An analysis of Market Structure of FMCG Sector in India

Fast moving consumer goods (FMCG) is the fourth largest sector in the Indian
economy. There are three main segments in the sector food and beverages, which
accounts for 19% of the sector; healthcare, which accounts for 31% of the share;
and household and personal care, which accounts for the remaining 50% share.

According to a survey, the Indian FMCG industry grew 9.4% in the January-March
quarter of 2021, supported by consumption-led growth and value expansion from
higher product prices, particularly for staples. The rural market registered an
increase of 14.6% in the same quarter and metro markets recorded positive growth
after two quarters. E-commerce is likely to contribute 5% or US$ 4 billion to FMCG
sales by 2022

The rural FMCG market is expected to expand to US$ 220 billion by 2025. The Indian
processed food market is projected to expand to US$ 470 billion by 2025, up from
US$ 263 billion in 2019-20.

Indian online grocery market is estimated to exceed sales of about Rs. 22,500 crore
(US$ 3.19 billion) in 2020, a significant jump of 76% over the previous year. The
gross merchandise value (GMV) of the online grocery segment in India is expected to
increase 18 times over the next five years to reach US$ 37 billion by FY25. As of
February 2021, out of 39 Mega Food Park projects, 22 are operational, 15 are under
implementation and 2 are in-principle approval. Many FMCG brands partner with e-
commerce platforms such as Dunzo, Flipkart, Grofers and BigBasket to deliver
products at the doorstep of consumers during the COVID-19 pandemic.

FMCG companies are looking to invest in energy efficient plants to benefit the
society and lower cost in the long term. Dabur India has grown its rural network to
over 52,000 villages in March 2020, from 44,000 villages in March 2019. For 2020-
21, the company aims to have up to 60,000 villages. The sector witnessed healthy
FDI of US$ 18.19 billion from April 2000 to March 2021.

In January 2021, Udaan raised US$ 280 million (~Rs. 2,048 crore) in funding from
existing and new investors, including Lightspeed Venture Partners and Tencent. With
the latest infusion of capital, Udaan has earned a total of US$ 1.15 billion to
date. Although the company did not reveal the valuation information, sources stated
that the valuation exceeded US$ 3 billion after this deal.

Growing awareness, easier access, and changing lifestyle are the key growth drivers
for the consumer market. The focus on agriculture, MSMEs, education, healthcare,
infrastructure and tax rebate under Union Budget 2019 20 was expected to directly
impact the FMCG sector. Initiatives undertaken to increase the disposable income in
the hands of common man, especially from rural areas, will be beneficial for the
sector.

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Introduction

Fast-moving consumer goods (FMCG) sector is India’s fourth largest sector with
household and personal care accounting for 50% of FMCG sales in India. Growing
awareness, easier access and changing lifestyles have been the key growth drivers
for the sector. The urban segment (accounts for a revenue share of around 55%) is
the largest contributor to the overall revenue generated by the FMCG sector in
India. However, in the last few years, the FMCG market has grown at a faster pace
in rural India compared to urban India. Semi-urban and rural segments are growing
at a rapid pace and FMCG products account for 50% of the total rural spending.
Market Size

The retail market in India is estimated to reach US$ 1.1 trillion by 2020 from US$
840 billion in 2017, with modern trade expected to grow at 20 25% per annum, which
is likely to boost revenue of FMCG companies. Revenue of FMCG sector reached Rs.
3.4 lakh crore (US$ 52.75 billion) in FY18 and is estimated to reach US$ 103.7
billion in 2020. According to Nielsen, the Indian FMCG industry grew 9.4% in the
January-March quarter of 2021, supported by consumption-led growth and value
expansion from higher product prices, particularly for staples. The rural market
registered an increase of 14.6% in the same quarter and metro markets recorded
positive growth after two quarters.

Rise in rural consumption will drive the FMCG market. It contributes around 36% to
the overall FMCG spending. In the third quarter of FY20 in rural India, FMCG
witnessed a double-digit growth recovery of 10.6% due to various government
initiatives (such as packaged staples and hygiene categories); high agricultural
produce, reverse migration and a lower unemployment rate. The Indian processed food
market is projected to expand to US$ 470 billion by 2025, up from US$ 263 billion
in 2019-20.

Investments/ Developments

The Government has allowed 100% Foreign Direct Investment (FDI) in food processing
and single-brand retail and 51% in multi-brand retail. This would bolster
employment, supply chain and high visibility for FMCG brands across organised
retail markets thereby bolstering consumer spending and encouraging more product
launches. The sector witnessed healthy FDI inflows of US$ 18.19 billion from April
2000 to March 2021.

