TPL Case Study FMCG

Indian FMCG Industry Overview 1

Indian FMCG Industry Overview

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Indian FMCG Industry OverviewFast Moving Consumer Goods (FMCGs) are products that are consumed in a short span of time, and are often con-sumed daily. Examples of FMCG products include toiletries, soap, cosmetics, oral hygiene and shaving products, detergents, packaged food products, soft drinks, candy and chocolate bars, etc.

The FMCG sector is the fourth largest constituent of Indian economy, and has a market size of about Rs. 130,000 crore. According to a report by Booz & Company, the industry is expected to reach Rs 4 trillion (a trillion is Rs 100,000 crore) by 2020. Unlike the US market for FMCG, which is mainly dominated by a handful of global players, the Indian FMCG sector is highly fragmented with almost half the market accounted for by unbranded, unpackaged home made products.

Key Sector CharacteristicsThe FMCG sector is characterized by a well-established distribution network spread across nearly six million retail outlets (including two million in 5,160 towns and four million in 627,000 villages), low penetration levels, increasing consumption, high brand awareness, intense competition between the organized and unorganized segments, and a strong MNC presence.

Since FMCG products are items of daily consumption, demand is slow to be impacted by economic slowdown. However, providing good price points is the key to success

Food products and personal care together make up two-third of the sector’s revenues.

Rural India accounts for almost 50% of the total Indian FMCG market.

Managing the distribution network to reach millions of stores, and keep them stocked is a big challenge. Exten-sive distribution networks and logistics are key to achieving a high level of penetration in both the urban and rural markets

Customer does not have bargaining power in case of branded products, but intense competition between FMCG companies results in value for money deals for consumers. Price wars are a common phenomenon.

Marketing has a significant place in the brand building process. Competition is between local unorganized


players, MNCs and large domestic brands. Private labels offered by retailers are becoming a competition to undifferentiated and weak brands.

High investment is required to launch new products, and to set up nation-wide distribution networks. Existing companies and brands have a big advantage over new entrants.

Many product classes require very low investment in fixed assets. There is widespread use of contract manu-facturing, even by well-known brands

Since inputs are mainly agri-commodities, the suppliers are numerous and most lack scale to wield bargaining power. Companies that are integrated backwards have lower dependence on suppliers.

Low entry barriers, fiscal incentives from government and low brand awareness in rural areas have led to the mushrooming of the unorganized sector

The government has abolished licensing for almost all food and agro-processing industries except for some items like alcohol, cane sugar, hydrogenated animal fats and oils etc., and items reserved for the exclusive manufacture in the small scale industry (SSI) sector. This has resulted in a boom in the FMCG market through market expan-sion and greater product opportunities.

Trends in FMCG SectorAn average Indian spends around 40% of his income on grocery and 8% on personal care products. The large share of fast moving consumer goods (FMCG) in total individual spending along with the large population base is another factor that makes India one of the largest FMCG markets. Even on an international scale, total consumer expenditure on food in India at $120 billion is amongst the largest in the emerging markets, next only to China. However, the Indian FMCG sector is highly fragmented, volume driven and characterized by low margins.

Significant progress in literacy levels, higher government spending on welfare programs, growing support to agricultural sector, and better infrastructure and DTH and mobile connections have acted as a catalyst in bolster-ing rural demand for FMCG products. Due to increasing awareness and penetration of mass communication into rural areas there is a change in rural tastes, resulting in a huge surge in the demand or many personal use products in rural areas.

The product categories that are witnessing high growth include salty snacks, refined edible oil, healthcare prod-ucts, etc. Several measures taken by the government to support the rural population including higher minimum support prices (MSPs), loan waivers, and disbursements through the National Rural Employment Guarantee Act (NREGA) program have bolstered the purchasing power of the rural buyer.

Indian firms also have a presence across the entire value chain of the FMCG industry from supply of raw material to final processed and packaged goods, both in the personal care products and in the food processing sector. For instance, Indian firm Amul’s product portfolio includes supply of milk as well as the supply of processed dairy products like cheese and butter. This makes the firms located in India fairly cost competitive.

Penetration of FMCG ProductsPenetration level in product categories like jams, toothpaste, skin care, hair wash, etc in India is still low. The contrast is particularly striking between the rural and urban segments—the average consumption by rural households is much lower than their urban counterparts. Low penetration also implies the existence of unsaturated markets, which are likely to expand as the income levels rise. This provides an excellent opportunity for many industry players

Moreover, per capita consumption in most of the FMCG categories (including the high penetration categories) in India is low as compared to both the developed markets and other emerging economies. A rise in per capita consumption, with improvement in incomes and affordability and change in tastes and preferences, is further expected to boost FMCG demand. Growth is also likely to come from consumer “upgrading”, especially in the matured product categories.


