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Confederation of Indian Industry Since 1895

FMCG Roadmap to 2020The Game ChangersAbhishek Malhotra Vikash Agarwalla Srishti Chaudhry

Prepared by


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This Report has been prepared by Booz & Company Inc for the Confederation of Indian Industry (CII) Confederation of Indian Industry (CII), 2010 Disclaimer and Confidentialities All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means electronic, mechanical, photocopying, recording or otherwise, without the prior written permission from Confederation of Indian Industry (CII). While every carehas been taken in data collection, analyses and compilation of this Report, CIIdoesnt accept any claim for compensation if any entry is wrong, abbreviated, cancelled, omitted or inserted incorrectly either as to the wording, space or position in the Report. Published by Confederation of Indian Industry, Northern RegionSector 31-A, Dakshin Marg, Chandigarh 160030 Tel: 0172-2602365/2605868, Fax: 0172-2606259 Email: [email protected]; Web: www.cii.in

CONTENTS

Message from Conference Chairman Executive Summary 1. Industry Context 1.1. 1.2.1.3. 2.1. 2.2. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 3.9. 4.1. 4.2. 4.3. 7 46 Abbreviations and Acronyms

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The FMCG Industry: Growth in the Last Decade Growth across FMCG Categories Growth across FMCG Players Industry Growth Drivers FMCG Roadmap to 2020 AcceleratingPremiumization Evolving Categories Rapid Globalization Many-Indias 31 34 39 42 4

8 48 48 54 46 Growing Modern Trade Eco-consciousness Enabling Policies 16 22 2810 12 13 14 7 7

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2. Determinants of Industry Growth and Outlook for the Future

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3. Megatrends Shaping the Indian FMCG Industry

Goldmine at the Bottom of the Pyramid

Game-changing Technologies

4. Implications for the FMCG Industry Industry Paradigms in 2020

Imperatives for the FMCG Industry Implications for Other Stakeholders 55 55

Endnotes

About the Authors

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FMCG Roadmap to 2020


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MESSAGE FROM CONFERENCE CHAIRMAN

The Indian FMCG industry is over INR 1300 billion in size. It touches the life of every Indian and therefore has perhaps the widest reach among all industries in India! The industry has tripled in size over the last 10 years, growing much faster than in past decades. This has been facilitated by the many changes in theIndian economic and industrial landscapereduced levels of taxation, easier import of materials and technology, reduced barriers to entry of foreign players, growing organizational maturity of Indian players, growth of media, and, of course,the growing afuence and appetite for consumption of the Indian consumer. The industrys potential to grow further and faster is awesome, given the low penetrationof most categories and rising consumer incomes. Though many changes have takenplace over the last 20 years, I believe the rate of change in the FMCG operatingenvironment is set to accelerate. The waves of change will be propelled by government policy, channel customers, technological advances, leaders of social change such as NGOs, consumer behaviour and, of course, the players themselves. Change will therefore occur along many dimensions simultaneously, in a more compressed time scale at the intersection of these change vectors. This will produce signicant, if unpredictable, outcomes for the industry. Over the last 20 years, almost all FMCG companies have been riding the rising tide and almost all have prospered. That may, however, not hold true over the next 10 years. While the industry is set to grow at an even faster rate, in this round there could be as many losers as winners! Winners will discard archaic models which prioritize urban markets over rural and innovate more complex but vastly more insightful segmentation

models. They will alter the dialogue with modern retailers and the emerging specialized trade channel customers in meaningful ways, to grow the market and earnprotable market share. They will use technology to not just pare costs, but to create exible supply chains which can access more consumer segments and satisfy more consumer requirements. They will also use technology to both win more consumers and collaborate more intensely with consumers to create innovative products.Issues of sustainability will become far more central to their agendas. In thiscontext, all stakeholders in the FMCG industry will nd this report by Booz & Company valuable. Booz has developed an excellent model to understand the forces shaping the FMCG industry and this model is supported by a strong analytical foundation. Several interesting conclusions ow from the application of this model whichshould inform many board room discussions as companies in India and elsewhere grapple with issues of the future. Industry associations and the CII FMCG committ

ee will no doubt see value in this report, as they seek to inuence different stakeholders; and, of course, investors will vote with their money as they identifycompanies that reect a stronger understanding of these dynamics in their strategyand execution. Kannan Sitaram Chairman CII FMCG Forum 2010


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EXECUTIVE SUMMARY

The Indian FMCG industry at INR 1300 billion (in FY2010) accounts for 2.2 per cent of the GDP of the country. Given the inherently essential nature of the products, the sector is more or less immune to recessionary pressures. The last decade has seen the sector grow by 11 per cent annually. Robust GDP growth, opening up of rural markets, increased income in rural areas, growing urbanization alongwith evolving consumer lifestyles and buying behaviours have all been drivers ofthis growth. Over the next decade, all the above drivers are expected to continue to impact the industry favourably. Based on discussions with industry expertsas well as Booz & Company analysis, we believe that the FMCG industry will growat a base rate of at least 12 per cent annually to become an INR 4000 billion industry by 2020. Additionally, if some of the factors play out favourably withinan environment of enabling policy and easing of supply constraints, 17 per centgrowth may be expected over the next decade, leading to an overall industry size of INR 6200 billion by 2020. FMCG consumption is becoming more and more broad-based, and has reached an inexion point where the growth can be expected to takeoff, following the traditional S-shaped curve witnessed across many markets. Whileon an average, the growth of the industry will be strong, it will not be uniform. Variations are likely across product categories, companies and locations. Based on our research and extensive interviews, we have identied nine mega trends across consumers, markets, and environments which will shape the industry by 2020.

1. Accelerating Premiumization: Continuous income growth coupled with an increas

ed willingness to spend will push consumer up-trading and demand for higher priced, better quality (real or perceived) products. 2. Evolving Categories: Many consumers with rising economic status will shift from basic need to want based producs. In addition, evolving lifestyle behaviour and emphasis on beauty, health, andwellness will see increased requirements for customized and more relevant products. 3. Goldmine at BOP: A signicant majority of the population in the country, especially in the rural markets, will become an important source of consumption by moving beyond the survival mode. This bottom-of-the-pyramid (BOP) segment will require tailored products at highly affordable prices with the potential of verylarge volume supplies. 4. Rapid Globalization: While many leading foreign multinational companies (MNCs) have operated in the country for years, given liberal policies, the next decade will witness increased competition from Tier 2 and 3 global players. In addition, larger Indian companies will continue to seek opportu

nities internationally and also gain access to more global brands, products, andoperating practices. 5. Many Indias: Despite the complexities of our language,culture, and distances, the Indian market has largely been seen as a homogenousmarket. Increased scale and spending power will demand more fragmented and customized business models

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(across products, branding and operating structures). 6. Growing Modern Trade: The share of modern trade will increase and may be expected to account for nearly30 per cent of the total trade by 2020. This channel will compete with existingtraditional trade (approximately 8 million stores which will continue to grow)and offer both a distribution channel through its cash & carry model as well asother avenues to interact with the consumer. 7. Eco-consciousness: Global climatic changes, dwindling natural resources, and growing ecological awareness of consumers are increasing emphasis on environmental concerns. The pressure on companies to go green is growing due to the involvement of various stakeholdersthe government (through policy), the consumers (through brand choice) and NGOs (throughawareness and advocacy). 8. Game-changing Technologies: Increased relevant functionality coupled with lower costs will enable technology deployment to drive signicant benets and allow companies to deal with complex business environments. Thiswill

be seen both in terms of efciencies in the back-end processes (for example, supply chain and distribution) as well as in the front-end (for example, consumer marketing). 9. Enabling Policies: Many government policies under consideration, ifexecuted, can help create a more suitable operating environment. This will helpboost both demand and supply. Demand will go up because of increase in income levels and spread of education and supply will be augmented by removal of processbottlenecks and boost in infrastructure investments. While some of the above trends can already be observed today, many are yet to break the existing paradigms.In addition, the conuence of many of these change driversconsumers, technology, g

overnment policy, channel partnerswill have a multiplier effect and magnify boththe magnitude as well as the pace of change. As with any change that is disruptive in nature, there will be winners and losers. This transition from a stable and homogenous operating model to a dynamic, unpredictable and rapidly

changing operating model will have signicant implications for the industry and its stakeholders. To excel in this new model one will need to enhance current capabilities and build new ones to bridge gaps. In this new setup, FMCG companies will have six imperatives from a business strategy perspective: 1. Disaggregatingthe operating model 2. Winning the talent wars 3. Bringing sustainability into the strategic agenda 4. Re-inventing marketing for i-consumers 5. Re-engineering supply chains 6. Partnering with modern trade Stakeholders including government, retailers, NGOs, and investors will also need to play a key role in supporting th

e growth of the industry, while continuing to deliver on their core business andsocial mandates. In conclusion, the FMCG sector in India is poised for rapid growth in the next 10 years. Companies will need to evolve to better meet the rapidly changing consumer needs within an increasingly complex operating environment. The FMCG industry in 2020 will be larger, more responsible, and more tuned toits evolved customers.


