ANALYSIS OF MICROECONOMIC FACTORS AFFECTING THE FMCG SECTOR

Kushal Bohra C007

Prarthana Gulati C018
Atul Kedia C030
Jinal Trivedi C061




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1. Overview of the Sector .................................................................................................................. 2
2. Evolution of Indian FMCG Sector .............................................................................................. 3
2.1 Scope of the Sector ................................................................................................................ 4
2.2 Growth Prospects .................................................................................................................. 5
3. Analysis of FMCG Sector in India .............................................................................................. 6
3.1 PEST ANALYSIS FOR FMCG IN INDIA ......................................................................... 6
3.2 SWOT ANALYSIS FOR FMCG IN INDIA ....................................................................... 7
3.3 PORTERS 5 FORCES FOR FMCG IN INDIA: .............................................................. 7
4. Industry Analysis of FMCG Sector ............................................................................................. 8
4.1 Major Government Policies/Changes .................................................................................. 9
4.2 Factors Affecting the Growth .............................................................................................. 9
4.3 Growth Scenarios of FMCG sectors .................................................................................... 9
4.4 Key drivers of the FMCG Industry in India .................................................................... 11


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1. Overview of the Sector
Products which have a quick turnover, and relatively low cost are known as Fast Moving
Consumer Goods (FMCG). FMCG goods are popularly named as consumer packaged
goods. Items in this category include all consumables (other than groceries/pulses) people
buy at regular intervals. The most common in the list are toilet soaps, detergents, shampoos,
toothpaste, shaving products, shoe polish, packaged foodstuff, and household accessories and
extends to certain electronic goods. These items are meant for daily of frequent consumption
and have a high return.
FMCG products are those that get replaced within a year. These products are purchased by
the customers in small quantity as per the need of individual or family. These items are
purchased repeatedly as these are daily use products. The price or value of the products is not
very high. These products are having short life also. It may include perishable and non
perishable products, durable and non durable goods. Examples of FMCG generally include a
wide range of frequently purchased consumer products such as toiletries, soap, cosmetics,
tooth cleaning products, shaving products and detergents, as well as other non-durables such
as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include
pharmaceuticals; consumer electronics, packaged food products, soft drinks, tissue paper, and
chocolate bars. A subset of FMCGs are Fast Moving Consumer Electronics which include
innovative electronic products such as mobile phones,MP3 players, digital cameras, GPS
Systems and Laptops. These are replaced more frequently than other electronic products.
White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music
Systems, etc.

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2. Evolution of Indian FMCG Sector
In 2005, the INR 48,000-crore FMCG segment was one of the fast growing industries in
India. According to the AC Nielsen India study, the industry grew 5.3% in value between
2004 and 2005. The Indian FMCG sector is the fourth largest in the economy and has a
market size of US$13.1 billion. Well-established distribution networks, as well as intense
competition between the organized and unorganized segments are the characteristics of this
sector. FMCG in India has a strong and competitive MNC presence across the entire value
chain. The middle class and the rural segments of the Indian population are the most
promising market for FMCG, and give brand makers the opportunity to convert them to
branded products. Most of the product categories like jams, toothpaste, skin care, shampoos
etc. in India, have low per capita consumption as well as low penetration level, but the
potential for growth is huge. The Indian Economy is surging ahead by leaps and bounds,
keeping pace with rapid urbanization, increased literacy levels, and rising per capita income.
The big firms are growing bigger and small-time companies are catching up as well.
According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by
MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27
of these are owned by Hindustan Lever. Pepsi is at number three followed by ThumsUp.
Britannia takes the fifth place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle
(9). These are figures the soft drink and cigarette companies have always shied away from
revealing. Personal care, cigarettes, and soft drinks are the three biggest categories in FMCG.
Between them, they account for 35 of the top 100 brands.

