Fast Moving Consumer Goods Sector Analysis Report

 Fast moving consumer goods (FMCG) is the 4th largest sector in the Indian
economy. There are three main segments in the sector – household and
personal care which accounts for 50%, healthcare which accounts for 31%,
and food and beverages which accounts for 19% of the sector.

 The urban segment accounts for 55% of the overall revenue generated by the
FMCG sector. On the other hand, the rural segment contributes 45% and is
growing at a faster pace compared to the urban segment. Demand for quality
goods and services have been going up in rural areas, on the back of
improved distribution channels of FMCG companies.

 The Government of India has approved 100% Foreign Direct Investment (FDI)
in the cash and carry segment of the sector along with 51% FDI in multi-brand
retail. Global retailers, who are keen to increase their footprint in India can
now cash in on the consumption growth story of the country.

 The Goods and Services Tax (GST), launched in 2017, has been beneficial for
the FMCG sector. Many of the FMCG products such as soap, toothpaste and
hair oil now come under the 18% tax bracket against the previous 23-24%
rate. Moreover, rates on food and hygiene products have been reduced to 0-
5% and 12-18%, respectively.

 Despite being one of the fastest growing markets globally for FMCG products,
the per capita FMCG consumption in India is still amongst the lowest in the
world, giving the industry a long runway for growth.

 Supply
Abundant supply through a distribution network of over 8 m stores across the
country. Distribution networks are being strengthened in rural areas.

 Demand
 Not being an essential commodity, the demand for consumer products is elastic.
Several brands are positioned with narrow product differentiation. However,
rising contribution of women to the working force and growing nuclear families
have led to higher demand for convenience foods, especially in urban areas.

 Barriers to entry
Huge investments in establishing brand identity and setting up distribution
networks.

 Bargaining power of suppliers

Small and fragmented suppliers have limited bargaining power. Larger FMCG
companies can negotiate better rates during times of high input cost inflation.
Most companies have integrated backwards and have their own supply chains.

 Bargaining power of buyers

Rising competition and the onslaught of the e-commerce boom does provide
good bargain opportunities for customers. However, on account of a large
number of buyers and limited number of suppliers, the bargaining power of
consumers is low in the FMCG sector.

 Competition
Competitiveness among Indian FMCG players is high. With more MNCs entering
the country, the industry has become highly fragmented. Domestic players feel
the competitive pressure from large well established MNCs. Spending on
advertisements continues to grow and marketing budgets, as well as strategies,
are becoming more aggressive
 Long Term Profitability /Level of
Competition & its impact /Entry
Barriers /Regulations /Life Cycle
/Current position of FMCG industry

FMCG Sector – Present

Being the second most populated country in the world, there is no doubt that India should be
one of the countries with a pioneering and growing FMCG market. Apparently, that is indeed
what is happening right now and what is more interesting are the products that have a greater
market share.

In the past few years, there are increasing number of initiatives like farm loan waivers, Direct
Benefit Transfer (DBT) and development of infrastructure in rural areas. Under the Union
budget 2019-2020, the focus has been shifting towards education, agriculture, healthcare,
infrastructure, tax rebate and micro, small and medium enterprises (Ministry of Micro, Small
and Medium Enterprises).These initiatives are projected to have an impact by increasing the
minimum wages of common people, especially in rural areas. Thus, any increment in income
will be directly proportional to demand in FMCG products.

Change in lifestyle and traditional culture is also having a positive impact on the FMCG
industry. The population in urban areas is diverging towards premium products as opposed to
essential goods because of the rise in income of the middle-class people. This has also lead to
FMCG companies to rethink strategies as people are willing to pay high prices for premium
products.
India’s demographic profile plays a major role in the growth of this sector. Not only is India’s
demographic young, but this segment is also characterized by increased urbanization and
higher expenditure. Urban development initiatives by the government, as well as the
increasing middle class of India, has led to an increase in the number of attractive markets in
the country. Ernst & Young’s research on the cities of India highlights the emergence of 30
‘new wave’ cities such as Jaipur and Surat. Consumption in these cities is growing at a faster
rate than that of many of India’s metros. India’s young population is also characterized by a
high degree of technological awareness. Growing penetration of smartphones and better
internet connectivity in India has led to a burgeoning E-Commerce sector, which has, in turn,
helped formalize large sections of the unorganized retail sector.

