Food Supply Chain in India

Food Supply Chain in India
In India, about 60 percent of food quality is lost in the supply chain from the farm to the final consumer. Consumers
actually end up paying approximately about 35 percent more than what they could be paying if the supply chain was
improved, because of wastage as well as multiple margins in the current supply structure. The farmer in India gets
around 30 percent of what the consumer pays at the retail store. Compare this with the situation obtaining in the USA,
where farmers can receive up to 70 percent of the final retail price and wastage levels are as low as 4 to 6 percent. One
can easily understand the benefits that could be generated from emulating those practices and tapping that expertise for
the supply chain in India.
As supply chain Management involves procuring the right inputs (raw materials, components and capital equipments);
converting them efficiently into finished products and dispatching them to the final destinations; there is a need to study
as to how the company's suppliers obtain their inputs. The supply chain perspective can help the retailers identify
superior suppliers and distributors and help them improve productivity, which ultimately brings down the customers
costs. At the same time, Market logistics helps planning the infrastructure to meet demand, then implementing and
controlling the physical flows of material and final goods from point of origin to points of use, to meet customer
requirements at a profit.
Till now most retailers in India have invested majorly into the front end, but relatively little on the back end and supply
chain. Even in countries like the USA, Germany and England, where organized retail is highly developed; supply chain
efficiency is a major concern. The nature of retail sector in India is different from other countries around the world. The
organized retail sector in India is highly fragmented and there are huge inefficiencies in the supply chain.
The most important part of retailing business is to find a balance between investing in front-end and back-end
operations. The channel dynamics is going to change over next couple of years as the retailers start growing in size and
their bargaining power is likely to increase. Probably that would bring some kind of mutual understanding between
manufactures and retailers to develop strong supply chain network. In such a scenario, both the existing operators and
new operators must put collaborative efforts to phase out inefficiencies in the supply chain network.
Now, let us try to find out what efforts are being taken up by the big retailers in India like Future Group with retail
stores like Big Bazaar and Pantaloons, Reliance Retail and Wal-Mart & Bharti to improve the efficiency and
effectiveness of supply chain and logistics. We will also try to find out the changed role of Agriculture Produce
Marketing Cooperatives and third party sourcing firms.
Future Group
Future Group is the country's leading retail business group that caters to the entire Indian consumption space. It
operates through six verticals: Future Retail (encompassing all lines of retail business), Future Capital (financial
products and services), Future Brands (all brands owned or managed by group companies), Future Space (management
of retail real estate), Future Logistics (management of supply chain and distribution) and Future Media (development
and management of retail media spaces).
The group's flagship company, Pantaloon Retail (India) Limited operates over 5 million square feet through 450 stores
in 40 cities. Some of its leading retail formats include, Pantaloons, Big Bazaar, Central, Food Bazaar, Home Town,
EZone, Depot, Health & Beauty Malls and online retail format.
The group's joint venture partners include Italian insurance major, Generali, French retailer ETAM group, US-based
stationary products retailer, Staples and UK-based Lee Cooper and India-based Talwalkar's, Blue Foods and Liberty
Shoes.
Future Group is working on the vendor network as well as the logistics network. The company has identified up to 40
anchor vendors, each with turnovers of US$45 million, to achieve economies of scale. The group is also keen to ensure
that its smaller vendors are able to reach turnovers of around US$1 million and a growth rate of 40% annually, to be
able to pass on the benefits of scales. The company is also working towards bringing its 1,200 vendors online, like Wal-
Mart.
Going further in this direction, the Future Group has also launched Future Logistics initially aimed at handling the
supply chain logistics of the group. However, sensing immense opportunity in this area, the company is now looking to
offer its services to its 1000-odd vendors, spread across consumer related goods, to reach a targeted turnover of about
Rs.700 crore by 2010.The thrust at present will be on modes of surface transport like roads and rail only. However, at a
later stage, sea and air modes might also be considered as per the requirement, said sources.
In India, Future group derives significant economies of scale in managing their supply chain. With more than 170000
products, the company maintains a strong supplier relationship in a partnership mode, avoiding the exploitative supplier
– buyer transactional philosophy. The IT enabled back-end operations and supply chain management increases the
reliability and efficiency of the business.
As part of the operation, Future Group is also undertaking to reduce its warehousing costs through a consolidation
process. In a country like India, where most retail stores are located in the heart of the city—where rents are high and
storage space is scarce—supply chain management has even more serious business implications. Future Logistics now
handles two-and-a-half million SKUs (or stock keeping units) a day across the Future Group's various retail formats
around the country. By 2010, this number is expected to increase to more than 30 million SKUs a day. Even with 98%
accuracy, some 600,000 pieces will not be delivered correctly, resulting in an estimated sales loss of more than Rs 4
crore a day.
The biggest driver in consumer logistics is going to be zero defect in managing the supply chain. While infrastructure,
technology, automation, processes and people will all play an important role, zero defect can only be achieved through
vertical integration across the entire supply chain—from raw material supply, production, wholesale and retail. The
different parts of the supply chain will no longer be able to work in silos as they do today.
Reliance Fresh
Reliance Retail is also going to open one store for every 3,000 families within a radius of 2 km across all locations by
2011. The company is competing directly with the large number of traditional local provision stores. Reliance Retail is
either going to set up new stores in the identified areas or take over existing stores. The company has already done that
in Mumbai and other cities.
Of the four million sq ft of retail space to be created under the "Reliance Fresh" brand (for groceries), one million will
be through acquisitions. The retailer is also moving into laundry, personal care and apparel product lines, in which it
plans to launch private labels. Reliance is planning to roll out its specialty format stores this year, beginning with
consumer durables, for which it has struck sourcing deals with companies in Hong Kong, the Chinese mainland and
with Videocon in India.
