Assignment

On

Industrial Analysis

(FMCG Sector)

Submitted to: Submitted by:Dr. Ipshita Bansal Padmalini Singh(5984)Faculty Pallavi Joshi(5985)WISDOM Parul(5986) Parul Jain(5987) Parul Jharar(5988) Parul Paliwal(5989) Payal Chaudhary(5898) Pinki(5990)

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ACKNOWLEDGEMENT

We take this opportunity to express our heartiest thanks to our

mentor Dr Ipshita Bansal for assigning us such an interesting assignment

and for her support and guidance through out the period. It helped us a great

deal in brushing up our knowledge about the FMCG sector.

Last but not the least we are always indebted to our Dean Mr.

Siddharth Shastri who has always encouraged us in our endeavors and

shown confidence in us.

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TABLE OF CONTENTS

Sr. No. Particulars Pg. No.

1 Introduction 4

2 Major Players of the Industry 5

3 SWOT Analysis 10

4 SPOT Analysis 11

5 Porter’s Model 16

6 Issue Priority Matrix 19

7 TOWS Matrix 22

8 Societal Level Strategy of Major Players 27

9 Intellectual Property Rights 34

10 Fate Analysis 40

11 Conclusion 49

12 Bibliography 50

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INTRODUCTION

Fast Moving Consumer Goods (FMCG), are products that have a

quick turnover, and relatively low cost. FMCG products, which are generally replaced

less than once a year (e.g. kitchen appliances).

Examples of FMCG generally includes a wide range of frequently purchased consumer

products such as toiletries, soap, cosmetics, teeth 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 and drinks, although these are often categorized

separately.

Examples of FMCGs are soft drinks, tissue paper, and chocolate bars. A subset of

FMCGs are Fast Moving Consumer Electronics which contain innovative electronic

products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops

which are replaced more frequently than other electronic products. White goods in

FMCG refers to house hold electronic items such as Refrigerator, T.V, Music Systems

etc.

Major players in FMCG sector

4

THE TOP 10 COMPANIES IN FMCG SECTOR

S. NO. Companies

1. Hindustan Unilever Ltd.

2. ITC (Indian Tobacco Company)

3. Nestlé India

4. GCMMF (AMUL)

5. Dabur India

6. Asian Paints (India)

7. Cadbury India

8. Britannia Industries

9. Procter & Gamble Hygiene and

Health Care

10. Marico Industries

.

India is one of the largest emerging markets in FMCG sector because of

Large domestic market

India – an extravagant spender on consumer goods

Demand-supply gap

Rapid urbanization, increased literacy and rising per capita income

1.Hindustan Unilever Limited;-

Hindustan Unilever Limited, formerly known as Hindustan Lever Ltd is India's largest

FMCG company with sales of 10,000crores. Its parent company is Unilever, which holds

51.55% of the equity. It operates in seven business segments: Soaps and Detergents;

Personal Products; Beverages; Foods, including Culinary and Branded Staples; Ice

Creams; Exports, and Others, including Chemicals and Agri-Products. It has leadership in

Home & Personal care products and Food and Beverages.

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2. ITC (Indian Tobacco Company) :-

ITC was set up in 1910 by the name of 'Imperial Tobacco Company of India Limited'.

The company is now known as Indian Tobacco Company Ltd.

ITC has its presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging,

Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded

Apparel, Greeting Cards, Safety Matches and other FMCG products. ITC is a market

leader in the businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports.

It is gaining its market share very rapidly in the businesses of Packaged Foods &

Confectionery, Branded Apparel and Greeting Cards & Stationery.

3.Nestlé India :-

Nestlé's relationship with India started in 1912. It started its trading with India as The

Nestlé Anglo-Swiss Condensed Milk Company (Export) Limited, importing and selling

finished products in the Indian market. Nestlé India is amongst India's 'Most Respected

Companies' and amongst the 'Top Wealth Creators of India'.

3. Britannia Industries Ltd :-

The Company is in the manufacturing and selling of biscuits, bread, rusk, cakes and

dairy products like cheese, butter and milk. The brand names of biscuits are:

Marie Gold

Treat

Maska Chaska

Good Day

Milk Bikis

Pure Magic

4.Gujarat Cooperative Milk Marketing Federation:-

Gujarat Cooperative Milk Marketing Federation (GCMMF) is the largest food product

marketing organization of India. It aims to provide good returns to the farmers and also to

fulfill the requirements of consumers by giving them quality products.

Amul was formed in 1946 by an apex co-operative organization,

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Gujarat Cooperative Milk Marketing Federation. AMUL means "priceless" in Sanskrit.

Amul products are used by millions of people. Amul Butter, Amul Milk Powder, Amul

Ghee, Amulspray, Amul Cheese, Amul Chocolates, Amul Shrikhand, Amul Ice cream,

Nutramul, Amul Milk, and Amulya has made Amul one of the leading food brands in

India. Amul products are sold at reasonable prices.

5. Dabur India Ltd :-

Dabur India Ltd. is the fourth largest FMCG Company in India. Dabur deals in Health

care and Personal care products. Dabur India is divided into 2 major strategic business

units:

Consumer Care Division

Consumer Health Division

6.Asian Paints India Ltd:-

Asian Paints was formed in 1942 in India. Asian Paints is dealing in marine and industrial

coatings, automobile OEMs and refinishes, wood finishes, finish coats and an ancillary

product in decorative paints. It manufactures and markets paints. Asian Paints is the

largest paint company in India and the third-largest company in Asia.

7.Cadbury India Limited :-

Cadbury entered India in 1948 by importing chocolates.Cadbury is into the business of

Chocolate Confectionary, Milk Food Drinks, and Candies.

Some of Cadbury's key brands are:

Chocolates

Cadbury Dairy Milk

5 Star

Perk

Éclairs

Celebrations

Milk food drinks

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Bournvita Candy

Halls.

8.Britannia Industries Ltd:-

The Company is in the manufacturing and selling of biscuits, bread, rusk, cakes and dairy

products like cheese, butter and milk. The brand names of biscuits are:

Marie Gold

Treat

Maska Chaska

Good Day

Milk Bikis

Pure Magic

The Company's plants are located in Mumbai, Kolkata, Delhi, Chennai and

Uttarakhand.

9.Procter & Gamble;-

Procter & Gamble is a US-based company. Procter & Gamble is in the manufacturing of

personal care products, pet food and household cleaners.. The Procter & Gamble

Company (P&G) boasts boatloads of brands. It's divided into three global units: health

and well being, beauty, and household care. The company also makes pet food and water

filters and produces soap operas.