The market for personal wash products (body soaps) is estimated to be around Rs 8,300 crore. Personal wash can be segregated into three segments: Premium, Economy and Popular. The penetration level of soaps is about 92 per cent, and products are sold in more than 5 million retail stores, out of which, 75 per cent are in the rural areas. Hindustan Unilever (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.

The size of the detergent market is estimated to be Rs 12,000 crore. This 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 detergents has been growing. However, 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.

The total skin care market is estimated to be around Rs 3,400 crore, and the market is at a primary stage in India with a penetration level of about 20 per cent. With changing lifestyles, increase in disposable incomes, greater product choice and availability, people are becoming aware about personal grooming. The major players in this segment are HUL with a market share of ~54 per cent, followed by CavinKare with a market share of ~12 per cent, and Godrej with a market share of ~3 per cent.

The hair care market in India is estimated at around Rs 3,800 crore. The hair care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. The Indian shampoo market is estimated to be around Rs 2,700 crore. It has the penetration level of only 13 per cent. Sachets make nearly 40 per cent of the total shampoo sales. The market is dominated by HUL with around ~47 per cent market share; P&G occupies second position with market share of around ~23 per cent. The market is expected to expand due to increased marketing by players and availability of shampoos in affordable sachets. Marico is the leader in Hair Oil segment with market share of ~ 33 per cent; Dabur occupies second position at ~17 per cent.

The oral care market can be segmented into toothpaste (60 per cent), toothpowder (23 per cent) and toothbrushes (17 per cent). The total toothpaste market is estimated to be around Rs 3,500 crore. The oral care market, especially toothpastes, remains under penetrated in India (penetration level ~50 per cent), with urban areas accounting for 75% of sales. 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 the toothpowders market, Colgate and Dabur are the major players. .

Typical FMCG Distribution NetworkFMCG products are typically branded and backed by skilled marketing, heavy advertising, slick packaging and strong distribution networks. Normally, they are retailed through two primary sales channels—General Trade and Modern Trade. General trade comprising of the ubiquitous kirana stores is the largest sales channel forming 95% of overall retail sales. However, growth of consumer goods retailed through modern trade channel is outpacing the growth of FMCG products in general trade. Factors such as a comfortable and modern store experience, access to a wide variety of categories and brands under a single roof and compelling value-for-money deals are attracting consumers to organized retail in a big way.

But modern trade is still an urban phenomenon in India. Product categories such as packaged rice, liquid toilet soaps, floor cleaners, breakfast cereals, air fresheners and mosquito repellent equipment have a higher penetration in modern trade channel. Modern trade is expected to gain greater importance with opening up of foreign direct investment in multi-brand retail.


Organized retail is also creating new channels for FMCG players through diverse retail formats such as depart-mental stores, hypermarkets, supermarkets and specialty stores. The current share of organized retail in the sales of FMCG products is estimated to be 4 to 5 per cent. This is expected to increase to 14 to18 per cent within a few years. Though India is one of the world’s largest producers for a number of FMCG products, its exports are a very small proportion of the overall production. Indian FMCG companies that are going global are mainly focusing on markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries because of the similar lifestyle and consumption habits.

Small Drives VolumesBy the early nineties FMCG marketers had figured out two things:• Rural markets are vital for survival since the urban markets were getting saturated• Rural markets are extremely price-sensitive

This led to a number of companies following a strategy of launching a wide range of package sizes and prices to suit the purchasing preferences of India’s varied consumer segments. Small sachets were introduced in almost all the FMCG segments from oil, shampoo, and detergents to beverages. This strategy was a success, and demand for small packs is growing. As a result, FMCG companies are increasing the production capacity and distribution reach of these packs to woo more cost-conscious consumers. Small packs are also key to inducing trial consump-tion in new product categories, and with new product launches.

For instance, after witnessing a 10% jump in the sales of its brands in economy packs, Dabur India, makers of Vatika hair oil, is increasing the production capacity for its low-unit packs by 15 to 20%. Similarly, Gujarat Co-operative Milk Marketing Federation (GCMMF), owners of the Amul brand, is increasing its production facility for economy packs (priced at Rs 5 and Rs 10) in categories such as milk, ghee and milk powder — after seeing a 15% rise in the sales of these economy packs. Nivea India, an affiliate of Beiersdorf, has recently introduced its select personal care brands in economy packs priced around Rs 20.

Industry Trends and OutlookThe FMCG sector has grown at a CAGR of 11% over the last decade. It is poised maintain this trend thanks to the large and growing young population, emergence of organized retail market, growing urbanization, increasing disposable income in the hands of people both, in rural and urban market, increase in consumption levels, better education and awareness, and changing life styles of middle income group.


Robust consumption in the rural economy is one of the key drivers of the FMCG industry. A large number of FMCG companies derive a significant proportion of their overall sales from outside the top 100 towns/cities. Despite the current slowdown, demand for premium products in the health and wellness space is rising, encour-aging companies to launch more premium products. Moreover, demand for sophisticated personal care products is also on the rise as people become beauty and health conscious.

