There is a strong MNC presence in the Indian FMCG market and out of the top 10 FMCG companies, four

are multinationals while two others have significant MNC shareholdings. Unlike several other sectors where multinationals have entered after 1991, MNCs have been active in India for a long time. The top five listed FMCG companies on the basis of their sales turnover in the last financial year (either year ended December 31, 1999 or March 31, 2000) are: Company Name Hindustan Lever Ltd. I T C Ltd. Nirma Ltd. Nestle India Ltd. Britannia Industries Ltd. Colgate-Palmolive (India) Ltd. Godfrey Phillips India Ltd. Dabur India Ltd. Smithkline Beecham Consumer Healthcare Ltd. Godrej Soaps Ltd. Marico Industries Ltd. Cadbury India Ltd. Procter & Gamble Hygiene & Health Care Ltd. Reckitt & Colman Of India Ltd. I S P L Industries Ltd. ym(finance_year) 199912 200003 200003 199912 200003 200003 200003 200003 199912 200003 200003 199912 200006 199812 199903 sales Rs. Crores 10978.31 7971.94 1717.88 1546.43 1169.84 1123.53 1082.63 1046.28 743.38 714.74 649.05 511.08 492.85 435.33 21.57 Profit After Tax Rs. Crores 1073.73 792.44 234.1 98.47 51.02 51.79 42.1 77.67 97.61 61.89 35.73 36.7 75.03 31.47 0.04

Among the major companies, Hindustan Lever has a strong presence in the food, personal care and household care (detergents) sectors; ITC is the market leader in cigarettes; Nirma has a strong presence in the detergent market; Nestle and Britannia are active in the food sector and Colgate has a strong presence in the oral care segment. Exports India is one of the worlds largest producer for a number of FMCG products but its FMCG exports are languishing at around Rs 1,000 crore only. There is significant potential for increasing exports but there are certain factors inhibiting this. Small-scale sector reservations limit ability to invest in technology and quality upgradation to achieve economies of scale. Moreover, lower volume of higher value added products reduce scope for export to developing countries.

FMCG >> SWOT Analysis >> Strengths:

Well-established distribution network extending to rural areas. Strong brands in the FMCG sector. Low cost operations

Weaknesses:

Low export levels. Small scale sector reservations limit ability to invest in technology and achieve economies of scale. Several "me-too products.

Opportunities:

Large domestic market. Export potential Increasing income levels will result in faster revenue growth.

Threats :

Imports Tax and regulatory structure Slowdown in rural demand

Policy issues Tax reforms The government has gradually removed the restrictions on imports of consumer goods in the country and also significantly reduced custom duties. The domestic tax structure of these products, however, has not been rationalised to provide level playing field for competition. This is adversely affecting the growth of the FMCG industry and could have far reaching adverse impact. The following taxation issues need urgent attention of the government: 1) Extremely high incidence of tax on certain product categories Some FMCG products such as shampoos, processed food, soft drinks and toiletries containing alcohol attract high rates of excise duty and sales tax. The total tax incidence in some cases is more than 60 per cent of the cost or more than 30 per cent of MRP. Such