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ABBREVIATIONS AND ACRONYMS

FMCG GDP FY INR US$ NREGS APMA NFSA FDI MVNO TRAI OCB SSI NGO CSR MNC OTC SMS VAS MRP GST

Fast Moving Consumer Goods Gross Domestic Product Financial Year Indian Rupees US (American) Dollars National Rural Employment Guarantee Scheme Agriculture Products Marketing (Regulation) Act National Food Security Act Foreign Direct Investment Mobile Virtual Network Operators Telecom Regulatory Authority of India Overseas Corporate Body Small-scale Industry Non-governmental Organization CorporateSocial Responsibility Multi-national Company Over the Counter Short Message Service Value-added Service Maximum Retail Price Goods and Service Tax

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1 INDUSTRY CONTEXT

1.1. The FMCG Industry: Growth in the Last Decade The fast moving consumer goods(FMCG) industry1, which accounts for 2.2 per cent of Indias GDP, is expected toattain a size of INR 1300 billion by FY2010. Over the last few years the industry has witnessed a high rate of growth boosted by favourable macroeconomic conditions, increased rural incomes, a rising consumption-culture in India and a proliferation of consumer awareness campaigns.

The sector witnessed a robust yearon-year growth of approximately 11 per cent inthe last decade, almost tripling from INR 470 billion in FY2001 to the currentsize. The last ve years have augured well for the industry with an annual growthrate of approximately 17 per cent since FY2005. Even in the meltdown years of FY2008 and FY2009, the FMCG industry witnessed sustained growth rates of 14 per cent and 11 per cent, respectively, demonstrating that unlike other sectors, thissector was relatively recession-proof (see Exhibit 1). 1.2. Growth across FMCG Categories The FMCG industry in India has grown rapidly and the growth rates across different product categories are good indicators of how the Indian consumer has evolved.

Within the category of food products, which accounts for nearly 45 per cent of the industry size, staple products like edible oils have grown at single digits given a high degree of penetration as well as established usage patterns. Fruit juices on the other hand have reported exponential growth, moving from near-zero

levels in FY2000 to INR 9 billion at present. Similar trends are visible in thepersonal products category with skin-care creams outpacing the growth of more mundane product lines such as toothpaste. Increased incomes, changing social habits and growing awareness of healthier and packaged beverages have contributed tothese patterns (see Exhibit 2, p. 8). 1.3. Growth across FMCG Players Three well-identied sets of players operate within a highly developed and intensely competitive landscape


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of the Indian FMCG market (see Exhibit 3, p. 9): 1. Foreign players who are present through their subsidiaries such as Unilever, P&G, Nestle and PepsiCo. 2. Strong Indian players with established national presence such as Marico, Dabur andGodrej Consumer Products. 3. Regional or small domestic players, such as Ajanta,Anchor, CavinKare etc., who are present in a few regions of the country. Most of the foreign players such as such as HUL, P&G etc., have either established their presence or are actively looking towards

entering India through organic and/ or inorganic routes. Kraft Foods for example, has entered India by buying Cadbury; and Danone, the French dairy major is re-establishing its presence in the food processing market through its tie-up withYakult Honsha, a Japanese probiotics major. There are also numerous Indian players who have established themselves in niche segments by developing differentiated products and positions and have thus become industry leaders. Dabur and Maricoare entities which have established their brand of health supplements (Chyawanprash) and coconut hair oils (Parachute) through products intrinsically linked tothe traditional

Indian psyche. These categories are therefore difcult to break into. Little wonder then that foreign MNCs have largely stayed away from these product segments. Apart from these, there are regional and small-scale FMCG players such as small tea producers and organic food producers, who mainly compete by offering low-priced products with similar looks or packaging compared to the bigger brands, to the right consumers typically based in rural areas or in small towns. These players

with lower corporate overheads and clear focus on specic consumer requirements have a competitive edge over larger FMCG players.

Exhibit 2: Selected Category Growth(FY2008-FY2010)

35% 24% 16% 8% Oils Biscuits 11% 26% 21%

Fruit Drinks Skin Care Toothpaste

Shampoo

Hair Oil

Source: IDFC Institutional Research, Euromonitor, Booz & Company analysis

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Booz & Company analysed the sales and protability of approximately 100 listed FMCG companies across foreign MNCs and large and small Indian players. The high growth rate of the FMCG industry was reected in the growth rate of these players. Also, the

last decade saw a golden run for the Indian players who grew at a CAGR of 12 percent in 2001-05 and 19 per cent in 2006-10. This compares handsomely with reported gures of 2 per cent and 16 per cent in the respective periods for the foreignMNCs.

While this has widened choices for consumers, markets are, on the downside, morefragmented. Players are offering multiple products within common categories resulting in brand erosion and decline in dominance.

Exhibit 3: Sales Growth FMCG Players

19% (CAGR) 17% 16%

12% 11% 9% 8%

2%

2001-2005Player Average Foreign MNCs Large Indian Regional / Small Domestic

2006-2010

Source: CMIE, Booz & Company analysis of ~100 FMCG players


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2 DETERMINANTS OF INDUSTRY GROWTH AND OUTLOOK FOR THE FUTURE

2.1 Industry Growth Drivers Having matured in a decade of tremendous economic growth, the Indian FMCG industry is now ready to sustain that growth and forge ahead. There are three key forces at work within and outside the industry which drive this development. 2.1.1. Developmental Cycle of the Industry Booz & Company analysis of consumption patterns across countries has revealed that most categories of consumer products tend to follow an S-curve of growth with the initial consumption driven by rich consumers and early adopters. At the trigger point though, the consumption becomes more wide-spread and then increases exponentially. Subsequently, the categories of consumer products mature as consumers move from a need-driven to a more want-driven consumption pattern as explained

by Rostows Stages on Economic Growth.2 The tipping point for exponential growth,however, varies across categories. At per capita GDP of US$ 7000, the basic consumption of staples as a proportion of total food consumption (measured by calories of intake), initially, tends to grow faster. For example, per capita consumption of wheat grows fast when GDP is US$ 2000-5000 per capita. However, the snacks category displays growth when GDP is in the range of US$ 4000-7000 per capita,though this rise occurs comparatively late. Socio-cultural norms and behavioursconsiderably impact both timing and growth patterns of various food categories.For example, Mexico reports high rates of snacking due to local food habits, while Latin America displays strong inclination for shampoos, which is driven not

Exhibit 4: Key Drivers of the FMCG Industry in India

GROWTH DRIVER

PAST GROWTH (2001-2010)

FUTURE GROWTH (2011-2020)

CONTRIBUTION TO FMCG TRANSFORMATION

GDP Growth

~7%

8-9%

Population Growth

1.5%

1.2%

~14% annual growth Per Capita Income Growth (disposable income) Womens participation 34% in 2010

>15% annual growth (disposable income) Womens participation closer to levels in d

eveloped nations (70%) 2.5% urbanization Similar age profile More up-trading inurban and rural areas GST FDI Right to Education Food Security

2.3% urbanization Lifestyle Changes ~60% people in 15-59 agegroup in 2010

NREGA Government Policy Farmer loan-waiver

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only by the availability of water but also social norms related to personal hygiene. While the Indian GDP per capita is low, many Indian consumer segments whichconstitute rather large absolute numbers are either close to or have already reached the tipping point of rapid growth. This is true for many categories of consumer durables, beauty and wellness goods, such as, skin-care products and evenedibles such as packaged beverages, all of which have reported signicantly fastergrowth rates. 2.1.2 Macroeconomic Factors Favourable macroeconomic drivers suchas the growth in GDP, coupled with rising incomes, increased participation of women in the workforce and the tapping of the rural markets, are seen to be enabling growth in the FMCG sector (see

Exhibit 4, p. 10). These are elaborated upon below: The Indian economy is expected to overtake UK in the coming decade, with GDP growth ranging between 8-10 percent.3 India is expected to reach Chinas current population gure of 1.4 billion by 2020. Per capita incomes supported by various government schemes and policiesare expected to rise in both rural and urban areas. Participation of women in the Indian workforce is also likely to rise. Estimates suggest that if it increases to approximately 70 per cent (as in the developed nations), it will further boost GDP growth by 2-3 per cent. Favourable government policies such as the introduction of GST

can be expected to substantially decrease supply chain costs. Increased FDI in multi-brand retail may open up a large channel for sales. Other policy measures such as lower income taxes, the Food Security Act, Right to Education, infrastruc

ture schemes etc have also acted as enablers of higher consumption. 2.1.3 Evolving Consumer Prole Lifestyle changes, a comparatively young population and greaterwillingness to spend more on better quality products are expected to boost theconsumption-driven economy. Rural markets, given the current low penetration andhigh potential for up-trading are expected to bring about super-normal growth for FMCG companies. All these factors will combine to catapult consumer demand for FMCGs to newer heights (see Exhibit 5).