10.Marico Industries Ltd;-

Marico was incorporated in 1990 and operates in consumer products, aesthetics services

and global ayurvedic businesses. The company also markets food products and distributes

third party products. Some of leading brands of Marico include Parachute, Saffola,

Sweekar, Shanti Amla, Hair & Care, Revive, Mediker, Oil of Malabar and the Sil range

of processed foods. It has six factories, and sub-contract facilities for production.

Marico's Products and Services in Hair care, Skin Care and Healthy Foods Parachute

o Saffola

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o Sweekar

o Hair & Care

o Nihar

o Shanti

o Mediker

o Revive

o Kaya

o Sundari

o Aromatic Fiancee

o HairCode.

Strengths Weakness

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1. Low operational cost.

2. Presence of established distribution

network in urban as well as rural areas.

3. Presence of well known brands.

1. Low exports level.

2. ‘Me-too’ products which legally

mimic the labels of established brands

narrow down the scope of fmcg products

in rural & semi-urban market.

Opportunities

1. Untapped rural market.

2. Rising income level of consumers.

3. Large domestic market- 1 billion

population.

4. Export potential.

5. High consumer good spending.

Threats

1. Removal of import restrictions

resulting in replacing of domestic brands.

2. Slowdown in rural demand.

3. Tax & regulatory structure.

SWOT ANALYSIS

SPOT ANALYSIS

OPPORTUNITIES:

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1) Rising income levels, i.e. increase in purchasing power of consumers:

The net disposable income has grown at a CAGR of 11.6% between FY00-FY08. Certain

measures like the implementation of the sixth pay commission announced by the

government may further trigger the disposable income in FY09, which may result in select

consumers moving up the value chain. On account of a rise in the disposable income with

consumers, a direct demand will be felt on the consumption of FMCG goods. A

considerable part of the disposable income is spent on buying products and services.

According to ASSOCHAM estimates of 2007, almost 40% of total FMCG consumers

spend their total income on grocery while 8% is spent on personal care products, resulting

in a potential hike in the demand for these goods.

2) Untapped rural market: With the presence of 12.2% of the world population in the villages of India, the Indian

rural FMCG market is something no one can overlook. Increased focus on farm sector

will boost rural incomes, hence providing better growth prospects to the FMCG

companies. 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.

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.

3)Higher employment generation: Employment generation was triggered by a thrust in industrial activity, which led to

newer jobs in sectors like logistics, infrastructure, and other related activities. The format

of modern trade has also enabled more employment in India. Organised retail has

augured well for the FMCG sector which has thereby derived greater exposure leading to

more employment. Furthermore, organised retail has also created more job opportunities

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without any gender bias for our teeming population. As per DIPP statistics, the food

processing industry reported the highest proposed employment numbers during the period

Aug 1991- Jun 2008, indicating a growth of 2.1% when compared to the previous

corresponding period. Similarly, the vegetable oil & vanaspati segment and soaps,

cosmetics and toiletries segment registered a growth of 3.4% and 3% respectively, during

the above mentioned period.

4) Large domestic market- a population of over one billion:

The Indian FMCG industry size was estimated to be around US$ 15 bn in 2007, as per

ASSOCHAM. Of this, close to US$ 8 bn was confined to the rural areas with US$ 4 bn in

the urban & metro area and almost US$ 3 bn in the semi-urban area. The large young

population of approximately 180 mn in the rural and semi-urban region is driving the

Indian FMCG industry, with the continuous rise in their disposable income, life style,

food habit etc, among others. The lifestyle of this section of the population is undergoing

a rapid change on the back of rising income levels.

According to ASSOCHAM, the market size of FMCG in the rural and semi-urban

segment is likely to jump up by 10% and 6% respectively by 2010. Currently, almost

52% of the rural market size is captured by FMCG products and is projected to reach

57% in the next three years. This size is further expected to grow by 10% in the next

three years.

5)Growing share of organised retail:

The modern trade format provides a wider visibility to the FMCG products. Organised

retail has led to a boom in consumption by generating wide spread employment

opportunities.

6) Presence across value chain

Indian FMCG firms have a presence across the entire value chain of the industry, from

raw material supply to final processed and packaged goods, both in the personal care

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products and in the food processing sector. As a result firms located in India have become

more cost competitive.

7)High consumer goods spending:

Consumer expenditure on food, beverages and tobacco in India is forecasted to grow at

a CAGR of 12.2% during 2007 to 2011. Rising per capita income, increased literacy and

rapid urbanisation have caused rapid growth and change in demand patterns. The rising

aspiration levels, increase in spending power has led to a change in the consumption

pattern. Apart from the demand for basic goods, convenience and luxury goods are

growing at a fast pace too. The urban population between the ages of 15 to 34 years is

expected to increase from 107 m in 2001 to 138 m in 2011, an increase of 30%. This

would unleash a latent demand with more money and a new mindset. With growing

incomes at both the rural and the urban level, the market potential is expected to expand

further

THREATS

1)Entry of foreign players and imports resulting in replacing of domestic brands: -

A major threat for any Indian market player is a foreign player because they usually come

with strong potential of rapid growth. FDI is a major way of replacing domestic brands.

And FDI pattern in Indian fmcg industry can be seen as under:-

In CY08, FDI inflows in sectors like food processing; soaps, cosmetics &

toilet preparations and vegetable oils & vanaspati together registered a growth

of 41%.

The total FDI in the food processing industry underwent a growth of 15% in

CY07. This came on the back of a robust 38% growth in the previous year.

The pattern of FDI inflow witnessed a huge variation in between the years

2004-2007 in the soaps, cosmetics and toiletries segment. From an almost

100% decline in CY06, the FDI inflow underwent a sharp growth of more

than four times in CY07.

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The vegetable oils and vanaspati segment registered a robust rise of more than

two times in CY07 as against the previous year when it had recorded a more

than 50% decline.

Recently, the government announced a cut of 4% in excise duty to fight the slowdown

and further reduced excise duty to 8% from 10% . This announcement is likely to have a

positive impact on the industry.

2) Slowdown in rural demand: -

Although it is said that rural market is a golden opportunity in hand of fmcg sector.

But reality is that it is not growing on expected pace. It can be seen by some data, like

growth rate for the period February ’06-07 was 1.0% while for February’07-08 it was

-2.2%. and for the period feburary’08-09 it was -6.1%, that shows slowdown in rural

market.

Along with growth rate fmcg sector is facing one more

threat in rural market, it is highly unorganized. 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. And this threat for

organized sector is getting reduced day by day.

