MICHAEL PORTER’S 5 FORCES

MODEL AND
FUTURE TRENDS OF FMCG
INDUSTRY
 \

1. Barriers to Entry : -
Entry of new players in an industry raises the level of competition, thereby reducing its attractiveness.
The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some
industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency,
restaurants, FMCG ).

Key barriers to entry include:-

 Economies of scale
 Product differentiation
 Brand Identity
 Customer switching costs
 Access to industry distribution channels
 Capital requirement
 Access to technology
 Government Protection
 Barriers to Entry
6

1 Barriers to Entry

 Economies of Scale are the key determinants of market structure and entry for any organization. In
FMCG Sector Economics of scale is highly attractive because units produced of goods is very larger
scale and the costs incurred on those is very less

 Differentiation looks to make a product more attractive by contrasting its unique qualities with other
competing products, in FMCG sector differentiation has been done via color, size, shape, quantity
etc. Product differentiation in FMCG sector is highly attractive

 The most visible elements of a brand are colors, design, logotype, name, symbol, etc. A well-built
brand identity will effectively communicate a company’s personality and its product value to
potential customers, helping build brand recognition, association and loyalty. So the brand identity is
very high in FMCG Industry and the customer switching cost is very low because there are ample
no. players in the market

 There are huge availability of distribution channels in FMCG like manufacture, retail outlets,
wholesaler etc and

custmers
Retail
outlets
Wholesaler

Manufacture

 The Indian FMCG Industry is characterized with modest entry and exit barriers.
 2. Rivalry Among competitors:-
Competitiveness among the Indian FMCG players is high. With more MNCs entering the country, the
industry has become highly fragmented.

Spending on advertisements continues to grow and marketing budgets as well as strategies are
becoming more aggressive.

Rivalry among competitors is includes:-

 Number of competitors
 Industry growth
 Differentiation
 Switching cost
 Openness of terms of sale
 Excess capacity
 Strategic stakes

Rivalry among competitors

6
5
4
3
2
1
0 Rivalry among
competitors

 The availability of market players in FMCG is really high which increase competition in market The
Top 5 market leaders in FMCG Industry, in terms of revenue and profits
 FY15 Revenue(Cr.) FY15 Profit(Cr.)
45000
12000
40000
10000
35000
30000 8000
25000
6000
20000
15000 4000

10000 2000
5000
0
0

 FMCG has been a safe sector for investors looking for predictable margins and stable returns during
the economic crisis. So we can say that the industry growth in the FMCG sector is high.

 The product differentiation is moderate in FMCG Sector that’s by the differentiation in competitors
is also moderate and switching cost from one company to another is low in this sector

 The intensity of competitive rivalry increases when success in an industry is important to a large
number of firms. For example, the success of a diversified firm may be important to its effectiveness
in other industries, especially when the firm is in interdependent or related industries. The high
strategic stakes impact the long term profit potential for an organization in this sector there are ample
no. of competitors so that we can say that the excess capacity is high and contribution of investor and
stakeholders is also high.

3. Bargaining Power of Suppliers :-

Suppliers to the industry wish to capture as much of the profit in the value chain as possible prices are
generally governed by international commodity markets, making most of the FMCG companies a
price takers. Due to the long term relationships with suppliers etc., the FMCG companies negotiate
better rates during times of high input cost inflation. If an intermediary is earning excessive profits,
suppliers will raise prices in order to capture a greater share of the profit

The bargaining power of suppliers includes:-

 Number of suppliers
  Availability of substitute
 Supplier’s threat of forward integration
 Industry’s threat of backward integration
 Contribution to cost
 Industry’s importance to supplier

 In this sector the power of suppliers of raw materials and intermediate goods is not very high
because there is ample number of substitute suppliers available so the bargaining power of the
suppliers is low

 All firms must recognize that they compete against firms producing substitute products, those
products that are capable of satisfying similar customer needs but come from outside the industry and
thus have different characteristics. So the availability of substitute is really high in FMCG sector

 high-volume, low-margin fast-moving consumer goods industry contributed moderate rate of cost
due to the involvement of advertisement, manufacturing, packaging so that importance to supplier is
also moderate

Bargaining power of suppliers

6

0
No. of suppliers Availability of Supplier's Industry’s Contribution to Industry’s
substitutes threat of threat of cost importance to
forward backward supplier
integration integration
Bargaining power of suppliers

4. Threat of Substitutes: -
The presence of substitute products in FMCG industry attractiveness and profitability because they limit
price levels. The threat of substitute products depends on:

 Availability of close substitute

  Switching cost
 The relative price and performance of substitutes
 Profitability of the producers of substitutes