Exhibit 5: FMCG Growth Ladder

Demand Drivers

NEW CONSUMERS

INCREASING CONSUMPTION

UP-TRADING

UNFORESEEN FUTURE DRIVERS

Population growth Increasing penetration (access to rural areas, more coverage)

Increasing consumption in every occasion Increasing occasions of consumption GDPincreased , incomes, younger population driving the above

Using premium, sophisticated products Increasing income, womens participation in

workforce, lifestyle changes powering above

Supply Drivers

Modern Trade + Technology Investments + Regulations


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Young population (below age of 30 years) comprise 59 per cent population currently, and the composition is likely to remain similar over the next decade. This augurs well for the industry as the young have greater willingness to spend more.2.2 FMCG Roadmap to 2020 Booz & Company analysis and discussions with industryexperts indicate that the FMCG industry may grow at a base rate of at least 12 per cent annually to become INR 4000 billion industry in 2020. Additionally, if some of the positive factors play out favourably, it could even record a 17 per cent growth over the next decade, leading to an overall industry size of INR 6200billion by 2020. These growth rates, however, depend on varying economic scenarios (see Exhibit 6).

Base Case models an As-Is scenario where the key assumptions are that GDP growth will continue at the same pace (of about 7 per cent) in the next decade and therewill be no major change in regulations. Optimistic Case models a Transformation scenario where key assumptions are that GDP growth will touch 9 per cent in the next decade, and favourable changes in regulations (such as FDI in multi-brand retailing or rolling-out of the GST) will unlock industry potential. While the overall growth rates may be anticipated to lie in the 12-17 per cent range, many product categories are likely to grow much faster as consumer incomes increase, behaviours evolve and requirements change. In some areas one would

expect Indian FMCGs to follow well-established growth-evolution paths. However,in many product categories growth may be accelerated by the explosive economic rise, young consumer base and the inuence of the ubiquitous media. Some of that im

pact is already evident in a category like liquid hand-wash which has shown verystrong growth driven by increased consumer awareness around personal hygiene specically for children. Given the nascent stage of development across many categories even supply-led actions can help trigger rapid growth. For example, many packaged food categories (such as soups, breakfast cereals, and fruit juices) haveseen rapid growth rates driven by increased presence of modern trade.

Exhibit 6: Growth Scenarios of FMCG Sector6250 (IN INR BILLION) Optimistic Case

17%

Base Case 2850 12%

17% 12% 1300 2300 4000

FY10E

FY15P

FY20P

Source: News articles, Booz & Company analysis

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3 MEGATRENDS SHAPING THE INDIAN FMCG INDUSTRY

CIIBooz research on industry evolutions in other markets and discussions with industry experts and practitioners helped identify nine key forces that will changethe face of the industry over the next ten years. These trends may be categorized into three broad groups, based on their origins or sources (see Exhibit 7). However, their impact will be freely felt across multiple stages of the industryvalue chain. Consumer-related Trends: Changing demographic proles and evolving behaviour signicantly impact the way consumers consume and interact with products and services. Numerous and diverse consumers in India throw up an equally mind boggling diversity of consumption trends and patterns. At the same time, three prominent trends merit some discussion. The rst one is increasing premiumization whichwill see consumers trading up the price ladder in search of additional functionality or brand promise. Second, at the middle

of the pyramid, the evolution of consumption behaviour will be seen to lead to signicant changes within and across product categories. And nally, many companies will nd increasing value at the Bottom of the Pyramid (BOP) by serving products customized to specically meet the requirements of this large market. It may be saidthat there will be signicant scaling up at each step of the consumer incomepyramid to be able to justify independent commercialization of the business potential. Market-related Trends: These pertain to evolving geographical markets or channels for the FMCG players. The key trends within this segment will be the viability of sub-markets in India, growing organized retail and the increasing globaliza

tion of FMCG players. These players need to be conscious of such trends and adapt their products as well as go-to-market strategies as per their target markets.

Exhibit 7: Key Trends Shaping the FMCG Market in India

1 2 3

Accelerating Premiumization Evolving Categories

4 5

Rapid Globalization Many Indias Growing Modern Trade

ers

Goldmine at BOP

6

Ma

um

rke

ns

ts

CoEnvironment7 8 9Source: Booz & Company analysis

Eco-consciousness Game-changing Technologies Enabling Policies


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Environment-related Trends: These are inuenced by sociopolitical, legal, environmental and technological reprioritizing that is inevitable in a dynamic environment. Changing government policies, growing importance of sustainability, evolvingmedia platforms and technology will compel FMCG players to adopt business strategies which keep the interests of communities and the environment in mind for inclusive development. 3.1. Accelerating Premiumization 3.1.1. Trend Description The motivation for buying premium products varies with consumer income. The richare willing to buy premium products for their emotional value and exclusive feel, ad their behaviour is very close to consumers in developed economies. They are well-informed about various

product options, and want to buy products which suit their style. The upper middle class wants to emulate the rich and trade up towards higherpriced products which offer greater functional benets and experience compared to products for massconsumption. Such products are often referred to as masstige products. The risingincome of Indian consumers has accelerated this trend towards premiumization or consumer up-trading. The improved purchasing power of Indian consumers is supported by greater workforce participation among women and an increasingly younger earning population with higher consumer willingness to spend on lifestyle products.These factors will gradually combine to give considerable push to premiumization in the future, making it more

pronounced as compared to the last decade. The premiumization trend can be observed prominently in the top two income groups mentioned already, the rich with an

annual income exceeding INR 1 million, and the upper middle class with an annual income ranging between INR 500 thousand and INR 1 million (see Exhibit 8). While these two income groups account for only three per cent of the population currently, it is expected that by 2020 their numbers will double to constitute seven per cent of the total population. By 2020 these groups will constitute large enough numbers to merit a dedicated business strategy that FMCG companies will dowell to adopt and follow. As per estimates, the Rich will grow to approximately 30 million people in 2020, which

Exhibit 8: Household Distribution by Income and Profiles of Affluent Consumers in India

HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME

AFFLUENT CONSUMERS IN INDIA > INR 1 million (Rich) Rich: Spend high proportion on personal care, entertainment, etc.; want luxury and exclusivity

1% 2% 11%

2% 5%

INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles)

29%

Upper Middles: Have similar needs as the rich and purchase inexpensive brands of

known companies

86% 64% < INR 0.2 million (Bottom of the Pyramid)

2010

2020

Source: McKinsey Global Institute, NCAER, Booz & Company analysis


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is more than the current total population of Sweden, Norway and Finland put together! Similarly, the Upper Middles will be a population of about 70 million in 2020, which is more than the current population of the UK. The Indian population isalso quite young compared to those in developed economies. People in the age group of 15-44 comprise approximately 60 per cent of the population (see Exhibit 9, p. 16). There are multiple ways in which the burgeoning younger population issupporting premiumization. First, the prole of the young population reveals moreactively employed people. This means, increased incomes available in householdsto spend on expendables. Second, young people tend to spend more compared to their parents and grandparents, and are easily attracted towards high-end products. Third, they are more exposed to the media and its inuences, specically new platforms such as the internet, mobile phones etc. Their awareness levels are higher, and they are better informed about developments around them.

Continued favourable age distribution is a driver for premiumization in the future as well. There are several examples of consumers up-trading to more premium products, as well as FMCG companies launching various products to capture the premium market: Dove, the premium personal and hair care brand from HUL, increasedits market share from 0.1 per cent in 2005 to approximately 5 per cent in 2010 in the hair care products category. LOreal, with premium brands in cosmetics, haircare and skin care, has been growing rapidly in India with 7.5 per cent marketshare in cosmetics climbing up to the third position in this category. Similarlyfor hair colour, LOreal has occupied 20 per cent share of the INR 12 billion hair colour market with premium brands such as LOreal Excellence Crme and Garnier (a m

asstige brand).4 As a result, LOreals overall sales have doubled in the last ve yeas, and the growth trend is expected to continue.