To strengthen its links with farmers, the company is setting up integrated agri-retail business centres, which include
three processing and distribution centres, 51 retail outlets for farmers and 75 rural business hubs, all with an investment
of US$445 million. Many companies, looking at the retail boom in food and grocery, are setting up ventures to help
retailers source these goods.
Reliance Logistics Ltd part of Reliance Industries Ltd, currently handles Reliance Retail's logistics services.
Wal-Mart and Bharti
The success of Wal-Mart is well known all across the world. One of the major factors behind their success is the right
implementation of supply and logistics management. Now the same Supply Chain and Logistics Management take a
front seat here and that's why Wal-Mart is coming to India in a joint venture with Bharti Group. Here, Wal-Mart is
going to manage the back end operation, while Bharti will manage the front end operations.
Wal-Mart has also stated that it would replicate its global supply chain model in India, while taking into account the
unique features of the Indian market. They are also going to emphasise on local sourcing of goods. Besides sourcing
locally, Wal-Mart, through its international operations is also in a position to source globally. The company is set to roll
out its first set of stores by the first quarter of 2008, in cities that have a population of one million. Wal-Mart claims it
will take 35% of the Indian retail market by 2015.
It is the sheer importance of the logistics management that Wal-Mart's fully-owned logistics arm Gazeley has already
confirmed its India foray and is going to look after the Wal-Mart and Bharti retail venture. They are closely studying
various logistics providers like Radhakrishnan Foods, before they finally closes on its India model. Again, Bharti
Enterprises is directly negotiating with the rail authorities instead of negotiating with a logistics provider.
Wal-Mart and Bharti FieldFresh
Just like Reliance Fresh, Bharti Group in a joint venture with NM Rothschild is launching Field Fresh to provide
premium quality fresh produce to markets worldwide. It has over 5,000 acres of land under cultivation all over the
country producing many varieties of fruits and vegetables and is planning to double land under cultivation by the end of
2007.
The company is to supply fresh produce to the Bharti-Wal-Mart venture. To ensure best qualities and varieties, Field
Fresh has engaged ACM China, an industry leader in building greenhouses, to set up state-of-the-art glass-based
greenhouses at the Field Fresh Agri Centre of Excellence in the Punjab. Field Fresh is also planning investments to the
tune of US$220 million in the backend, including investments in cold chains and warehouses. Bharti's Field Fresh will
enter this segment within the next three months. A number of companies are also venturing into this segment to service
the backend needs of retailers.
Agriculture Produce Marketing Cooperatives in India
The Indian Retail Revolution is also changing the way farm produce was marketed in India. Now even the farmers are
getting benefited due to less or no middlemen involved in the selling process. Till now, the Indian fresh produce
marketing was controlled by state-owned Agriculture Produce Marketing Cooperatives (APMCs). Now it is also
changing with reforms in the APMC Act in many states. This has opened up the space for private players, and all major
retailers are setting up private 'mandis' (marketplaces), from where they can directly source their requirements of fresh
foods. Almost everyone in the retail sector like Reliance, Future Group, Bharti – Wal-Mart, Subhiksha are setting their
bases at the places of farm produce to source vegetable, fruits and other farm products.
Sourcing Firms
Besides the presence of retailers in the countryside for farm produce sourcing, now there are also few players; who are
helping various retail chains for their sourcing requirements. For instance, DCM Shriram Consolidated Ltd (DSCL) is
in the process of tying up with them to source fruits and vegetables from farmers and supply to the retail chains. DSCL
is already doing this for Future Group's Food Bazaar, south based Subhiksha and RPG's Spencer. The new tie-ups
would help the company to operate on economies of scale, and to operate all over the country.
Ordering Process :-
 Team Members to maintain the log book for their section (as given in 'order log
book' sheet)
 Stockist to check the Ware house quantity.
 Team Leaders to see the requirement for the stock & raise a purchase quantity &
fill in the log Book.TL will place the order in line with the MBQ fixed.
 Vendor wise log file to be passed to cataloguers for generating the final PO
 Cataloguers to sign the register while receiving the ordering log book & while
giving back to TL /DM.
 DM authorizes the final PO
 For the stock lifting of promotional offer ASM to be involved.
A big challenge in retail organizations to know supply chain management. Often, the
functions merge with purchasing and inventory management.
So, as a purchasing professional, you must understand inventory management principles
to remain valuable.
* First, you must know how much inventory to have on hand to ensure continuity of
supply in the event of an uncharacteristic increase in either demand and/or lead time. This
quantity of inventory is called the safety stock. There is no universally used formula for
determining safety stock quantity, but Purchase Tips suggested a risk adverse calculation.
* Second, you must know when to reorder materials for inventory. Generally, this point in
time is determined when the quantity of materials in stock decreases to a certain level,
called the reorder point. The reorder point is determined by the formula:
ROP = SSQ + (QUD x ALT)

Where, ROP = Reorder Point
SSQ = Safety Stock Quantity
QUD = Quantity Used Daily
ALT = Average Lead Time (in days)
Third, you must know how much to order. A complex mathematical equation determines
the Economic Order Quantity, or EOQ. The equation recognizes the tug of war between
acquisition costs and inventory carrying costs: when you order bigger quantities less
frequently, your aggregate acquisition costs are low but your inventory costs are high due
to higher inventory levels. Conversely, when you order smaller quantities more often,
your inventory costs are low but your acquisition costs are higher because you are
expending more resources on ordering. The EOQ is the order quantity that minimizes the
sum of these two costs.