3)Tax and regulatory structure:

The total incidence of tax on processed products in India is as high as 40% on certain

items. Considering the importance of this sector, while a few countries have kept the

incidence of tax at zero %, most others have pegged it at 12% to 14%. This much level of

taxation is preventing Indian players to compete with foreign players. But now seeing this

global slowdown government is helping fmcg by some tax and duty reduction. Some

examples of these measures are:

Reduction of duty on edible oil will have a positive impact on related companies.

Full exemption of excise duty on biscuits priced at 50 rupees or less per kg is

positive for ITC, Britannia, and Parle.

Reduction of custom duty on food processing machinery and their parts from

7.5% to 5%.

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Reduction of excise duty on food mixes from 16% or 8% to nil is positive for

ITC.

Development of rural infrastructure is in focus, which is beneficial for FMCG

companies because it is a big market for FMCGs. Better infrastructure will

improve the supply chain.

Exemption of free samples and displays from the purview of FBT will be

beneficial for FMCG companies because they spend huge amount of money on

advertising and brand building. HLL, Dabur, ITC, and Marico will be amongst the

most benefited companies.

So now we can hope that this threat is getting fade away and

fmcg sector is expecting a ray of hope.

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PORTER’S MODEL

Michael Porter's competitive forces model is probably one of the most often used business

strategy tools and has proven its usefulness on numerous occasions. Porter's model is particularly

strong in thinking outside-in. Care should therefore be taken not to underestimate or

underemphasize the importance of the (existing) strengths of the organization (inside-out) when

applying this five competitive forces framework of Porter.

It is an outside-in business unit strategy tool that is used to make an analysis of the

attractiveness (value...) of an industry structure. The Competitive Forces analysis is made by the

identification of 5 fundamental competitive forces:

the Barriers to entry (how easy or difficult is it for new entrants to start to compete,

which barriers do exist)

the Bargaining power of suppliers (how strong is the position of sellers, are there many

or only few potential suppliers, is there a monopoly)

the Bargaining power of buyers (how strong is the position of buyers, can they work

together to order large volumes)

the Rivalry among the existing players (is there a strong competition between the

existing players, is one player very dominant or all equal in strength/size)

the Threat of substitutes (how easy can our product or service be substituted, especially

cheaper)

When we apply Porter’s model in FMCG sector this is what we get

Barriers to entry

.

Traditionally in India, companies like ITC, HLL, Colgate, Cadbury (now de-listed) and

Nestle dominated the FMCG sector, with each one happy in their own segment, negligible

competition and many barriers to entry in the form of high import duty. Thus, these

companies were able to squeeze the customers' wallets by charging a high premium on their

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products

Huge investments in promoting brands, setting up distribution networks and intense

competition, but the sector is not capital intensive.

Abundant supply in metros. Distribution networks are being beefed up to penetrate the rural

areas. HLL expects the FMCG market to triple in market size by FY10, which highlights the

potential.

Bargaining power of suppliers

Some of the companies are integrated backwards, which reduces the supplier's clout.

Manufacturing is largely outsourced Due to globalisation, the FMCG distributors in the

developing countries are struggling to capture and retain their market share from the

multinational companies. To attract the retailers, the distributors supply on credit and collect

the amount in unequal weekly instalments. When the supply on credit becomes inevitable,

the distributors have to find out ways of optimising the investment. Moreover, the

investment has to be shared among the retailers depending on their demand and payment

policy, to maximise the sales and minimise the balance payment..

Bargaining power of buyers

In case of branded products, there is little that the consumer can influence, but intense

competition within the FMCG companies results in value for money deals for consumers

(e.g. buy one, get one free concept).

Rivalry between Existing Firms

“So often our brands are placed in situations outside of our direct control. Creating a brand

that continues to convey its position in the hands of others is the true test of Strategic Brand

Management within FMCG. Defining and focusing on your brand as a ‘unique individual’

that requires sustenance to survive is critical to a brand’s ongoing success.”

Competition is faced from both domestic, MNCs and also from cheaper imports, which are increasingly

visible in urban markets. Price wars are a common phenomenon.

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Players from unorganised and organized sectors continue to grab each other’s market shares. Highly

scattered market and poor transport infrastructure limits the ability of MNCs and national players to reach

out to remote rural areas and small towns. Low brand awareness enables local players to market their

spurious look-alike brands. Also with entry of existing players in new segments like ITC’s entry in

personal care products, Dabur’s plans to venture into health beverages would add to the already aggressive

environment resulting in high pressure on margins.

FMCG companies, on their part, are doubtful of certain business models of modern retailers. For instance,

most retailers such as Subhiksha and Reliance Fresh have their presence in close proximity to each other.

"Organised retailers are competing for a limited density of population in a crowded market space. Hence,

they have a low velocity in movement of goods and are facing payment issues," explains an executive

from a leading FMCG company who has also curtailed supplies to select stores and certain retail chains.

The tug of war between FMCG and retail sectors will continue as modern trade picks up in the country

and we ask for better terms and conditions

Pressure from Substitute Products

More selling points in the sale outlet means more shopping opportunities for continuous growth.

The best part in FMCG sector is that the substitutes here are found within the sector itself so if the

customers change their consumption pattern then too the effect will be on the company but the

whole sector remains unaffected.

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THE ISSUE PRIORITY MATRIX

Making the very most of your opportunities

There are a lot of environmental factors capable of influencing and hence affecting

the business. The feasible approach to identify the important environmental factors is to

test each factor with regard to its impact on the business of the organization and the

probability of such an impact. The issue priority matrix shelps in doing the same i.e.

helps a strategist to identify the high priority environmental factors.

The Issue Priority Matrix is a simple diagramming technique that helps you choose which

activities to prioritize (and which ones you should drop) if you want to make the most of

your time and opportunities.It is useful because by choosing activities intelligently, you

can make the very most of your time and opportunities. However by choosing badly, you

can quickly bog yourself down in low-yield, time-consuming projects that close down

opportunities and stop you moving forwards

ISSUE PRIORITY MATRIX OF FMCG INDUSTRY

Our Issue Priority Matrix shows three levels of probability of occurrence of an event: high,

medium, and low. On the other axis it shows the impact of this event on the business in three

categories: high, medium, and low. Business is expected to remediate issues in priority order:

first high; then medium; and finally low.

Impact on Business

Probability of

Occurence

High Medium Low

High 2. CREDIT CRUNCH 3. ADDITION IN IMPORT

DUTY

5. INFLATION COOLING OFF

1.RECESSION

Medium 4. RISE IN GDP AND PER

CARITA INCOME

Low

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_____

1. RECESSION

Despite rising input price rises and high inflation, fast-moving consumer goods FMCG

companies are expected to post a strong topline growth in the second quarter of the financial

year 2008-09. According to industry projections, the sector is expected to post a 15-17%

topline revenue growth in the July-September quarter, riding on price hikes and higher focus

on value-for-money products.