FMCG – who are the big boys?

In the Indian FMCG landscape, the biggest FMCG players are HUL, Nestle, ITC, Britannia
Industries, Marico, Godrej Consumer, Tata Consumer.

Some terms used in FMCG and what they mean (Click on Hyperlink)

Brand Advertising Volume Consumption SSSG

Value Growth
Jugaad Pricing Supply Chain Logistics Warehous
Types e
Product Discretiona Non- Vendors/Suppli Consumer
Placement ry spending Discretionary ers
Spending
Producer Shelf Contract Wholesalers Equilibriu
Planning Manufacturi m price
ng
Elasticity Inelastic Elastic dema Category Retailers
of demand demand nd management
Key Stockists & Product Market Share Market
Performan Super Flanking leadership
ce Stockists
Indicators
Mass Law of Complement Niche Market Demand
production Demand & ary and Forecastin
Supply Substitute g
Goods
RoCE Organic Inorganic FIFO Push
Marketin
g
Pull  Surrogate LIFO Promotions 7 P‘s of
Marketing Marketing Marketin
 g
BCG  Rural  Co-Branding
Matrix Marketing

How does the FMCG Sector work? Everything you need to know!
You know how they say that everything begins with an Idea? Well, for a FMCG company
everything starts with a product!

Src – Marketing Weekly

Rural and Urban – The 2 sides of a coin called FMCG!

 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 reached US$ 23.63 billion in FY18. The
rural FMCG market is expected to grow to US$ 220 billion by 2025.
 Accounting for a revenue share of around 55 percent, the urban
segment is the largest contributor to the overall revenue generated by
the FMCG sector in India.
 The rural segment is growing at a rapid pace and accounted for a
revenue share of 45 percent in the overall revenues recorded by the
FMCG sector in India. FMCG products account for 50 percent of
total rural spending.
 Rural India is witnessing increased demand for quality goods and
services driven by upgraded distribution channels of FMCG
companies. Low penetration levels in the rural market offer room for
growth

Key Deals in recent times in the FMCG Sector

Why do FMCG companies have very low margins on their products?
Fast-moving consumer goods have generally very low profit margins. Products and therefore
sold in large quantities.

Suppose you have an IT company that executes Rs 10000 Cr of contacts each year and earns
a 35% operating profit margin. In FMCG, what happens is the company produces and sells
Rs 500 Cr of products with a 5-10% operating profit margin but it does so 40 times. FMCG is
all about the churn!

Intermediaries and their earnings in the FMCG Value Chain (Subject

to change on the company and the type of products)

Src – Marketing Weekly

What are the stages of a FMCG product?

The four stages of a typical fast moving consumer good are:

Introduction into the market: When the product enters the market for the first time.
The demand for the product needs to be increased; this is usually done, by giving the
customer some samples so that they can try before they purchase the product. This stage
helps the company to identify potential issues the product might have, from the consumer’s
point of view.

Growth Stage: After the product is introduced into the marker the sales increase, people
start to buy the product when required, the public is aware of the features and benefits of the
product at this stage.
Maturation stage: Production costs usually reduce at this point as the product would
have sold several times during the growth stage. The price of the product usually drops down
and the sales peek at this time. During this stage, competitors introduce their own products,
which have, are of similar characteristics.

Decline Stage:  Sales would have dropped down significantly, the price of the product
increases, and consumers tend to buy other products. Getting profits becomes very hard at
this stage. The product is then stopped when it reaches this stage.

E-Commerce – The prodigal son of the FMCG Sector?

E-commerce is not something that is taken lightly by any of the FMCG companies. Just read
any annual report and the word is featured a lot of times. But why is that so?

 India’s increasing internet penetration and rising digital maturity

along with developing infrastructure has helped boost online
transactions
 The online FMCG market is forecast to reach US$ 45 billion in 2020
from US$ 20 billion in 2017, backed by growth in online users from
90 million in 2017 to 200 million in 2020E.
 Around 72 percent of Indian consumers are most likely to shop
online locally for premium products.
 The 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 percent over the previous year.
 It is estimated that 40 percent of all FMCG purchases in India will
be online by 2020, thereby making it a US$ 5-6 billion business
opportunity.