Here the EOQ formula:
Where:
EOQ = Economic Order Quantity
ACPO = Acquisition Costs Per Order
AUU = Annual Usage in Units
UC = Unit Cost
CCP = Carrying Cost Percentage
Example
So, if you know that it costs you 150 Rs. in overhead per order, you use 5,000 widgets a year,
you pay 200 Rs per widget, and your Finance Department tells you that annual carrying costs
are equal to 20% of the value of the goods in stock, you should order...
What is the value of the marginal revenue when total revenue increasing when revenue
totals is maximum when total revenue decrease?
Marginal revenue is the amount of revenue which comes from every increase of unit
sales. Take an example. 5 mangoes sold at 60 Rs. 6 mangos sold at Rs 70. Thus the
marginal revenue for 6th mango is 10/- Rs .
Formula of marginal revenue = total sales value / no of units (-) total sales value / no
of units (after adding the units)
4
Food & Groceries to drive topline growth…
The entire retail industry can be divided into two segments -
Value retailing, which is typically a
low margin-high volume business (primarily food and groceries)
and Lifestyle retailing, a high
margin-low volume business (primarily apparel, footwear, etc.).
Pantaloon is currently the only
listed player in the retail industry that caters
significantly to both the Value and Lifestyle business
segments. Despite being a low margin business, Value
retailing has been able to attract much greater customer
traffic at retail malls and has helped retail companies,
such as Pantaloon, to record a stupendous topline growth
over the last few years. For Pantaloon, the contribution
of the Value retailing business rose from 52% of the
topline in Q1 FY05 (quarter ending Sep’04) to 72% in
Q1 FY07 (quarter ending Sep’06).
New entrants in the Indian retail industry, such as Reliance and the
upcoming Bharti-Wal Mart, are
also aiming to tap the Value-retailing segment in a big way and expect
food and groceries to
contribute around 40% to the topline. Both Reliance and Bharti-Wal Mart
have already taken
initiatives for regular supply of groceries and food
items and are in the process of entering into
agreements with big farmers for direct procurement of
their food production at a price that is slightly higher
than the prevailing market price. Such agreements
between farmers and retailers will create a win-win
situation for both the parties, as the former will obtain
a better price for their production, while the latter will
be able to attract increased customers by providing
low cost products. The only losers will be the
intermediaries.
Margin pressure to continue into the future…
A higher contribution from the low margin
Value retailing segment will maintain the
pressure on the margins of retailers in the
coming years. Moreover, higher operating
expenses, primarily employee cost, lease
rentals and selling and distribution expenses
will further increase the pressure on
margins in the coming years. The rise in
employee cost is primarily due to shortage
of talented and skilled manpower in the
industry, which is typical of a fast growth
industry. Moreover with an increase in the
number of retail players in the domestic
industry, both the existing as well as the
Despite being a low margin business,
Value retailing has been able to
attract much greater customer traffic
at retail malls and has helped retail
companies, such as Pantaloon, to
record a stupendous topline growth
over the last few years
Both Reliance and Bharti-Wal Mart
have already taken initiatives for
regular supply of groceries and food
items and are in the process of entering
into agreements with big farmers for
direct procurement of their food
production at a price that is slightly
higher than the prevailing market price
A higher contribution from the low margin Value
retailing segment will maintain the pressure on
the margins of retailers in the coming years.
Moreover, higher operating expenses, primarily
employee cost, lease rentals and selling and
distribution expenses will further increase the
pressure on margins in the coming years…
… with an increase in the number of retail players
in the domestic industry, both the existing as well
as the new entrants will be forced to incur higher
selling and distribution cost towards brand
promotion and efficient sourcing of goods
FIRST GLOBAL www.firstglobal.in
India Research
EBIDTA Margin (%) trend
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
Q1FY05 Q2FY05 Q3FY05 Q4FY05 Q1FY06 Q2FY06 Q3FY06 Q4FY06 Q1FY07 Q2FY07
Shopper's Stop Pantaloon Trent
new entrants will be forced to incur higher selling and distribution cost
towards brand promotion and
efficient sourcing of goods. The fact that the market is unlikely to
grow fast enough to absorb the
investments being made in the industry (see “The First Global’s
Series on the Indian Retail
Sector”, Part-I) only means greater competition to get the
consumer’s attention and share of
wallet.
Source: Company Financials, First Global
Even historically, such a rise in operating expenses has kept margins
under pressure and we believe
that a further rise is inevitable, which will therefore, mean a
continued margin squeeze.. We believe that margin pressure
will be common feature for all the industry players, as players
in the Lifestyle segment, such as Shopper’s Stop and Trent,
who have minimum presence in the Value retailing segment,
will also face the problem of high employee cost and selling
& distribution cost, as well as competition from both nationwide,
as well as more regional chains.
Even historically, such a rise in
operating expenses has kept
margins under pressure and we
believe that a further rise is
inevitable
9
companies ahead…
Till now, the big FMCG giants and consumer durable companies had much
greater bargaining
power, which provided them enough muscle to arm-twist the small
unorganised retailers. However,
with the conversion of unorganised retail to
organized retail, several large organized retail
players will emerge, which will lead to a decline in
the bargaining power of the former and may have
an adverse impact on their margins and/or working
capital. This is something, which is already visible
in developed economies.
The success of both organized retail companies as
well as the FMCG/Consumer durables company
are complementary to each other. For instance,
both Reliance and HLL are complementary for
each other’s success, since a Reliance store
without any HLL product may not be able to attract much customers and
similarly HLL may miss an
opportunity if its products are not available in a Reliance store, especially
considering its fast-pace
expansion plan. We believe that since the FMCG/Consumer durable
companies will not be able to
With the conversion of unorganised
retail to organized retail, several large
organized retail players will emerge,
which will lead to a decline in the
bargaining power of the former and
may have an adverse impact on their
margins and/or working capital. This is
something, which is already visible in
developed economies
FIRST GLOBAL www.firstglobal.in
India Research
enjoy the same high bargaining power with organized retailers, as earlier
with the unorganised
(primarily Kirana stores) retail players, they will definitely face margin
pressure in the coming years.