Demand in the fast moving goods may get impacted if there is a prolonged liquidity crisis

but as of now there is no witnessing of any dip in sales. The current financial scenario does

not have an immediate relevance to the FMCG sector, as the sector is, to some extent,

insulated.

2. CREDIT CRUNCH

Major fast moving consumer goods (FMCG) companies such as Godrej, Marico and Dabur

have curtailed supplies to select leading modern trade retailers, following default in

payments."We have curtailed supplies to those modern retailers who are not paying

according to terms of the contract," confirmed Adi Godrej, chairman, Godrej Group.

Marico's Chief Executive Officer (Consumer Products Business) Saugata Gupta, too,

affirmed that his company was being cautious in dealings with such retailers. FMCG

companies work on tight credit cycles. Due to the economic slowdown and tight credit

squeeze, a few retailers are seeing their working capital cycles get stretched as they

struggle with high real estate, rental prices and face a slowdown in business offtake. The

working capital for retailers is normally stuck for one or two months as retailers expand

their stores, buy inventories and book properties.

3. ADDITION IN IMPORT DUTY

Imported finished products in the segment may get more expensive with the FM

levying an additional import duty of 4%, a step that will add more cheer to the domestic

FMCG sector. With the reduction in import duties on raw materials like industrial oils

consumed by the toilet soap industry, and

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plastics used in packaging becoming cheaper, the FMCG sector here is heaving a sigh of

relief.

4. RISE IN GDP AND PER CAPITA INCOME

The fast-moving consumer goods (FMCG) industry shares a strong correlation with

the per capita income of a country. Any rise in the per capita income augurs well for the

industry. Thus, the fact that the per capita income has nearly doubled in a short span of four

years has elated FMCG companies. The growth trend over the last four years has shifted

significantly upwards.

The rapidly increasing Indian GDP and per capita GDP will lead to an accelerating growth

of the Indian FMCG industry. The per capita income growth in India will further accelerate

over the next five years as the momentum is extremely strong

5. INFLATION COOLING OFF

With inflation finally cooling off and input costs touching a new low,

indications are that prices of fast-moving consumer goods (FMCG),especially that of

soaps and detergents may come down. However, since most companies are said to be

holding on to old stocks of raw material, based on forward contracts that were booked in a

rising crude market, they are said to be waiting for their stocks to be replenished.

There is a buzz that market leader Hindustan Unilever Ltd (HUL), with its prudent cost

management strategies, might take the lead and drop prices. This is likely to take place in

the next couple of weeks, or even in the new calendar year.

TOWS MATRIX

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TOWS

MATRIX

Strength Weakness

1. Low operational

cost.

2. Presence of

established

distribution network

in urban as well as

rural areas.

3. Presence of well

known brands.

1. Low exports level.

2. ‘Me-too’ products

which legally mimic the

labels of established

brands narrow down the

scope of fmcg products

in rural & semi-urban

market.

SO STRATEGIES WO STRATEGIES

Opportunitie

s

1.

Untapped

rural

market.

2. Rising

income

level of

consumers

.

3. Large

domestic

market- 1

billion

Expand the

rural market.

(O1,S1,S2)

Create new

products

which are

efficient & for

premium

segment so

that it can be

better

charged. (S3,

02, 05)

Serve value oriented

consumers in

mature market for

selected product

category.

(O2,O3,O5,W1)

Aggressive low-cost

advertising &

continuous

innovation is

needed to wipe

out generalization

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population

.

4. Export

potential.

5. High

consumer

good

spending.

Establish

brands should

modify their

products for

international

business.

(S3,O4)

effect. (O1,W2)

23

24

Should focus on

market share first

& after catching

significant share

can go for better

pricing for

profitability as

there is lot of

space.(S1,O3)

Aggressive cost

effective

promotional

strategies should

be adopted to

create demand.

(S3, O2)

Diversification for

catering large

customer group.

(O3,W2)

ST STRATEGIES WT STRATEGIES

Threats 1. Removal of

import

restrictions

resulting in

replacing of

domestic

brands.

2. Slowdown in

rural demand.

3. Tax &

regulatory

structure.

Restructuring

portfolio &

concentrating

on core brands.

(T1,S3)

Nano packaging

should be adopted for

rural markets to

provide quality goods

at lower price.

(T2,S1)

Savings should be

generated through

global purchasing &

centralized supply

chain.(T3,S3)

Adopt market

penetration

strategy & earn

through volume.

( T1,W2)

Constant product

innovation is

required to cope

with the loss of

business due to

imitated products.

(T2,W2)

Leverage on cost

advantage. (T 1,

W1)

SO STRATEGY:

(S1, O3) – As there is large domestic market and large number of players in the industry,

companies should first focus on grabbing the market share rather than focusing on

profitability by leveraging on low operational cost of such product segment. Acquiring a

significant share may help the companies to fight against the foreign players as well as

new entrants and they can later upgrade their pricing structure for profitability once they

hold substantial share.

WO STARETEGY:

(O3, W2) – Concentric diversification may help the companies to produce new products

by using related technology which may not be much cost incurring strategy. As it will

help to serve large customer group, even if one product looses its market share due to

imitated product, company can profit by serving other product especially targeted to other

customer group.

WT STRATEGY:

(T1, W1) - Cheap labor and quality product & services have helped India to represent as

a cost advantage over other Countries. Even the Government has offered zero import duty

on capital goods and raw material for 100% export oriented units. FMCG companies can

leverage on this cost advantage factor to push its export business.

ST STRATEGY:

(T1, S3) – To fight with the foreign players companies can restructure their portfolio

through mergers and acquisitions, with the aim of becoming national leaders in a few

core categories. For e.g., Marico, went on to buy its closest competitor Nihar from HUL

to prevent Dabur from moving to a position of strength. Dabur itself bought the ailing

Balsara brands to give meat to its ailing oral care products.

Along with reshaping its portfolio, companies should focus on fewer brands where they

can concentrate marketing and other resources to eliminate weaker ones. This can bring

25

other advantage to strengthened brands that can make it more difficult for retailers to

insist on price cuts.

(T3, S3) -

Significant reduction in custom duty rates on selected raw materials has made it cheaper

cost of production as compared to purchase of the same raw material in India itself. It

gives the opportunity for the Indian companies to have a global purchasing & centralized

supply chain structure.

CORPORATE SOCIAL RESPONSIBILITY FMCG sector is no doubt registering an up trend in growth. According

to CNBC, FMCG sector growth story will continue because of the positive budget.