P&Gs Olay (premium anti-ageing skin-care brand) captured 20 per cent market sharewithin one year of launch in a category which grew ve times between 2007 and 2008. We expect that in the future, FMCG players will need to increase their efforts to cater to the ever-growing needs of consumers demanding premium products. 3.1.2. Possible Strategies for FMCG Players Going forward, those FMCG players whodecide to tap into the premiumization trend will nd the need to align their business strategy to the pulse of the relevant consumer classes. Product Strategy: Premium products are intended to convey prestige or super-premium position that has irational value. People increasingly want products which are different, safe, andethical with ingredients and/or features that have special and measurable benets

. Indian FMCG players are likely to gain from investment in technology to develop and manufacture

Many consumers are likely to indulge in choice-driven consumption, which will increase demand for premium and super premium products in urban India. The middle and upper middle classes will be the chief contributors to this Mint, Dec 2009


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First, as consumers needs change, they start purchasing more evolved and sophisticated products within a category, hence, the product offering must also transform to keep pace with demand trends. For instance, consumers have moved from toothpowders to toothpastes and are now also demanding mouth-wash within the same product category. Second, consumers start demanding customized products, specicallytailored to their individual tastes and needs. Nowhere is this more apparent that in the differentiated demand for toothpaste depending on individual oral careneeds. Third, driven by growing concerns about beauty, health, and wellness

supported by hygienic and healthier lifestyles, consumers shift towards personalgrooming products which purportedly further these goals. Such, category evolution is primarily observed among the upper middle and lower middle income classes.While these consumer groups in India account for approximately 150 million people currently, their size is expected to increase to about 500 million people in2020, which is approximately 1.5 times the current population of the US (see Exhibit 10, p. 18). Shift towards Evolved Products In the oral care category, consumer

preferences have shifted over time. While neem datun for brushing teeth was a common tradition earlier, it was replaced by the tooth powder in 1970s and 80s. The toothpaste emerged in late 1980s and 90s. Toothpaste penetration has increasedfrom 50 per cent in 2005 to 55 per cent in 2010. Lately, in the oral hygiene category, supplementary products like mouthwash and sugar-free chewing gum have also seen increased acceptance amongst consumers.. The current penetration of mout

hwash is 6 per cent and is growing at a rate of 35 per cent. Toothpowder has seen a decrease in penetration from 35 per cent to 30 per cent in the last 5 years.This trend is likely to pick up in the coming decade with a maturing economy

Lately, in the oral hygiene category, supplementary products like mouthwash andsugar-free chewing gum have also seen increased acceptance amongst consumers.


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and increased sophistication in emerging consumer choices. An analysis of consumption patterns across economies shows that consumers tastes change as an economymatures. For instance, as per capita GDP rises, in the initial years, wheat consumption per capita rises as well. Larger number of consumers emerge from relative poverty to choose wheat over coarse grains. Then, as consumers start moving towards convenience products (such

as pre-mixes and processed foods) per capita wheat consumption starts to fall. Finally, it levels-off as consumers start demanding more product variety suited to their preferences. India is expected to follow a similar pattern of consumption across staple food products (see Exhibit 11, p. 20). Increased Product VarietyConsumers are increasingly demanding customized products which are suited to their individual needs. Micro-segmentation for

product development and masscustomization for identifying different product variants is already underway. For instance, a decade ago, only a limited variety ofproducts such as shampoos was available within a particular brand. Now most large players have launched many variants in accordance with hair types (oily / dry/ normal), the seasons in which these can be used (winters / summers) as well asconsumer categories, targeted separately at men, women, and children. P&Gs Headand

Exhibit 10: Evolving Needs of Middle Class Consumers in India


MIDDLE CLASS CONSUMERS IN INDIA > INR 1 million (Rich) Evolving Needs: Increasingly want sophisticated products in categories; desire products which improve their appearance and are good for their health; want products meeting their specific needs

1% 2% 11%

2% 5%

INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles)

29%


2010

2020


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Shoulders brand which started with two variants in 1997 now boasts 11 variants to choose from. Mass-customization in India will intensify in the future with FMCG players proling the potential buyer by age, region, personal attributes, skin type, ethnic background, and professional choices. Microsegmentation will amplifythe need for highly customized market research so as to capture the specic needsof the consumer segment targeted, before the actual product design phase gets underway. Increasing Beauty, Health and Wellness Concerns The beauty products market is expected to grow by 15-20 per cent in

the future, which is the direct result of the changing socio-economic status ofthe Indian consumers, especially the women. Better paying jobs and exposure to fashion and beauty trends prevailing in the developed world through the television and other media have resulted in changing tastes and choices. Middle class women are now more conscious of their appearance and are willing to spend more on enhancing it. Products such as colour cosmetics (growing by 46 per cent), sun care products (growing at 13 per cent) have latched on to this trends rapidly.5 Indian men are also becoming more conscious of their appearance, and several companies have been launching beauty and grooming products specically targeted at men.HUL has launched

Vaseline for Men, Emami came out with Fair and Handsome, and LOreal has launchedGarnier Men Power Light products. As per estimates, the demand for in-salon skincare treatments by men is increasing by 40 per cent annually.6 Along with beauty products, there is an increased awareness about good health practices among co

nsumers today. Sedentary lifestyles and unhealthy habits have led to the rise oflifestyle-related diseases such as diabetes and heart problems. Increased awareness of healthrelated issues has led to the demand for healthier products with lower calories, less sugar, more nutritional content, and with a greater

In the skin category, there have been over 1200 brands and variants launched in the last ve years alone. Even in a more developed category like soaps there have been over 800 brands and variants launched in the last ve years. Gopal Vittal, ED, Home and Personal Care, Hindustan Unilever Limited


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proportion of natural ingredients. This trend has impacted the food and beverages category to a large extent, along with some other categories such as personalcare, and fabric care. The market size of health drinks and health foods is about INR 50 billion currently and is expected to grow at approximately 10 per centannually in future (see Exhibit 12, p. 21).

We have already witnessed heightened activity around health product launches byFMCG players, and this is only expected to increase in the future. Sugar Free Gold has been targeting health-conscious and diabetic people, and claims that it results in reducing intake by approximately 500 calories per day.

Marico launched Saffola Gold with LoSorb technology, which results in less oil absorption while frying. Nestle recently launched Maggi Dal Atta noodles, expected to provide dietary bres and protein, thus lending to a healthy meal. Recently multi-grain Maggi has also been launched.

Exhibit 11: Wheat Consumption Patterns

High

Wheat Consumption per Capita

Pre-mixes Bulk-flour Branded Flour/ Bakeries Segmented Food Processed Food FastFood India China Brazil Specialized Bakeries

Drivers

COST

QUALITY

CONVENIENCE

CUSTOMIZATION

Source: United Nations; Booz & Company analysis

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3.2.2. Possible Strategies for FMCG Players Innovations towards more evolved and sophisticated product forms, healthier variants of existing products, and enhanced product

portfolios to introduce a much larger variety suited to different consumer groups may provide critical tools for grappling with the dynamic Indian consumer landscape.

Evolved product forms of developed markets adapted to Indian requirements alongwith new product development leveraging the health platform will demand focused R&D and market research efforts.

Exhibit 12: Market Size and Growth in the Health and Wellness SpaceGROWTH RATE (%) 2009 - 2012 24 22 20 18 16 14 12 10 8 6 4 2 0 0 5 10 15 20 25 3035 40 45 50 55 60 65 APPROXIMATE MARKET SIZE (IN INR BILLION), 2009Source: Businessworld publication, Marketing Whitebook 2010

Ayurvedic Medicines & Products

Alternative Medicines

FMCG Products Health & Food Drinks Skin & Health Care Dietary Supplements


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During market research, greater consumer segmentation may be required to identify consumer needs and market potential. Manufacturing processes will need to be adapted to serve mass customization objectives. The supply chain, marketing and sales and distribution process may have to be redesigned to best reach the target

consumer segment. For example, using gymnasiums for selling health drinks or stocking of a product for a specic ethnic group near their residential area may be strategic targeting moves. Complex business models have to support ever wideningproduct portfolios, variants, and products types straddling categories.

3.3. Goldmine at the Bottom of the Pyramid 3.3.1. Trend Description We have denedthe bottom-ofthe-pyramid or BOP consumers as those who earn less than INR 200 thousand per annum per household. This group currently constitutes about 900-950million people in India (see Exhibit 13). Unlike the middle class segment, whichis rather urban,

Exhibit 13: Profile of BOP Consumers in India.


