FMCG industry overviewThe FMCG industry manages consumer packaged goods - production, distribution to marketing. The Indian FMCG industry is the fourth largest industrial sector that has stayed recession-resilient and shows signs of bright future.

Introduction

The Fast Moving Consumer Goods (FMCG) industry primarily deals with the production, distribution and marketing of consumer packaged goods, i.e. those categories of products that are consumed at regular intervals. Examples include food & beverage, personal care, pharmaceuticals, plastic goods, paper & stationery and household products etc. The industry is vast and offers a wide range of job opportunities in functions such as sales, supply chain, finance, marketing, operations, purchasing, human resources, product development and general management. Global leaders in the FMCG segment are Sara Lee, Nestlé, Reckitt Benckiser, Unilever, Procter & Gamble, Coca-Cola, Carlsberg, Kleenex, General Mills, Pepsi and Mars etc.

Performance

In India, the FMCG industry is the fourth largest sector with a total (organized) market size of over US$15 billion in 2007, as per ASSOCHAM, and can be classified under the premium and popular segments. The premium segment (~25%) caters mostly to the higher/upper middle income consumers while the price sensitive popular or mass segment (~75%) consists of consumers belonging mainly to the semi-urban or rural areas who are not, and cannot afford to be, brand conscious.The market growth over the past 5 years has been phenomenal, primarily due to consumers’ growing disposable income which is directly linked to an increased demand for FMCG goods and services. Indeed, it is widely acknowledged that the large young population in the rural and semi-urban regions is driving demand growth, with the continuous rise in their disposable income, life style, food habits etc. On the supply side, the wide availability of raw materials, vast agricultural produce, low cost of labor and increased organized retail have helped the competitiveness of players.At a time when the economy and other large industrial sectors such as automobiles, aviation and financial services are reeling from the global slowdown, the consumer goods sector in India has managed to defy the trend. According to the recent reports by Zeus Consulting, India's FMCG industry has so far been resilient to the slowdown in the economy and a dip in consumer sentiment, with most companies posting double-digit growth in net profits in the first half of fiscal 2009, backed by healthy sales. As very categorically said by the Amway India Enterprises managing director and chief executive, Mr. William Pinckney, “I am not saying that our company [sector] is recession-proof but it is recession-resilient.” This statement on the whole stands strong for most the leading players in the FMCG sector.While a price hike and cost-cutting were the first lines of defense in a bid to protect margins, Indian manufacturers were able to let logic rather than bottom lines dictate measures, with increased marketing efforts, a well-thought product mix and new launches helping them emerge

unscathed from the turmoil. The prospects going forward also remain promising. Adi Godrej, Chairman and MD of Godrej Consumer Products Limited (GCPL) and Chairman of Godrej Industries feels that the best policy would be to provide tremendous fiscal and monetary stimuli to the economy, “…[stimuli is needed] especially in industries connected with consumer finance. Once that is done, the economic growth will come through and that will generally create multiplier factors. FMCG already seems to be doing quite well and FMCG sector will have its best year ever in 2009-10,” he said.

Future Prospects

The only threats to this strong growth trajectory remain the high portion of unorganized trade, the limited distribution network of new entrants and the pressure on profit margins due to increasing competition. But these are likely to be of diminished importance as proportion of organized trade increases and players invest in improving distribution. Going forward, the industry prospects remain attractive, and new graduates can hope to leverage the training and on-the-job learning at the leading players in various functional roles, across the Metros as well as the interior heartlands on India.