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

fourth largest sector in the economy. A well-established distribution network, intense

competition between the organized and unorganized segments characterize the sector.

FMCG Sector is expected to grow by over 60% by 2010.

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For example, Hindustan Levers Limited (HLL) has shown a healthy growth in the last

quarter. An estimated double-digit growth over the next few years shows that the good

times are likely to continue.

Corporate Social Responsibility in the Supply Chain

Nowadays, Corporate Social Responsibility (CSR) becomes an

increasingly popular topic in the business world, due to, among others the growing

awareness of a company’s task as not only on profit making but also on providing

benefits for the society to get a better life from the company’s existence. In spite of the

relative slow adoption of CSR considerations by supply chain practitioners, its concepts

in the supply chain are increasing in importance. CSR continues to evolve in practice, and

its reach now extends to supply chain partners including suppliers, customers and

logistics providers.

In FMCG industry, there is a very long and complex supply chain

network, so that social responsibility of the corporation has to be able to reach the last

part of the chain. To enable the development of CSR research in supply chain, research

of the entire supply chain or of its individual element is necessary in various industries.

The Black Soybean Program conducted by Unilever is a novel way in

implementing CSR. It was actually invented when Unilever tried to source one of the

essential ingredients to produce “Kecap Bango” sweet soy sauce directly from the

farmers.

Let us have look topmost players in this industry and their social activities.

1. Hindustan Unilever Ltd.

2. ITC (Indian Tobacco Company)

3. Nestlé India

4. GCMMF (AMUL)

5. Dabur India

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HUL(Hindustan Unilever Ltd.)

Sankalap – A Determination to God - HUL Sankalp is a program that

allows the employee to register and get associated to a cause or NGO. The back-end

support was provided by indianngos.com which was responsible for checking the

authenticity of its partner NGOs and for tracking the employee’s commitment. The

programme has now gone beyond the cities to touch lives of people in the rural districts

like that of Wad/ Jawahar. Here HUL Mumbai employees travelled 130 km to create

awareness on hand wash and hygiene. Similarly, employees have also started involving

their family members.

Greening Barrens - Water Conservation and Harvesting

HUL's Water Conservation and Harvesting project has two major

objectives:

To reduce water consumption in its own operations and regenerate sub-soil water

tables at its own sites through the principles of 5R - Reduce, Reuse, Recycle,

Recover and Renew

To help adjacent villages to implement appropriate models of watershed

development

Shakti - Changing Lives in Rural India

Shakti is HUL's rural initiative, which targets small villages with population of less than

2000 people or less. It seeks to empower underprivileged rural women by providing

income-generating opportunities, health and hygiene education through the Shakti Vani

programme,and creating access to relevant information through the Shakti community

portal.

Started in 2001, Shakti has already been extended to about 80,000 villages in 15 states -

Andhra Pradesh, Karnataka, Tamilnadu, Maharashtra, Gujarat, Madhya Pradesh,

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Chattisgarh, Uttar Pradesh, Rajasthan, Punjab, Haryana, West Bengal, Orissa, Bihar &

Jharkhand.

Lifebuoy Swasthya Chetana - Health & Hygiene Education

Lifebuoy Swastya Chetna (LBSC) is a rural health and hygiene

initiative which was started in 2002. LBSC was initiated in media dark villages (in UP,

MP, Bihar, West Bengal, Maharashtra, Orissa) with the objective of spreading awareness

about the importance of washing hands with soap.

Fair & Lovely Foundation - Economic Empowerment

The Fair & Lovely Foundation is HUL's initiative which aims at economic empowerment

of women across India. It aims to achieve this through providing information, resources,

inputs and support in the areas of education, career and enterprise. It specifically targets

women from low-income groups in rural as well as urban India.

Happy Homes - Special Education & Rehabilitation

Under the Happy Homes initiative, HUL supports special education and rehabilitation of

children with challenges.

The various initiatives undertaken by HUL in this field are Asha Daan, Ankur,

Kappagam and Anbagam.

Yashodadham - Rebuilding Lives

HUL has reconstructed a village in the Bhachau Taluka of Gujarat's Kachch district. The

village, which has been named Yashodadham, was dedicated to its 1100 residents in

December 2002. The residents belong to Nani Chirai village, which was completely

wrecked by the devastating earthquake of January 2001.

Yashodadham, spread over 25 acres, comprises 289 homes. HUL has

also provided a school building, an exclusive playground for children and a multi-

purpose community centre, includinga creche, health centre, community room and village

administration office.

2. ITC

E-Choupal

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ITC’s Agri Business Division, one of India’s largest exporters of agricultural

commodities, has conceived e-Choupal as a more efficient supply chain aimed at

delivering value to its customers around the world on a sustainable basis.

Social responsibility at Chirala

The story of how the giant Chirala GLT plant of ITC came to be set up in 1927 in such a

quaint place, there certainly is a connection, and perhaps even a lesson for some of our

large companies on corporate social responsibility.The unit there has also received the

ISO-14001 - for environmental management, said to be the first in world tobacco

industry, and the Sword of Honour from the British Safety Council UK, for as many as

six times between 1994 and 2000.

3. Nestle INDIA

Water Management Program

Nestle India is committed to improving the situation and believes that the

first step is to create awareness in the communities around its factories. Nestle’s water

management program is a one of its kind effort by a corporate to create the means for

providing safe drinking water to local communities and to educate children in schools to

conserve this scarce resource.

Other Activities include

• Education for students as well as teachers and parents on the importance of hygiene and

cleanliness in the living environment

• Posters, Demonstrations are used as a medium to teach students water basics like the

water cycle, ground water table, uses of water, water resources, ground water depletion

etc.

• Creating awareness on the means and methods to conserve and manage water in daily

living

• Nestle has also established several water management initiatives at the factory level

• Zero waste water discharge: In some of the Nestle factories, treated waste water is

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recovered for in-house irrigation

• Imparting rain water harvesting techniques for better water management at dairy farms

4. AMUL Gujarat Co-operative Milk Marketing Federation (GCMMF)

CSR-sensitive Organisational Structure

AMUL is a three tier co-operative organisation.

The first tier is the co-operative society at the village,of which; milk producers are

voluntary members

The second tier is the district co-operative that processes milk into milk products,

markets locally and sells surplus to the state co-operative for national and international

marketing.

Third tier is the state level co-operative - the Gujarat Co-operative Milk Marketing

Federation (GCMMF) responsible for national and international marketing of milk and

milk products produced and sold to it.

CSR-sensitive Business Philosophy

The first step towards discharging the CSR is the business philosophy of the GCMMF. It

is two-fold: one, to serve the interests of milk producers and second, to provide quality

products to consumers as value for money.