1% 2% 11%

2% 5%

> INR 1 million (Rich) INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles)

29%

BOP CONSUMERS IN INDIA Spend mostly on essentials, no / very limited demand forexpensive lifestyle products


2010

2020


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already well-served and competitive, the BOP markets are largely rural, poorly-served and uncompetitive. The second characteristic of BOP markets is that a lotof their basic needs are yet unmet: nancial services, mobiles phones and communication, housing, water, electricity and basic healthcare are lacking. Rural BOP population is estimated to be about 78 per cent of the total BOP population in the country (see Exhibit 14). The growth trends, issues and challenges in rural markets are somewhat different from those in urban areas. Income is largely

agricultural, which is dependent on monsoons. Supply chain is constrained by poor infrastructural development. However, government initiatives such as the National Rural Employment Guarantee Act (NREGA), increasing minimum support prices ofcrops, Sampoorna Grameen Rozgar Yojna, Pradhan Mantri Gram Sadak Yojana and Swarnjayanti Gram Swarozgar Yojana (with a total allocation of INR 535 billion in FY2010) are changing the rural landscape of India. Between FY2007 and FY2010 disbursement under NREGA has

increased from INR 125 billion to INR 390 billion. Minimum support price (MSP) of key crops such as paddy and wheat rose at a CAGR only 2 per cent and 3 per cent in the period FY2003-FY2007 but between FY2007 and FY2010, these prices have risen at attractive CAGRs of 18 per cent and 20 per cent respectively. These initiatives along with government-sponsorship of selfhelp groups have resulted in higher disposable incomes, greater womens empowerment and improvement of social indicators in the rural economy (see Exhibit 15, p. 24).

Exhibit 14: Rural and Urban BOP Population Distribution

Urban

22%

78% Rural

Source: IFC and World Resources Institute


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It is heartening to note that by 2025, percentage rural population in the INR 200 thousand to INR 500 thousand category is projected to increase to 22 per centfrom the present level of 3 per cent. Rural Growth Outpacing Urban Markets As aresult of rising incomes, the FMCG market growth in rural areas at 18 per cent per annum has

recently exceeded that of the urban markets at 12 per cent. Products such as fruit juices and sanitary pads which had no demand in the rural markets earlier have suddenly started establishing presence. While the rural market comprises only34 per cent of the total FMCG market currently, given the current growth rates,its contribution is expected to increase to 45-50 per cent by 2020 (see Exhibit16, p. 25).

While most FMCG players have succeeded in establishing sufcient access to their products in rural areas, the next wave of growth is expected to come from increasing category penetration, development of customized products for these markets and up-trading rural consumers towards higher-priced and better products.

Exhibit 15: Promising Annual Income Levels and Social Indicators in Rural India

RURAL HOUSEHOLD INCOME DISTRIBUTION

145 3% 1% 0%

161 7% 1% 1%

167 2% 2% 22% 48% 100%> INR 1 million INR 0.5-1.0 million INR 0.2-0.5 million

59% 46% 36% 22% 27%

59%

35% 50% 61%

INR 90-200 thousand

1981 2007

41% 2015

26% 2025

< INR 90 thousand

2005

Number of Pucca Houses

Below Poverty Line

Rural Literacy

Source: CII Rural Report, Consumer Lifestyles-India, Euromoniter, Indian Institute of Foreign Trade

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While category penetration has increased in rural areas in the last decade, there is further scope to raise the levels to match urban penetration in the future(see Exhibit 17, p. 26). Blurring Urban-Rural Divide Rural women are now more brand-conscious and are shifting

towards brands used by their urban counterparts. They want quality products in their homes. The demand for branded healthcare products, branded processed food and beverages and toiletries is expected to grow in the future. Many local brandshave been nding it difcult to grow in rural areas because of this

shift, thereby providing increased opportunities to the organized FMCG players to target this market with their products. This trend may eventually erase differentiation between the urban and rural brands, with the rural consumers increasingly demanding the same

Exhibit 16: Retail Growth in Rural and Urban India

20% 15% 10% 5% 0% 2003 -5% -10%Source: Edelweiss, IDFC Securities, Booz & Company analysis

Rural

Urban

2004

2005

2006

2007

2008

2009


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products as urban consumers in the next decade. Cheaper brands will however co-exist for products with wide price differentials between local brands and well-established brands. For products with narrower price variations, some amount of up-trading can be expected. However, the affordability of branded products will remain a challenge for BOP consumers. For higher-end brands, consumers in this

segment will want price points which are affordable and within their budget andhence demand smaller SKUs. 3.3.2. Possible Strategies for FMCG Players FMCG players with an eye on rural volumes could gear their innovation, manufacturing andrural supply chain processes towards small-volume units of products which the rural consumer can afford. Shampoos in sachets are a

good example of the success of such innovation. Given the large number of BOP consumers, the top line will need to be volume-based rather than valuebased. Hence, a different business model will need to be devised by the FMCG companies. Somedening features of such a business model are outlined below. This is, however, not an exhaustive list.

The corporate sector has realized that the next growth in its business will comefrom the rural sector. Rural is a much discussed topic in boardrooms Pradeep Kashyap, Founder and CEO, MART

Exhibit 17: Rural and Urban Penetrations - A Comparison

RURAL PENETRATION (%) CATEGORY 2001 2009 Headroom for growth

URBAN PENETRATION, 2009 (%)

Toothpaste Skin Cream Dish Wash Shampoo

32 20 12 16

45 33 16 46

75% 32% 60% 62%

Source: IDFC Securities, Edelweiss, A.C. Nielsen, Booz & Company analysis

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HUL Brand-Building Initiative Khushiyon Ki Doli s HUL has initiated a rural campaign called Khushiyon Ki Doli. The objective of the campaign is to create awareness and engage with the masses through technology. Vehicles equipped with LCD TVs, DVD players, small generators etc roam rural habitations, mainly targeting housewives. A range of HULs product commercials are played ranging from Surf Excel to Huggies Diapers. HUL organizes games at the end of the campaign distributing sachets of various products as prizes. HUL is also engaging with local retailersin rural areas on purchase of merchandize or new sale of stocks.

Innovative products customized to local tastes available at affordable price points. Effective and attractive product packaging that enables convenient use andstorage. Effective mix of multimedia marketing strategies to create a buzz; unconventional partnering with NGOs and local governments to inuence the inuencers, educating consumers around attributes and functionality of products. Ensuring accessto typically rural or remote consumers through new and low-cost ways of distribution given the inadequate supply chain / logistics infrastructure in these areas. An entrepreneur driven model would be an appropriate example.

Increasingly, the rural consumer will demand the same product as the urban consumer and there will be convergence. Sunil Duggal, CEO, Dabur India


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3.4. Rapid Globalization 3.4.1. Trend Description The Indian FMCG industry has avery competitive landscape, with three sets of players: the global players or foreign MNCs, the large Indian players, and regional or small domestic players. Increasing globalization has important ramications for foreign MNCs as well as large Indian companies with pan-India presence and

sometimes, small international footprints as well. Many foreign FMCG multinationals have established themselves on a rm footing in India. Examples include Unilever which has been present in India since the 1930s, P&G, which established its presence through its Vicks brand in the 1950s, and Nestle, which commenced operations in the late 1950s.

In the recent past, India as one of the fastest growing economies in the world has attracted foreign MNCs who see it as a key market. With a spurt in reverse innovation foreign MNCs are leveraging India as an innovation hub; consumer research happens rst in India, and then, products are taken to other markets. Several foreign FMCG majors have headed for India with the purpose

With a spurt in reverse innovation foreign MNCs are leveraging India as an innovation hub; consumer research happens rst in India, and then, products are taken to other markets.

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Popularly Positioned Products Nestle plans to build a dedicated R&D centre in India, which is expected to commence operations by mid 2012. The centre will focuson developing Popularly Positioned Products, which can meet specific needs of consumers belonging to lower income groups, and provide high-quality and nutritional foods at affordable prices. These products are also expected to be sold in other countries. Second, Nestle plans to broaden its product portfolio in India, and has been evaluating the option of entering the breakfast cereals market, a nascent but fast-growing category by leveraging its strong cereal brands such as Nesquik, Cheerios etc.

of acquiring experienced talent, and deploying them in similar markets elsewhere. Companies are seeking senior management experience in handling a diverse and complex market such as India, to crack other markets by sharing ideas which haveworked before. Unilever for example, has deployed senior resources from India toEast Europe, Africa, and South-east Asia, where it expects to see the next waveof growth.