Some of the recent developments in the FMCG sector are as follows:

In June 2021, Dabur India announced its Rs. 550 crore (US$ 75.6 million) investment
to set up a new plant in Madhya Pradesh for manufacturing of food products,
ayurvedic medicines and health supplements.
In May 2021, Nepal-based CG Corp Global, known for its popular noodles brand Wai
Wai, announced its plan to invest Rs. 200 crore (27.42 million) to set up two new
manufacturing plants in West Bengal and Uttar Pradesh.
In April 2021, Rasna launched affordable immunity boosting syrup concentrates,
comprising Vitamin E, B12, B6, Selenium and Zinc.
In March 2021, ITC Ltd. launched milkshakes and cakes to expand in categories such
as chocolates and staples.
In March 2021, Sanjay Ghodawat Group launched RIDER, an energy drink. It is
available across all modern retail formats such as supermarkets, general stores and
e-commerce platforms.
In February 2021, Nestle India announced plans to reach ~1.2 lakh villages (with
each having population of over 5,000) over the next 2-3 years.
In February 2021, Food and snack company, Haldiram's partnered with Africa's
Futurelife to bring its nutritional food product range to India. The two companies
launched a range of four products—Smart Foods, Smart Oats and Ancient Grains,
Crunchy Granola and High Protein.
In January 2021, Tata Consumer Products announced that it is looking for ways to
add more of its beverages’ portfolio onto a direct-to-consumer platform to capture
the urban online market.
In January 2021, Tata Consumer Products introduced two new products, TATA Tea Tulsi
Green and TATA Tea Gold Care, and reformulated its existing Tetley Green Tea, with
added Vitamin C.
In January 2021, Dabur India decided to foray into the ‘cow ghee’ category. These
product will be prepared from milk sourced from indigenous cows bred in Rajasthan.
In January 2021, Dabur India decided to foray into the ‘cow ghee’ category. These
product will be prepared from milk sourced from indigenous cows bred in Rajasthan.
In January 2021, Del Monte has launched a special 1 litre pouch pack in India,
priced at Rs. 250 (US$ 3.42), thereby making olive oil affordable to consumers.
In January 2021, FMCG businesses in India are planning to expand their oral care
portfolio by entering new and niche categories such as mouth sprays, ayurvedic
mouth cleansers and mouthwashes to meet the rising consumer demand for hygiene
products.
For example, Pulling oil, an ayurvedic concoction used as a morning oral cleansing
ritual based on centuries-old Ayurvedic regimen, was launched by companies such as
Colgate Palmolive (India) Ltd. and Dabur India.
Government Initiatives

Some of the major initiatives taken by the Government to promote the FMCG sector in
India are as follows:

On November 11, 2020, Union Cabinet approved the production-linked incentive (PLI)
scheme in 10 key sectors (including electronics and white goods) to boost India’s
manufacturing capabilities, exports and promote the ‘Atmanirbhar Bharat’
initiative.
Developments in the packaged food sector will contribute to increased prices for
farmer and reduce the high levels of waste. In order to provide support through the
PLI scheme, unique product lines—with high-growth potential and capabilities to
generate medium- to large-scale jobs—have been established.
The Government of India has approved 100% FDI in the cash and carry segment and in
single-brand retail along with 51% FDI in multi-brand retail.
The Government has drafted a new Consumer Protection Bill with special emphasis on
setting up an extensive mechanism to ensure simple, speedy, accessible, affordable
and timely delivery of justice to consumers.
The Goods and Services Tax (GST) is beneficial for the FMCG industry as many of the
FMCG products such as soap, toothpaste and hair oil now come under the 18% tax
bracket against the previous rate of 23-24%. Also, GST on food products and hygiene
products have been reduced to 0-5% and 12-18% respectively.
GST is expected to transform logistics in the FMCG sector into a modern and
efficient model as all major corporations are remodelling their operations into
larger logistics and warehousing.
Road Ahead

Rural consumption has increased, led by a combination of increasing income and

higher aspiration levels. There is an increased demand for branded products in
rural India. The rural FMCG market in India is expected to grow to US$ 220 billion
by 2025 from US$ 23.6 billion in FY18.

On the other hand, with the share of unorganised market in the FMCG sector falling,
the organised sector growth is expected to rise with increased level of brand
consciousness, augmented by the growth in modern retail.

Another major factor propelling the demand for food services in India is the
growing youth population, primarily in urban regions. India has a large base of
young consumers who form majority of the workforce, and due to time constraints,
barely get time for cooking.

Online portals are expected to play a key role for companies trying to enter the
hinterlands. Internet has contributed in a big way, facilitating a cheaper and more
convenient mode to increase a company’s reach. The number of internet users in
India is likely to reach 1 billion by 2025. It is estimated that 40% of all FMCG
consumption in India will be made online by 2020. The online FMCG market is
forecast to reach US$ 45 billion in 2020 from US$ 20 billion in 2017.
It is estimated that India will gain US$ 15 billion a year by implementing GST. GST
and demonetisation are expected to drive demand, both in the rural and urban areas,
and economic growth in a structured manner in the long term and improved
performance of companies within the sector.