CSR-orientation To Distributors & Retailers

The GCMMF has identified the distributors and retailers are its important link in its

vendor supply chain. Through surveys the GCMMF found that 90% of the distributors do

not get any opportunity of exposure to latest management practices. The GCMMF has

developed and trained all its distributors through Value-Mission-Strategy Workshops,

competence building, Amul Yatra, Amul Quality Circle meetings, computerisation, and

electronic commerce activities.

Earnings Of GCMMF

Nurturing its primary members - the milk producers - is the first mission of the GCMMF.

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Discharge of this responsibility is reflected in the manner in which the GCMMF conducts

its business and shares its earnings.

CSR-oriented To Staff

The GCMMF hires and trains people to take advantage over its competitors. It has

developed in-house modules for training and competence building to improve and up

grade of their knowledge; communication skills to understand the customer, be

responsive to customer requirements, and communicate clearly for trouble shooting of

problems.

5. DABUR India

CSR activities: Dabur’s major initiatives in the Social sector include: Establishment of

the Sustainable Development Society, or Sundesh, in 1993 - a non-profit organization to

promote research and welfare activities in rural areas;

Sundesh

At Sundesh, dabur has initiated social development programmes that take a holistic

approach. Integrating various aspects like health, literacy, employment and empowerment

to let people take control of their lives.

The most deprived and weaker sections of society including women children the illiterat

the unemployed.

Aims & objectives

1. To design and implement integrated rural and slum development programmes for

health, education, improved nutrition and socio-economic upliftment.

2. To promote a better awareness and understanding of environmental issues.

3. To highlight the links between basic personal and household hygiene, sanitation and

health.

4. To improve access to affordable, quality health services and expand medical facilities

to rural areas.

5. To introduce group vocational training programmes for building income generation

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skills.

6. To empower communities for better control of their lives by participating in rural

development programmes.

INTELLECTUAL PROPERTY RIGHTS IN FMCG SECTOR

Not only in FMCG sector but everyday we encounter intellectual property at every step of our life today .Intellectual property (IP) is always with us. At any given time an average person is surrounded by products that are full of IP, ranging from clothes, sunglasses, footwear, mobile phones, watches, the car we drive to the electronics we use and the artifacts that adorn our homes. What most of us perhaps don't

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realize is that intellectual property is everywhere in our world.

India invented the Zero, without which there would have been no binary system. No computers! Counting would have been be clumsy and cumbersome! The spinning wheel is another innovation attributed to India which was introduced to Europe in the Middle Ages. Indian civilizations have protected and used herbal remedies known for their beneficial healing properties which have seen a renewed interest in the form of alternative therapies and preventative health care.

What is considered the most valuable patent is the one issued to Alexander Graham Bell for his invention of the telephone. The patent was number 174,465 issued in 1876. The invention of the light bulb by Edison led to the creation of jobs for millions of people. Quite literally, without this invention we would all still be in the dark. Thomas Edison actually received 1093 patents during his life.Abraham Lincoln was the only United States President to receive a patent. He did so for his manner of buoying vessels. He was issued this patent in 1849. Probably the most famous patent was the one issued to Frederic Auguste Bartholdi for his design of the Statue of Liberty. The Statue of Liberty came to New York on June 19, 1885. It was a gift of friendship given to the United States from the people of France. It was intended to celebrate their 100 years of independence 10 years earlier. The statue is constructed of copper sheets which are assembled on a framework of steel supports. In order to be transported to America the statue was disassembled into 350 pieces and was packed in 214 crates. It was then reassembled when it arrived. Nothing like this was ever done before and most likely will never be done again. Thousands of new products of IP in the form of trademarks, designs, patents, copyrights, plant varieties and biological materials are being submitted for registration by inventors, scientists and creators everyday.

DEFINITION

There is no uniform definition of Intellectual Property. As science and technology make rapid advances, and as competition for markets becomes ever fiercer, human ingenuity is throwing up ever new ideas and newer products. Different types of IP rights like patent, copyright, trademark, design etc can protect these ideas and products.

DIFFERENT TYPES OF IP

IP has been generally divided into two main categories viz.,

(a) Industrial Property,

(b) Copyright.

Industrial property consists of rights relating to inventions, trademarks, industrial designs and appellation of origin.

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Copyright protects rights related to creation of human mind in the fields of literature, music, art and audio-visual works. The owner of copyright has rights not only in the original work, but also in creative work that is derived from the original work, e.g. its translation or adaptation or the enactment or production of a film based on the original work. Such rights relating to a copyright are called related rights. There are neighbouring rights on copyright, which protect performances of performing artists, phonograms and broadcasts. Related rights and neighbouring rights are terms used interchangeably

Magnitude of the problem of Counterfeiting and Piracy in India:

WHAT'S in a name? A lot, especially if it is a brand name.

While increasing consumerism in India has led to Indian corporates spending huge sums of money for building up their brand images, it has also resulted in a burgeoning group of `entrepreneurs' leaning on this brand build-up to clutter the market with a flood of look-alike or counterfeit products.

Indeed, today the fake products under popular brand names constitute an almost parallel industry estimated at Rs. 10,000 crore.. Sample some of the recent findings during an on-going campaign against fake products by FICCI's India Brand Protection Committee (IBPC):

A recent raid by the police led to the discovery of a young `entrepreneur' who has been raking in hefty earnings from his ramshackle house in one of the by-lanes of Bhandup in Mumbai.

His investment? A stove, a plastic container, supplies of white petroleum gel and, of course, several used Vaseline containers with the original wrappers. He has been passing off his concoction as Vaseline into the market for quite some time, netting a 15 per cent profit margin.

A trader in auto parts operating from Kashmiri gate area in Delhi procures unbranded auto spares from the local market, packs them into TELCO wrappers and markets them under the original brand name.

A Mumbai-based housewife during a recent visit to a general store in Ahmedabad to buy a bottle of Sunsilk black shampoo was surprised when the storeowner refused to sell her what she wanted. On closer inspection, she realised that the product was not `Sunsilk', but `Sunmilk', with the wrapper being similar to the original. The storeowner was frank enough to admit that this was for the "uneducated rural consumers, who are not familiar with the Sunsilk ads on the TV."

India has a large drug manufacturing industry, which currently comprises of 250 large units, about 8000 small-scale units, including 5 central Public sector units. These units produce a complete range of formulations and bulk drugs. (Source: Asia Times online)

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Fake medicines are estimated to occupy between 15 to 20 percent of the total Indian market. Not only allopathic drugs have spurious competition, but fake homeopathic drugs are also spreading in the market(Source: Tribune News Service)

Music industry is passing through difficult times; 40% of music industry’s production ends being copied and distributed illegally in India. Loss of revenue to music industry is Rs 600 crores annually and film industry is of Rs 2000 crores/ year since last 3 years due to piracy.