Top 10 Companies in FMCG Sector
1. Hindustan Unilever Ltd.
2. ITC (Indian Tobacco Company)
3. Nestl 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

The personal care category has the largest number of brands i.e. 21, inclusive of Lux,
Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HLL brands in the 21,
aggregating INR 3,799 crore or 54% of the personal care category. Cigarettes account for
17% of the top 100FMCG sales, and just below the personal care category. ITC alone
accounts for 60% volume market share and 70% by value of all filter cigarettes in India. The
foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC,
Godrej, and others. This category has 18 major brands, aggregating INR 4,637 crore. Nestle
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and Amul slug it out in the powders segment. The food category has also seen innovations
like softies in ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both
GCMMF and Godrej Pillsbury. This category seems to have faster development than the
stagnating personal care category. Amul, India's largest foods company has a good presence
in the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also
ranks in the top 100FMCG brands, dominates the biscuits category and has launched a series
of products at various prices. In the household care category (like mosquito repellents),
Godrej and Reckitt are two players. Good knight from Godrej is worth above INR 217 crore,
followed by Reckitt's Mortein at INR 149 crore. In the shampoo category, HLL's Clinic and
Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also
trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk. Dabur is
among the top five FMCG companies in India and is a herbal specialist. With a turnover of
INR 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla,
Dabur Chyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable
presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific,
Caribbean, Africa and Europe. Asian Paints is India's largest paint company, with a turnover
of INR22.6billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian
Paints among the 200 Best Small Companies in the World Cadbury India is the market leader
in the chocolate confectionery market with a 70% market share and is ranked number two in
the total food drinks market. Its popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs,
and Gems. The INR 15.6 billion (USD 380 Million) Marico is a leading Indian group in
consumer products and services in the Global Beauty and Wellness space. There is a huge
growth potential for all the FMCG companies as the per capita consumption of almost all
products in the country is amongst the lowest in the world. Again the demand or prospect
could be increased further if these companies can change the consumer's mindset and offer
new generation products. Earlier, consumers were using non-branded apparel, but today,
clothes of different brands are available and the same consumers are willing to pay more.
2.1 Scope of the Sector
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 characterizes the sector. That will translate into an
annual growth of 10% over a 5-year period. Hair care, household care, male grooming,
female hygiene, and the chocolates and confectionery categories are estimated to be the
fastest growing segments, says an HSBC report. Though the sector witnessed a slower
growth in 2002-2004, it has been able to make a fine recovery since then. 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.
FMCG in numbers:
The Indian FMCG industry represents nearly 2.5% of the countrys GDP.
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The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the
last 5 years driven by rising income levels, increasing urbanisation, strong rural
demand and favourable demographic trends.
The sector accounted for 1.9% of the nations total FDI inflows in April 2000-
September 2012. Cumulative FDI inflows into India from April 2000 to April 2013 in
the food processing sector stood at `9,000.3 crore, accounting for 0.96% of overall
FDI inflows while the soaps, cosmetics and toiletries, accounting for 0.32% of overall
FDI at `3,115.5 crore.
Rural India accounts for more than 700 mn consumers or 70% of the Indian
population and accounts for 50% of the total FMCG market.


2.2 Growth Prospects
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. Better
infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit
from growing demand in the market. Because of the low per capita consumption for almost
all the products in the country, FMCG companies have immense possibilities for growth. And
if the companies are able to change the mindset of the consumers, i.e. if they are able to take
the consumers to branded products and offer new generation products, they would be able to
generate higher growth in the near future. It is expected that the rural income will rise in
2007, boosting purchasing power in the countryside. However, the demand in urban areas
would be the key growth driver over the long term. Also, increase in the urban population,
along with increase in income levels and the availability of new categories, would help the
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urban areas maintain their position in terms of consumption. At present, urban India accounts
for 66% of total FMCG consumption, with rural India accounting for the remaining 34%.
However, rural India accounts for more than 40% consumption in major FMCG categories
such as personal care, fabric care, and hot beverages. In urban areas, home and personal care
category, including skin care will keep growing at relatively attractive rates.

