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FMCG SECTOR IN INDIA

CHAPTER 1. INTRODUCTION TO FMCG SECTOR IN

INDIA

The Fast Moving Consumer Goods (FMCG) sector is the fourth largest

sector in the Indian economy with a total market size in excess of Rs.

80,000 Crores. Products which have a quick turnover, and relatively low

cost are known as Fast Moving Consumer Goods (FMCG). FMCG

products are those that get replaced within a year. Examples of FMCG

generally include a wide range of frequently purchased consumer

products such as toiletries, soap, cosmetics, tooth cleaning products,

shaving products and detergents, as well as other non-durables such as

glassware, bulbs, batteries, paper products, and plastic goods. FMCG

may also include pharmaceuticals, consumer electronics, packaged food

products, soft drinks, tissue paper, and chocolate bars. India’s FMCG

sector is the fourth largest sector in the economy and creates employment

for more than three million people in downstream activities. Its principalconstituents are Household Care, Personal Care and Food & Beverages.

The total FMCG market is in excess of Rs. 85,000 Crores. It is currently

growing at double digit growth rate and is expected to maintain a high

growth rate. FMCG Industry is characterized by a well established

distribution network, low penetration levels, low operating cost, lower

per capita consumption and intense competition between the organizedand unorganized segments. This industry essentially comprises Consumer

Non Durable (CND) products and caters to the everyday need of the

population. The fast moving consumer goods business is characterized by

two pillars ' strong brand equity and a wide distribution network. Brand

equities are built over a period of time by technological innovations,

consistent high quality, aggressive advertisement and marketing.

Availability near the consumer through a wide distribution network is

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another crucial success factor, as products are of small value, frequently

purchased daily use items. FMCG are products that have a quick shelf

turnover, at relatively low cost and don't require a lot of thought, time

and financial investment to purchase. The margin of profit on every

individual FMCG product is less. However the huge number of goods

sold is what makes the difference. Hence profit in FMCG goods always

translates to number of goods sold. The FMCG sector represents

consumer goods required for daily or frequent use. The main segments of

this sector are personal care (oral care, hair care, soaps, cosmetics, and

toiletries), household care (fabric wash and household cleaners), branded

and packaged food, beverages (health beverages, soft drinks, staples,

cereals, dairy products, chocolates, bakery products) and tobacco. The

Indian FMCG sector is an important contributor to the country's GDP. It

is the fourth largest sector in the economy and is responsible for 5% of

the total factory employment in India. The industry also creates

employment for 3 m people in downstream activities, much of which is

disbursed in small towns and rural India. This industry has witnessed

strong growth in the past decade. This has been due to liberalization,

urbanization, increase in the disposable incomes and altered lifestyle.

Furthermore, the boom has also been fuelled by the reduction in excise

duties, de-reservation from the small-scale sector and the concerted

efforts of personal care companies to attract the burgeoning affluentsegment in the middle-class through product and packaging innovations

Unlike the perception that the FMCG sector is a producer of luxury items

targeted at the elite, in reality, the sector meets the everyday needs of the

masses. The lower-middle income group accounts for over 60% of the

sector's sales. Rural markets account for 56% of the total domestic

FMCG demand. Many of the global FMCG majors have been present inthe country for many decades. But in the last ten years, many of the

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smaller rung Indian FMCG companies have gained in scale. As a result,

the unorganized and regional players have witnessed erosion in market

share. The growth potential for FMCG Company’s look promising over

the long- term horizon, as the per-capita consumption of almost all

products in the country is amongst the lowest in the world.

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CHAPTER 2. OBJECTIVE OF THE STUDY

The FMCG Sector is one of the largest growing sectors each fiscal year

and still there is immense growth left in coming years. So the main objective of

my study is to show –

1) THE SWOT ANALYSIS OF THE FMCG SECTOR IN INDIA

2) FMCG INDUSTRY CLASSIFICATION

3) GROWTH OPPURTUNITIES

4) MARKET PLAYERS IN INDIA

5) INTERNATIONAL COMPETETIVENESS

6) INDIAN EQUITY PLAYERS IN THE FMCG INDUSTRY AND

EQUITY ANALYSIS OF THE FMCG PLAYERS FUTURE

OUTLOOK

Hence, these are the areas that I am going to cover in this project

and would give the overview of the FMCG SECTOR in India.

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CHAPTER 3. HISTORY AND PRESENT SCENARIO OF

FMCG COMPANIES IN INDIA

In India, companies like ITC, HUL, Colgate, Cadbury and Nestle have

been a dominant force in the FMCG sector well supported by relatively

less competition and high entry barriers (import duty was high). These

companies were, therefore, able to charge a premium for their products.

In this context, the margins were also on the higher side. With the gradual

opening up of the economy over the last decade, FMCG companies have

been forced to fight for a market share. In the process, margins have been

compromised, more so in the last six years (FMCG sector witnessed

decline in demand).

CURRENT SITUATION

The growth potential for FMCG companies looks promising

over the long-term horizon, as the per-capita consumption

of almost all products in the country is amongst the lowest

in the world. As per the Consumer Survey by KSA-

Technopak, of the total consumption expenditure, almost

40% and 8% was accounted by groceries and personal

care products respectively. Rapid urbanization, increased

literacy and rising per capita income are the key growth

drivers for the sector. Around 45% of the population in

India is below 20 years of age and the proportion of the

young population is expected to increase in the next five

years. Aspiration levels in this age group have been

fuelled by greater media exposure, unleashing a latent

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demand with more money and a new mindset. In this

backdrop, industry estimates suggest that the industry

could triple in value by 2015 (by some estimates, the

industry could double in size by 2012). In our view, testing

times for the FMCG sector are over and driving rural

penetration will be the key going forward. Due to

infrastructure constraints (this influences the cost-

effectiveness of the supply chain), companies were unable

to grow faster. Although companies like HLL and ITC have

dedicated initiatives targeted at the rural market, these

are still at a relatively nascent stage. The bottlenecks of

the conventional distribution system are likely to be

removed once organized retailing gains in scale.

Currently, organized retailing accounts for just 3% of total

retail sales and is likely to touch 10% over the next 3-5

years. In our view, organized retailing results in

discounted prices, forced-buying by offering many choices

and also opens up new avenues for growth for the FMCG

sector. India offers a large and growing market of 1 billion

people of which 300 million are middle class consumers.

India offers a vibrant market of youth and vigor with 54%

of population below the age of 25 years. These young

people work harder, earn more, spend more and demand

more from the market, making India a dynamic and

inspirational society. Domestic demand is expected to

double over the ten-year period from 2010 to 2020. The

number of households with "high income" is expected to

increase by 60% in the next four years to 44 million

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households. India is rated as the fifth most attractive

emerging retail market. It has been ranked second in a

Global Retail Development Index of 30 developing

countries drawn up by A T Kearney. A.T. Kearney has

estimated India's total retail market at $202.6 billion, is

expected to grow at a compounded 30 per cent over the

next five years. The share of modern retail is likely to

grow from its current 2 per cent to 15-20 percent over the

next decade, analysts feel. The Indian FMCG sector is the

fourth largest sector in the economy with a total market

size in excess of US$ 13.1 billion. The FMCG market is set

to treble from US$ 11.6 billion in 2008 to US$ 33.4 billion

in 2015. Penetration level as well as per capita

consumption in most product categories like jams,

toothpaste, skin care, hair wash etc in India is low

indicating the untapped market potential. Burgeoning

Indian population, particularly the middle class and the

rural segments, presents an opportunity to makers of

branded products to convert consumers to branded

products. India is one of the world’s largest producers for

a number of FMCG products but its FMCG exports are

languishing at around Rs 1,000 crore only. There is

significant potential for increasing exports but there are

certain factors inhibiting this. Small-scale sector

reservations limit ability to invest in technology and

quality up gradation to achieve economies of scale.

Moreover, lower volume of higher value added products

reduce scope for export to developing countries. The

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FMCG sector has traditionally grown at a very fast rate

and has generally outperformed the rest of the industry.

Over the last one year, however the rate of growth has

slowed down and the sector has recorded sales growth of

just five per cent in the last four quarters. The outlook in

the short term does not appear to be very positive for the

sector. Rural demand is on the decline and the Centre for

Monitoring Indian Economy (CMIE) has already downs

called its projection for agriculture growth in the current

fiscal. Poor monsoon in some states, too, is unlikely to

help matters. Moreover, the general slowdown in the

economy is also likely to have an adverse impact on

disposable income and purchasing power as a

whole. The growth of imports constitutes another problem

area and while so far imports in this sector have been

confined to the premium segment, FMCG companies

estimate they have already cornered a four to six per cent

market share. The high burden of local taxes is another

reason attributed for the slowdown in the industry. At the

same time, the long term outlook for revenue growth is

positive. Give the large market and the requirement for

continuous repurchase of these products, FMCG

companies is expected to do well in the long run.

Moreover, most of the companies are concentrating on

cost reduction and supply chain management. This should

yield positive results for them. Thus, the present scenario

is positive for FMCG companies in India and there is lots of

potential upside seen in this sector in coming years

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except that the rising costs do not make any impact on

the overall economy demand.

India’s FMCG Market Size (In USD Billion)

Sources: Naukri Hub, IBEF, Chennai Online

Hence, given the size of the ever increasing market size, the present

scenario looks promising for FMCG industry in India.

CHAPTER 4. STRUCTURE OF FMCG INDUSTRY IN

INDIA

The FMCG industry is volume driven and is characterized by low

margins. The products are branded and backed by marketing, heavy

advertising, slick packaging and strong distribution networks. The FMCG

segment can be classified under the premium segment and popular

segment. The premium segment caters mostly to the higher/upper middle

class which is not as price sensitive apart from being brand conscious.

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The price sensitive popular or mass segment consists of consumers

belonging mainly to the semi-urban or rural areas who are not

particularly brand conscious. Products sold in the popular segment have

considerably lower prices than their premium counterparts.

Following are

the segment-wise details of FMCG industry in India –

4.1 HOUSEHOLD CARE –

The size of the fabric wash market is estimated to be $1 billion,

household cleaners to be $239 million and the production of synthetic

detergents at 2.6 million tonnes. The demand for detergents has been

growing at an annual growth rate of 10 to 11 per cent during the past five

years. The urban market prefers washing powder and detergents to bars.

The regional and small un-organized players account for a major share of

the total volume of the detergent market.

4.1.1 Personal Wash-

The market size of personal wash is estimated to be around Rs. 8,300 Cr.

The personal wash can be segregated into three segments: Premium,

Economy and Popular. The penetration level of soaps is ~92 per cent. It

is available in 5 million retail stores, out of which, 75 per cent are in the

rural areas. HUL is the leader with market share of ~53 per cent; Godrej

occupies second position with market share of ~10 per cent. With

increase in disposable incomes, growth in rural demand is expected to

increase because consumers are moving up towards premium products.

However, in the recent past there has not been much change in the

volume of premium soaps in proportion to economy soaps, because

increase in prices has led some consumers to look for cheaper substitutes.

4.1.2 Detergents –

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The size of the detergent market is estimated to be Rs. 12,000 Cr.

Household Care segment is characterized by high degree of competition

and high level of penetration. With rapid urbanization, emergence of

small pack size and sachets, the demand for the household care products

is flourishing. The demand for detergents has been growing but the

regional and small unorganized players account for a major share of the

total volume of the detergent market. In washing powder HUL is the

leader with ~38 per cent of Market share. Other major players are Nirma,

Henkel and Proctor & Gamble.

4.2 PERSONAL CARE –

The size of the personal wash products is estimated at $989 million; hair

care products at $831 million and oral care products at $537 million.