Companies are seeking senior management experience in handling a diverse and complex market such as India, to crack other markets by sharing ideas which have worked before.


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There are numerous instances of foreign FMCG attention to India: Kraft Foods acquired Cadburys in 2009 to establish a foothold in developing countries such as India. Ferrero Rocher is planning to expand presence in India in the confectionarysegment. Many foreign MNCs are contending to acquire Paras Pharmaceuticals, a domestic player with strong brands in OTC and personal care categories. French cosmetics major LOreal is planning to enter the deodorant segment which is growingat 30 per cent annually. GSK Consumer has recently expanded into the noodles andbiscuits market in India through its agship brand Horlicks. We can expect the foreign FMCG MNCs already operating in India to

focus on the Indian business even more strongly and develop their Indian subsidiaries as a signicant contributor to global business by increasing penetration ofexisting products, while introducing greater variety, broadening category portfolios and developing new brands and innovations. The multinationals not present in India can be expected to look for entry opportunities in terms of organic or inorganic expansion in the future. Apart from foreign MNCs in India, there are numerous large Indian players which have started establishing global footprints todiversify their business risks and tap the growth potential in other countries.Initially, Indian FMCG players expanded outside India to either target the Indian diaspora in specic countries or to hedge against increasing competition withinIndia. Traditionally, the same product portfolio was taken to other countries.However, increasingly FMCG companies have been acquiring international FMCG companies with

strong brands to widen their product portfolio, thereby sharing brands between India and the global markets of the acquired company. In the future, many Indiandomestic players are expected to evolve into mini-MNCs and therefore will need to develop customized products to target the local populations in international markets (see Exhibit 18). Examples of Hedging against Domestic Competition GodrejConsumer Products Ltd. took its hair colours and Fairglow soap to the UK targeting the Indian population residing there. Dabur International exports products to over 60 countries, targeting the Indian diaspora in those countries. Examplesof Brand Sharing Godrej acquired Keyline Brands (a UK-based FMCG player) in 2006, which enabled it to enter the skin care segment using Keylines brands. It introduced the latters

Exhibit 18: International Growth of Indian FMCG Players

STAGE 1 Hedging against Domestic Competition STAGE 2 Brand Sharing STAGE 3 Targeting Local Populations of Other Countries

Organic growth Target Indian diaspora of other markets with existing product portfolio Exports / limited channel reach

Inorganic growth by acquiring international companies with strong FMCG brands Broadening brand / product portfolio for all target markets Increased sales and distribution as distribution channels are augmented through acquisition

Organic growth after establishing presence in other markets Behaving as a multinational and developing customized products for local populations of global markets

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brands such as Erasmic (shaving products) and Cuticura (talcum powder) in India. Dabur acquired the Turkish FMCG company Hobi Kozmetik Group this year to strengthen its presence in the Middle East and North Africa. Hobi Kozmetik is presentin the personal care market and sells a wide variety of hair care and skin careproducts under the brands Hobby and New Era in 35 countries. Its brands also enjoy ignicant market shares in their respective categories. As Hobis brands complementDaburs portfolio, they give Dabur a strong platform in new product categories inIndia (by introducing Hobis brands) and new markets (leveraging Hobis establishedpresence). Marico acquired the skin care company Sundari LLC, and two aromatic soap brands in Bangladesh. Wipro acquired the marketing rights for Chandrika soapin India and other SAARC countries. As Chandrika is the second largest sellingbrand in south India, this was seen as aligning with Wipros strengths in marketslike Andhra Pradesh, where its soap brand Santoor was already the market leader.Examples of Targeting Local Populations of Other Countries Emami bought a manufacturing facility in Egypt this year. This acquisition was seen to be consolidating its presence in Africa, a fast growing market which contributed about one-third to the companys international business. The plant is expected to serve as a regional manufacturing base for the Middle East, Europe, and African markets. Also, international

business accounted for 20 per cent of Emamis turnover in FY2010 and this is expected to grow further. Godrej has introduced sandalwood and ayurvedic variants ofGodrej No. 1 in British super-markets which has helped it attract the British Afro-Asian population which has a high demand for ethnic-Indian products. Maricos s

kin care services brand, Kaya, recently acquired aesthetic skin care business ofDerma Rx, a company providing skin care services. Derma Rx operates three centres in Singapore and one in Kuala Lumpur, with consumer base of approximately 37,000. This is expected to help Marico establish its presence in the market for skin care products in Singapore. It may also open Kaya clinics in the country. 3.4.2. Possible Strategies for FMCG Players Going forward, we expect the larger players in India to marry the best of global practices with the Indian operationalnuances (regulations, channel mix, consumer preferences etc) in their business models. Foreign MNCs will bring in global business models and products to India,adapt them to Indian tastes, develop products in India and market them to similar geographies internationally as well. Large, Indian FMCG players will learn nuances of operating in other countries in managing new retail channels and different regulations and bring back these best practices to India. Also, Indian MNCs w

ill now have to develop organization designs that are geared towards a geographically-diversied model. Indian players integrating with acquired companies successfully

would need to retain the human capital to ensure continuity and understanding ofthe characteristics of the local market. They would need to ensure that while acquiring a company, there is either an absence of or very limited overlap with the acquired brands. This helps avoid the elimination of one brands share by another. Companies would need to institutionalize best practices between various markets. In fact, expansion into new geographies may help companies to identify newtrends which could occur in other markets. For example, changing consumer preferences in one country may be replicated in another market with a time-lag, whichcan be captured by a geographicallydiversied business. Companies with presence in

developed nations with a high share of organized retail may also be able to apply their learning in India. Indian players developing into international organizations will have to follow global standards in terms of governance, people processes, etc. 3.5. Many-Indias 3.5.1. Trend Description Spanning an area of 3.3 million square kilometres, India is a vast country with 29 states. Language, eatinghabits and sartorial styles vary by region, or state, and ethnic group. Increasingly, FMCG players are realizing that India is not a homogenous market but consumer preferences vary signicantly. Second, certain states present higher growth potential in certain categories necessitating a focussed business strategy to drive growth. Recently, the BIMARU states of Bihar, Madhya Pradesh, Rajasthan and U


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ttar Pradesh


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have been responsible for tremendous growth in FMCG compelling players to look at these states more closely. It has become imperative for FMCG players to grow regional in their thinking and move towards an increasingly decentralized operating

model in India. Given the large Indian population, consumers within a state provide FMCG companies sufcient scale to form dedicated organizations for individualregions or states. By 2020, Maharashtras GDP will exceed that of Greece, Belgium,and Switzerland, and Uttar

Pradeshs economic size will exceed that of Singapore and Denmark (see Exhibit 19). So, having a dedicated rm for Maharashtra or Gujarat can prove to be a realistic and protable proposition.

Exhibit 19: Some Indian State GDPs Compared to Select Country GDPs

GDP PPP IN 2020 (IN INR BILLION) 25,000

20,000

15,000

10,000

5,000

0 Maharashtra UP Andhra Pradesh WB Gujarat Greece Belgium Switzerland SingaporeDenmark

Note: Extrapolation of 2001-2009 Growth Rates Source: IMF, CIA World Factbook, Booz & Company analysis

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Buzz Around the BIMARUs BIMARU contributes 35-45 per cent of our sales. These states are not BIMARU for us; we would be BIMARU without them. Aditya Agarwal, Director, Emami Group of Companies Godrej is planning to increase marketing spends anddistribution network in these states. These states consume 17-18 per cent of Godrejs products. We expect it to go up to 25 per cent in a years time. A Mahendran, M, Godrej Consumer Products Ltd Apart from the youth factor, what makes BIMARU important is that the consumers here are brand-loyal. The diaper category has seen43 per cent growth in UP in FY2010 over the previous year. Anil Chugh, Senior VP Wipro Consumer Care and Lighting , Varying Consumer Preferences As consumer preferences differ across regions and states, companies may be well-advised to followa regional strategy in terms of product ingredients, positioning, marketing campaign, and channels. Historically, we have seen some examples of regional adaptation of business strategies by companies: HUL launched Brooke Bond Sehatmand for low-income consumers to compete against regional tea companies such as Wagh Bakri, Girnar and Sapat. Sehatmand was specically meant for down-trading consumers inUttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Chhattisgarh. HUL also launched brand Ruby, specically for the Karnataka market. HUL launched a regional detergent brand in Punjab called Chokra which is present in two or three districts of the state. Several players adapted beverage avours to local tastes, while tobaccplayers customized blends to regional preferences Dabur registered strong doubledigit growth in BIMARU states in FY2010 and expects that to continue. Dabur rolled out special rural focussed sales initiatives in BIMARU states. Rural distribution reach was stepped up in many high potential districts, penetrating to villages of lower population strata. George Angelo, EVP Sales, Dabur India