Macro View of the Indian EconomyDisposable Income on a riseThe net disposable income has grown at a CAGR of 11.6% between FY00-FY08. Certain measures like the implementation of the sixth pay commission announced by the government may further trigger the disposable income in FY09, which may result in select consumers moving up the value chain. On account of a rise in the disposable income with consumers, a direct demand will be felt on the consumption of FMCG goods. A considerable part of the disposable income is spent on buying products and services. According to ASSOCHAM estimates of 2007, almost 40% of total FMCG consumers spend their total income on grocery while 8% is spent on personal care products, resulting in a potential hike in the demand for these goods.Industrial GrowthThe growth in real GDP during FY08 was at 9% moderating from 9.6% as recorded in FY07 and 9.4% during FY06, as per the Central Statistical Organisation (CSO).Out of 63 non-durable consumer items (with a weight of 23.3% in the IIP), 20 items which accounted for a 7.4% weight, recorded a decline in production during FY08. Furthermore, lower growth in respect of sugar (with weight of 2.2% in the IIP) and some other non-durables such as chocolate and sugar confectionery, beer and edible oils also led to moderation in the non-durables segment. 

 Source: RBI

Market sizeThe Indian FMCG industry size was estimated to be around US$ 15 bn in 2007, as per ASSOCHAM. Of this, close to US$ 8 bn was confined to the rural areas with US$ 4 bn in the urban & metro area and almost US$ 3 bn in the semi-urban area. The large young population of approximately 180 mn in the rural and semi-urban region is driving the Indian FMCG industry, with the continuous rise in their disposable income, life style, food habit etc, among others. The lifestyle of this section of the population is undergoing a rapid change on the back of rising income levels.According to ASSOCHAM, the market size of FMCG in the rural and semi-urban segment is likely to jump up by 10% and 6% respectively by 2010. Currently, almost 52% of the rural market size is captured by FMCG products and is projected to reach 57% in the next three years. This size is further expected to grow by 10% in the next three years.Higher employment generationEmployment generation was triggered by a thrust in industrial activity, which led to newer jobs in sectors like logistics, infrastructure, and other related activities. The format of modern trade has also enabled more employment in India. Organised retail has augured well for the FMCG sector which has thereby derived greater exposure leading to more employment. Furthermore, organised retail has also created more job opportunities without any gender bias for our teeming population. As per DIPP statistics, the food processing industry reported the highest proposed employment numbers during the period Aug 1991- Jun 2008, indicating a growth of 2.1% when compared to the previous corresponding period. Similarly, the vegetable oil & vanaspati segment and soaps, cosmetics and toiletries segment registered a growth of 3.4% and 3% respectively, during the above mentioned period. 

Source: DIPP

Foreign Direct Investment in the FMCG Sector In CY07, FDI inflows in sectors like food processing; soaps, cosmetics & toilet preparations and

vegetable oils & vanaspati together registered a growth of 41%. The total FDI in the food processing industry underwent a growth of 15% in CY07. This came on

the back of a robust 38% growth in the previous year. The pattern of FDI inflow witnessed a huge variation in between the years 2004-2007 in the

soaps, cosmetics and toiletries segment. From an almost 100% decline in CY06, the FDI inflow underwent a sharp growth of more than four times in CY07.

The vegetable oils and vanaspati segment registered a robust rise of more than two times in CY07 as against the previous year when it had recorded a more than 50% decline. 

Source: DIPP

Proposed and implemented domestic investments in various FMCG segments Food Processing: The proposed Industrial Entrepreneur Memorandum (IEM) is growing rapidly

over the last couple of years in various FMCG sub segments. The ratio of implemented IEM to proposed investments in the food processing segment underwent a steady rise between 2004 and 2006, from 3.4% to 13.4%. However, in 2007, while proposed investments amounted to Rs 21,700 mn, those implemented summed up to a mere Rs 2,630 mn, indicating a ratio of 12%. 

Source: DIPP

Vegetable Oil & Vanaspati: The vegetable oil & vanaspati segment witnessed a considerable decline in the ratio of implemented investments to that of proposed investment between 2004 and 2007. From a ratio of 14% in 2004, it slided to 6% in 2007 after reaching a high of 17% in 2005. 

Source: DIPP

Soaps, Cosmetics and Toiletries: The soaps, cosmetics and toiletries segment of the FMCG sector reported a sharp rise in the ratio of implemented investments to proposed investments between 2004 and 2007. From a low of 9% in 2004, this ratio surged to almost 36% in 2007. 