While the overall personal wash market is growing at one per cent, the

premium and middle-end soaps are growing at 10 per cent. The leading

players in this market are HLL, Nirma, Godrej Soaps and Reckitt &

Colman. The oral care market, especially toothpastes, remains under

penetrated in India (with penetration level below 45 per cent). The

industry is very competitive both for organized and smaller regional

players. The Indian skin care and cosmetics market is valued at $274

million and dominated by HLL, Colgate Palmolive, Gillette India and

Godrej Soaps. The coconut oil market accounts for 72 per cent share inthe hair oil market. In the branded coconut hair oil market, Marico (with

Parachute) and Dabur are the leading players. The market for branded

coconut oil is valued at approximately $174 million.

Personal Care Products’ Market Sizes (In USD Million)

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Source- IBEF

4.2.1 Skin Care –

The total skin care market is estimated to be around Rs. 3,400 Cr. The

skin care market is at a primary stage in India. The penetration level of this segment in India is around 20 per cent. With changing life styles,

increase in disposable incomes, greater product choice and availability,

people are becoming aware about personal grooming. The major players

in this segment are Hindustan Unilever with a market share of ~54 per

cent, followed by CalvinKare with a market share of ~12 per cent and

Godrej with a market share of ~3 per cent.

4.2.2 Hair Care –

The hair care market in India is estimated at around Rs. 3,800 Cr. The

hair care market can be segmented into hair oils, shampoos, hair

colorants & conditioners, and hair gels. Marico is the leader in Hair Oil

segment with market share of ~ 33 per cent; Dabur occupies second

position at ~17 per cent.

4.2.3 Shampoos –

The Indian shampoo market is estimated to be around Rs. 2,700 Cr. It has

the penetration level of only 13 per cent in India. Sachet makes up to 40

per cent of the total shampoo sale. It has low penetration level even in

metros. Again the market is dominated by HUL with around ~47 per cent

market share; P&G occupies second position with market share of around

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~23 per cent. Antidandruff segment constitutes around 15 per cent of the

total shampoo market. The market is further expected to increase due to

increased marketing by players and availability of shampoos in

affordable sachets.

4.2.4 Oral Care –

The oral care market can be segmented into toothpaste - 60 per cent;

toothpowder - 23 per cent; toothbrushes - 17 per cent. The total

toothpaste market is estimated to be around Rs. 3,500 Cr. The penetration

level of toothpowder/toothpaste in urban areas is three times that of rural

areas. This segment is dominated by Colgate-Palmolive with market

share of ~49 per cent, while HUL occupies second position with market

share of ~30 per cent. In toothpowders market, Colgate and Dabur are the

major players. The oral care market, especially toothpastes, remains

under penetrated in India with penetration level ~50 per cent.

4.3 FOOD & BEVERAGES –

The size of the Indian food processing industry is around $ 65.6 billion,

including $20.6 billion of value added products. Of this, the health

beverage industry is valued at $230 million; bread and biscuits at $1.7

billion; chocolates at $73 million and ice creams at $188 million. The

size of the semi-processed/ready-to-eat food segment is over $1.1 billion.

Large biscuits & confectionery units, soya processing units and starch or

glucose/sorbitol producing units have also come up, catering to domesticand international markets. The three largest consumed categories of

packaged foods are packed tea, biscuits and soft drinks. The Indian

beverage industry faces over supply in segments like coffee and tea.

However, more than half of this is available in unpacked or loose form.

Indian hot beverage market is a tea dominant market. Consumers in

different parts of the country have heterogeneous tastes. Dust tea is popular in southern India, while loose tea in preferred in western India.

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The urban-rural split of the tea market was 51:49 in 2000. Coffee is

consumed largely in the southern states. The size of the total packaged

coffee market is 19,600 tonnes or $87 million. The total soft drink

(carbonated beverages and juices) market is estimated at 284 million

crates a year or $1 billion. The market is highly seasonal in nature with

consumption varying from 25 million crates per month during peak

season to 15 million during offseason. The market is predominantly

urban with 25 per cent contribution from rural areas. Coca cola and Pepsi

dominate the Indian soft drinks market. Mineral water market in India is

a 65 million crates ($50 million) industry. On an average, the monthly

consumption is estimated at 4.9 million crates, which increases to 5.2

million during peak season.

4.3.1 Food Segment –

The foods category in FMCG is gaining popularity with a swing of

launches by HUL, ITC, Godrej, and others. This category has 18 major

brands aggregating Rs. 4,600 Cr. Nestle and Amul slug it out in the

powders segment. The food category has also seen innovations like

softies in ice creams, ready to eat rice by HUL and pizzas by both

GCMMF and Godrej Pillsbury.

4.3.2 Tea –

The major share of tea market is dominated by unorganized players.

More than 50 per cent of the market share is capture by unorganized

players. Leading branded tea players are HUL and Tata Tea.

4.3.3 Coffee –

The Indian beverage industry faces over supply in segments like coffeeand tea. However, more than 50 per cent of the market share is in

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unpacked or loose form. The major players in this segment are Nestlé,

HUL and Tata Tea which have wide presence all over India in the coffee

segment.

SHORT DESCRIPTION OF FMCG STRUCTURE

CATEGORY PRODUCTS1) Household care Fabric wash, Household cleaners,

Floor cleaners, Toilet cleaners, Air

fresheners, Insecticides and

mosquito repellents; etc.

2) Food and Beverages Health beverages, Soft drinks,

Staples/cereals, Bakery products,

Snack food, Chocolates, Ice cream,

Tea, Coffee, Processed fruits,

Vegetables, Dairy products ,

Bottled water, Branded Flour,

Branded rice, Branded sugar,

Juices; etc.

3) Personal Care Oral care, Hair care, Skin care,

Personal wash, Cosmetics and

toiletries, Deodorants, Perfumes,

Feminine hygiene, Paper products;

etc.

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CHAPTER 5. SWOT ANALYSIS OF FMCG SECTOR IN

INDIA

The size of the Indian fast-moving consumer goods (FMCG) sector is

close to Rs 600 bn. The northern and the western regions of the country

account for more than half of the market for consumer goods. Barring the

fastest growing personal care segment, no other product segment has seen

the entry of so many players. In the past decade, the personal care

industry has witnessed a consumer boom. This has been due to

liberalization, urbanization, and an increase in the disposable incomes,

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and altered lifestyles, especially a heightened level of awareness among

the rural community, consequent to the onslaught of satellite television.

Furthermore, the boom has also been fuelled by the reduction of excise

duties, dereservation from the small-scale sector and the concerted efforts

of personal care companies to woo the burgeoning affluent segment of

the middle class through product and packaging innovations. Unlike in

the past, when domestic companies were not perceived as competitive

vis-à-vis multinational corporations (MNCs), the scenario is gradually

changing, with some domestic companies, like Nirma, Marico and Jyothi

Labs, standing up to their MNC counterparts. Also, competition amongst

the MNCs has intensified, leading to shrinkage of margins. The personal

and home care segment has very low entry barriers of technology and

capital requirements. This attracts new players and has resulted in

intensifying competition. Despite this, the strong distribution networks

and heavy investments needed for brand building remain key deterrents

to new players. Low margins and high volumes characterize the industry.

While the level of disposable incomes determines the overall sector

growth, the market has already been segmented and sub-segmented.

Companies have launched products at a number of price points to drive

up volumes. New products are being launched in niche segments, and old

products re-launched. Brand equity drives the customer’s purchase

decisions, and is the key to gaining market share. Also, competitive pressures have hiked the advertising budgets of most players. Besides, a

profusion of promotional schemes are being offered. Most players,

including Hindustan Lever Ltd (HLL), are struggling to maintain top line

growth, despite the heavy advertising and sales promotion (ASP)

expenditure. A lower price differential between the organized and the

unorganized sectors from reducing excise duties allows the former togrow at the expense of the latter. The organized sector also has a superior

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distribution reach. Although most of the product categories are still in the

growth phase, a few broad categories, like Detergents have reached a

mature phase only in the urban market. According to industry sources,

the affluent segment in the rural sector is growing at a faster rate than the

urban one. For the past three years, the organized sector has been

focusing on the rural markets, which are perceived to drive growth in the

industry and which, to a very large extent, are dominated by unorganized

players.

5.1 STRENGTH OF FMCG INDUSTRY –

1) AGRICULTURAL OUTPUT -

India is one of the major agrarian economies in the world with around

70% of the population involved in agriculture and agri related activities.

Therefore the raw materials in the form of agricultural output are

provided by the Agricultural activities, hence providing instant raw

materials to the FMCG industry in India. This is one of the major

strength of the FMCG players in India.

2) LOW LABOUR COST –

India’s Per Labour cost is lowest compared to various economies in the

world which reduces the total labour cost of the FMCG companies in

India. This is because of the large population and ability of Indian people

to work more in less cost as compared to others.

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3) VAST MARKET OPPORTUNITIES –

India’s FMCG market is one of the largest growing markets all over the

globe, with the population exceeding in billions. Still, there are various

markets which are not penetrated by the FMCG players and this gives

ample opportunities for these FMCG players to create a niche in every

corner of India.

4) MERGERS AND ACQUISTIONS –

In present Globalizations scenario, Mergers and acquisitions are playing

a major role. These have been an important aspect from past 2 years and

going ahead will help the FMCG companies to expand their product base

as well as their profit margins. Example, Godrej Ltd has announced 5

acquisitions across personal care, household care and hair care since

March 2010 in a bid to expand its operations in Asia, Africa and Latin

America and these all operations have made the expected earnings to rise

highly in coming quarters.

5) LOW OPERATIONAL COSTS –

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One of the major strength of FMCG industry is that the Operational costs

in India are low as compared to other destinations. Various areas in Rural

and Semi urban areas provide various facilities at cheap cost which

benefits the FMCG companies earning directly and contributes to GDP

growth as well. This is also because of various Tax benefits given to

certain companies promoting Special Economic Zones (SEZ).

6) ESTABLISHED DISTRIBUTION NETWORKS –

The supply chain of products in the FMCG market in India is one of the

longest supply chains an industry could really have. There are as many as

5 levels of intermediaries involved in the entire supply chain through

which a product passes before reaching the end consumer. What has been

observed is that even though these FMCG companies are big

multinationals and Indian but face a major challenge of making their

products available in the market in the right quantities and in the right

time. This is simply because these companies don’t really have a widenetwork of sales agents and other force which is required and is ideal for

catering their products to the markets. This aspect is taken over by

distributors, wholesalers and retailer whose margins on these products

actually double the price of these products when a final consumer buys it.

The margins kept by these intermediaries range from 2% to 5%. The

products in this industry are transported from manufacturing units via c &

f agencies or warehouse to distributors who further sell the same to

wholesalers or stockiest who finally sell it to the retailers in the market.

These products are transported either via roadways or railways within the

domestic markets and normally don’t take more than a week to reach the

retailers. FMCG products are normally a high volume ball game and

products have to essentially be available in the market at all given points

of time and at all given points of purchase and therefore the distribution

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activities are highly volatile and dynamic. The supply of products takes

place virtually on a daily basis in fixed quotas or otherwise, to retailers as

per their requisitions and the anticipation of demand and the performance

of products in the recent past. All such criteria are taken into

consideration before the quantum of products being dispatched to the

next level of intermediary. Since it’s a volume game, manufacturers

make all possible efforts to boost sales and promote their distributors to

earn more and more orders from the retailers and wholesalers. A close

check is maintained on the flow of the products on a daily, weekly,

fortnightly and monthly basis to determine the trend in the business and

flow of products and consumption. This activity also helps to find out

drawbacks of the distribution system, if any, and rectify them within

time. Thus, FMCG industry has great established distribution networks.

7) PRESENCE OF WELL KNOWN BRANDS IN FMCG

SECTOR –

One of the major strength in FMCG sector lies in its Brand value, which

caters to day to day need of Indian people. The top FMCG majors like

HUL, P&G, MARICO, ITC, etc; have created niche brands of products

which are highly used in India and other countries as well.