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We expect this trend of launching different product variants in different regions / states to continue in the future. 3.5.2. Possible Strategies for FMCG Players Strategizing for Growth Centres Bihar, MP, Rajasthan and UP together comprise36 per cent of Indias population, and 40 per cent of Indias youth. However, theircummulative contribution to FMCG consumption is only 24 per cent, which shows sufcient room for growth. Further, per capita income in the four states has startedgrowing at 13 per cent, exceeding the national average growth rate. Hence, going forward, the Indian FMCG sector can expect to see signicant growth from BIMARU.For players to take full advantage of this potential, a separate strategy willhave to be devised for such regions with greater resource deployment and more focused product and sales initiatives. Other Strategic Tools Overall, decentralization or regionalization will become an increasingly important theme for

FMCG players. They will need to identify and achieve clarity on their strategy in each state targeted. Product Strategy: FMCG players need to ensure that brandswhich do well in specic regional markets do not lose out due to their focus on national brands. For example, for HUL, Hamam leads in Tamil Nadu, Rexona leads inAndhra Pradesh and Sunlight detergent leads in West Bengal and Kerala. However,lack of focus on these individual brands has led to loss of market share in these specic markets. Marketing Strategy: Marketing strategy and expenditure may vary with states, their position in the market, and growth trajectories. Also, thepositioning will have to be better adapted to consumer preferences. Supply ChainStrategy: Sales and distribution structures, investment in logistics and warehousing among other facilities cannot remain inexible across states. Competitive St

rategy: Competitive strategy of national players will also need to watch out forregional players which have better customized products for a particular region.Organization Design: Going

forward, FMCG players may need to decentralize their organizational design, withseparate R&D and strategic planning operations for different states. 3.6. Growing Modern Trade 3.6.1. Trend Description Historical Growth of Organized Retail No strategic exercise is complete without a business strategy for the retail sector, as the FMCG industry depends on retail for consumer sales. While Indias retail sector has been growing at over 7 per cent annually, a large proportion of itis unorganized retail in the form of scattered momand-pop stores which require avery resource-intensive distribution process in terms of manpower and logistics. Also, volume per retail store is very low. However, modern trade or organized

retail has created a concentrated (high volume) channel for distribution by FMCGplayers. Second, the share of some consumer product categories such as processed food and beverages is also expected to grow rapidly within organized retail, which makes the latter a very crucial contributor to the industry. Modern trade is still at a nascent stage in India; the share of modern

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trade in retail last year was only about ve per cent. However, it has been growing very rapidly displaying approximately 25 per cent annual growth (see Exhibit 20). Several formats exist within modern trade and organized retail, such as, hyper marts, supermarkets, and

cash-and-carry (which is essentially organized wholesaling). While supermarketshave the highest share in terms of the number of stores (approximately 85 per cent of total modern trade stores in 2009), hyper marts account for the highest area (approximately 70 per cent of the total area under modern trade). Cash-and-carry is still nascent

with only about eight stores in 2009. In a large and growing market such as India, we expect existing formats to evolve and new formats to come up in the future, driving the growth of various FMCG categories. Local Indian players have beenexperimenting with different

Exhibit 20: Organized Retail Penetration in Select Economies

(% OF TOTAL RETAIL) 81.0%

85.0%

55.0%

40.0% Organized retail has grown at 24% CAGR over the last 4 years but significant headroom exists 4.8%

30.0%

20.0%

3.1% India 2005

India 2009

China

Indonesia

Thailand

Malaysia

Taiwan

US

Source: IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis


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business models with mixed success. The Future Group is one of the prominent players in this space and operates more than 1000 stores with different formats such as Big Bazaar (hypermarket), Food Bazaar (supermarket), Central (urban mall),futurebazaar.com (online shopping portal), home town (home furnishings), and Aadhar (rural retailing). The economic slowdown dented the growth of organized retail during 2008 and 2009. Lower footfalls resulted in lower sales growth

and margins contracted as retail expansion had been nanced through debt and the interest rates were now rising. There were also increasing funding constraints. However, growth has picked up again and expansion plans are now being announced.Future Growth Modern trade is expected to grow very rapidly in the future with its share in total retail projected to reach 11 per cent by 2014 and 30 per centby 2020 (see Exhibit 21). This growth will be supported by:

High economic growth: GDP is expected to grow at 8-10 per cent in the future, boosting growth in all sectors. Increasing incomes: Incomes are expected to continue to rise which should further drive convenience shopping. Increasing urbanization: Organized retail will continue to increase presence in Tier 1 and Tier 2 cities, which are growing faster than metros.

Exhibit 21: Modern Trade Penetration

(% OF TOTAL RETAIL) 30.0%

11.0%

4.8%

2009

2014E

2020E

Source: IBEF, Booz & Company analysis

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Improving infrastructure: The government is increasing its thrust on improving infrastructure. A recent example is the construction of the Golden Quadrilateral,a dedicated freight corridor which will result in improved supply chain efciencies. Future Trends in Modern Trade This analysis has tried to capture the ongoingand future trends within modern trade which are expected to impact the FMCG industry. Among these are a focus on supply chain management for improved

protability, emergence of private labels, expansion of modern trade beyond metrosand the rise of cashand-carry business in India (see Exhibit 22). Focus on Supply Chain Management: Organized retailers are going to be increasingly interestedin reducing time-to-market. To achieve this, it will be important to invest ininventory management and related technology for capturing sales data, forecasting demand and generating automatic replenishment.

Decreasing inventory levels will also require strong backward integration with distributors or manufacturers. Retailers will also need to optimize logistics further in terms of warehousing and transportation etc. For this it will be imperative to increase supplier collaborations. Emergence of Private Labels: Private labels or products manufactured and marketed by retailers, have been growing in India as they are very attractive to retailers for three reasons:

Exhibit 22: Organized Retail Industry TrendsFocus on Supply Chain Management Emergence of Private Labels

Expansion beyond MetrosSource: Booz & Company analysis

Rise of Cash-and-Carry


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First, they help retailers to improve protability as the margins for private labels are higher (30-35 per cent on average) compared to the manufacturers brands. Second, they help retailers to create differentiation between competitors as theyare unique to their stores. Third, the emergence of retailing as a specialist function and the growth of multiple retailing have helped retailers push manufacturers towards greater margins. Experience has shown that the retailers who mostconsistently exceed expectations are rewarded with higher average sales, more repeat business, and invaluable goodwill. All these are critical stepping stones on the journey to sustainable loyalty.

Further, penetration by private labels in India is quite low compared to other developed countries (see Exhibit 23). Due to all these factors, it is expected that private labels will become a major threat to FMCG players in the future. Expansion beyond Metros: Organized retailers have started expanding their presence from metros to smaller cities. For example, Big Bazaar had 44 per cent of its stores outside the top 19 cities in 2009. There are plans to open stores in Tier 1and Tier 2 cities in Tamil Nadu as well. Similarly, Lifestyle is planning to expand its base across 22 cities by FY2013. This further implies that modern tradewill become increasingly important for FMCG players as a major channel not

just in metros, but in other cities as well (see Exhibit 24, p. 39). Rise of Cash-and-Carry: Several foreign, organized retailers have been increasing their presence in the cashand-carry business in India. Metro was one of the rst to enter India in 2003. It targeted kirana owners, hotels, restaurants and catering servic

es through ve outlets across Bangalore, Mumbai, Hyderabad and Kolkata. Wal-Mart entered the cash-and-carry business through a joint venture with Bharti Enterprises under the brand name Best Price. It has three stores in Punjab currently and plans to expand to 10-15 stores over the next few years. Similarly, Carrefour is expected to set up its rst cash-and-carry store in Delhi. Cashand-carry is expected to provide an alternative channel to FMCG players

Exhibit 23: Private Label Share in Overall Organized Retail Sales46% 40% 35% 29% 27% 21% 20% 11% 20%