Source: DIPP

Major issues and challenges of the Indian FMCG sector 

Highly unorganised: Although the organised market is gaining strength, majority of the share is still captured by the unorganised market. Rising income levels and a growing middle class allows players selling branded products to push consumers towards branded products.

  Inadequate distribution network: Since majority of the Indian population live in rural villages,

there is less presence of super markets and other retail networks in these regions. As a result, the reach of MNCs and bigger players to these rural areas has become restricted. 

High competition between large and small players: Rise in disposable incomes and more young population have spruced up demands for products in the personal care, processed food etc segments. This has led to competition among the FMCG companies thereby putting the profit margins under pressure. Key Growth DriversThe FMCG industry has undergone substantial growth on account of the following reasons: 

Availability of raw materials: India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew apart from being the second largest producer of rice, wheat, fruits & vegetables. On account of its diverse agro-economic conditions, there exists a wide variety of raw materials that suit the requirements of the food processing industry. 

Vast agricultural output: Worldwide, India is one of the largest producers of farm output. In 2005, agriculture and allied sectors like forestry, logging and fishing accounted for 18.6% of the GDP. India is also home to the world’s largest cattle population, approximately 193 mn. 

Low labour costs: As per the labour cost advantage index prepared by global management consultancy AT Kearney for the year 2006, India has maintained its supreme position, followed by China in the South Asian sub-continent. 

Large Domestic Market: Increasing disposable income has resulted in a rise in the domestic market size. Increasing income has translated into higher consumption levels.  

Presence across value chain: Indian FMCG firms have a presence across the entire value chain of the industry, from raw material supply to final processed and packaged goods, both in the personal care products and in the food processing sector. As a result firms located in India have become more cost competitive. 

Growing share of organised retail: The modern trade format provides a wider visibility to the FMCG products. Organised retail has led to a boom in consumption by generating wide spread employment opportunities.

FMCG industry eyes 15% growth this yr

The Rs 86,000-crore FMCG industry is expected to witness a lot of action in 2010. With the economy showing signs of revival, the industry is expected to register a 15% growth in 2010 as compared to the previous year.

“The industry will witness a spate of acquisitions & mergers in the 2010. There will be a renewed focus on rural consumers too,” said an analyst based in Mumbai. The country’s FMCG industry registered a 12% growth in 2009 despite the economic downturn. The captains of the FMCG sector are optimistic about the industry’s performance in the New Year. Godrej Group chairman Adi Godrej said, “With 8% GDP growth and GST implementation, we feel it will be a great year for the FMCG sector in India. The focus area for the Godrej Group will be on FMCG business in 2010.”

Sharing similar sentiments, Amit Burman, vice-chairman of Dabur India said the industry is expected to register a 14% growth this year as India is getting out of the recessionary blues. Our focus would be on OTC healthcare and skincare brands to sustain our growth in this sector,” he added.

According to Wipro Consumer Care & Lighting CEO Vineet Agarwal, the industry is expected to perform better in the new year as compared to the previous year. Even during the economic slowdown, the FMCG industry registered a 12% growth. When you see buoyancy in economy, the industry will further grow in 2010. Our core focus will continue to be on rural consumers,” he said.

Harsh Agarwal, director of Emami Ltd said Emami is looking at both organic and inorganic growth strategy in 2010. “The industry is poised for a double digit growth as the overall growth rate of the country is growing,” he said.

Echoing similar views, Saugata Gupta, CEO, Consumer Products, Marico Ltd said the industry will register a 15 % growth in 2010 as compared to the previous year.” I expect the topline growth of the industry to register 15-20 % this year,” he added.

Nikhil Vora, managing dirctor , IIDFC SSKI Securities Ltd said the topline of the FMCG is likely to grow by 14.2% y-o-y in Q3FY2010, substantially driven by volume growth.

Despite the rise in input costs, FMCG industry is likely to sustain its robust growth momentum aided by increased rural incomes, taxation benefits and gradual shift from the unorganised sector/regional players.