high tax incidence hampers growth of these product categories besides encouraging manufacture of spurious products and smuggling. It is recommended that the total excise incidence of FMCG products should not exceed 16 per cent in the case of non food items and eight per cent in the case of processed foods. Similarly, the marginal rates of sales tax, which is currently in the range of 10 to 25 per cent, should not exceed 12 per cent. 2) Irrational domestic tax structure encouraging imports Significant reduction in custom duty rates of consumer goods has made imported product cheaper as compared to indigenously manufactured products, due to irrational domestic tax structure. For instance, goods manufactured in India suffer from cascading effects of taxes on inputs as additional cost compared to imports. The cascading effect of sales tax and local levies on inputs used in domestic manufacture should be eliminated by providing either MODVAT credit or by introducing notional VAT covering both central and state taxes on an urgent basis. Moreover, MRP-based excise duty is levied on a large number of FMCG products. Countervailing duty on the same product when imported is charged on CIF value. The MRP based assessable value for excise duty does not allow abatement for post manufacturing costs such as advertising and selling expenses whereas CIF value considered for the purpose of import duty does not include costs of these elements incurred subsequently by importers. This differential basis creates unfair competition as tax incidence on domestic manufacture could be considerably higher in case of those products which incur significant marketing and distribution cost. There is a need to bring parity in tax incidence between domestic manufacture and imports by including all such elements of post manufacturing costs while deciding the abatement percentage of MRP based duty. 3) Inverted Duty structure for selected inputs Duty on certain raw materials is higher or the same as compared to finished products in which these materials are used. Such raw materials include oils and chemicals like Soda ash, caustic soda and LAB. In addition to customs duty, raw materials are also subject to SAD/sales tax and octroi and therefore total tax incidence and cost of indigenous manufacture goes up. The import duty on raw materials needs to be rationalised so that it does not exceed 60 to 70 per cent of the duty on finished goods. 4) Need for rationalisation of taxes on processed foods Processed food industry, with its vertical integration with the agricultural sector has significant potential for employment generation and economic growth. The existing tax

structure and its high overall incidence, however, has been hampering the growth of the processed industry. The increase in excise duty in last years budget from eight per cent to 16 per cent has adversely affected the growth of processed foods industry. It is recommended that marginal rate of excise duty on processed foods should not be more than eight per cent and the sales tax should be levied at four per cent. 5) Cascading effect of Special Excise Duty The special excise duty introduced last year is not "cenvatable except in the case of selected products. Most FMCG products covered by tariff chapter 33 such as shampoos, ice creams and cosmetics are subject to SED. This tariff chapter also contains very wide definition of the term "manufacture which includes labeling, relabeling or conversion of large packs into small packs. The levy of SED on such products therefore leads to double taxation when goods are labeled or converted into small packs after manufacture. It is recommended that SED should be made "cenvatable; alternatively the term "manufacture needs modification , atleast for the purpose of SED by excluding labeling, relabeling or conversion into small packs. Other suggestions 1. A joint industry government initiative for building a "Made in India brand for FMCG products is required. With many multinationals moving into the Indian FMCG market, a concerted marketing strategy which creates strong brands will be needed for Indian FMCGs to gain recognition in the market. Better packaging materials are necessary as a large number of FMCG products are perishable . The government must facilitate more R&D in packaging materials as this will help in cutting wastes and costs in the sector. The possibility of a longer shelf life will encourage production of goods of higher value addition by companies in the sector. While import of most items has been allowed, the government is not geared to prevent import of spurious products. In other countries, FMCG goods have to be cleared by regulatory authorities before they are allowed to enter domestic shores. This is not happening in India and the government needs to undertake a comprehensive crackdown on these products. The small-scale reservation policy should be reviewed as it hampers the growth of this sector. Many reserved products, including several FMCG products can be freely imported. Under the current policy, not only are Indian producers of many FMCG products restricted from attaining economies of scale, they also have to compete against import that do not face constraints on small scale reservations. Food laws such as the PFA Act should be amended and be made contemporary.

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Fmcg introduction The Fast Moving Consumer Goods (FMCG) sector is the fourth largest sector in the economy with a total market size in excess of Rs 60,000 crore. This industry essentially comprises Consumer Non Durable (CND) products and caters to the everyday need of the population. Product Characteristics Products belonging to the FMCG segment generally have the following characteristics:

They are used at least once a month They are used directly by the end-consumer They are non-durable They are sold in packaged form They are branded

Industry Segments The main segments of the FMCG sector are:

Personal Care: oral care; hair care; skin care; personal wash (soaps); cosmetics and toiletries; deodorants; perfumes; paper products (tissues, diapers, sanitary); shoe care.

Major companies active in this segment include Hindustan Lever; Godrej Soaps, ColgatePalmolive, Marico, Dabur and Procter & Gamble.

Household Care: fabric wash (laundry soaps and synthetic detergents); household cleaners (dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticides and mosquito repellants, metal polish and furniture polish). Major companies active in this segment include Hindustan Lever, Nirma and Reckitt & Colman.