FMCG – Growth Driver

 Favorable demographics. According to CRISIL, as many as 90% of

the Indian population will be below the age of 60 by the calendar
year 2020 and 64% of them form a part of the working population
(in the age bracket of 15 and 59 years). In comparison, the U.S.,
China, and Brazil are expected to only have 77%, 83%, and 86% of
their population below the age of 60.
 Urbanization. Urbanization is one of India’s most important
economic growth drivers as this leads to substantial investments in
infrastructure development, which, in turn, lead to job creation,
development of modern consumer services, and increased ability to
mobilize savings. The share of the urban population in the total
 population has been consistently rising over the years and stood at
about 30.9% in 2010 and is expected to reach 37.4% by 2025
thereby increasing demand.

FY20 Roundup of the whole FMCG Sector!

What does a good FMCG company look like?

If you had read the previous articles on Banking, NBFC, and Gold
Financing, we chose the best companies or the market leader. We
chose Kotak and HDFC Bank in Banking, Bajaj Finance in NBFC, and
Manappuram in Gold Finance, we will do the same here.

Hindustan Unilever is by far the best FMCG company in terms of

business and management.

Few Indians have heard of Hindustan Unilever Limited (HUL). But

they are intimate with the brands it sells. To name a few: Lifebuoy,
Dove, Clinic Plus, Ponds, Lakme, Closeup, Surf Excel, Vim, Brooke
Bond, Bru, Kwality Wall’s, Kissan, and, as of 2020, Horlicks. Nine out
of ten Indian households use an HUL product every month. Forget
Google and Facebook, more Indians use HUL products than those
who own a television, those who vote, or even those who have
running water or electricity.

In 1958, HUL was already one of the biggest companies in India. It

made a net profit of Rs 1 Cr and in 2019 it made a net profit of Rs
6080 Cr, a CAGR of 15%.

In this period, the Indian Economy grew 1400 times but HUL grew
6000 times!

Fun Facts on HUL!

Fixing the Price – A twist

Fix the price and the profit you want to make; the cost is the target
you have to achieve.

It is a disruptive thought. Most companies assume the costs and

then fix one of the other two — price or profits. Multinationals tend
to fix the profit they want and price accordingly, and local
competitors fix a price and take a reduction on profits. HUL alone, in
my knowledge, fixes profit and price and treats cost as a variable.
Price and Volumes

Price is the biggest driver of volumes and volumes are the biggest
driver of cost reduction. By fixing Prices low, you drive volumes up
and cost down. Why do volumes drive costs down? All costs are
either variable, like raw materials and power, or fixed, like rent,
advertising, salaries of office staff, etc. If the fixed costs are 20 per
cent of revenue and revenue doubles, the fixed costs come down to
10 per cent of revenue. This is called leverage, where costs come
down not because you cut it, but because the business becomes
bigger. More interestingly, even those that are considered variable
costs are not fully variable and have large fixed components to
them. Take raw material costs, clearly a variable cost. But the more
volume you produce, the less the wastage in factories and the better
your negotiation power. The more the volumes, the less the chances
of trucks going half full or energy being wasted in factory
shutdowns. So in reality you get leverage not just on fixed costs but
even on what are considered variable costs.

Supply Thoughts

Samir Jain, currently CEO of Bunge, was the chief packaging buyer
at HUL when he realized two things. Every factory was buying
cardboard boxes (CLD, in HUL jargon) from three or four suppliers.
Supply security was the reason. Samir realized that having several
suppliers makes you less important to each supplier thereby
affecting supply security. It is the chicken-and-egg story. The more
you push for supply security by fragmenting the less likely you are
to achieve it. Instead, if you become crucial to the business of a
single supplier, you not only reduce costs but also ensure that it will
do its best to ensure supplier security. Each region was given one
supplier to work with, with a supplier from another region as the
backup. Costs went down and supply security did indeed go up.