Increasing urbanization and higher disposable incomes are encouraging many consumers to move from unbranded to branded products, bolstering growth in the FMCG market. Historically, the middle income group has been the main growth driver with mass products driving volume and value growth. The trend is changing


and there is extension of demand both for the top end (premiumization) and scalability for the bottom end (rural demand) consumers led by higher aspirations of consumers. Further, the growing influence of women in decision making is aiding FMCG growth as they now enjoy greater flexibility to make choices and demand more conve-nience products.

Low cost labor and low per capita consumption of almost all products in India, gives the country a competitive advantage as many MNC’s have established their plants in India to outsource for domestic and export markets. However, the sharp depreciation in the value of rupee, new norms of standard-size packaging, increase in raw material costs due to upward spiraling interest rates and inflation are dampners for the industry.

Consolidation: Indian FMCG companies are either increasing their focus on certain market segments, or are consolidating their existing business portfolios. This is leading to divestments, mergers and acquisitions.

Product Innovation: Most companies are formulating and launching new products, or are customizing their existing product portfolios for new consumer segments.

Lifestyle products: Lifestyle and premium range products are the new target product segment among Indian FMCG players.

Third-party manufacturing: Outsourcing the manufacturing or processing of certain products to small vendors is gaining importance, for both tax and operational reasons.

Expanding horizons: Having achieved scale, many Indian companies are exploring the business potential of overseas and under-penetrated regional markets.

Backward integration: Backward integration is becoming the preferred strategy for securing capacity and sources of supply, and increasing profit margins.

CSR & Green Initiatives: Companies are also beginning to examine the reduction of carbon footprint in opera-tions, manufacturing and logistics.

Major operating expenditures for FMCG companies are raw material costs, followed by wages and advertising expenditures. The rising costs of petrochemical inputs, transportation and distribution costs, and foreign exchange fluctuations are the biggest challenges for the industry. New regulatory norms regarding the use of chemical ingredients, packaging materials, and taxes are viewed as some of the biggest risks by companies in the sector.


Key ChallengesA plethora of rural government schemes, steep minimum support price (MSP) increases, and continuous rise in agriculture output has led to higher disposable income in rural India. This has translated into increased spending in aspirational product categories amongst rural customers. In urban areas, the growing number of organized sector jobs coupled with decent pay rises in the private and public sector undertakings has also spurred the con-sumption of health-oriented offerings, niche categories and westernized premium variants.

The FMCG industry is expected to witness a robust growth of 18 per cent over the next 4 to 5 years and emerge as the sector that will constitute the biggest component of the consumer expenditure by the end of the 12th Plan, according to an ASSOCHAM Eco Pulse study. Since FMCG products need to be sold quickly and are relatively low priced, it becomes important for the firms to generate large sales quantities so that the cumulative profit on such products can be substantial. However, the industry faces a number of challenges, including:

High inflation: The biggest challenge for companies due to inflation is both on the cost side and demand side because India is a value sensitive market. Massive consumption deceleration in urban markets is anticipated due to incessant consumer inflation and paltry income increase, since the middle class continues to remain the main growth driver

Rising cost of inputs: Commodity prices fluctuate, which make it difficult to finalize raw material prices, thus affecting the final price of the product. It is very difficult for FMCG firms to pass on the increased costs to cus-tomers without compromising sales volumes

Marketing costs: Companies are expected to incur high advertising and promotion costs on account of rising intensity of competition. MNC brands, despite being household names, continue to spend heavily on A&P to increase consumer awareness and gain market share

Private labels: Private labels serve to lower the consumer’s price points, particularly at the mass level. Conflicts of interest arise when a retail chain has its own label whose packaging looks like category leaders’ and stocks brands of other manufacturers, (in terms of display space, promotions etc)

Counterfeits and pass-offs: These products narrow the scope of FMCG products in rural and semi-urban market. The spurious pass-off products mainly affect high quality brands

Foreign exchange fluctuations: Rupee depreciation can hit margins of companies that depend on imported materials

Infrastructure bottlenecks: Power cost and availability, transportation challenges, inadequate market con-nectivity, fragmented nature of the demand, and lack of adequate storage Infrastructure are also big problems for manufacturers and distributors.

Additional reading and references on FMCG in India 1. http://www.ibef.org/industry/fmcg-presentation2. http://reports.dionglobal.in/Actionfinadmin/Reports/FDR0108201343.pdf3. http:// content.icicidirect.com/.../IDirect_FMCG_SectorUpdate_Dec2013.pdf4. http://www.livemint.com/Industry/LyNBizkuOMdmThw6iaoGbN/Five-trends-that-will-drive-FMCG-growth-in-2013.html5. http://www.tsmg.com/our-services/industry-domains/fmcg.html6. www.ffymag.com/admin/issuepdf/fmcg_july10.pdf7. www.idfc.com/pdf/consumerism.pdf

TPL Case Study FMCG

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