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

 | May 18,2010 12:55 pm IST

Markets all over the world have been on a roll in 2003 and the Indian bourses are no exception having gained almost 60% in 2003. During this period, while there are sectors that have outperformed this benchmark index, there are also sectors that have under performed.

FMCG registered gains of just 33% on the BSE FMCG Index last year.

 

At the macro level, Indian economy is poised to remained buoyant and grow at 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 market would also continue to impact the FMCG industry.

 

Recent survey conducted by a leading business weekly, approximately 47 per cent of India's 1 + billion people were under the age of 20, and teenagers among them numbered about 160 million. Together, they wielded INR 14000 Cr worth of discretionary income, and their families spent an additional INR 18500 Cr on them every year. By 2015, Indians under 20 are estimated to make up 55% of the population - and wield proportionately higher spending power. Means, companies that are able to influence and excite such consumers would be those that win in the market place.

 

The Indian FMCG market has been divided for a long time between the organized sector and the unorganized sector. While the latter has been crowded by a large number of local players, competing on margins, the former has varied between a two-player-scenario to a multi-player one.

 

Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a handful of global players, India's Rs.460 billion FMCG market remains highly fragmented with roughly half the market going to unbranded, unpackaged home made products. This presents a tremendous opportunity for makers of branded products who can convert consumers to branded products. However, successfully launching and growing market share around a branded product in India presents tremendous challenges. Take distribution as an example. India is home to six million retail outlets and super markets virtually do not exist. This makes logistics particularly for new players extremely difficult. Other challenges of similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a structurally unattractive industry in which to participate. Even so, the opportunity keeps FMCG makers trying.

 

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 capita consumption of most FMCG products is much below world averages. This is the latent potential that 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. Going forward, 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 gamut of products such as detergents, toilet soaps, toothpaste, shampoos, creams, powders, food products, confectioneries, beverages, and cigarettes. Typical characteristics of FMCG products are: -

 

1.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. Price and income elasticity of demand varies across products and consumers.


2.Individual items are of small value (small SKU's) although all FMCG products put together 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 the technical 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.


5.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 this sector from the others include the following: -  

 

1. Design and Manufacturing

 

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

 

2.Technology - Basic technology for manufacturing is easily available. Also, technology for most products has been fairly stable. Modifications and improvements rarely change the basic process.

 

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

 

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