Products

Most consumers want benefits from products at the cheapest cost.

A vocal few, usually higher income, demand specific ingredients.
There is no value judgement here and companies should service the
needs of their consumers in the best way. HUL being a
predominantly mass marketing company, it usually designs for
output and not input.

Supply Chain

A Lean supply chain is needed that does three things – it extracts

more from fixed capital, creatively reduces operating costs, and sells
close to the factory.

HUL is a master of extracting more from fixed capital. Every

manufacturing process is thoroughly studied and de-bottlenecked to
increase the rated capacity. Pradeep Banerjee, executive director
supply chain and a company veteran of forty years, has a 50:25:25
rule when it comes to capital expenses: 50 percent of new capacity
must come from de-bottlenecking, 25 percent from efficiencies like
factory worker productivity, and only 25 percent from new capital.

Obsessions with low costs! The results are ROCEs of 93%+!

This obsession with low capital spends is why HUL’s ROCE at 93% is
the highest in the industry. Arun Adhikari, a former managing
director at HUL, believes that ‘respect for money’ is a key-value
system in HUL and it is best evinced by its attitude to capital
expenditure. He recalls a story of when his friend Durgesh Mehta
was the branch accountant at the Calcutta branch. Durgesh wanted
a Godrej Store well cupboard in his room and made a capital
expenditure proposal citing the security of crucial financial
documents as the reason. The reply from the CAPEX approval
authority was that the proposal had been partly approved. The
request for the cupboard was disallowed but an upgrade of the
existing lock to the door to his room was approved. A more secure
lock to the room would surely solve the problem of theft of
important documents!

Cost Controls while keeping the end product same!

Categories can often get locked into high-priced raw materials if

their formulations are input- and not output-focused. Imagine a
master chef who has a recipe for his secret masala: it contains
turmeric from Meghalaya, chilies fresh from Mexico, coarse sea salt,
and saffron from Spain. Tastes wonderful but costs the earth,
especially when the rupee depreciates versus the euro.

There is another approach to deconstructing this masala:a certain

shade of yellow that is measurable, aromas that can be measured on
an olfactometer, a certain combination of the five basic tastes of
salt, sweet, sour, umami, and bitter, a certain average particle size
and a certain nutrition profile. Once you know these parameters you
can formulate for these output variables. Turmeric from Greece can
be replaced by Salem turmeric and you could add deflavoured
mango powder to get the same shade of yellow. The possibilities are
endless, creative, and cheap. To hell with the food snobs.

Price per gram debate

Logically the price per kilo of a small pack should be more than the
price per kilo of a large pack. But the truth is that the consumers of
small packs are generally much poorer than those of medium-size or
large packs. So from a consumer point of view, it is better to
discount the small packs, but ideally not by more than 15 to 20%
from the core pack.

Working Capital Obsession

HUL’s obsession with working capital is legendary. Working capital

includes credit and stocks in hands and it is famously (though not
accurately) said in corporate circles that HUL operates with negative
working capital. When Rohit Jawa was training in Shahjahanpur,
near Bareilly, he recalls, he got information that a distributor’s
cheque had bounced meant unpaid company working capital was
lying with the distributor. Jawa finished his dinner and rode his bike
through dacoit-infested areas to the distributor’s house. Knocking
on the door at 10 p.m., he demanded and got the cashback.

Investments/ Developments & Government Initiatives

The Government has allowed 100 percent Foreign Direct

Investment (FDI) in food processing and single-brand retail and 51
percent in multi-brand retail. This would bolster employment, supply
chain, and high visibility for FMCG brands across organized retail
markets thereby bolstering consumer spending and encouraging
more product launches. The sector witnessed a healthy FDI inflow
of US$ 16.28 billion during April 2000-March 2020.

Some of the major initiatives taken by the Government to promote

the FMCG sector in India are as follows:

 The Government of India has approved 100 percent FDI in the cash
and carry segment and in single-brand retail along with 51 percent
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 percent tax bracket against the
previous rate of 23-24 percent. Also, GST on food products and
hygiene products has been reduced to 0-5 percent and 12-18 percent
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. It is estimated that 40 per cent 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.