Branded and Packaged Food and Beverages: health beverages; soft drinks; staples/cereals; bakery products (biscuits, bread, cakes); snack food; chocolates; ice cream; tea; coffee; processed fruits, vegetables and meat; dairy products; bottled water; branded flour; branded rice; branded sugar; juices etc. Major companies active in this segment include Hindustan Lever, Nestle, Cadbury and Dabur.

Spirits and Tobacc Major companies active in this segment include ITC, Godfrey Philips, UB and Shaw Wallace. An exact product-wise sales break up for each of the items is difficult.

The size of the fabric wash market is estimated to be Rs 4500 crore; of household cleaners to be Rs 1100 crore; of personal wash products to be Rs 4000 crore; of hair care products to be Rs 2600 crore; of oral care products to be Rs 2600 crore; of health beverages to be Rs 1100 crore; of bread and biscuits to be Rs 8000 crore ; of chocolates to be Rs 350 crore and of ice cream to be Rs 900 crore. In volume terms, the production of toilet soap is estimated to have grown by four per cent in 1999-2000 from 5,30.000 tonnes from 5,10,000 tonnes in 1998-99. The production of synthetic detergents has grown by eight per cent in 1999-2000 to 2.6 million tonnes. The cosmetics and toiletries segment has registered a 15 per cent growth in 1999-2000 as against an annual growth of 30 per cent recorded during the period 1992-93 to 1997-98. In the packaged food and beverage segment, ice cream has registered a negligible growth and the soft drink industry has registered a six per cent growth in 1999-2000. Nirma back ground The Nirma story began in 1969 and since then it has expanded its detergents (cakes and powders), soaps, soap intermediates Alfa Olefin Sulphonate (AOS) to a level of Rs. 82 billion. Today, Nirma has a Rs.17 billion share in this market and has been acknowledged as a marketing miracle. Nirma known for its focus on cost effectiveness by integrating latest technology manufacturing facilities with innovative marketing strategies to create world class brands, has by passed MNCs like HLL, P&G to become the market leader (in terms of volumes) in this price-sensitive industry. In value terms, Nirma holds 16% market share in the branded detergents segment. The manufacturing and marketing operations were divided in several closely held group companies. In FY97, Nirma group restructured its operations and merged 4 companies, namely Nilinta Chemicals Ltd, Nirma Detergents Limited, Nirma Soaps and Detergents Limited and Shiva Soaps and Detergents Limited, with its flagship Nirma Limited. Kisan Industries, the sole separate detergent manufacturing unit has been merged with Nirma in March '00. Nirma now owns all the detergent manufacturing facilities of the group, besides toilet soap/other industrial chemicals manufacturing facilities and a modern packaging unit owned by Kisan. Marketing of products is carried out through a 100% subsidiary, Nirma Consumer Care Limited (NCCL). NCCL is the licensee for using the trade marks and the brand Nirma, which are owned by Nirma Chemicals Pvt Ltd. NCCLs lease for the brand will be in

perpetuity, except in the event of Karsanbhai & Associates equity stake in NCCL falling below 51%.

Shareholding Pattern Share holding pattern The share capital of the company is Rs.33.9 crore and the total shares outstanding amount to 3.39 crore. The face value per share is Rs.10. The stock is currently trading at Rs. 418, as on May 28, 2001. The market capitalization of the company is Rs.1415.85 crore. The free float is 18% and the promoters hold 72% stake in the company.

