and when required.

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

Distinguishing features of Indian FMCG Business

FMCG companies sell their products directly to consumers. Major features that distinguish thissector from the others include the following: -

Part - III1. Design and Manufacturing

Low Capital Intensity -

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

Technology -

Basic technology for manufacturing is easily available. Also, technology for most products has been fairly stable. Modifications and improvements rarely change thebasic process.

Third-party Manufacturing -

Manufacturing of products by third party vendors is quitecommon. Benefits associated with third party manufacturing include (1) flexibility inproduction and inventory planning; (2) flexibility in controlling labor costs; and (3) logistics- sometimes its essential to get certain products manufactured near the market.

2. Marketing and Distribution

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

High Initial Launch Cost -

New products require a large front-ended investment inproduct development, market research, test marketing and launch. Creating awarenessand develop franchise for a new brand requires enormous initial expenditure on launchadvertisements, free samples and product promotions. Launch costs are as high as 50-

100% of revenue in the first year. For established brands, advertisement expenditurevaries from 5 - 12% depending on the categories.

Limited Mass Media Options -

The challenge associated with the launch and/or brand-building initiatives is that few no mass media options. TV reaches 67% of urbanconsumers and 35% of rural consumers. Alternatives like wall paintings, theatres, videovehicles, special packaging and consumer promotions become an expensive but requiredactivity associated with a successful FMCG.

Huge Distribution Network -

India is home to six million retail outlets, including 2 millionin 5,160 towns and four million in 627,000 villages. Super markets virtually do not exist inIndia. This makes logistics particularly for new players extremely difficult. It also makesnew product launches difficult since retailers are reluctant to allocate resources and timeto slow moving products. Critical factors for success are the ability to build, develop, andmaintain a robust distribution network

Part - IV3. Competition

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

A general assessment of this would lead to the conclusion that FMCG is not a StructurallyAttractive Industry to Enter.

Entry barriers are high due the nightmare logistics associated with distributing a FMCG and thelimited mass media options available to build a brand. Likewise, the intensity of competition frombranded and unbranded goods and the power of retailers make the FMCG a structurallyunattractive industry in which to enter and difficult industry in which to remain a competitiveplayer.

Blue-print for the Future

To offer a blue-print for an industry which is one of the most dynamic and demanding is likescheduling events in my life for the days to come. One thing in common between this two wouldalways be the risk of uncertainty involved is very high.Any draft on these topics would certainly always involve issues like distributions, channel-conflict,optimizing operations (supply chain) and if not the last, rural marketing.

Part - V

This blueprint will delve 4 basic concepts and why it could be of major reckoning in the future.These are: -1.Excellence in operations - through Value Chain De-Verticalisation