8) INCREASE IN ORGANIZED MARKET SHARE –

Indian FMCG Industry comprises of two markets basically; Organized

and Unorganized market. Earlier the market share of organized marketshare was less due to high existence of unorganized market in rural areas

and other parts of India as well. But now in last few years organized

market has also penetrated in to rural and semi rural areas raising its

market share highly. So Indian FMCG companies are gaining more

advantage due to high growth projector in rural areas in coming time as

well.

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5.2 WEAKNESS OF FMCG INDUSTRY –

1) HIGHER ADVERTISEMENTS COSTS –

The main weakness of the FMCG Sector companies in India is its high

advertisements costs which in turn lower the profit margins of the

companies by huge level. Advertisements have become a vital thing for

promoting FMCG because all major FMCG players advertise to show

their brands effectively which they have come up with and if certain

players do not advertise, they will not be able to reach to the maximum

number of masses. Also, the brands are promoted by stars and celebrities

which make the advertisements costlier for the companies because

celebrities make a big impact to customer’s preferences; as said by A.C

Nielsen Survey 2009.

So, to stay ahead in the competition, FMCG companies are forced to

make huge advertisement costs which lead to increase in their volume

growth, though that beats their profits margins to large extent.

2) NO PRICE HIKE POSSIBLE –

Even if the profit margins of FMCG companies are low, even if the cost

of raw materials increases, even if the excise duties and MAT (Minimum

Alternate Tax) increases, the FMCG companies cannot suddenly increase

the prices of its products. This is because if the prices are reduced

suddenly then maybe it would bring down the customer base of thecompany and hence would impact the profitability and sales of the

company. Hence, FMCG companies find it difficult to hike the prices

when required.

3) GOVERNMENT RULES AND REGULATIONS –

The FMCG companies have to compulsorily follow stringent government

rules and regulations and cannot avoid them. The regulations keep onchanging on changing business and global scenarios and also change in

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products narrow the scope of FMCG products in rural and semi-urban

market.

7) DEMAND IS SEASONAL SOMETIMES –

The demand in FMCG products to some extent is seasonal and only high

during festive seasons in some cases. This affects the profitability of the

company and companies have to manage its production accordingly. So,

in some companies the demand is just seasonal and not throughout the

year which adds to the weakness of the FMCG industry in India.

8) POOR GOVERNMENT SPENDINGS –

One of the other weaknesses of FMCG industry is poor government

spending on infrastructure and allied activities related to FMCG.

Infrastructure plays an important role for these FMCG companies as it

serves an important aspect for their Distribution of the products. Hence, if

infrastructure is not available then it would be difficult for FMCG

companies to market their products in rural areas and other far areas. It

would severely acts as a barrier to FMCG distribution networks.

9) HIGH INVESTMENT TO GROW –

FMCG companies need high investment to expand their base as huge

capital is required for manufacturing process, land, operating expense at

higher levels, etc. Hence, if the small FMCG companies desire to grow, it

would really find it difficult to expand its operations in this sector.

5.3 OPPURTUNITIES IN FMCG INDUSTRY –

1) UNTAPPED RURAL MARKET –

The Indian rural market with its vast size and demand base offers a

huge opportunity for investment. Rural India has a large consuming class

with 41 per cent of India’s middle-class and 58 per cent of the total

disposable income. With population in the rural areas estimated to have

risen to 153 million households by 2009- 10 and with higher saturation inthe urban markets, future growth in the FMCG sector will come from

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increased rural and small town penetration. Technological advances such

as the Internet and e-commerce will aid in better logistics and distribution

in these areas. Rural marketing has become the latest marketing mantra

of most FMCG majors. True, rural India is vast with unlimited

opportunities, waiting to be tapped by FMCGs. So it’s not surprising that

the Indian FMCG sector is busy putting in place a parallel rural

marketing strategy. Among the FMCG majors, Hindustan Lever, Marico

Industries, Colgate-Palmolive and Britannia Industries are a few of the

FMCG majors who have been gung-ho about rural marketing. Seventy

per cent of the nation’s population, i.e., rural India, can bring in the

much-needed volumes and help FMCG companies to log in volume-

driven growth. That should be music to FMCGs who have already hit

saturation points in urban India.

2) RISING INCOME LEVELS –

If we see the statistics of last one decade, it is observed that the per capita

income of average person have been increasing each year leaving higher

amount of funds in to the hands of the people of India. Hence, this shows

the potential for FMCG companies to operate in India as the consumers

income levels is on a high rise from each year after year. Also, the

government has been doing well by raising the Tax slabs this Fiscal

budget with increasing the tax slab to higher amount leaving more money

in to the hands of final consumer.3) LARGE DOMESTIC MARKET –

India, with its population exceeding in billions, shows the potential of

growth of FMCG industry in India. It have huge domestic market as the

population is also so high, hence the companies would find a large

market in India, hence the foreign markets are also having eyes on Indian

FMCG Industry to invest or operate here because of the huge marketopportunities which awaits for them.

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4) EXPORT POTENTIAL –

Indian FMCG companies have a huge export potential going ahead as

they have already created huge Brand value in India and they are eyeing

for Exports to earn foreign revenues and to make a mark in foreign

markets as well. So, this provides ample opportunities for FMCG

companies to export their product and go global.

5) HIGH CONSUMER GOODS SPENDING –

There’s high consumer goods spending in Indian market which gives lots

of opportunities to FMCG companies to operate in India. The change in

Indian consumers to shift to branded goods other then cheap goods makes

a mark for the companies operating in India. Hence, this would lead a

better future for the FMCG companies operating in India.

6) EASY AVAILABILITY OF FINANCE –

Another big opportunity which can be advantageous to FMCG industry is

easy availability of finance from various sources, so that they can expand

their base in working as well as pay off their debt as well. Thus, this is

what most cheering for the FMCG companies operating in India that

allows the freedom to operate in India and lure consumers with better

products from time to time.

7) RAPID URBANISATION –

The era of liberalization of 1992 and the various policies made post

liberalization have made far off changes in Indian industry. These havecaused rapid urbanization in past two decades. Urbanizations have

brought far off changes in Indian FMCG industry with lots of

improvements and change in spending patterns giving boost to FMCG

industry. Thus, Urbanization has made our companies operate at large

scale in each and every part of our nation and the growing growth is

supplied with this urbanization as well.

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5.4 THREATS TO FMCG INDUSTRY –

1) INCREASE IN EXCISE DUTIES AND TAXES –

Recent hike in Excise duties from 8% to 10% in March have provided a

threat to FMCG companies operating margins. Also the hike in MAT i.e.

Minimum Alternate Taxes from 15% to 18% has created a pressure on

FMCG companies’ profit margins. So, this can be seen that Hike in

excise duties and various taxes affect the FMCG companies largely and

affect their profitability to large extent.

2) ENTRY OF FOREIGN PLAYERS –

One of the biggest threats of the FMCG industry would be if the foreign

players would be allowed to enter the Indian markets. The foreign

player’s entry would see other major Indian players losing their market

share to them. So this would be detrimental to small and emerging

players of India in this industry as it would increase competition and

decrease market share of Indian companies to large extent.

3) RISING COSTS OF RAW MATERIALS –

The continuous rise in raw materials have been really big threat for the

FMCG industry and hampered its growth to certain extent as well. This is

because of high inflationary pressures in an economy that the prices of

raw materials go up which means the FMCG companies have to pay

more for raw materials, which increases their production costs and thisdirectly impacts the profitability of the company. Due to this, several

FMCG majors in India have raised their prices of various products by

some extent, so as to cope up with the rising costs.

4) TIMELY MONSOONS –

Monsoons play a very important role in determining faith of FMCG

companies in India. It is because good monsoons would bring in rawmaterials at low cost, and also the availability of raw materials is at ease

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fulfilling the demand and supply equilibrium in the market. So,

monsoons play an important role for FMCG industry.

5) INFLATION –

High inflation rates in an economy may harm the FMCG sector in some

cases because it would lead to low consumer spending due to high food

inflation which is on a continuous rise in recent past. High food inflation

has an adverse affect on the FMCG industry. People will spend less

money on discretionary items which will hit the FMCG industry.

6) SLOWDOWN IN RURAL DEMAND –

The FMCG industry revenues had been on a great rise from the rural

markets as majority of the Indian population resides in rural and semi

rural areas. So, if there is slowdown in rural demand due to any reasons,

it would be a threat to the FMCG sector in big way. The main cause for

slowdown may be the increase of unorganized sector in rural areas which

do not provide any good quality of products and cheat the consumers

with poor quality products at approximately same rates of branded

products. So, this may prove threatful to the FMCG industry in big way.

7) CHEAP IMPORTS –

The last but not the least factor which would be a big threat to FMCG

industry is cheap imports from China, Singapore and other Asian

countries. If imports would become cheap and restrictions on capital

account transactions would be lifted, then these countries may try andenter the Indian markets with the view to capture the market share of the

existing players by selling goods at cheaper rates, as there they produce

with high class technology and cheap labour as well.

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CHAPTER 6. MARKET AND SECTORAL

OPPORTUNITIES FOR INVESTMENT

Measuring the opportunity: Domestic FMCG market to treble –

FMCG Market Size (US$ billions)

Source: HH Panel data

According to estimates based on India’s current per capita consumption,

the Indian FMCG market is set to treble from US$ 11.6 billion in 2009 to

US$ 33.4 billion in 2015. The dominance of Indian markets by

unbranded products, change in eating habits and the increased

affordability of the growing Indian population presents an opportunity to

makers of branded products, who can convert consumers to branded

products.

The investment potential in rural markets –

The Indian rural market with its vast size and demand base offers a huge

opportunity for investment. Rural India has a large consuming class with

41 per cent of India's middle-class and 58 per cent of the total disposable

income. With population in the rural areas set to rise to 153 million

households by 2009-10 and with higher saturation in the urban markets,

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future growth in the FMCG sector will come from increased rural and

small town penetration. Technological advances such as the internet and

e commerce will aid in better logistics and distribution in these areas.

Already Indian corporate such as HLL and ITC have identified the

opportunity and have initiated projects such as 'Project Shakti' and 'e-

Choupal' to first, expand rural income, and then, to penetrate this market.

Boosting Rural Income - Novel Experiments by Indian

Corporates – PROJECT SHAKTI –

FMCG giant Hindustan Lever initiated 'Project Shakti' to spur growth and

increase the penetration of its products in rural India while changing lives

and boosting incomes. Through a combination of micro-credit and

training in enterprise management, women from self-help groups turned

direct-to home distributors of a range of HLL products and helped thecompany test hitherto unexplored rural hinterlands. The project was

piloted in Nalgonda district in Andhra Pradesh (AP) in 2001; it has since

been scaled up and extended to over 5,000 villages in 52 districts in AP,

Karnataka, Gujarat, Chhattisgarh, Orissa and Madhya Pradesh with

around 1,000 women entrepreneurs in its fold. The vision is to create

about 11,000 Shakti entrepreneurs covering 100,000 villages and 100

million rural consumers by 2010. For HLL, greater penetration in rural

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areas is also imperative since over 50 per cent of its incomes for several

of its product categories like soaps and detergents come from rural India.

The project has borne fruit for HLL. In Andhra Pradesh, so far, since the

experiment began, HLL has seen 15 per cent incremental sales from rural

Andhra, which contributes 50 per cent to overall sales from Andhra of

HLL products.

Source- IBEF publication Fast Moving Consumer Goods

E-CHOUPAL –

An example of the successful application of IT is the e-Choupals

experiment kicked off by diversified tobacco giant ITC. ITC has designed

and set up internet kiosks called e-Choupals to support its agricultural

product supply chain. The e-Choupals are totally owned and set up by

ITC with the operators not having any investment or risk of their own.