3. Analysis of FMCG Sector in India

The analysis of the FMCG sector of India is carried out on the basis of following:

3.1 PEST ANALYSIS FOR FMCG IN INDIA

Pest analysis of FMCG sector in India is carried out on political, economical, social and
technological aspects. It is explained below:

Political:

Tax exemption in sales and excise duty for small scale industries.
Transportation and infrastructure development in rural areas helps in distribution
network.
Restrictions in import policies.
Help for agricultural sector.
Economical:

The GDP rate of Indian economy is increasing every year. It is expected in future it
would be better only in comparison with other countries.
Inflation rate is increasing across the world and India is also no exception. The
Government and Reserve Bank of India both are trying to control the inflation rate
with the help of different measures.
Increase in disposable income has taken place due to higher GDP rate. The per capita
income is increasing so the customers are having more income to spent for various
reasons.
The FMCG sector is the 4
th
largest sector of Indian economy with market size of more
than INR 60,000 crore. The Indian Territory is very large and number of customers is
also very high.

Social:

The Indian culture, social & life styles are changing drastically. The total population
is nearly 115 crores and population includes rich, poor, middle class, male, female,
located in rural, urban and sub urban areas, different level of education etc.

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Technology:

Technology has been simplified and available in the industry. Where technology is
not available then it is brought from foreign countries to meet FMCG sector
requirements.
Foreign players help in high technological development. With research and
development facilities the new technologies are developed alone or with the help of
foreign players.


3.2 SWOT ANALYSIS FOR FMCG IN INDIA

SWOT analysis of this sector is carried as follows:

Strengths:
Well-established distribution network extending to rural areas.
Strong brands in the FMCG sector.
Low cost operations

Weaknesses:
Low export levels.
Small scale sector reservations limit ability to invest in technology and achieve
economies of scale.
Several "me-too products.

Opportunities:
Large domestic market.
Export potential
Increasing income levels will result in faster revenue growth.

Threats:
Imports
Tax and regulatory structure
Slowdown in rural demand


3.3 PORTERS 5 FORCES FOR FMCG IN INDIA:

Supply: Abundant supply through a distribution network of over 8 m stores across
the country. Distribution networks are being beefed up to penetrate the
rural areas.
Demand: Being items of daily consumption, demand is least impacted by economic
slowdown.
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Barriers to
entry:
Huge investments in setting up distribution networks and promoting
brands and competition from established companies.
Bargaining power
of suppliers:
Inputs being mostly agri-commodities, the suppliers are numerous and
lack scale to wield bargaining power. Companies like ITC that are
integrated backwards have lower dependence on suppliers.
Bargaining power
of customers:
Customer does not have bargaining power in case of branded products
but intense competition within the FMCG companies results in value for
money deals for consumers (e.g. buy one, get one free concept).
Competition: Competition is faced from domestic unorganized players and established
MNC's. Price wars are a common phenomenon. Private labels offered by
retailers at a discount to mainframe brands act as competition to
undifferentiated and weak brands.

4. Industry Analysis of FMCG Sector
(i) The FMCG sector in India is expected grow at a compound annual growth rate at 9% to a
size of INR 1, 43,000 crs by 2015 from INR 93000 crs at present.
(ii) The industry is growing double digit growth in last 2 yrs.
(iii) Annual revenues of us $14.74 billion.
(iv) Market growth rate Rural -40%, urban -25%