In India 1 in 3 automotive parts are copied. Spurious car parts takes up an estimated 37% of the market in India. (Source MEMA)

The impact of counterfeiting in FMCG sector is 8-10%, hampering quality of goods as well as raising concerns about health issues

10 % of the major soft drinks sold in India are fakes & 10-30 % of cosmetics, toiletries and packaged foods are counterfeited.

A random search of registered Indian companies reveals that:

There are over 60 companies starting with the word ‘Nike’;

65 companies starting with the word ‘Rolex’;

217 companies starting with the word ‘Intel’.

This is not limited to multinationals and there are 136 companies beginning with the word Tata, and over 400 companies beginning with the word ‘Reliance’.

"Today the market is full of fake products ranging from salt and tea to high-end garments and shoes. No State has been spared."

A recent study conducted by AC Nielsen across 30 FMCG companies has estimated that FMCG companies lose Rs 2,600 crore revenue out of the Rs 60,000 market.

Another study by the FICCI's Brand Protection Committee has come out with similar findings — look-alike popular FMCG brands account for five to 15 per cent of the original brand sales volumes, with as many as 20 lakh dealers involved in the marketing of these products. The study was conducted on selected categories such as balms, coconut hail oil, toothpastes, powders, fairness creams, detergent powders, shampoos, tea and cloth whiteners.

"The study has come across 113 versions of Fair & Lovely, 128 versions of Parachute coconut hair oil, 28 variations of Sunsilk, 38 of Clinic Plus, 44 look-alikes of Vicks Vaporub, 34 variants of Amla and 26 Iodex variants. What is more, we discovered fake products in high-end departmental stores.

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FICCI's campaign has however yielded positive results in this regard, including significant reduction of fake products in Delhi, seizure of huge stocks of counterfeit products, packaging material and machinery, creation of a special cell within the police department in Madhya Pradesh and empowerment of two Magisterial courts in Delhi to deal specifically with Intellectual Property Rights cases.

Inadequate consumer awareness has been identified as one of the reasons for this growing market for fake products.

Causes Of The Violations:

The main reason behind the proliferation of counterfeits is the huge gap between the manufacturing cost and the retail price. Also, the counterfeiters have easy access to basic manufacturing and packaging technology. Faster take off, rural penetration, and the trade being hand-in-glove with the counterfeiters helps the practitioners of illegal trade. The top management also must give attention to the issue. The companies would do better if they tried to wrest control of the counterfeit’s market share instead of wasting money on fighting with their competitors. There is a need to treat IPR violations as serious crime and combating the elements of organized crime in this sector. There are about 5000 reported cases of IPR violations but not a single conviction. Conviction in cases of IPR infringement would act as deterrent to the counterfeits. Unfortunately, the law enforcers are not well aware of the offences related to IPRs. There is a need to train the police and the judiciary to understand its import for businesses.

Fraud Comes in Many Forms : Basically, every imaginable way, someone can make money by duplicating trade dress, swapping out cargoes, or altering contents etc. The commonly known fraudulent practices are:

Counterfeits : Low price, knock-off versions of products sold with fraudulent packaging that directly mimics the trademarks of trade dress of brand name merchandise.

Gray Market or Diverted Goods : Real products sent to markets where they were not intended. A lower-priced version produced for overseas might be re-imported and sold as top-priced domestic merchandise, or a large retailer might buy more than it can really sell to secure a low wholesale price, then resell the surplus to smaller retailers.

Refills : Real, emptied packages are refilled with low-cost, low-quality, counterfeit product. Ink jet cartridges are common targets of this type of fraud.

Threats to genuine products in the marketplace take on many different forms, though to counter the counterfeiting, a whole new range of technology and service providers have come into play. The technology being used include security inks, papers, specialty adhesives, ratio frequency identification (RFID) tags, micro-taggants, and holograms.

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Any characteristic that can create a unique, difficult-to-forge product "signature" can be used, but they generally fall into the following categories:

Fluorescent Inks : Light up when exposed to ultraviolet or infrared light. Color-Changing Inks : Change color when exposed to certain

stimuli.Thermochromic inks change when temperature is raised; photochromic inks change when illuminated by ultraviolet light; chemically sensitive inks change when wiped with an indicator pen or spray.

Magnetic Inks : Carry information much like a tape recorder. This information can form an electronic signature.

Security Papers : Incorporate features directly into the paper or boardstock. These include fluorescent fibers and other markets. The paper may have very low content of other fluorescent materials, which could mask the markers.

Security Adhesives : Normal packaging adhesive tagged with authentication markets, placing them where they are concealed from would-be counterfeiters.

Holograms : Somewhat difficult to copy micro-embossed, aluminized films. Micro-taggants : May have many different components, such as layers of colored

plastics, DNA, or distinctive chemical elements - anything that can be detected.

MEASURES TAKEN:

The opening up of the Indian economy coupled with growing competition and indeed growing consumer awareness, would collectively help to check the dangers of counterfeiting, spurious and pirated products etc. However, to combat the dangers of the piracy or counterfeiting of products etc, we have to learn much more from the experiences and technological developments of others in this field.

The industry should co-opt the consumer in the fight to curb piracy. The consumers could serve as the largest police force for genuine manufacturers and brand protectors. It is imperative for the industry to mount a campaign to educate the public on the danger of copyright theft. Every industry in India must set about proactively in protecting their brands. There is need to form associations covering the entire industry. The music industry has successfully done so.

The industry should appoint its own investigators who would fill the vacuum in the enforcement process. Hindustan Lever Ltd. had already appointed trademark investigators all across India.

A total integrated solution approach should be used in the new paradigm, which would include customer education, technological innovation, and a stricter enforcement regime. Firms need to invest in technology to make copying difficult.

However, the fact remains that as long as there are good brands, there will be fakes. It is a good sign that the Indian industry is coming together on a platform to fight the pirates. Yet until the consumers, who are the real owners and patrons of brands, are co-opted in the anti-counterfeiting drive, industry is not going to see much success.

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FATE ANALYSIS (FMCG-CONSUMER CARE)

1. Design and Manufacturing

1. Low Capital Intensity - Most product categories in FMCG require relatively

minor investment in plan and machinery and other fixed assets. Also, the business

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has low working capital intensity as bulk of sales from manufacturing take place

on a cash basis.

2. Technology - Basic technology for manufacturing is easily available. Also,

technology for most products has been fairly stable. Modifications and

improvements rarely change the basic process.