The extent of such margin pressure will depend upon the bargaining
power of both organized retail
players as well as the FMCG/Consumer durables companies, since both
are complementary to each
other. The more likely impact will be on working capital
management, where the negative working
capital historically enjoyed by major FMCG companies, which
could arm-twist their distributors
to pay cash in advance, may be a thing of the past.
for Integrated Learning in Management, New Delhi.
Dabur India—Working Capital and Cost Management
Narender L. Ahuja
Sweta Gupta
After running as a family business for over 100 years, when in late 1990s, the
management of the Dabur
was handed over to a team of professional managers, the new management faced a
gigantic task of improving
performance in several critical areas. In particular, working capital and cost management
required urgent
attention as the company’s performance in these areas had been far from satisfactory.
The then prevailing
current ratio of 3:2 and quick ratio of 2:4 were considered too high and indicative of
heavy unnecessary
investments in working capital that would have a negative effect on company’s
profitability.
Efforts to improve the working capital efficiency were met with stiff resistance from
various quarters,
but finally yielded results. The case study discusses the measures taken to improve the
working capital and
cost management performance, and how with concerted efforts the management turned
around a highly inefficient
working capital management into one of the most efficient in the FMCG sector of the
Indian industry.
In fact, the company seemed to have taken the matter to the other extreme of negative
working capital, with
the current ratio declining to 0:8 and the quick ratio to just 0.4 in 2004–05.
In 2005–06 as the company was ready to launch itself into the next phase of fast growth,
several critical
issues related to the liquidity and solvency of the company confronted the management
which are also discussed
in the case study.
company’s staff canteen. Bo (nick named
for Bose) had spent the morning studying
the company’s balance sheets for the years
2003–04 and 2004–05 and was surprised to
see that the company’s current liabilities exceeded
its current assets. He remembered
reading in his textbooks that such a situation
GLOBAL BUSINESS REVIEW, 8:2 (2007): 335–350
SAGE Publications Los Angeles/London/New Delhi/Singapore
DOI: 10.1177/097215090700800210
by on November 20, 2008 http://gbr.sagepub.com Downloaded from
336 _ Narender L. Ahuja and Sweta Gupta
Global Business Review, 8:2 (2007): 335–350
indicated that the company could face difficulties
in meeting its short-term liabilities.
‘I don’t know about that’, Sharad replied,
‘but I think it is a highly profitable company’.
‘Sure, no problem with the company’s profitability.
In fact the net profit in 2004–05
jumped by as much as 46 per cent to Rs 148
crore from Rs 101 crore last year’.
‘Wow, that’s a lot of increase in one year,’
Sharad said, ‘in fact I am told that the company
has an impressive market share in its
product line and is the fourth largest FMCG
company in India. But if the company is
making high profits and has a good market
share, then where is the problem?’
Bo was ready with his reply, ‘The way
I understand, that could be a common trap
for the profitable but fast growing companies.
Liquidity and profitability are two
separate issues and it is naïve to assume that
a profitable company would necessarily be
liquid too. See, what happens is that in order
to provide finance for expansion and diversification
projects, a company could cut down
on inventories, reduce the credit period to
customers while at the same time seek extended
credit facilities from its suppliers of
raw materials, other goods and services.
Also, it tries to manage with nil or as little cash
in hand as possible. As a result, the current
assets represented by inventories, debtors
and cash would be reduced and current
liabilities represented by creditors would
increase, culminating in a situation when the
company might not have enough current
assets to pay for its current liabilities if all
creditors wanted them to be settled at once,
what to talk about leaving some surplus to
continue with its normal business operations’.
Bo said emphatically.
Dabur India’s corporate office was housed
in a beautifully landscaped, imposing six
storied glass building set on several acres of
prime land at Kaushambi adjacent to New
Delhi. ‘Well, if the company can make its
working capital more efficient, I don’t see
anybody should have a problem with that.
But don’t forget we have an orientation meeting
with the finance department in a little
while from now’.
Bo was too engrossed with his own
thoughts to be affected by such interruption,
and continued, ‘The traditional wisdom of
having a positive networking capital means
that at least some part of the working capital
finance should come from the company’s
long term sources so that at any time, even if
the company has to settle all its current liabilities
at once, it would still be left with some
minimum current assets with which it could
continue to do its normal business. In technical
terms, they say a company needs some
permanent working capital and a fluctuating
working capital. From what I have read,
ideally the permanent working capital and
maybe some part of the fluctuating working
capital also should be financed out of the
company’s long-term sources in order to ensure
good liquidity and avoid the threat to
its solvency’.
Sharad looked at his watch, ‘My friend,
times are changing. Reduction in inventory
and debtors could as well be a management
strategy. The Japanese have shown the world
how to manage with zero inventories. As far
as debtors are concerned, when a firm can
sell on cash or near cash terms, why should
it sell on credit just to make the balance sheet
fit in to your traditional wisdom? Modern
Dabur India—Working Capital and Cost Management _ 337
enterprises have to be efficient, lean and
mean, if we could put it that way, to remain
competitive’.
Bo did not like this argument and said,
‘You don’t get the point, do you? Once a company
defaults on payment of any of its current
liabilities, the word spreads like wild fire
and affects the company’s image and credit
rating. With lower credit rating, not many
lenders would come forward if it wanted to
borrow more, and even if they do, it would
cost the company dearer. All this might just
start a roller coaster the company might not
have bargained for’.
Sharad did not like Bo’s habit of lecturing,
and firmly said, ‘Bo, come out of the textbooks.
I think there’s more to liquidity than
just the ratio of current assets and current liabilities’.