There are four kinds of e-Choupals tailored for shrimps, coffee, wheat

and soyabean. The focus is on creating internet access for global market

information to guide production and supply decisions. It provides priceinformation and thus, price certainty to the farmers. In addition, the

farmers get access to operational information, developed by ITC experts,

pertaining to cropping, seeds, fertilizers etc. The initial benefits of the

ITC effort include a substantial reduction in transaction costs, from 8 per

cent to just 2 per cent. These gains are shared roughly equally between

ITC and individual farmers. The longer-term goal is to use e-Choupals as

sales points for soyabean oil and a range of other consumer goods. ITC

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has also set up its first rural mall near Bhopal, where it distributes

products of other FMCG majors as well. Hence, incomes generated

through e-choupals will be targeted by the FMCG major to drive their

product sales.

EXPORT POTENTIAL –

India has a locational advantage that can be exploited to use it as a

sourcing base for FMCG exports. Export of pre-prepared meals with

Indian vegetables for large Asian ethnic population settled in developed

countries is a very big opportunity for India. South East Asia, which is

presently being catered to by USA and EU, can be sourced from India

due to its lower freight cost. Investments can also be made in Indian dairy

industries to manufacture and package dairy food (through contract or

local collaboration) for export to Middle East, Singapore, Malaysia,

Indonesia, Korea, Thailand and Hong Kong. Commodities like dry milk,

condensed milk, ghee and certain cheese varieties that are utilized as

ingredients in foreign countries can also be exported. These markets can

be expanded to include value-added ingredients like packaged cheese

sauce and dehydrated cheese powders. Large export potential also exists

in the soya products industry.

SECTORAL OPPURTUNITIES IN FMCG SECTOR IN

INDIA

According to the Ministry of Food Processing, with 200 million, people

expected to shift to processed and packaged food by 2010, India needs

around US$ 28 billion of investment to raise food processing levels by 8-

10 per cent. In the personal care segment, the lower penetration rates also

present an untapped potential.

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Key sectoral opportunities are mentioned below:

• Staple: branded and unbranded –

While the expenditure on mass-based, high volume, low margin basic

foods such as wheat, wheat flour and homogenized milk is expected to

increase substantially with the rise in population, there is also a market

for branded staples is also expected to emerge. Investment in branded

staples is likely to rise with the popularity of branded rice and flour

among urban population.

• Dairy based products –

India is the largest milk producer in the world, yet only 15 per cent of the

milk is processed. The US$ 2.4 billion organized dairy industry requires

huge investment for conversion and growth. Investment opportunities

exist in value-added products like desserts, puddings etc. The organized

liquid milk business is in its infancy and also has large long-term growth

potential.

• Packaged food –

Only about 8-10 per cent of output is processed and consumed in

packaged form, thus highlighting the huge potential for expansion of this

industry. Currently, the Semi processed and ready to eat packaged food

segment has a size of over US$ 5 Billion and is growing at 15 per cent

per annum. Growth of dual income households, where both spouses areearning, has given rise to demand for instant foods, especially in urban

areas. Increased health consciousness and abundant production of quality

soybean also indicates a growing demand for soya food segment.

• Personal care and hygiene –

The oral care industry, especially toothpastes, remains under penetrated

in India with penetration rates below 45 per cent. With rise in per capitaincomes and awareness of oral hygiene, the growth potential is huge.

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Lower price and smaller Packs are also likely to drive potential up

trading. In the personal care segment, according to forecasts made by the

Centre for Industrial and Economic Research (CIER), detergent demand

is likely to rise to 4,180, 000 metric tonnes by 2011-12 with an annual

growth rate of 7 per cent between 2006 and 2012. The demand for toilet

soap is expected to grow at an annual rate of 4 per cent between 2010-12

to 870,000 metric tonnes by 2013-14. Rapid urbanization is expected to

propel the demand for cosmetics to 100,000 metric tonnes by 2011-12,

with an annual growth rate of 10 per cent.

• Beverages –

The US$ 2 billion Indian tea market has been growing at 1.5 to 2 per cent

annually and is likely to see a further rise as Indian consumers convert

from loose tea to branded tea products. In the aerated drinks segment, the

per capita consumption of soft drinks in India is 6 bottles compared to

Pakistan's 17 bottles, Sri Lanka's 21, Thailand's 73, the Philippines 173

and Mexico's 605. The demand for soft drink in India is expected to grow

at an annual rate of 10 per cent per annum between 2006-12 with demand

at 805 million cases by 2011-12. Per capita coffee consumption in India

is being promoted by the coffee chains and by the emergence of instant

cold coffee. According to CIER, demand for coffee is expected to rise to

535,000 metric tonnes by 2012, with an annual growth rate of 5 per cent

between 20010-12.• Edible oil –

The demand for edible oil in India, according to CIER, is expected to

rise to 21 million tonnes by 2011-12 with an annual growth rate of 7 per

cent per annum.

• Confectionary –

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The explosion of the young age population in India will trigger a spurt in

confectionary products. In the long run the industry is slated to grow at 8

to 10 per cent annually to 870,000 metric tonnes by 2011-12.

CHAPTER 7. GROWTH PROSPECTS OF FMCG

SECTOR IN INDIA

LARGE MARKET

India has a population of more than 1.150 Billions which is just behind

China. According to the estimates, by 2030 India population will be

around 1.450 Billion and will surpass China to become the World largest

in terms of population. FMCG Industry which is directly related to the

population is expected to maintain a robust growth rate.

Source: UN Population Division: Medium variant

SPENDING PATTERN-

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An increase is spending pattern has been witnessed in Indian FMCG

market. There is an upward trend in urban as well as rural market and

also an increase in spending in organized retail sector. An increase in

disposable income, of household mainly because of in-crease in nuclear

family where both the husband and wife are earning, has leads to growth

rate in FMCG goods.

CHANGING PROFILE OF INDIAN CONSUMERS-

People are becoming conscious about health and hygienic. There is a

change in the mind set of the Consumer and now looking at “Money for

Value” rather than “Value for Money”. We have seen willingness in

consumers to move to evolved products/ brands, because of changing

lifestyles, rising disposable income etc. Consumers are switching from

economy to premium product even we have witnessed a sharp increase in

the sales of packaged water and water purifier. Findings according to a

recent survey by A. C. Nielsen shows about 71 per cent of Indian take

notice of packaged goods labels containing nutritional information

compared to two years ago which was only 59 per cent.

ADVANTAGES TO THE SECTOR-

Governmental Policy –

Indian Government has enacted policies aimed at attaining international

competitiveness through lifting of the quantitative restrictions, reducingexcise duties, and automatic foreign investment and food laws resulting

in an environment that fosters growth. 100 per cent ex-port oriented units

can be set up by government approval and use of foreign brand names is

now freely permitted.

Central & State Initiatives –

Recently Government has announced a cut of 4 per cent in excise duty tofight with the slowdown of the Economy. This announcement has a

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positive impact on the industry. But the benefit from the 4 per cent

reduction in excise duty is not likely to be uniform across FMCG

categories or players. The changes in excise duty do not impact cigarettes

(ITC, Godfrey Phillips), biscuits (Britannia Industries, ITC) or ready-to-

eat foods, as these products are either subject to specific duty or are

exempt from excise. Even players with manufacturing facilities located

mainly in tax-free zones will also not see material excise duty savings.

Only large FMCG-makers may be the key ones to bet and gain on excise

cut.

Foreign Direct Investment –

Automatic investment approval (including foreign technology

agreements within specified norms), up to 100 per cent foreign equity or

100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment,

is allowed for most of the food processing sector except malted food,

alcoholic beverages and those reserved for small scale industries (SSI).

There is a continuous growth in net FDI Inflow. There is an increase of

about 150 per cent in Net Inflow for Vegetable Oils & Vanaspati for the

year 2008.

Sour

ce- www.ghallabhansali.com

Vast Rural Market –

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Rural India accounts for more than 700 Million consumers, or ~70 per

cent of the Indian population and accounts for ~50 per cent of the total

FMCG market. The working rural population is approximately 400

Millions. And an average citizen in rural India has less than half of the

purchasing power as compare to his urban counterpart. Still there is an

untapped market and most of the FMCG Companies are taking different

steps to capture rural market share. The market for FMCG products in

rural India is estimated 52 per cent and is projected to touch 60 per cent

within a year. Hindustan Unilever Ltd is the largest player in the industry

and has the widest market coverage.

Export - “Leveraging the Cost Advantage” –

Cheap labor and quality product & services have helped India to

represent as a cost ad-vantage over other Countries. Even the

Government has offered zero import duty on capital goods and raw

material for 100% export oriented units. Multi National Companies out-

source its product requirements from its Indian company to have a cost

advantage. 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. It adds a cost advantage as well as

easily available raw materials.

Buoyant rural spending –

Growth in rural India, where 50% of FMCG sales come from, has beenquite strong. A lot of money is being spent in rural India through

employment generation schemes, while the loan waiver changes

sentiment substantially. The country has been blessed with good

monsoons and good agricultural production. The food inflation has also

helped farmers with rise in income. Hence the purchase power in rural

areas has increased and spending behavior is also changing. These helpFMCG companies with more revenues, while higher and middle class

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urban consumers demand is inelastic for the goods and services that

FMCG companies offer, so slowdown in demand is not expected for

FMCG.

Favourable Pricing Strategies –

With the cost of almost every input ranging from palm oil and milk to

packaging material zooming upwards, FMCG companies had increased

the price smoothly to mange cost escalation. Colgate, for instance, had

increased prices by 3-4% earlier this year while Dabur had upped prices

of hair oil, chyawanprash and toothpaste by 4% and shampoos by 7%.

Marico had increased prices of Parachute hair oil by 5-6% while

Hindustan Lever too had upped prices of a few brands by about 1 to 28%.

Companies with large product portfolios and a presence across price

points - Hindustan Unilever and Dabur - managed to offset margin

pressures through shifts in the product mix. With inflation showing signs

of easing, the companies, which have taken price increases on their

products, are likely to benefit in the forthcoming quarters.

Decrease in Raw Material Prices –

During the second quarter the crude price has fell to almost $60 from

record high of $ 147. For raw materials such as palm oil and packaging

material, where prices bear clear linkages to crude oil, it has been big

relief for FMCG companies. Though to match rising cost the companies

had increased product pricing, the operating margin has shrunk by 150-200 bps. However the companies made forward purchases or built up

additional inventories in the latter part of 2007 and in the first quarter of

2008, to guard against a further rise. Dabur India, for which packaging is

a key input, had covered most of its requirements for the June quarter

through forward purchases in the March quarter itself. Now, after this

challenging phase, FMCG makers may have less to worry about on theraw material front over the next few months, as a range of inputs - palm

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oil, packaging plastics and petroleum derivatives have seen a 20-30%

price correction, tracking the meltdown in crude oil prices which will

recover the operating margins. The government had also supported with

decrease in peak import duty for raw materials and also excise cut in

packaging material. The tax holiday at Himachal Pradesh, Jammu and

Kashmir, Uttarakhand will be significant benefit for FMCG companies,

which will also continue to improve bottom lines.

Better Product mix –

The companies are improving its product mix with changing dynamics of

consumer behavior. As consumers are becoming health conscious, the

manufacturers are ready to woo them by offering more Ayurvedic and

Herbal products. Change in life-style affluent Indians have also spurred

the growth for FMCG products with increasing ‘premiumisation’ of

portfolios and categories like anti-aging solutions, hair colors etc.

Besides, the Indian rural regions too are witnessing change in lifestyle,

further pushing up the FMCG sales.