Switzerland

UK

Germany

Spain

France

Australia

USA

India

World Average

Source: Technopak, Booz & Company analysis

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in the future. However, whether cashand-carry would form a signicant chunk of total sales is a question given that all foreign retailers are eyeing the retail opportunity and waiting for multi-brand FDI in retail to open up. 3.6.2. PossibleStrategies for FMCG Players With increasing importance of modern trade, channelsegmentation is expected to become crucial for FMCG players, along with the adoption of a greater collaborative approach with the most important channel partners. With the emergence of private labels, the retailer-manufacturer relationshipwill come under greater pressure. FMCG players will need to become primary suppliers to top retailer-partners by leveraging their position as market leaders. They may also have to provide special discounts. Second, to prepare a

better value proposition to retailers, they will also need to shift their role from transaction to advisory and help in category development, joint promotions etc. The need for FMCG players to improve execution in terms of merchandising inthe top organized retail accounts and invest in technology to gain insights intoconsumer behaviour and purchasing patterns will signicantly increase in the future. 3.7. Eco-consciousness 3.7.1 Trend Description What makes sustainable business practices essential? Increased ecosustainability of business will be extremely important for FMCG companies in the future. Global climatic changes and the growing scarcity of natural resources have already led to increased concerns aboutthe environment. The pressure on companies from key stakeholders

to be environmentally responsible is gradually on the rise. Various stakeholderresponses to ecoconcerns are showcased below. Government: India is committed to

reducing carbon emissions by 25 per cent by 2020 and the government has been imposing stringent environmental norms on companies. Also, many states have enactedlegislations such as the ban on plastic bags to further the cause. Consumers: Concern for the environment has changed the purchasing behaviour of consumers. AnEdelman survey of 6000 global consumers conducted between August and October, 2008 found that 87 per cent believed it was their duty to contribute to a better environment. Media and NGOs: Environmental activists and journalists are

Exhibit 24: Percentage Share of Retail Presence Across Different Cities, 2009Number of Stores 113 27 18 45 100% 26% 67% 30%Top 4

61%

49%

Planning to open Stores in T1/T2 cities in Tamil Nadu

9% 35% 33% 39%

31% 9% 11% Pantaloons 22

5 to 15 16 to 35 Others

Big Bazaar Number of Cities 58

Shoppers Stop 9

Lifestyle 8

Planning to open 45 stores across 22 cities by FY13

Source: Technopak, news articles, Booz & Company analysis



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becoming increasingly vocal in their protests against companies which have beenpolluting the environment or not engaging in judicious use of resources. Some NGOs routinely monitor and track the CSR efforts of FMCG companies in India, driving awareness and importance of such initiatives (see Exhibit 25). Competitors: Some FMCG companies have started pioneering sustainability efforts. For example ITChas been publishing an annual report on sustainability and has also conducted sustainability audit of businesses and subsidiaries. HUL has been focusing on ensuring sustainable practices in business. Nestle has initiated pollution-free waste disposal at manufacturing plants, while Dabur has been focusing on reducing energy consumption, increasing renewable

energy and plans to become carbon positive in the next few years. Such measuresare forcing other players to also involve themselves considerably in driving green practices. Channels: Some of the global modern trade players have mandated sustainability requirements from their suppliers. Wal-Mart has been at the forefront of such initiatives. Such practices will soon be implemented in emerging markets like India. Investors: Foreign investors have also been driving the sustainability agenda in the companies they invest in by benchmarking with global practices. Some of the top sustainability issues worldwide have also been identied forthe FMCG industry in India. The

most important of these are packaging, water-use, harmful emissions and the impact of products on health. These have been detailed below: Packaging: Primary andsecondary packaging costs typically constitute approximately 8-10 per cent of t

he total cost base for most FMCG players. A signicant proportion of packaging ispolymer-based and non-biodegradable. It has been observed that for essential commodities such as milk, the packaging issue is not given much importance by the consumers or regulators; while for products such as snacks, packaging sustainability has attracted more attention. Hence, FMCG players should take a closer lookat their packaging cost-base and try to eliminate or reduce the quantity of packaging material used and upgrade to biodegradable packaging materials.

Exhibit 25: Karmayog CSR Rating of FMCG Companies Across IndiaDISTRIBUTION OF FMCG COMPANIES ACROSS CSR RATINGS 25 0% 20% 7% 27% 28% 4% 20% 23% 26%5 4 3

41 2%

43 2% 5%

48%

2

44%

44%1 0

2007

2008

2009

Performance of FMCG companies is improving but many are still in the lowest bracket

Note: 5 is the best rating and 0 is the worst rating on CSR performance Source:


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Harmful emissions: This is a problem area for FMCGs given these are logistics-intensive businesses that also release greenhouse gases during their manufacturingprocesses. Since fuel scarcity in the future is likely and transportation is amajor GHG culprit, companies should strive to make transportation more efcient and encourage usage of renewable energy through use of hybrid vehicles for transportation. Water utilization: With depleting groundwater and scarcity of fresh water, FMCG companies should resort to water-efcient technologies during manufacturing, and recycle used water. Health impact of products: This is a big concern forboth consumers and the government. It has been observed that increasingly, consumers are reading through the nutritional information on products, and becomingmore conscious of the harmful impact of categories such as snacks and fast foods. The FMCG industry needs to lead by example in this case and shift towards healthier products. Others: FMCG players should partner with suppliers which providegreen (organic) raw materials, drive the usage of renewable energy sources andmore energy efcient technologies such as CFL for lighting up ofces and factories.Business Sense in Driving Sustainability Adopting green technology and processeshas also started making economic sense for companies. The following points enable better understanding of how this has worked:

Rising costs of resources: Costs of doing business will increase, especially inareas dependent on natural resources. Many commodities have seen a high degree of price volatility and long-term forecasts indicate sky rocketing costs of natural resources. Affordable Green Technology: Cost-effective green technologies areemerging, as is the supporting ecosystem comprising of researchers, regulators

and other such personnel facilitating and supporting their development. Commercialization further ensures the protability, or at least the economic feasibility,of green initiatives. For example, the widespread adoption of solar energy systems had long been hampered by the high cost of photovoltaic (PV) cells per kilowatt-hour compared with other energy sources. But as the price of traditional energy skyrocketed, low-cost thin-lm technology became increasingly commercialized and this has begun replacing rst-generation crystalline silicon PV installations today. As solar energys cost per kilowatthour continues to drop, it is estimated that a larger proportion of the population will adopt this. Impact on top-line andbottomline: More and more business leaders are recognizing the fact that goinggreen can have a dramatic effect on their companies nancial results. To capture this value, they use green programmes to eliminate waste and drive efciency throughout the enterprise and, in more advanced cases, to create top-line growth by bri

nging new product offerings to market. An example lies in organic foods. Also,

Wal-Mart has decided to sell only concentrated laundry detergents, which requireless packaging and space for transport and storage, saving fuel and transportation costs while driving a green initiative. Increasing Commitment Levels for Sustainability Since the forces driving sustainability are compelling and enduring,every company should incorporate sustainable business practices. This is not abusiness choice but a prerequisite, particularly for major FMCG companies. Moreand more companies realize that if they dont address the green challenge in a rigorous way, their costs will increase over time, their reputations in the marketwill suffer, and they will miss some of tomorrows most valuable market opportunities. The three levels of sustainability based on the commitment levels of companies are described below (see Exhibit 26, p. 42). Responsible Green: This is the

leastevolved level of green business, and is characterized by a limited and legalistic approach to sustainability. Companies that pursue green at this level arefocused on projects and initiatives designed to ensure compliance with environmental laws and regulations in the locales in which they operate. They also respond to the green demands of value chain partners (suppliers or retailers) they cannot afford to lose. At this level, companies dont develop capabilities which support green, and may not even have a dedicated environmental function. However, some managerial attention is required for awareness of ever-changing regulationsand market conditions. Also, some investments may be required to prove compliance in terms of tracking and reporting. Most of the Indian companies are at this l


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evel of sustainability.


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Efcient Green: These companies approach sustainability with an internal focus, and strive to simultaneously reduce environmental impact, lower costs, and enhanceoperating efciencies. They can take the form of a simple e-mail message asking ofce workers to voluntarily turn off their computers before leaving work or entaila rigorous effort to reduce waste by redesigning products. They can feature dedicated efforts and signicant investments, but typically they deliver relatively short-term payback. The key is to balance the investmentsin resources, systems, and assetswith the likely payoff. Continued focus of senior leadership on costs andefciency savings provides signicant support for sustainability initiatives. Differentiated Green: Differentiated green companies pursue green in a strategic waythroughout the

value chain of the business and in a variety of new businesses and business opportunities. Going for green at the differentiated green level requires signicant investments of time, effort, and capital. The company can expect to obtain long-term paybacks in terms of more efcient operations, and increased market share vis--vis competitors. 3.7.2. Possible Strategies for FMCG Players Going forward, FMCGplayers will need to make a

4 changers

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