Then getting up he said, ‘Any ways,
let’s not be late for the orientation meeting.
We can continue with our discussion later on’.
The stage was already set for the orientation
meeting by the time Bo and Sharad
walked in. The meeting had a touch of professional
perfection and was more detailed
and thorough than they had anticipated.
Mr D.K. Chhabra, Additional GM—Financial
Planning, made an impressive PowerPoint
presentation and dealt with many aspects including
the company’s history, handing over
of the management to professional team, current
challenges and future strategy. Some
PowerPoint slides are reproduced in the
annexure.
The Company
The story of Dabur began with a visionary
endeavor by Dr S.K. Burman to provide
effective and affordable natural cures for the
killer diseases of those days like cholera,
malaria and plague for ordinary people in
far-flung villages in Bengal. Soon ‘Daktar’
(Doctor) Burman became popular for his
effective cures, and that is how his venture
Dabur got its name—derived from the
Devanagri rendition of Daktar Burman.
Dr. Burman set up Dabur in 1884 to produce
and dispense Ayurvedic medicines, with the
vision of good health for all.
More than a century later, by 1990s Dabur
had grown manifold. Over the years, the
family has understood the need for incorporating
a professional management team that
would be able to launch Dabur onto a high
growth path in the emerging competitive
environment. Therefore, in 1998, the Burman
family started handing over the management
of the company to professionals and downscaled
its direct involvement in day-to-day
operations.
In 2003, with the approval of the Delhi High
Court, the company demerged its pharmaceutical
business to a new company, Dabur
Pharma Limited, to ‘unlock value in both
pharma & FMCG business’. As a result, the
entire pharma business was transferred to the
said company.
By 2005, Dabur India had emerged as a
leading nature-based health and family care
products company with eight manufacturing
units, 5,000 distributors and over 1.5 million
retail outlets spread all over India and
abroad. Dabur crossed a turnover of Rs 1, 000
crores in year 2000–01, and further Rs 1,300
crore in 2004–05; thereby establishing its market
leadership in its line of activity. Its main
product lines include:
• Hair-care: Vatika, Dabur Amla Hair Oil
• Health supplements: Glocose-D, Dabur
Honey, Chyawanprash, Real
• Digestives and confectionaries: Hajmola,
Anardana Churan
• Oral care: Dabur Lal Dant Manjan,
Dabur Red Toothpaste
• Baby and skin care: Dabur Tel, Gulabari
The New Management
With the professional management team
taking over in 1998, there was a significant
change in the focus, approach and strategy
of managing the company. Earlier, the company
used to focus mainly on bottomline
growth, that is, on improving the profits,
while the new management stressed on
improving efficiency and performance in all
areas. With the help of management consultants
from Mckinsey, the company changed
its organizational structure for better responsibility
accounting. Various departments
were introduced/rationalized including the
supply-chain, sales and marketing, purchase/
procurement etc and their functions were
clearly defined. The planning and budgeting
activity was strengthened, performance oriented
incentives were put in place and the
finance department was made the custodian
of all MIS. The finance department instituted
a system of regular comparative evaluation
of the company’s performance vis-à-vis other
FMCG competitors using detailed financial
ratios analysis; this aspect was somehow not
given due importance in the earlier management
regime. The main idea behind introducing
such changes was to improve not only
the bottom-line of the company but to induce
competency in all functional areas.
One area which the new management considered
as full of potential was the management
of working capital. A lot of investment
seemed blocked in inventories and debtors,
which was pulling down the overall return
on capital employed (ROCE). There was an
opportunity and a need to trim down investment
in this area. Therefore, the company
focused on reducing the working capital
needed for the operations. The company set
a target of achieving zero networking capital
by year 2000–01 and aimed at further reducing
it to negative levels in the long term. A
number of initiatives were taken to reduce
the cost of different components of working
capital. However, it was not an easy task as
the management faced stiff resistance and
opposition from its bulk customers and
stockists, suppliers of raw materials and other
services, as well as internal departments.
Inventory Management and Cost Reduction
Given the large variety of products that are
manufactured and marketed, and hundreds
of different raw materials used by the company,
accurate forecasting of inventory is
very important for effective working capital
management. A wrong forecast can lead to
piles of inventory, thus blocking unnecessary
investment and increasing storage cost as
well as the risk of damage associated with
perishable items.
After the new management took over, an
inventory management system was instituted
involving all related departments like
procurement, manufacturing, marketing,
sales and supply chain. The finance department
is involved throughout the process and
helps in linking all operations and controlling
flow of information through various
departments.
The annual planning process begins in
November–December each year with the
objective of finalizing the company’s annual
budget, before the start of the next accounting
year from April. The sales targets for the
forthcoming period are set by MANCOM
(Management Committee), which comprises
the heads of functional areas like Sales,
Marketing, Human Resource, Commercial,
Supply chain, and Production and Finance
taking the company’s product-packaging
mix of approximately one thousand (1,000)
SKU’s (Stock Keeping Units) into consideration.
The sales targets take into account the
sales trends and special promotion schemes.
On the basis of sales targets set for the
forthcoming period, the sales department
establishes product-wise requirements of the
finished goods. This information is used by
the production department to prepare a rolling
production plan and establish the quantity
of each type of raw material required for
meeting the production targets. This information
on raw material requirements is then
communicated to the purchase/procurement
department.
As the production department itself establishes
the requirements of raw materials to
be purchased, it prevents excess purchases
and helps in reducing the storage cost as well
as the cost of funds blocked in inventories.
For each item purchased, a safety stock is
identified and maintained to take care of any
fluctuations in lead-time and usage of raw
materials before fresh supplies would arrive.
Suitable safety stocks are maintained for
finished goods too.