3. Third-party Manufacturing - Manufacturing of products by third party vendors

is quite common. Benefits associated with third party manufacturing include (1)

flexibility in production and inventory planning; (2) flexibility in controlling labor

costs; and (3) logistics - sometimes its essential to get certain products

manufactured near the market.

2. Marketing and Distribution

Marketing function is sacrosanct in case of FMCG companies. Major features of the

marketing function include the following: -

1. High Initial Launch Cost - New products require a large front-ended investment

in product development, market research, test marketing and launch. Creating

awareness and develop franchise for a new brand requires enormous initial

expenditure on launch advertisements, free samples and product promotions.

Launch costs are as high as 50-100% of revenue in the first year. For established

brands, advertisement expenditure varies from 5 - 12% depending on the

categories.

2. Limited Mass Media Options - The challenge associated with the launch and/or

brand-building initiatives is that few no mass media options. TV reaches 67% of

urban consumers and 35% of rural consumers. Alternatives like wall paintings,

theatres, video vehicles, special packaging and consumer promotions become an

expensive but required activity associated with a successful FMCG.

3. Huge Distribution Network - India is home to six million retail outlets,

including 2 million in 5,160 towns and four million in 627,000 villages. Super

markets virtually do not exist in India. This makes logistics particularly for new

players extremely difficult. It also makes new product launches difficult since

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retailers are reluctant to allocate resources and time to slow moving products.

Critical factors for success are the ability to build, develop, and maintain a robust

distribution network.

A general assessment of this would lead to the conclusion that FMCG is not a

Structurally Attractive Industry to Enter.

Entry barriers are high due the nightmare logistics associated with distributing a FMCG

and the limited mass media options available to build a brand. Likewise, the intensity of

competition from branded and unbranded goods and the power of retailers make the

FMCG a structurally unattractive industry in which to enter and difficult industry in

which to remain a competitive player.

Blue-print for the Future

To offer a blue-print for an industry which is one of the most dynamic and demanding is

like scheduling events 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-Virtualization

2. Rural marketing

3. Distributions

4. Brand managers to Business managers

1. Excellence in operations - Value Chain De-Verticalisation

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.

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According to a McKinsey report based on 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 the other two business

processes.

2. 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-verticalisation.

De-verticalisation

Multinational FMCG companies that 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 be in a

position to address the above-mentioned operational issues. A strongly incentivised

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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-verticalisation 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 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-

verticalisation 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"

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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.

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.

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 and urban 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?

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

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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 have always 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. Its 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 distributors and channel partners is a

Herculean task. Few ways to reduce pain involved in this link: -

Reducing supply chain costs by reducing intermediaries - Organized retail 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

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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.

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 radical approaches which

organization are re-inventing or discovering. Its 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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Indian FMCG Sector Trends

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1. Focus on Health

Companies are widening their health food portfolio to cash in on the rich, urban,

health conscious Indian. In recent we have seen flurry of products in this segment.

Have a look of some of them:

1.1) Probiotic Ice Creams

1.2) Butter Lite (Nutralite)

1.3) Lays (40% less saturated fats) – Snack Smart

1.4) Low Calorie Sweetners

2. Impact of Inflation: The expenditure of FMCG in the consumer's wallet is

coming down year on year. This is leading to low sensitivity with price increases.

Almost a decade back people use to downtrade from expensive brands to value

for money ones. But now the trend is changing. Consumer are not switching to

cheaper substitutes. Rather companies have come with lower quantity SKUs and

make consumers switch from higher to lower SKUs and not from premium to

popular brands (like Dove to Lux International). Just to give you an example,

Henkel instead of increasing the price of their HenkEl detergent from Rs. 46 to

Rs. 50, they have launched a new SKU of 400gms for Rs. 40. During the time of

inflation, people shift to sachets of their brands. Sales numbers of FMCG

companies are quite robust.

FMCG spend now comprises a smaller share of consumer’s wallet

3. Micro Segmentation/ Niches: Its interesting and funny to see that companies

are not leaving any opportunity to micro segment the market. I can forsee that we

are here to see further segments in different categories. Here are some examples:

Age

a) Junior Horlicks

b) Junior Chyawanprash

c) Pepsodent Barbie for Kids/ Colgate Strawberry

Sex

a) Women’s Horlicks

b) Male fairness cream

4. Low value SKUs - Sachetization: You name the category it has a sachet !! We

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all know that it all started in 1980's with shampoos. Here is a small list of sachets:

4.1) Butter (Munna Pack)

4.2) Noodles (Chotu Maggi)

4.3) Ketchup (Pichko)

5. Jet Age Consumer Products: Because of changing lifestyles, busy jobs etc

marketers are coming up with Jet Age consumer products.

Ready to Eat

a) Corn Flakes/ Oats

b) Pastas

Ready to Drink

a) Energy Drinks

b) Non-Cola Drinks (Juices)

Ready to Cook

a) Cut Vegetables

b) Soups

c) Paranthas/ Rotis

7. Under-penetrated Growth Categories: Barring few main mainstream

categories as mentioned above, there are number of FMCG categories with low

penetration and are expected to grow by 20% during 2008-2009. Have a look of

that list:

7.1) Men’s grooming products

7.2) Skin care & Cosmetics

7.4) Anti-aging solution

Conclusion

In last few years, we have seen large number of companies expanding their portfolio into

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other categories, which is leading to fragmentation of market. This will lead to cut throat

competition from regional/ national companies, giving the ultimate benefit to the

consumers. In this environment, only the innovators will survive. Focus will be the key to

profitability. Companies developing products targeting niche segments, by addressing

specific needs The modern retail format will slowly occupy a bigger share. This will lead

to change in shopping behavior and growth in FMCG sector

Undoubtedly, all this is good for the consumers, who can now choose a variety of

products, from a number of companies, at different price points.

Bibliography

1. Strategic Management by Azhar Kazmi

2. www.fmcgmarketers.com

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3. www.financialexpress.com/news/fast-moving-changes-in- fmcg

4. www.economictimes.indiatimes.com/News/News-By-IndustryCons-Products/

articlelist

5. www.moneycontrol.com/india/news/news/ fmcg -cos-expect-prices-to-come-

down

6. http://fmcg-marketing.blogspot.com/2007/11/porters-five-forces-model.html

7. http://www.google.co.in/search?

hl=en&q=porter+model+of+fmcg&btnG=Google+Search&meta=

8. http://www.euromonitor.com/Corporate_Social_Responsibility_

%28and_the_FMCG_Market_Response%29

9. http://www.hul.coulditbeu.in/U_pages/U_CSR_initiatives.aspx

10. http://www.itcportal.com/

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