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CHAPTER 8. CHALLENGES BEFORE THE INDIAN

FMCG SECTOR

At the macro level, Indian economy is poised to remained buoyant and

grow at more than 7%, the economic growth would impact large proportions of the population thus leading to more money in the hands of

the consumer. Changes in demographic composition of the population

and thus the market would also continue to impact the FMCG industry.

Recent survey conducted by a leading business weekly, approximately 47

per cent of India's 1 + billion people were under the age of 20, and

teenagers among them numbered about 160 million. Together, they

wielded INR 14000 Cr worth of discretionary income, and their families

spent an additional INR 18500 Cr on them every year. By 2015, Indians

under 20 are estimated to make up 55% of the population - and wield

proportionately higher spending power. Means, companies that are able

to influence and excite such consumers would be those that win in the

market place.

The Indian FMCG market has been divided for a long time between the

organized sector and the unorganized sector. While the latter has been

crowded by a large number of local players, competing on margins, the

former has varied between a two-player-scenario to a multi-player one.

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Unlike the U.S. market for fast moving consumer goods (FMCG), which

is dominated by a handful of global players, India's Rs.460 billion FMCG

market remains highly fragmented with roughly half the market going to

unbranded, unpackaged home made products. This presents a tremendous

opportunity for makers of branded products who can convert consumers

to branded products. However, successfully launching and growing

market share around a branded product in India presents tremendous

challenges. Take distribution as an example. India is home to six million

retail outlets and super markets virtually do not exist. This makes

logistics particularly for new players extremely difficult. Other

challenges of similar magnitude exist across the FMCG supply chain.

The fact is that FMCG is a structurally unattractive industry in which to

participate. Even so, the opportunity keeps FMCG makers trying.

At the macro-level, over the long term, the efforts on the infrastructure

front (roads, rails, power, and river linking) are likely to enhance the

living standards across India. Till date, India's per capita consumption of

most FMCG products is much below world averages. This is the latent

potential that most FMCG companies are looking at. Even in the much-

penetrated categories like soaps/detergents companies are focusing on

getting the consumer up the value chain. Going forward, much of the

battle will be fought on sophisticated distribution strengths. The major

challenge is to tap the markets which are yet to be fully integrated and

unorganized to increase the market share for the FMCG companies in

India. So, the FMCG companies are trying hard to make their way to

rural and semi-rural areas to tap the market opportunities waiting.

One more thing which these FMCG companies are facing is rising cost of

raw materials which is increasing day by day. These rising cost results in

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lower profit margins of the FMCG companies thereby decreasing the

Bottom Line growth of the company’s profitability.

Going ahead as there are rising threats of global warming, the rainfallshave been affecting the FMCG companies. Last year as well, due to bad

monsoons, FMCG companies were short of raw materials and therefore

there was scarcity of certain products in the market. Also, the entry of

foreign players in coming years could be detrimental to the interests of

present FMCG companies operating in India. This union budget of 2010-

2011 saw an increase in Excise duties on FMCG industry, which would be a big challenge for the companies to maintain their profit margins, and

threat of potential increase of excise in coming years.

So, the challenges need to be addressed well by these companies by

adopting appropriate measures so that they can improve their profit

margins and their overall market share. Hence, these were the challenges

to FMCG companies in India which can deter their Top line and Bottom

line growth.

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CHAPTER 9. FUTURE BLUE PRINT OF FMCG

SECTOR

To offer a blue-print for an industry which is one of the most dynamicand demanding is like scheduling events in my life for the days to come.

One thing in common between this two would always be the risk of

uncertainty involved is very high. Any draft on these topics would

certainly always involve issues like distributions, channel-conflict,

optimizing operations (supply chain) and if not the last, rural marketing.

This blueprint will delve 4 basic concepts and why it could be of major

reckoning in the future. These are: -

1. Excellence in operations - through Value Chain De-Verticalization

2. Rural marketing

3. Distributions

4. Brand managers to Business managers

1. Excellence in operations - Value Chain De-Verticalization -

Excellence in Operations remains an illusion for most FMCG companies.

This will be remaining as long as they stay confined within the

organizational structures and mindsets associated with today's vertically

integrated business model. According to a McKinsey report based on

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problems and opportunities relating to operational excellence, the study

comes out with the following findings: -

1. Operations issues get neglected from top-management two main business processes of customer management and consumer management.

It suggests that Operations issues get a lot less than 20% of the Executive

Committee's agenda time. To compound the problem, only around 10%

of top executives in FMCG companies have direct personal experience in

Operations. It is hardly surprising; therefore, that the commitment to

drive radical change may not be as strong in Operations as it is in theother two business processes.

2. Organization structure of many MNC's makes it's tough to optimize

decision-making or to spread best practices across units or countries.

Around 10% of FMCG companies have a global Operations director with

full responsibility for both operational improvement and strategic

resource allocation.

3. Most of the top quartile talent is siphoned for handling marketing or

finance functions. Operations functions are short of management talent.

High potential generalists often find FMCG Operations too internally

focused and too technical. At the other end of the scale, senior Operations

experts are often attracted to other industries - such as electronics,

automotive or engineering - where Operations is both more highly

regarded and more highly rewarded. These problems are not new. What

is new is that a potential solution - the combination of organizational

separation and value chain de-verticalization.

De-verticalization-

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A multinational FMCG company those are able to achieve organizational

separation - and functionally organized national companies. This

effectively means outsourcing your supply chain activities to a third

party. Typically this will involve selling the existing Operations assets

and activities, including procurement, manufacturing, primary

distribution, and process R&D, to a financial buyer, a third party

manufacturer or a joint venture with other FMCG companies. In essence,

this leaves an 'asset light' FMCG company and an 'asset heavy' supply

company.

How will it create value?

From the perspective of the FMCG Company, the supply company of its

will now is in a position to address the above-mentioned operational

issues. A strongly incentivized management team often directly

accountable to the capital markets - will be better able to attract and

motivate talented operations managers, focus 100% of its attention on

Operations issues and build operational skills. And operational excellence

will translate directly into bottom-line impact.

Thus de-verticalization allows the management of the FMCG company to

focus entirely on customer and consumer management - the main engines

of growth - while sharing in progressive Operations cost improvements

through either an equity stake or 'open book' supply contracts. From the

financial perspective this would also help the FMCG Company get a

quantum leap in return on capital employed.

Industry examples –

A few FMCG companies have already outsourced manufacturing to some

degree - including Sara Lee, Nike and several beverage companies - or

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begun establishing themselves as specialized players. But compared to

industries like automotive and electronics, where much of the industry

value chain has already changed owners, FMCG is some way behind.

One reason has been a lack of willing buyers of Operations assets.

However, there certainly is a trend at present and a visible scope in the

future wherein private equity firms, raw material suppliers and specialist

manufacturers, constrained by growth in their traditional markets, are

now actively exploring the FMCG de-verticalization opportunity.One big

challenge remains in managing the interfaces between the two companies

- for example, product development, forecasting and order processing.

However, the lesson from multinationals that have successfully

implemented organizational separation - and those that already make

extensive use of co-packers or third party logistics providers - is that this

challenge is far less daunting than it may at first appear. E-enablement

technologies aid to disaggregate the value chain without losing the

connectivity between its component parts. About the new product

development process - that can be addressed by retaining a pilot plant in-

house".

2. Rural marketing -

Rural marketing has become the latest marketing mantra of most FMCG

majors. True, rural India is vast with unlimited opportunities. All waiting

to be tapped by FMCGs. Not surprising that the Indian FMCG sector is

busy putting in place a parallel rural marketing strategy. Among the

FMCG majors, Hindustan Lever, Marico Industries, Colgate-Palmolive

and Britannia Industries are only a few of the FMCG majors who have

been gung-ho about rural marketing.

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70% of the nation's population that means rural India can bring in the

much-needed volumes and help FMCG companies to log in volume-

driven growth. That should be music to FMCGs who have already hit

saturation points in urban India.

“Not just rural population is numerically large; it is growing richer

by the day”

Food grain production touched 200 million tonnes during fiscal 1999

against 176 million tonnes logged during fiscal 1991. Not just improved

crop yields; tax-exemption on rural income too has been responsible for

this enhanced rural purchasing power.

Consider this statistics from a National Council of Applied Research

(NCAER) survey: lower income group is expected to shrink from over 60

percent (1996) to 20 per cent by 2007 and the higher income group is

expected to rise by more than 100 per cent.

Value-volume trade-off –

Rural marketing could open the doors of paradise, but the path is paved

with thorns. One major limitation here is this: most FMCG players just

do not have the critical size for going all out for rural marketing. That is

why most FMCG players are expected to concentrate both on rural andurban marketing: focus on urban markets for value and focus on rural

markets for volumes. One result-oriented marketing strategy here is this:

offer value-additions to existing lines to lure the urban consumer and

alongside offer the rural consumer wide-ranging choices within a single

product category in a bid to generate high volumes.

What should the FMCG players do now?

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They should not only price their products competitively, but also offer

their rural prospects maximum value for money spent. Certainly,

reaching out to 3.33 million retail outlets is an uphill task. The only way

out for Indian FMCG players: put in place an aggressive cost structure

that would enable them to offer low-price and value-for-money products.

But then, FMCG is a low-margin business with a high cost of raw

materials. Consider the case of Marico: its material cost works out to a

high of 59 per cent on sales. Therein lays the rural marketing paradox.

However, customer-centric and market-savvy FMCG companies havealways chased prospects when they perceive there is a latent demand. For

instance, Hindustan Lever's Rin, Surf and Lux are available even in

India's most obscure villages.

Hindustan Lever had given shape to its rural strategy a few years ago

when it perceived that its urban market was shrinking due to an industrial

slowdown. It’s Operation Bharat that focused on personal care products

made the most out of surging rural incomes.

The result was there for all to see. The company has been able to clock in

double-digit profits every three years and log in double-digit revenues

every four years. Britannia with its Tiger brand of biscuits and Colgate-

Palmolive with its low-priced and conveniently-packaged products

designed for the rural masses have been other pioneers in rural

marketing.

3. Distribution -

One of the age-old problems that FMCG has been facing not only in

India but globally is that of distribution. Integrating operations with your

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distributors and channel partners is a Herculean task. Few ways to reduce

pain involved in this link: -

Reducing supply chain costs by reducing intermediaries - Organisedretail chains have set up systems for inventory management and quick

servicing, thereby offering the opportunity for a company/supplier to

reduce distribution cost by reducing intermediaries such as

wholesalers/distributors and supplying directly to the warehouse of retail

chain.

Increasing sales by driving channel width - The relative share of grocers to FMCG sales has dropped from over 50% in the early 90's to

35% in the late 90's. On the other hand the contribution of chemist outlets

and paan outlets has been increasing. This has been a result of both

SKU's (sachets) and hardware (mini dispensers) being specifically

designed to facilitate entry to these outlets and increase consumer

interface.

4. Brand Managers to Business Managers -

Tough market situations and a more aware and savvier demanding

consumer have necessitated that yesterday's Brand Managers be

transformed into Business Managers who understand consumers and can

innovate and be flexible to move with the consumer.

Gone are the days when brands could be made to gallop with a big

budget media plan, a generous dose of below-the-line and above-the-line

activities and constant promotions and schemes in the market. Consumers

who have become demanding yet inscrutable in terms of attitudes,

outlook, moods and behaviour have rendered conventional Brand

Management tools obsolete.

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This makes it all the more important for Brand Managers to develop

strong consumer insights and constantly innovate. This requires

immersing oneself in the consumer's life space and understanding her to

open up new opportunities. These opportunities are hidden in seemingly

insignificant behavioral patterns, which open up wide new opportunities

for the brand.