Raw materials have been classified on the
basis of value, quantity required and location
of procurement. While purchases of more
valuable items are taken care of by the central
procurement unit, low-value and/or
low-number items may be locally purchased
on a decentralized basis. The main aim is to
minimize the cost of the raw materials including
transportation cost. Specialized professionals
(called Category Managers) are
appointed to look after the procurement of
various types of raw materials.
As far as possible, the company procures
materials on back-to-back basis following the
Just-in-Time (JIT) approach. However, JIT
inventory system is not applicable for all inputs.
Many of its inputs are agricultural
products that are available at cheaper prices
seasonally when fresh crops arrive into the
market. If the annual requirement of raw materials
is not purchased/tied-up during this
period, the company may have to pay much
higher prices which could rise by as much
as 50 per cent to 75 per cent in the off-season
months. As a result, the company must procure
such raw materials within the period of
their seasonal abundance (typically just 45–
65 days) and preserve them for later use.
Often, enough stocks are procured to partly
use them in the current year (40 per cent) and
partly (60 per cent) next year.
Fortunately, with the start of the Commodities
Exchange in India, the company has an
alternative way of managing raw material
cost, and that is by taking a position in the
derivatives (futures and options) market. For
example, suppose the company can buy a call
option for 1 million kg of material X at an
exercise price of Rs 15 per kg with a maturity
of 3 months. The call option gives the company
a right (but not obligation) to buy the
stated quantity of X at the agreed exercise
price. To buy a call option the company will
have to pay a cost, called premium (say
Rs 0.50 per kg), but at the same time the call
option will hedge it against possible losses
if the market price of X rises beyond the exercise
price before the maturity of the option.
For example, if the price of X rises to Rs 18
per kg, the company will find it advantageous
to exercise its option to buy it at Rs 15.
Usually, the company enters into futures and
options contracts for periods ranging from
3 to 9 months. Hedging combined with
e-procurement has significantly helped the
company in cost control and reduction.
According to the CFO, Mr Rajan Varma,
‘We managed to cut costs through our
e-procurement system. We as a company
may or may not have control over commodity
prices, but our marketing and purchase
guys are taking futuristic positions and even
though this practice constitutes a business
risk it is beginning to show results’.
Another significant tool of cost reduction
used by Dabur India is ‘value engineering’
to identify and develop more cost effective
materials. For example, this has resulted in
reducing the cost of packaging for several of
the company products. Research and development
activities have also helped in reducing
the time of processing which has
increased productivity.
In non-manufacturing areas too, the
company has been looking for opportunities
to cut down the costs. In 2003, the company
applied for and got the court approval for
de-listing of its shares from several regional
stock-exchanges including Ahmedabad,
Bangalore, Delhi, Jaipur, Ludhiana, Magadh
and Uttar Pradesh stock exchanges. The trading
volumes of the company’s shares at these
stock exchanges had been negligible for
many years and by de-listing its shares from
these regional stock exchanges, the company
saved itself from considerable costs as well
as regulatory provisions.
Debtors Management
The company has mainly three types of customers:
stockists, institutions and international/
export customers. The company
does not have a standard credit policy that
could be applied to all customers. Instead,
distinct credit terms are offered to each
group depending upon various factors such
as the product, place, price, demand and
competition.
1. Stockists: In 2005, the company had
about 1.5 million stockists. The credit
terms to the stockists vary from 1–10
days depending upon factors stated
above as well as their locations vis-àvis
the depot towns. Depot towns are
mostly the state capitals or other commercial
towns/cities where the company
has its own sales depots operating.
• Stockists in town depots: 70 per cent
of the company’s stockists are located
in or around the depot towns.
At these places, the company uses
the Cash Management System
(CMS) offered by banks; stockists’
cheques collected till the end of a day
are deposited next morning into the
company’s local bank account from
where the funds are transferred to
the corporate bank account.
Earlier these stockists used to enjoy
five days credit period but now the
company has decreased the time
frame to one day. For new stockists,
sales are normally made through
demand drafts. If a stockist’s cheque
bounces, then the party has to make
payment only by demand-draft. If
a party defaults on payment (or a
party’s cheques bounce) more than
once, then for all its transactions
with Dabur India in the coming year,
the party would be required to make
payments only by demand-drafts.
• Stockists in remote areas: The rest
30 per cent of the turnover with
stockists takes place at remote places
away from depot towns with no easy
access to banks so that the ‘anywhere
cheque’ system is logistically not possible.
Such stockists may be allowed
a credit period of up to 10 days. On
the average, the money is credited
in company’s bank account in 3–7
days.
2. Institutions: Institutions like canteen
stores department (CSD), large stores,
hotels and modern malls are offered
soft payment terms that may range
from 15 to 90 days. Though such institutions
are slower in making payments,
the higher profit margins on such sales
more than make up the cost of extended
credit.
3. International Customers: Similarly,
credit terms negotiated with export
customers would depend on the international
competition and product
pricing.
Where longer credit terms must be offered
as a part of the marketing strategy, the company
often resorts to ‘factoring’ as a means
of financing debtors. The factoring arrangements
are made with banks or specialized
factoring companies. In these cases, the company
makes sure that profit margins from
such sales are high enough to cover the cost
of factoring.
Cash Management
As stated above, the company maintains
bank accounts at all depots towns. Cheques/
drafts received from customers in nearby
places are sent for local clearing to initially
collect funds in these bank accounts. This
reduces the average collection period (as
compared to the time it would take if customer
cheques were first received at headoffice
and then sent for out-station clearing);
thereby increasing the velocity of cash inflows.