FMCG Industry

We believe H2CY10 will be beneficial for the sector as food inflation would be under control

unlike the current

situation which currently is ~ 19%. A good monsoon would be a further trigger for this

sector. According to the

industry body FICCI, the sector is likely to post a growth of 12-15% in the coming year.

FMCG companies are clearly focused towards the rural market ~ Increase in disposable

income and improvement in

standard of living even as they have been very aggressive in terms of market expansion

strategies – Extending

distribution reach in rural markets, hitting the markets with new advertisements and

products and increasing trade

margins in specific product category.

Fiscal measures by the RBI unlikely to impair FMCG growth; anti-inflationary measures,

could be a positive

Stocks to watch out for: Marico Industries, HUL, ITC, Nestle India, etc.

The three things that will make an impact on FMCG Marketing, on the road to

2010

The Indian FMCG sector with a market size of US$13.1 billion is the fourth largest sector in

the economy. A well-established distribution network and intense competition between the

organized and unorganized segments characterize the sector. The FMCG Sector is expected

to grow by over 60 per cent by 2010. That will translate into an annual growth of 10 per cent

over a five year period. There are some developments that will leave a very deep imprint on

the way the FMCG sector operates in the near future.

The three major areas that will impact are: Development of organized retail, Infrastructure

growth and young working population with higher disposable income. According to this

year’s Global Retail Development Index, India is positioned as the leading destination for

retail investment.

Organized Retail is growing in India at a phenomenal pace. Although it contributes only 4 to

5 per cent of the total retail industry, it is poised to garner 12 to 15 per cent share by 2010.

India’s retail industry accounts for 10 percent of its GDP and 8 percent of the employment

and is expected to reach $17 billion by 2010. All this has big western retailers like Wal-mart

and Tesco lining up to enter the Indian market, we would see about 300 new malls, 1,500

supermarkets and 325 departmental stores being built across the country.

This will change the face of retailing in India. The evolution is very fast and growth of self-

service stores can be seen across all cities. The outlets can be standalone as well as chains

promoted by Indian companies. In few cities the turnover of Modern trade salience is as high

as 30 per cent. FMCG companies are noticing that business growth in this channel is faster

than in traditional trade - and that it would become a major force in the years to come.

Modern trade also gives the products a chance to interact with consumers unlike the

traditional mom and pop stores. In order to leverage the fast growing Modern trade, FMCG

companies are aligning and restructuring to meet their demand by improving the look and

feel of the product, rationalize the SKU mix and build up a strong supply chain. Special sales

teams are created who understand and cater to the need of these chains.

Modern trade would enable consumers to look at a wider choice and better quality products

at reasonable prices by eliminating multiple layers of intermediaries. This explosion in

modern trade or organized retailing would also help develop other areas of the economy

(construction, logistics, food processing etc) and reach out to smaller towns. Infrastructure

development will play a crucial role in helping India sustain high growth rates and evenly

spread the benefits of growth among its people.

By promoting connectivity of producers and markets, lowering transactions costs, and

providing people with access to important services like education and health care, a reliable

infrastructure network lays the foundation for a future of sustainable economic growth.

Growth In infrastructure (like the set up of the golden quadrilateral) would make distribution

to far flung areas easier, faster and cheaper for FMCG companies to market goods to the

rural consumer, thus bringing down transaction costs for the manufacturer who in turn

would pass this on to the consumer on account of higher and intense competition. The rise

in the young working population and the increasing salary levels would ensure that the

average disposable income would go up. An Indian today can potentially spend double of

what he could in 1985; and in the next twenty years he would be able to spend four times

what he does now. But we also have to take into account the fact that consumers now have

wider choice, huge exposure to global trends and new avenues to spend their income - cell

phones, entertainment, eating out, cars and bigger houses, etc. This leaves relatively lesser

money in their hands to spend on traditional consumer items such as personal care, food

and consumer products. However, because of the low per capita consumption for almost all

the products in the country as compared to developed nations, FMCG companies have

immense possibilities for growth.

These companies will have to gear themselves tobecome flexible and proactively manage

such growth. While customers would try and experiment with little or no loyalty they will

ultimately stay on with those products, which satisfy them most.