Developing strong consumer insight basically requires one to

a) Align oneself to the challenge, in terms of correctly identifying the

key issues and objectives.

b) Leverage all that one knows and understands from available sources.

c) Immerse oneself in the consumer's life space.

d) Connect this insight to a usable platform/ idea.

e) Executing it in a format that solves the challenge he started with.

The above four are by no means an exhaustive list of new and radicalapproaches which organization are re-inventing or discovering. It’s no

denying that the FMCG space will be for time to come, remain a

glamorous sector, but also be testimony to new innovations and

excellence through-out the value-chain.

A spate of new product launches, new schemes, brand extensions and

new marketing initiatives across companies indicate that only the fittest

ideas survive "Only the Paranoid Survive ", the famous line by Andy

Grove seems relevant to this space.

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CHAPTER 10. MAJOR FMCG PLAYERS IN INDIA

A) ITC LIMITED

THE ITC PROFILE –

ITC is one of India's foremost private sector companies with a market

capitalization of over US $ 22 billion and a turnover of US $ 6 billion.

ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and

the World's Most Reputable Companies by Forbes magazine, among

India's Most Respected Companies by Business World and among India'sMost Valuable Companies by Business Today. ITC ranks among India's

`10 Most Valuable (Company) Brands', in a study conducted by Brand

Finance and published by the Economic Times. ITC also ranks among

Asia's 50 best performing companies compiled by Business Week. ITC

has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty

Papers, Packaging, Agri-Business, Packaged Foods & Confectionery,Information Technology, Branded Apparel, Personal Care, Stationery,

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Safety Matches and other FMCG products. While ITC is an outstanding

market leader in its traditional businesses of Cigarettes, Hotels,

Paperboards, Packaging and Agri-Exports, it is rapidly gaining market

share even in its nascent businesses of Packaged Foods & Confectionery,

Branded Apparel, Personal Care and Stationery. As one of India's most

valuable and respected corporations, ITC is widely perceived to be

dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source

of inspiration "a commitment beyond the market". In his own words:

"ITC believes that its aspiration to create enduring value for the nation

provides the motive force to sustain growing shareholder value. ITC

practices this philosophy by not only driving each of its businesses

towards international competitiveness but by also consciously

contributing to enhancing the competitiveness of the larger value chain of

which it is a part." ITC's diversified status originates from its corporate

strategy aimed at creating multiple drivers of growth anchored on its

time-tested core competencies: unmatched distribution reach, superior

brand-building capabilities, effective supply chain management and

acknowledged service skills in hoteliering. Over time, the strategic forays

into new businesses are expected to garner a significant share of these

emerging high-growth markets in India. ITC's Agri-Business is one of

India's largest exporters of agricultural products. ITC is one of the

country's biggest foreign exchange earners (US $ 3.2 billion in the lastdecade). The Company's 'e-Choupal' initiative is enabling Indian

agriculture significantly enhance its competitiveness by empowering

Indian farmers through the power of the Internet. This transformational

strategy, which has already become the subject matter of a case study at

Harvard Business School, is expected to progressively create for ITC a

huge rural distribution infrastructure, significantly enhancing theCompany's marketing reach. ITC's wholly owned Information

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Technology subsidiary, ITC InfoTech India Ltd, provides IT services and

solutions to leading global customers. ITC InfoTech has carved a niche

for itself by addressing customer challenges through innovative IT

solutions. ITC's production facilities and hotels have won numerous

national and international awards for quality, productivity, safety and

environment management systems. ITC was the first company in India to

voluntarily seek a corporate governance rating. ITC employs over 26,000

people at more than 60 locations across India. The Company

continuously endeavors to enhance its wealth generating capabilities in a

globalizing environment to consistently reward more than 3,77,000

shareholders, fulfill the aspirations of its stakeholders and meet societal

expectations. This over-arching vision of the company is expressively

captured in its corporate positioning statement: "Enduring Value. For the

Nation. For the Shareholder."

ITC FMCG BRANDS –

It is ITC's strategic intent to secure long-term growth by

synergizing and blending the diverse pool of

competencies residing in its various businesses to exploit

emerging opportunities in the FMCG sector. The

Company’s institutional strengths – deep understanding of

the Indian consumer, strong trademarks, deep and wide

distribution network, agri-sourcing skills, packaging know-

how and cuisine expertise – continue to be effectively

leveraged to rapidly grow the new FMCG businesses. Over

the last few years, ITC has rapidly scaled up presence in

its newer FMCG businesses comprising Branded Packaged

Foods, Lifestyle Retailing, Education and Stationery

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products, Personal Care products, Safety Matches and

Incense Sticks (Agarbattis) with Segment Revenues

growing at an impressive compound annual growth rate of

38% during the last 5 years. The Company’s unwavering

focus on quality, innovation and differentiation backed by

deep consumer insights, world-class R&D and an efficient

and responsive supply chain will further strengthen its

leadership position in the Indian FMCG industry.

CIGARETTES –

ITC is the market leader in cigarettes in India. With its wide range of

invaluable brands, it has a leadership position in every segment of the

market. It's highly popular portfolio of brands includes Insignia, India

Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan,

Berkeley, Bristol and Flake.

Source- www.itcportal.com

FOODS –

ITC made its entry into the branded & packaged Foods business in

August 2001 with the launch of the Kitchens of India brand. A more

broad-based entry has been made since June 2002 with brand launches in

the Confectionery, Staples and Snack Foods segments. The packaged

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http://www.kitchensofindia.com/


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foods business is an ideal avenue to leverage ITC's proven strengths in

the areas of hospitality and branded cuisine, contemporary packaging and

sourcing of agricultural commodities. ITC's world famous restaurants

like the Bukhara and the Dum Pukht, nurtured by the Company's Hotels

business, demonstrate that ITC has a deep understanding of the Indian

palate and the expertise required to translate this knowledge into

delightful dining experiences for the consumer. ITC has stood for quality

products for over 100 years to the Indian consumer and several of its

brands are today internationally benchmarked for quality. In order to

assure consumers of the highest standards of food safety and hygiene,

ITC is engaged in assisting outsourced manufacturers in implementing

world-class hygiene standards through HACCP certification. The Food

segment have been growing tremendously for ITC this fiscal year and

going forward it is expecting to see huge turnover from this segment

itself as the demand is also expected to rise. The unwavering

commitment to internationally benchmarked quality standards enabled

ITC to rapidly gain market standing in all its 6 brands:


LIFESTYLE RETAILING –

ITC's Lifestyle Retailing Business Division has established a nationwide

retailing presence through its Wills Lifestyle chain of exclusive specialty

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stores. Wills Lifestyle, the fashion destination, offers a tempting choice

of Wills Classic work wear, Wills Sport relaxed wear, Wills Clublife

evening wear, fashion accessories and Essenza Di Wills - an exclusive

range of fine fragrances and bath & body care products and Fiama Di

Wills - a range of premium shampoos and shower gels. Wills Lifestyle

has also introduced Wills Signature designer wear, designed by the

leading designers of the country. With a distinctive presence across

segments at the premium end, ITC has also established John Players as a

brand that offers a complete fashion wardrobe to the male youth of today.


PERSONAL CARE –

In line with ITC's aspiration to be India's premier FMCG Company,

recognized for its world-class quality and enduring consumer trust, ITC

forayed into the Personal Care business in July 2005. In the short period

since its entry, ITC has already launched an array of brands, each of

which offers a unique and superior value proposition to discerning

consumers. Anchored on extensive consumer research and product

development, ITC's personal care portfolio brings world-class products

with clearly differentiated benefits to quality-seeking consumers. ITC's

Personal Care portfolio under the 'Essenza Di Wills', 'Fiama Di Wills',

'Vivel Di Wills' 'Vivel UltraPro', 'Vivel' and 'Superia' brands has

received encouraging consumer response and is being progressively

extended nationally.

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EDUCATION AND STATIONERY –

ITC made its entry to the education and stationery business with its

Paperkraft brand in the premium segment in 2002; and later expanded

into the popular segment with its Classmate brand in 2003. By 2007,

Classmate became the largest Notebook brand in the country. Together,

Classmate and Paperkraft offer a range of products in the Education &

Stationery space to the discerning consumer, providing unrivalled value

in terms of product & price.


B) HINDUSTAN UNILEVER LTD

COMPANY PROFILE –

Hindustan Unilever Limited (HUL) is India's largest Fast MovingConsumer Goods Company, touching the lives of two out of three

Indians with over 20 distinct categories in Home & Personal Care

Products and Foods & Beverages. The company’s Turnover is Rs. 17,523

Crores (for the financial year 2009 - 2010)

HUL is a subsidiary of Unilever; one of the world’s leading suppliers of

fast moving consumer goods with strong local roots in more than 100

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countries across the globe with annual sales of about €40 billion in 2009

Unilever has about 52% shareholding in HUL.

Hindustan Unilever was recently rated among the top four companiesglobally in the list of “Global Top Companies for Leaders” by a study

sponsored by Hewitt Associates, in partnership with Fortune magazine

and the RBL Group. The company was ranked number one in the Asia-

Pacific region and in India.

The mission that inspires HUL's more than 15,000 employees, including

over 1,400 managers, is to help people feel good, look good and get more

out of life with brands and services that are good for them and good for

others. It is a mission HUL shares with its parent company, Unilever,

which holds about 52 % of the equity.

HUL BRANDS –

FOOD BRANDS –

HUL is one of India’s leading food companies. Our passion for

understanding what people want and need from their food - and what

they love about it - makes our brands a popular choice. HUL ltd have

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continuously made innovations in food brands and provided with the

world class products.

Annapurna –

Source-www.hul.co.in

Launched nationally in 1998, Annapurna Atta is aimed at helping the

homemaker provide wholesome, tasty nutrition to her family. Annapurna

Farm Fresh Whole Wheat Atta is made from premium quality wheat

grains. These grains are ground using advanced technology so that the

Atta absorbs more water while kneading, makes rotis stay soft for a

longer time and retains the nutrition of vitamins and minerals of the

wheat grains. Annapurna was awarded the prestigious ‘Awaaz Consumer

Award” for the most preferred brand of Atta for two successive years in

2006 and 2007.

Red Label –


Red Label is a 107 year old brand and has tremendous

equity and heritage in the Indian market. The oldest and

largest brand in the Brooke Bond portfolio in India, It has both leaf and

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dust variants, as well as a health and immunity variant - Red Label

Natural Care. Red has also launched a premium variant under the name

‘Red Special’

Kissan –

• Kissan is in its 62nd year of its existence in India.

• Category leaders in Jams with an All India Share of 65%.

Kissan Jam Kissan Squashes Kissan Tomato Ketchup Kissan Tomato Ketchup

Kissan Squeezo Ketchup Kissan Jam Squeeze Mango Kissan Jam Squeeze

Strawberry


Kwality Wall's –


Kwality Wall’s, the brand with a big heart, offers a range of delightful

frozen desserts that bring smiles to the faces of millions of Indians – kids,

teens and adults. We do so with our very popular brands - Cornetto,

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Feast, Paddle Pop, Selection & our award winning parlour concept,

Swirl’s. Unilever is the world's biggest ice cream manufacturer, operating

under the Heartbrand.

HOME CARE PRODUCTS –

HUL has a diverse portfolio of brands offering home care solutions for

millions of consumers across India

Active Wheel –


The new revolutionary Active Wheel gives consumers less elbow effort

in their daily laundry thereby enabling them to enjoy some moments of

leisure. With Active Wheel, consumers are able to balance their role of

being an efficient & dutiful housewife as well as a ‘smart homemaker’,

who manages her family budgets with ease by exploring her limited

resources with unlimited resourcefulness. Wheel, biggest laundry brand

in India, dominates a complex mass market laundry business in India.

Wheel powder commands the market with 20 shares as per AC Nielson

data.