Funds thus collected at the depot towns
are each day transferred to the company’s
head-office (or corporate) bank account. The
company has a ‘sweeping arrangement’
with the bank at head-office by which any
funds transferred from the depot towns are
automatically applied towards settling the
company’s cash credit loan from the bank
and reducing its debit balance. These steps
have resulted in reducing and controlling the
cost of interest to the company.
When the company has surplus funds, the
company invests the same in short-term
investments or instruments like mutual
funds and government securities.
Suppliers
The company has more then 1,000 suppliers
inclusive of service providers like advertisement
companies. Out of these, 100–150 are
regular suppliers. Most suppliers are small
business units with annual trading volume
of Rs 2–3 crore with Dabur India.
The company enjoys credit periods ranging
from seven to 90 days from the creditors,
which can at times be extended up to 120 days.
The suppliers use the bills discounting to
avail bank financing against their receivables
from Dabur India and bear the bank charges
as well. However, if the credit period is extended
beyond 120 days, the bills discounting
charges are borne by Dabur India.
Financing Working Capital: The company
makes an aggressive use of all ethical means
to increase the velocity of cash inflows from
customers and tries to slow down the cash
outflows to creditors. Credit facilities from
suppliers of raw materials, other goods and
services are therefore the main sources of
financing working capital. However, it has
not been easy for the company to negotiate
favourable terms with its debtors and creditors.
The Dabur management spends considerable
time and effort to train debtors and
suppliers in modern ways of financing such
as factoring or bills discounting, and helps
them by bank introductions etc. When a policy
change in credit terms seems necessary,
it is first negotiated with the big creditors and
debtors before being implemented for all
suppliers and customers.
Discussions with suppliers take place in
a highly transparent manner. Among the
methods used to control credit are techniques
such as regression, progression, slap or standardized
terms. The management identifies
and bridges the communication gaps through
educating the suppliers.
Supply Chain Management
The supply chain management in Dabur
India is a key factor impacting sales, profitability
and working capital. Exhibit 1 shows
the supply chain flowchart.
An efficient supply chain system helps in
value creation for the business in four important
ways. These are: (i) Positive impact
on sales: created by improved service through
reliable and regular flow of quality goods to
retailers and end-use customers. (ii) Reducing
investment in inventories and increasing
accounts payables, (iii) Cost management:
lower inventory levels result in lower carrying
cost, which is approximately 10 per cent
per annum on the average inventory held.
Thus, if inventory holding reduces by Rs 10
million, it will lead to a saving in carrying cost
of about Rs 1 million per annum. Cost savings
also result from the better coordination
between inventory planning, acquisition
and usage departments and (iv) Facilitating
optimum use of the firm’s fixed assets
and infrastructure by increasing inventory
turnover.
Role of the Finance Department
The finance department is involved in all
aspects of financial planning and control. It
maintains a quarterly score card, which helps
the company to evaluate the performance
of employees in terms of cost to company
(CTC). Managerial remuneration consists of
a fixed salary plus bonuses based on performance
on a variety of parameters including
maintenance of inventory levels and
other working capital items within agreed
limits. The department also prepares MIS
and communicates the same to all the concerned
departments. It also continuously
monitors the management of inventory,
debtors and creditors to ensure that the net
working capital remains within the budgeted
levels. If, for example, the investment in inventory
exceeds the planned limits due to
some unavoidable circumstances, it must be
offset by either an increase in creditors or a
reduction in debtors.
The orientation meeting was coming to a
close. The AGM concluded by saying, ‘Ever
since the professional management took over
the reigns of the company, efforts have been
made to upgrade efficiency in all aspects of
business to build a competitive edge and
improve the return on investment. I may add
here that, in my personal opinion, the balance
sheet as per the current provisions of
the Companies Act does not show a true
picture of the company’s liquidity. This is because
the company’s investment in marketable
securities is at present not allowed to be
included in the current assets. Therefore, the
company actually has a better liquidity position
than reflected by the net working capital
as shown in the balance sheet.’
Bo was so absorbed in the presentation
that he remained seated even after it was over
and others starting leaving the small but well
furnished conference hall. He was shaken out
of his thoughts when he heard Sharad,
Exhibit 1
Supply Chain Flow Chart
‘Wow, I didn’t know managing working
capital involved so many aspects. What do
you think?’
‘Well, definitely it has been a learning
experience. I guess I have to start analysing
the company performance all over again. To
fully understand the evolving financial strategy,
may be I should begin with a comparative
analysis of Dabur India’s performance
against its competitors, say HLL, for some
years before and after 1998 when the change
in management took place’. Bo said as they
followed others out of the hall.
Questions
1. Assume this is 1998–99. The new management
wants to identify areas with
potential for improving performance,
particularly in the area of working capital.
For this purpose, taking HLL financial
performance as a benchmark, carry
out a financial ratios analysis for Dabur
India for the period 1995 to 1998, and
identify the areas where there is need
for improving performance. Use the
summarized data in Exhibits 2 and 3
for this purpose.
2. Using data in Exhibit 4, calculate various
working capital ratios for Dabur
India for the years 2003–04 and 2004–
05. Compare these with similar ratios
for the years 1995 to 1998. Identify the
trends and discuss their implications
on cost management and other aspects.
3. What do you think are the advantages
and disadvantages of a ‘negative’ net
working capital policy? If you are the
CFO of a company, which policy would
you like to follow and why?
4. What is the importance of cost control
and reduction in the emerging business
environment? Using Dabur India’s experience
as an illustration, discuss the
techniques or methods that a company
could use to reduce costs.
5. What is hedging and how can futures
and options contracts be used to hedge
against adverse price rises? Prepare
a note on Commodities Futures and
Options markets in India. (Skip this
question if not relevant to the specific
training group).
6. Using internet and other available
sources collect latest financial information
on major competitors in the FMCG
sector and carry out a detailed financial
ratios analysis covering as many aspects
as possible.