Business Overview Nirmas principal business activities pertain to manufacture and sale of detergents and toilet soap. Nirma dominates the popular detergent segment with brands like Nirma Popular powder, Nirma Detergent powder, Nirma bar, etc. Super Nirma detergent powder is positioned in the mid-priced segment. Toilet soaps recorded a strong 40% plus volume and value growth driven by the success of the launch of "NIMA" brand in FY00. Nirma also sells glycerine, LAB and other industrial chemicals. The Soaps & Detergents Industry is characterized by a number of small scale manufacturers at one end of the spectrum and large companies (including MNC's) at the other end. The market for Soaps & Detergents has increased manifold with changing lifestyles, growing purchasing power, increased awareness about personal hygiene, responsiveness of the consumer to brands offering superior value and the spread of audio-visual media. Fabric Wash Industry in India is characterized by (like any other non-durable product category in India) low per capita consumption and substantial potential in rural markets ( in terms of category penetration and per capita consumption). Per capita consumption of fabric wash products in India is just 3.1 Kg, which is very low compared to developed and some developing countries. Also, this consumption figure has to be viewed against the fact that India's Active Matter standards are one of the lowest in the world. The Fabric Wash Industry is divided into Laundry Soaps, Synthetic Detergent Cakes & Powder. The Toilet Soaps Industry is segmented into economy, popular and premium segments. The market is witnessing fierce competition from MNCs and requires substantial efforts for market penetration and brand development, reflected by the fact that only 5% of total production comes from the small scale sector. The company is hoping to cash in on the advantages of the in-house production of soda ash and LAB, which together constitute 63 percent of the total costs of soaps and detergents. It is expecting to boost its sales revenue

by selling salt which is the by-product of soda ash. The company will be marketing the salt called "Nirma Salt" on a platform of "value for money", which is common to all its other products. At the moment Nirma Salt is being test marketed in Gujarat. It is planning to add another 60,000 to 70,000 tpa, to its existing toilet soap capacity of 1,10,000 tpa in Bhavnagar this fiscal. Plans are also under way to increase the detergent capacity from 8,00,000 tpa to 1.10 mn tpa. Nirma also plans to introduce new products and brand extensions in the personal care segment. Performance of segments The sales breakup of the company for FY00 and FY99 is as follows: Period ended Sales value (Rs mn) Detergents Glycerine Linear alkyl benzene Salt Shampoo Sulphuric acid Toilet soap Others Sales volume (unit) Detergents (Ton) Glycerine (Ton) Linear alkyl benzene (Ton) Salt (Ton) Shampoo (Ton) Sulphuric acid (Ton) Toilet soap (Ton) Unit realisation (Rs/unit) Detergents (Ton) Glycerine (Ton) 13,729 60,421 13,172 63,347 -4.05% +4.84% 590,031.0 4,269.0 17,688.0 3,588.0 19.0 51,588.0 75,102.0 615,749.0 4,810.0 31,552.0 1,044.0 4.0 67,028.0 106,626.0 +4.36% +12.67% +78.38% -70.90% -78.95% +29.94% +41.97% 8,100.4 257.9 761.3 9.0 1.4 64.6 3,275.3 2,259.6 8,110.7 304.7 1,565.3 2.6 0.3 134.1 4,674.9 2,383.6 +0.12% +18.15% +105.61% -71.11% -78.57% +107.59% +42.73% +5.49% 03/99 03/00 % change

Linear alkyl benzene (Ton) Salt (Ton) Shampoo (Ton) Sulphuric acid (Ton) Toilet soap (Ton)

43,040 2,508 73,684 1,252 43,612 Products

49,610 2,490 75,000 2,001 43,844

+15.26% -0.72% +1.79% +59.82% +0.53%

The main products for Nirma are detergent Cakes, Bathing Soaps, other products like salt and industrial products like linear alkyl benzene, sulphuric acid, glycerin, fatty acid, LAB and soda ash. SWOT Analysis Strengths: Strong Brand equity. Nirma is a Rs.17 billion umbrella brand offering consumers a broad portfolio of products at multiple price points in the Detergents, Soaps & Personal Care market. Produces a range of industrial chemical products which primarily serve as raw material or intermediates for Soaps & Detergents business. Market leadership in detergents market and fabric wash industry and second largest player in Toilet soaps industry. Wide distribution network. Weaknesses: High interest burden. Less presence in premium segment. Lack global tie ups and thus lacking in export markets. Opportunities: Exports. Acquisitions for strengthening its distribution tie ups. Entry into other categories like shampoos, toothpastes and fabric whiteners. Threats: MNCs coming to India particularly in Toilet and Soap industry. Emergence of small but strong regional players.