Rin Powder –


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Sparkling white - clean clothes not only help us form great impressions

on the people we meet but also provide us confidence to realize our

ambitions. Rin understands this need and strives to deliver best in class

whiteness through continuous innovation and product improvements

supported by memorable campaigns like “Uski saari, meri saari se safed

kaise” in the 90s to “Safedi ka Shehanshah” with Amitabh Bachchan. In

2007, Rin introduced the first ever shade in the laundry category, offering

proof of whiteness to consumers with the “Kya Saboot Hai” campaign

with Boman Irani.

In 2008 Rin has been re launched and now provides “Dugni Safedi,

Dugni Chamak” as compared to ordinary powders. Rin is now sold in

developing markets in Africa, Asia and Latin America.

Vim –


Created in 1885, the Vim brand is still innovating and using the magic of

natural ingredients to create unbeatable results over a hundred years later.

Vim is sold in four continents, is the leading hand dishwashing brand in

twenty countries, and is available to more than 2 billion people around

the world. Vim began life as a soap (both in England, and in Thailand,

where King Rama V asked Unilever to supply his household with soap),

but is now available as a complete range of hand dishwashing – including

bars, powders and liquids. Whereas other products are only just

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beginning to realize the importance and power of natural ingredients,

Vim's use of the power of lemons to provide its unbeatable degreasing

power is well-established. We also use other natural products, such as

lime, vinegar and green tea to maximize the results, and minimize the

number of chemicals in our products and in the environment.

Surf Excel –


A pioneer in the Indian detergent powder market, Surf Excel has

constantly upgraded itself over the years, to answer the constantlychanging washing needs of the Indian homemaker. Today Surf Excel

offers outstanding stain removal ability on a wide range of stains. This

means that mothers now have the freedom to let their kids experience life

without worrying about stains.

Surf Excel quick wash is powered with a path-breaking technology- it

reduces water consumption and time taken for rinsing by 50%. It is a

significant benefit, given the acute water scarcity in most of India.

PERSONAL CARE BRANDS –

Our personal care brands, including Axe, Dove, Lux, Pond's, Rexona and

Sunsilk, are recognized and love by consumers across India. They help

consumers to look good and feel good – and in turn get more out of life.

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Axe – With Best Quality Fragrance –


AXE is a cool, iconic, youth brand available in more than 60 countries

around the world. It was launched in India in 1999 and has already

become the largest selling Male Deodorant in India. Apart from the deos,

Axe also provides a grooming range for the young Indian male, viz.

Shaving Gel, Foam, After-Shave lotion, and Cologne Talc.

Each fragrance of Axe is a scent of desire, created by the international

diva of fragrances; Ann Gottlieb. The formulation is a base with higher

efficacy to help men in attracting the fairer sex better than ever!

Dove –


Since 1993, Indian women have relied on Dove for beautiful skin. Dove

is known to be a keeper of promises and has given real products to

women world over. To help you enjoy your own brand of beauty, Dove

provides a wide range of personal care, hair care, skin care and

deodorants. So choose a new way of pampering your skin, everyday, with

Dove.

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Fair & Lovely –


Developed in 1975, Fair & Lovely is the world’s first fairness cream. It

contains no bleach or harmful ingredients. Instead, it provides visiblefairness in a safe and reversible process. In 2003, it was rated as the

Twelfth Most Trusted Brand in India by ACNielsen ORG-MARG. In

2004, it was identified as a Super Brand. Today, 250 million consumers

across the globe strongly connect with Fair & Lovely as a brand that

stands for “beauty that empowers a woman to change her destiny”.

The brand’s commitment towards empowering women has inspired the

initiation of Fair & Lovely Foundation.

Lifebuoy –


Lifebuoy, an undisputed market leader for 112 years, has a compelling

vision “to make 5 billion people across the world, feel safe and secure by

meeting their personal care hygiene & health needs”. Lifebuoy have

undisputed Leader in the soaps market of India, with 18.4% share. It has

a turnover of €350 million a year globally, € 200 million in India. Also it

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has a consumer base of 140 Million households in India. Recent Awards:

Voted in the top 10 most trusted brands in India in the “Brand Equity

Survey” (came in at No. 9 in 2008 as well)Marketing excellence awards

for its recent innovations and activations: “Gold” at the Emvies 2008 for

best use of media innovation, ASIA Pacific CSR Award 2007, for

Lifebuoy Swasthya.

Lux Soap Brand –


Lux stands for the promise of beauty and glamour as one of India's most

trusted personal care brands. The brand name Lux has been derived from

Luxury. Since Leela Chitnis in 1929, Bellwood beauties throughout ages

have appeared in Lux commercials. Till date nearly 50 Bollywood

heroines have featured in Lux ads. The first bar of Lux was made in

India and sold for a princely sum of two annas in 1934. Lux has always

believed in taking up ground-breaking endeavors and has always enjoyed

venturing with various brand associations, be it a ‘Coffee Table Book’ or

‘A Lux Couture Show’ at the Lakme Fashion Week or coming up with a

‘Chocolate seduction soap’.

Pepsodent –

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Pepsodent is a 15 year old brand that offers various oral care solutions to

specific need based solutions. Pepsodent was launched in 1993 in India

and since then the brand has raised the benchmark on Oral Care solutions

in India. Pepsodent has a range of toothpastes and toothbrushes that could

take care of specific oral care needs. Pepsodent toothpaste fights germs to

protect teeth against cavities and gives strong teeth, fresh breath and

healthy gums. Pepsodent as an oral care expert offers solution to specific

problems like bleeding gums and sensitive teeth.

Sunsilk –


Sunsilk brand was launched in 1964 and is a global brand with its

presence across 80 countries. The Sunsilk hair care range provides a

complete hair care solution and functions as a 3-step combination of

cleansing, nourishing and manageability that gives a 20 something girl

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the confidence to express herself. It’s a Number 1 in Asia, Latin America

and the Middle East. Recent Awards: Holds the Guinness World Record

for the most heads of hair washed and styled in one day. Sunsilk brand is

sold in more than 80 countries over the globe. It has sales of more than

€1 billion a year. The products also comprises of Anti- dandruff solutions

and conditioners which have to be applied along with Sunsilk shampoos

for better results.

CHAPTER 11. EQUITY ANALYSIS OF FMCG

COMPANIES IN INDIA

There are various FMCG companies in India which have listed

themselves on the Indian stock exchanges, basically BSE and NSE.

These companies got listed to get access to equity capital which can be

utilized for various purposes, say expansion plans, debt restructuring,

mergers, acquisitions, working capital requirements, or simply raise

funds for future activities of the company. Even in Bombay Stock

exchange, BSE FMCG INDEX is traded which comprises of all the

FMCG companies which are listed with BSE. Each scrip’s have been

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given some weightage in the index according to their market

capitalization. Some of the major FMCG companies listed on Indian

stock exchanges include, HUL, ITC, United spirits, Marico, Dabur India,

Nestle, Colgate Palmolive, Tata global beverage, etc. So, we are going to

study few of the important stocks equity analysis and try to figure out the

possible investments in these companies.

A) HINDUSTAN UNILEVER LTD –

Hindustan Unilever's (HUL) FY10 annual report signifies

heightened competitive activity and its strong response to drive

long term growth. The following are the important intakes-

1) Increase in commodity costs and food inflation has created an

inflationary operating environment. In FY10, FMCG markets grew

at a slower pace than in FY09.

2) Strong growth potential and a slowdown in developed economies

resulted in the entry of new players and increased aggression byexisting MNCs. The resultant competitive intensity led to

aggressive pricing action, and media and trade spend.

3) HUL has taken multi-pronged initiatives to defend its leadership

through innovation, right pricing and competitive media spends.

4) HUL continues to invest in new categories such as deodorants, hair

conditioners, surface cleaners and soupy snacks.

5) HUL has significantly invested in supply chain capability aiming

to increase rural and urban distribution.

6) HUL ltd has shown full faith in its operations which led to the

recent Buyback of its own shares at a price of 280 Rs.

7) HUL is ready to drive up its volumes this quarter due to high

demand of goods due to festivals.

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HUL re-launches major brands to regain lost ground –

HUL went through a major re-launch exercise in FY10 as major brands

like Wheel, Rin, Lux, Lifebuoy, Breeze, Liril, Pepsodent, Clinic Plus andFair and Lovely were re-launched. The re-launch of some brands was

backed by pricing corrections (Rin and Lifebuoy), and the relaunch of

others was led by product formulation changes (Wheel, Liril and Lux).

Soap, detergents slip; personal products support margins –

HUL's FY10 volumes grew ~5% (FY09 adjusted for 12 months).

Segmental volume growth is unascertainable due to the base of 15

months in FY09. In FY10, soaps and detergents posted value growth of

1.5% YoY and personal product sales rose 16.2%. Faster personal

products growth enabled a 140bp rise in contribution resulting in a sales

mix improvement.

HUL ups the ante on new category development in food, skin care –

HUL recently launched various products, particularly in the skin care and

food categories. In skin care, the Vaseline for Men range, Sure and Dove

deodorants were launched during the year. Knorr Soupy Noodles marks

the entry in the high growth easyto- cook snacks segment, which has

been growing in high double digits. In the household care segment, HUL

launched CIF surface cleaner and in the laundry segment it launched

Comfort fabric conditioner. HUL has extended its water purifier brand to

Pure IT compact for the economy segment and Pure IT auto fill for the

premium segment. But most of these categories are small and HUL will

have to drive category expansion in these segments so that they

contribute meaningfully to sales and profits over time.

HUL to expand rural reach; Shakti extended to Maharashtra,

Orissa–

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As smaller players expand their reach, HUL aims to take its distribution

network to the next level to maintain a relative advantage. The rural

network is being expanded threefold to improve the quality of coverage

(formerly covered by indirect accounts). HUL covers 100,000 villages in

15 states through 45,000 Shakti Ammas. HUL has extended the network

to Maharashtra and Orissa. HUL has also started Shakti Vani to increase

awareness about health and awareness in rural areas.

Volumes pick up in 2HFY10; profits might stay under pressure –

The impact of aggressive market intervention and re-launches is visible

as volume growth rebounded sharply in 2HFY10. We believe volume

growth will remain healthy in the near term as tactical pricing, trade

promotion and product re-launches play out. This has arrested a declining

trend in market share of a few products but significant share gains in

soaps, detergents and toothpaste are not visible. We believe volume

growth has been largely at the cost of margins as HUL invested heavily

on advertising and trade promotion. ASP (as a percentage to sales)

increased 340bp to 13.5% in FY10 and is likely to remain high due to

high decibel advertising and media inflation. We are cautious about the

sustenance of FY12 volume growth as HUL halts some of the high

decibel advertising and trade push. Besides, we see margins being under

pressure due to rising input costs (and the lack of pricing power); media

inflation, increase in royalty and freight cost (after the increase in fuelcost).

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INCOME STATEMENT AND BALANCE SHEET

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RATIOS AND CASH FLOWS

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ANALYSIS OF HUL LTD-

1) The Net sales i.e. the Top line growth of the company have

decreased this Fiscal year March 2010 to almost 13% , as the

figures shows in the financial valuations. This has been due to

slowdown of economy in this last fiscal.

2) The Net Profit after Tax i.e. the Bottom line growth of the

company has decreased by 13% approximately to Rs.22, 020

millions. Thus, the bottom line have decreased due to intense

margin pressures accompanied by higher advertisement costs, as

HUL ltd is one of the highest advertising company in India.

3) If we look at the debt- equity ratio, it is smooth at around 0.2

which is relatively less and shows that the company is financially

sound and less debt driven. The ideal debt- equity ratio is 1, and

below 1 really shows that company does not depend much upon

external borrowings, which indeed shows the strength of the

company.

4) The Earning per share have been reduced to some extent from 11.2

to 9.4 Rs, due to reduction in earnings this fiscal and stock prices

reacting neutral.