 Being an essential commodity the demand for consumer products is elastic. Several brands are
positioned with narrow product differentiation. Companies entering a category /trying to gain market
share compete on pricing which increases products substitution. Hence, threat of substitute is high in
the FMCG industry.
E.g. Available substitutes of Colgate in market

 the cost of switching from one supplier’s product to another supplier’s product is easy if the switching
cost is lower but if it’s high then it’s difficult to buyers , the switching cost in FMCG sector is low
because of easy availability of products

 the relative price and performance of substitutes are closely related in this sector and profitability of
producers is depend on the performance of the substitute

Threat of substitutes

Availabiity of close substitute

Switching Cost

The relative price and

performance of substitutes
Profitability of the producers of
substitute
5. Bargaining Power of Consumers: -
Bargaining power of buyers or consumers depends on:-

 Number of buyers
 Availability of suppliers
 Switching cost
 Contribution to quality
 Contribution to cost

 While firms seek to maximize their return on invested capital, buyers are interested in purchasing
products at the lowest possible price. To reduce cost or maximize value, customers bargain for higher
quality or greater levels of service at the lowest possible price by encouraging competition among
firms in the industry. Into this sector the availability of buyers are high.

 High brand loyalty for a product discourages customers’ product shift. But low switching cost and
aggressive marketing strategies under intense competition between the FMCG companies, induce
consumers to switch between products, thereby driving value for money deals for consumers.

 Brand loyalty for a product contributed good quality and high cost.

Bargaining power of buyers

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
No. of buyers Availability of Switching cost Contribution to Contribution to
suppliers quality cost

Bargaining power of buyers

Overall assessment:-
 FMCG Industry
6

0
Threat of new Rivalry among Power of Power of Threat of Overall
entrants competitores buyers suppliers substitutes Attractiveness
FMCG Industry Overall
assessment

Future trends of FMCG industry:-

 Fast moving consumer goods will become a Rs 400,000-crore industry by 2020. the FMCG
sector witnessed robust year-on-year growth of approx. 11 per cent in the last decade, almost tripling in
size from Rs 47,000 crore in 2000-01 to Rs 130,000 crore now (it accounts for 2.2 per cent of the
country’s GDP). Growth was even faster in the past five years — almost 17 per cent annually since
2005. It identifies robust GDP growth, opening up of rural markets, increased income in rural areas,
growing urbanization along with evolving consumer lifestyles and buying behaviors as the key drivers
of this growth

 Goods and Service Tax(GST), which will replace the multiple indirect taxes levied on FMCG sector
with a uniform, simplified and single-pint taxation system, is likely to be implemented soon. A swift
move to the proposed GST may reduce prices, bolstering consumption for FMCG products.

 FDI in retail- The decision to allow 51% FDI in multi brand retail and 100% FDI in single brand
retail augers well for the outlook for the FMCG sector. The move is expected to bolster employment,
and supply chains, apart from providing high visibility for FMCG brands in organized retail markets,
bolstering consumer spending, and encouraging more product launches. FDI of 100% under the
automatic route is allowed in the food processing sector, which is considered as a priority sector

 FMCG growth will be driven by new segments such as urban India’s poorest households and low-
income value seekers visiting modern trade outlets for the first time
 Expanding Distribution Network- In order to tap the growing potential of rural markets, the
companies are now focused on improving their distribution networks to expand their reach in rural
India.

 Rising Importance of Smaller-sized packs- Companies are increasingly introducing smaller stock
keeping units (SKUs) at reduced prices. This helps them sustain margins, maintain volumes from price
conscious costumers and increase their consumer base.

 Lifestyle Products- Increasing urbanization and higher disposable incomes are encouraging many
consumers to move from unbranded to branded products, bolstering growth in the FMCG market.
Despite the current slowdown, the demand for premium products (comprising of wheat cornflakes and
muesli, baked and non-fried potato chips and snacks, and diet beverages, 100% juices and organic or
green tea) in the health and wellness space, is rising, encouraging companies to launch more premium
products. Moreover, demand for sophisticated personal care products is also on the rise as people
become beauty and health conscious.

 The anti-ageing skincare category grew five times between 2007 and 2008. It’s today the fastest-
growing segment in the skincare market. Olay, Procter & Gamble’s premium anti-ageing skincare
brand, captured 20 per cent of the market within a year of its launch in 2007 and today dominates it
with 37 per cent share.

 Entry of New Brands (Brand/ Line Extension)- Innovation is a driving factor in Indian FMCG.
Several companies have started innovating or customizing their existing product portfolios for new
consumer segments. Brand extensions are 5 times more successful than launching brands, increasing
sales by 30% and contributing to 30% to brand sales

Conclusion: -
FMCG Sector is a high volume and low margin industry, according to Michael Porter’s 5 forces model
in FMCG industry, the number of the buyers and the number of suppliers both are high, competition is
also very high that’s by substitutes are easily available in there. If customers are not so very brand loyal
that means because of substitute are easily available, the switching cost of buyers is also very low.

So overall we can say that the FMCG sector is highly admirable in India because the contribution of
this sector is almost 2.5% of the total GDP