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4.1 Major Government Policies/Changes
In the context of the positives and the negatives, investing in FMCG stocks is a tricky
prospect. Given this, one has to be active with FMCG stocks and should book profits as soon
as the targeted returns are reached. Unlike earlier times, nowadays, one cannot afford to buy
an FMCG stock and forget about it for a long time. It is unlikely that the government's
initiatives will boost the sector overnight. The ongoing price wars mean that company
earnings will continue to be volatile. Hence, in the short term, one should look at individual
companies' prospects rather than the overall sector's prospects. This means that it is better to
leave mutual funds that concentrate on FMCG companies and instead buy shares depending
upon the company. It is not necessary that an MNC will be better than an Indian company.
One should look at a company's profile and analyze its prospects before investing in its
shares. It is not that you will lose out by buying FMCG stocks. But, in buying an FMCG
stock, it will be ideal to cash in during short bursts of activity.
4.2 Factors Affecting the Growth

Over the years, demand for consumer durables has increased with rising income levels,
double income with no kids (DINK) families, changing lifestyles, availability of credit,
increasing consumer awareness and introduction of new models. Products like air
conditioners are no longer perceived as luxury products. The biggest attraction for MNCs is
the growing Indian middle class. This market is characterized with low penetration levels.
MNCs hold an edge over their Indian counterparts in terms of superior technology combined
with a steady flow of capital, while domestic companies compete on the basis of their well-
acknowledged brands, an extensive distribution network and an insight in local market
conditions. With companies opting for information technology a reduction in inventory levels
and an improvement in the working capital cycle are likely. This will benefit companies by
controlling costs and improving margins.

4.3 Growth Scenarios of FMCG sectors

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The trends seen in the FMCG sector over the years are likely to accelerate in the coming
years, primarily due to the following factors:
Vast rural market:
o The rural consumer market is expected to touch USD100 billion by 2025.
o Growth will also be driven by new segments such as families earning less than
`6000 per month and low-income value seekers visiting modern trade outlets
for the first time. These two segments are expected to add around $3billion to
the FMCG sector by 2015, as per Nielsen reports.
Innovative products:
o The Indian consumers have always welcomed innovation in products. Firms
should launch more products and widen their portfolio as they get into new
segments and categories.
Market related trends:
o The key trends within this segment will be the viability of sub-markets in
India, growing organized retail and the increasing globalization of FMCG
players.
Environment related trends:
o Changing government policies, growing importance of sustainability, evolving
media platforms and technology will compel FMCG players to adopt business
strategies which keep the interests of communities and the environment in
mind for inclusive development.
Premium products/Premiumization:
o Research indicates consumers are willing to adopt a new premium category
even at a higher price, in the space of convenience, health and wellness.
o With rise in disposable incomes, mid- and high-income consumers in urban
areas have shifted their purchase trend from essential to premium products.
Sourcing base:
o FMCG players can leverage India as a strategic sourcing hub for cost-
competitive product development and manufacturing to cater to international
markets.
E-commerce:
o According to a study by Assocham, the Indian online retail sector is expected
to grow to Rs 7,000 crore by 2015.
o The e-commerce market in 2012 has grown 45-50%. This is an important
trend and can have significant impact on the way consumers buy and
organized retail evolves in the country.
o ITC: shopping.kitchensofindia.com
o Marico has started sales through Flipkart and Amazon
o Dabur has started Daburveda.com

Apart from the trend related factors, many external factors like per capita income,
population growth, government policies also make a huge impact on this sector.



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4.4 Key drivers of the FMCG Industry in India




Companies should focus on deepening their market penetration in categories which
have a poor market penetration. The following graph shows the penetration of various
categories and we can clearly identify the categories which need attention.









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Sources:

1. http://www.livemint.com/Industry/LyNBizkuOMdmThw6iaoGbN/Five-trends-
that-will-drive-FMCG-growth-in-2013.html
2. http://www.strategyand.pwc.com/media/file/CII_FMCG-Roadmap-to-2020.pdf
3. http://www.ffymag.com/admin/issuepdf/FMCG_FFYFeb13.pdf
4. http://www.afaqs.com/news/story/41627_Now-FMCG-majors-push-their-
products-online
5. IBEF sector report on FMCG
6. http://www.strategyand.pwc.com/media/file/CII_FMCG-Roadmap-to-2020.pdf
7. IBEF reports