5) The Price/Earnings ratio (P/E) is around 27 times which is discount

to the Industry i.e. FMCG P/E of 31. Hence, going ahead the HUL

stock can perform well and maintain the P/E of more than 31.This

indicates a good upside potential for the stock movements of HUL

ltd.

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6) If we see the technical aspect of share prices of HUL ltd, the share

prices were neutral from the past 8 months. In the past 4 months

the stock was revolving around 225 and 240 levels. This means

that the stock had made a good support of 225 and good resistance

at 240 levels.

7) Support means it is a price below which the stock does not go and

Resistance means the price above which the stock does not go. So,

in HUL ltd, the stock was providing good support at 220-225 Rs

and strong resistance at 238-240 Rs.

8) Hence, this was the ideal time to invest in this stock when it was

reaching 220 levels, which was acting as a solid support from past

1 year.

9) However, after the stock being range bound most of the time i.e.

around 6 months, HUL ltd announced buyback of its share in

August at the price of Rs 280 and then the prices where around 260

Rs. Buyback of shares means a company buys it shares from the

existing shareholders in the market. This shows a positive note, as

this means the company is sure of its solid performance in coming

quarters. Hence, soon after a Buyback of shares at a price of 280

Rs, soon the stock made a new high of RS 314 recently on 24 th

September’2010.

Hence, HUL ltd is presently quoting around 300 Rs and if it

corrects to 280 Rs, it is a good buy for a short term target of 315

Rs and it would be a very good stock especially to own for long

term horizon.

B) ITC LTD –

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ITC, an associate of BAT (British American Tobacco), controls

more than two thirds of the cigarette market in India. ITC has

emerged as a diversified conglomerate with a leading presence in

paperboards, hotels and processed foods. E-Choupal, an Agri-rural

initiative, has been widely appreciated for its foresight in

harnessing potential in the rural market. The following are the

recent insights which have been related to ITC:

Cigarette volumes fall 3.5%; increased prices, improved mix boost

realizations –

We can estimate cigarette volumes to grow ~3.5% YoY (against our

estimate of 4.5%) due to sharp price increases. Net sales grew 12.4% to

Rs24.8b led by ~15% realization growth. The growth was due to a price

increase (~16% YoY) and improved mix, which were partly offset by

higher excise and VAT (~10%). The near-term outlook on cigarette

volumes is uncertain due to a sharp price increase, though lower-than-

expected decline is a positive.

Other businesses perform strongly; paperboard margins a positive

surprise –

New FMCG business sales were up 32% YoY at Rs10b and EBIT loss

declined 11% to Rs893m (4QFY10 loss of Rs787m). The agri business

posted a 44% increase in sales to Rs13.5b and EBIT grew 23.2%.Margins contracted 150bp to 9.1% due to higher proportion of soya

trading. Hotel business revenue grew 21% to Rs2b as a revival in the

economic environment propped up occupancy (~60%) with ARR at Rs7,

500. Paper and paperboard sales rose 13% YoY to Rs7.9b and EBIT

grew 47% YoY to Rs1.9b, enabling margin expansion of 550bp.

Strong sales, EBIT growth boost ITC’s 1QFY11 results –

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An impressive performance in 1QFY11 was led by strong sales and EBIT

growth across categories. A less-than-expected decline in volumes and a

160bp margin expansion were key highlights in the cigarettes division

and strong sales and margin expansion in new FMCG, hotels and paper

added to the momentum.

Agri business sales grow; faster growth of low margin soya, wheat

sales Impact margins –

The Agri business posted a 44% increase in sales to Rs13.5b and EBIT

grew 23.2%. Margins contracted 150bp to 9.1% due to a higher

proportion of soy trading. Sales will be a function of trading in soy and

wheat as leaf tobacco prices are unlikely to increase. We estimate FY11

sales growth of 25% and EBIT growth of 12.5% in the agri business. E-

Choupal initiative has done a lot of benefit to ITC in increasing their rural

market share, hence increasing their volume to large extent.

Hotels business recovery underway; sales up, EBIT margins expand–

Revenue in the hotels business grew 21% to Rs2b as revival in the

economic environment propped up occupancy levels (~60%) with ARR

at Rs7, 500. EBIT grew 26% to Rs385m as margins expanded by 60bp.

The seasonal hotels business gets most of its revenue in the second half

of a year: we expect profit margins to expand significantly. ITC plans to

add 1,500 rooms in 3-4 years. The current room inventory is 2,600 (it

commissioned 292 rooms ITC Royal Gardenia in Bangalore in October 2009). ITC will commission a 600-room hotel at Chennai and work on its

Kolkata property is underway. Gurgaon and Ahmedabad will follow and

land has been acquired in Amritsar and Bhuvneshwar for more hotels.

We expect the hotel business to post 19.4% sales growth and 45% EBIT

growth in FY11 due to a lower base and a buoyant business and

consumer environment.

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INCOME STATEMENT AND BALANCE SHEET

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RATIOS AND CASH FLOWS

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ANALYSIS OF ITC LTD –

1) ITC ltd has a strong pricing power due to a dominant market share

in the cigarette market.

2) Paperboard businesses have achieved self sustenance.

3) It has excellent long term potential in its rural initiative of E-

Choupal and Choupal Sagar.

4) However, Increase in VAT from 12.5% to 20% by states and an

increase in excise duty could impact ITC’s cigarette volume

growth, which in turn would reflect in its share prices as well.

5) ITC Hotels plans to add 1,500 rooms in 3-4 years; the current room

inventory is 2,600 (commissioned 292 rooms ITC Royal Gardenia

in Bangalore in October 2009).

6) There has been good upsurge in top line which has increased

almost 17% from 2009 to 2010, which can be seen in the incomestatement. ITC have seen a good increase in volumes of Cigarettes

which have favoured the increase in revenues.

7) Also, this has supported the bottom line growth i.e. the Profit after

deducting all expenses and taxes have seen a growth of 24% from

2009 to 2010. This has supported the sharp increases in share

prices of ITC Ltd.8) The Earning per share have increased from 8.3 to 8.6, which is

increasing every fiscal year as the company’s growth have been

increasing.

9) With a Price/Earnings Ratio of 26, the stock looks attractive at

present levels and we can see upsurge in stock price from present

levels of 170 Rs, as the FMCG industry P/E is around 31.

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10) Also, Company recently gave bonus to its shareholders in a ratio

1:1, due to outstanding performance in the last few fiscal years.

11) The present price of ITC Ltd is around 170 levels, and 184 Rs is

the 52 week high for this stock. Hence, one can enter this stock for

investment at around 160-163 levels which looks a good support at

present chartings. Hence, if the stock crosses its resistance of 184

Rs, it would go on with further increase to make new high and

reward investors with good capital gains.

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CHAPTER 12. CONCLUSION

FMCG companies are fighting to stand out amid the clutter of a

massively vigorous and strengthening consumer market. To keep

consumers interested India's brands are diversifying well-loved favourites

by entering new FMCG territory. It is quite common for emerging market

companies to want to sell their share of the business to their global partners. In case the global company is willing to acquire the local

partner, the latter would improve its negotiating power and strengthen its

position. FMCG sector is long established and over the years, sustaining

ups and downs of the Indian economy. Thus the Critical operating rules

in Indian FMCG sector can be summarized as follows: Heavy launch

costs on new products on launch advertisements, free samples and

product promotions. Majority of the product classes require very low

investment in fixed assets Existence of contract manufacturing.

Marketing assumes a significant place in the brand building process

Extensive distribution networks and logistics are key to achieving a high

level of penetration in both the urban and rural markets Factors like low

entry barriers in terms of low capital investment, fiscal incentives from

government and low brand awareness in rural areas have led to the

mushrooming of the unorganized sector providing good price points is

the key to success. FMCG company stocks are relatively stable and are

not affected by global variation. In most of the Stock exchanges, FMCG

companies are the key players. With the market in a bearish phase, the

FMCG sector has found flavour among investors. The sector's

defensiveness is demonstrated by the stability in returns generated even

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during times of slow economic growth. While the Sensex is down by

29% since the beginning of this year, the ET FMCG index comprising the

top 20 stocks in the sector has fallen only by 12.5%. Nevertheless, the

FMCG growth story is here to stay. According to a survey on fast moving

consumer goods (FMCG) industry undertaken by Federation of Indian

Chambers of Commerce and Industry (FICCI), the growth momentum is

likely to continue in the current fiscal as well, spurred by lifestyle

category goods. It includes products categories like skin care, Shampoos,

deodorants, anti-aging solutions, fairness products and various men's

products.

Most are counting on two factors as driving forces:-

- Increased Market Penetration in Rural areas &

- A Shift in Urban Outlook Regarding Expenditure

These two things would probably drive the Indian FMCG industry in

coming years, as the FMCG players have started with large plans to drive

the unexplored rural areas in to one of the main access to growth, and this

would probably provide higher earning and growth potential for FMCG

industry.

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CHAPTER 13. ANNEXURE

INTERVIEW WITH –

MR. KIRAN BADDERRU,

EQUITY RESEARCH,

D.P INVESTO LTD, 9773568124

Q.1) What’s your view on the FMCG Industry in India?

Ans. FMCG industry is a very large industry in India. It is really

one of the core industries which cater to the day to day needs of billions

of people in India. Some of the major players who have made their niche

in India are HUL Ltd, ITC, Marico, Nestle, P & G, etc; However, there is

intense competition in this industry as well, which is affecting the profit

margins of these companies big time.

Q.2) Do you invest in FMCG stocks?

Ans. No. I do not have any personal holdings in any FMCG stocks.

Q. 3) So what are the changes you see in FMCG industry in the past two

decades?

Ans. In the past, there was less competition in this industry and so the

profit margins were good but the sales was not that high. However, in

recent years, there are lot of new players who entered in to markets, with

high advertising spends, increase in innovation in various segments of FMCG industry, and also increase in per capita income of individuals

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have led to higher sales. The only concern is the rising raw material costs,

and decrease in top line growth due to pressure on profit margins.

Q.4) Do you suggest your clients investing in FMCG stocks?

Ans. FMCG stocks are very defensive in nature. It means when you see

the past history or trends in the price movements of FMCG stocks, it is

visible that whenever the markets are bearish, the least affected or less

volatile stocks are those of FMCG sector. This stocks are not much

volatile and can be considered a safe bet, especially when you are not

sure of the market movements. However, the capital appreciation on the

stocks may take some time as these are low beta stocks.

Q.5) Finally, what do you think of the FMCG industry in coming times?

Ans. The FMCG industry may witness higher competition in coming

times as well. Firms would probably try to lower their advertising spends

as this have affected their bottom line to large extent, and we can see more

innovative products in the streamline. There would be more focus on

Rural sector, no doubt as it has large potential and markets are yet to

splurged. So companies would focus more on generating their revenues

from the rural and semi rural sides where still unorganized markets

prevail.

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CHAPTER 15. BIBLIOGRAPHY

WEBSITES –

1) www.gallabhansali.com

2) www.itcportal.com

3) www.hul.co.in

4) www.google.com

5) www.sre.co.in

6) www.bseindia.com

RESEARCH REPORTS –

1) Share khan quarterly reports

2) Galla bhansali research reports

3) IBEF research reports on FMCG sector

NEWSPAPER –

THE ECONOMIC TIMES

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http://www.hul.co.in/

http://www.google.com/

http://www.sre.co.in/

http://www.bseindia.com/

http://www.gallabhansali.com/


http://www.hul.co.in/

http://www.google.com/

http://www.sre.co.in/

http://www.bseindia.com/

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BLOGS –

1) http://fmcg-marketing.blogspot.com/

2) http://stock-report.blogspot.com/2009/06/india-fmcg-hsbc.html

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