Exhibit 2a
HLL Summarized P & L Accounts: 1995–98
(Rs. Crore)
1995 1996 1997 1998
Sales and other income 3434 6718 8004 9727
Expenditure
Operating expenses 3018 6001 7062 8466
Depreciation 24 55 58 102
Interest 20 57 34 29
Total Expenditure 3062 6113 7154 8597
Profit before tax 372 605 850 1130
Tax for the year 133 192 270 293
Profit after tax 239 413 580 837
Source: Annual Reports of HLL.
Exhibit 2b
HLL Summarised Balance Sheets: 1995–98
(Rs. Crores)
1995 1996 1997 1998
Sources of Funds
Shareholders’ funds 816 1170 1261 1713
Share Capital 146 200 199 220
Reserves and surplus 670 970 1062 1493
Loan funds 160 259 187 264
Total 976 1429 1448 1977
Application of Funds
Net Fixed assets 396 722 794 1054
Investments 122 328 532 697
Current Assets 1337 1829 2201 2609
Inventories 685 904 1045 1146
Receivables 563 722 582 803
Cash and bank balances 89 203 574 660
Current Liabilities and Provisions 879 1450 2079 2383
Net Current Assets 458 379 122 226
Total 976 1429 1448 1977
Source: Annual Reports of HLL.
Exhibit 3a
Dabur India Summarised P & L Accounts: 1995–98
(Rs. Crores)
1995 1996 1997 1998
Sales and other income 436.6 608.6 716.2 835.3
Expenditure
Operating expenses 379.3 530.6 629.4 745.9
Depreciation 8.1 12.1 11.3 16.2
Interest 18.3 24.5 32.0 29.4
Total Expenditure 405.7 567.2 672.7 791.5
Profit before tax 30.9 41.4 43.5 43.8
Tax for the year 7.0 7.0 1.1 0.3
Profit after tax 23.9 34.4 42.4 43.5
Source: CMIE software ‘Prowess’.
Exhibit 3b
Dabur India’s Summarised Balance Sheets: 1995–98
(Rs. Crores)
1995 1996 1997 1998
Sources of Funds
Shareholders’ funds 135.2 161.0 194.8 227.3
Share Capital 28.5 28.5 28.5 28.5
Reserves and surplus 106.7 132.5 166.3 198.8
Loan funds 144.2 191.1 214.0 271.4
Total 279.4 352.1 408.8 498.7
Application of Funds
Net Fixed assets 72.2 105.6 160.6 206.0
Investments 35.5 24.5 34.1 43.1
Current Assets 246.1 317.2 290.5 327.3
Inventories 62.8 107.5 96.8 118.1
Receivables 176.8 203.3 187.2 188.8
Cash and bank balances 6.5 6.4 6.5 20.4
Current Liabilities and Provisions 77.4 97.8 78.8 85.7
Net Current Assets 168.7 219.4 211.7 241.6
Misc. expenses not w.off 3.0 2.6 2.4 8.0
Total 279.4 352.1 408.8 498.7
Source: CMIE software ‘Prowess’.
Exhibit 4a
Dabur India Balance Sheets as at 31st March 2005 and 2004
Exhibit 4b
Dabur India Profit & Loss Account for the years ended 31st March 2005 and 2004
ANNEXURES
Dabur’s Vision and Philosophy
1. Ownership
2. Passion for Winning
3. People Development
4. Consumer Focus
5. Team Work
6. Innovation
7. Integrity
This is our company. We accept personal responsibility, and accountability to meet business needs.
We all are leaders in our area of responsibility, with a deep commitment to deliver results. We are
determined to
be the best at doing what matters most.
People are our most important asset. We add value through result driven training, and we encourage
& reward
excellence.
We have superior understanding of consumer needs and develop products to fulfill them better.
We work together on the principle of mutual trust & transparency in a boundary-less organisation.
We are
intellectually honest in advocating proposals, including recognizing risks.
Continuous innovation in products & processes is the basis of our success.
We are committed to the achievement of business success with integrity. We are honest with
consumers, with
business partners and with each other.
Dabur Mile Stones
• 1884: The birth of Dabur
• 1986: Registered as a Public Limited Company
• 1972: The company shifts to Delhi from Kolkata
• 1994: Company gets listed
• 1995: First Ayurvedic Company to get ISO 9002 Certification
• 1998: Professional CEO inducted
• 2000: Dabur reaches a turnover of Rs 1000 crores
• 2001: Board restructured, more professionals inducted
• 2003: De-merger of Pharmaceuticals business
• 2005: Profit exceeds Rs 150 crores
Dabur Business Structure
FAST MOVING
CONSUMER GOODS
www.ibef.org
WHY INDIA 3
INDIA COMPETITIVENESS AND COMPARISON WITH 7
THE WORLD MARKETS
POLICY 9
TRENDS AND PLAYERS 12
MARKET OPPORTUNITIES FOR INVESTMENT 32
ANNEX: APEX CONTACTS AGENCIES 38
A report by PricewaterhouseCoopers for IBEF
FAST MOVING
CONSUMER GOODS
The Indian FMCG sector is the fourth largest sector in the economy
with a total market size in excess of US$ 13.1 billion.
It has a strong MNC presence and is characterised by a wellestablished
distribution network, intense competition between
the organised and unorganised segments and low operational cost.
Availability of key raw materials, cheaper labour costs and presence
across the entire value chain gives India a competitive advantage.
The FMCG market is set to treble from US$ 11.6 billion in 2003
to US$ 33.4 billion in 2015. Penetration level as well as per capita
consumption in most product categories like jams, toothpaste, skin
care, hair wash etc in India is low indicating the untapped market
potential. Burgeoning Indian population, particularly the middle class
and the rural segments, presents an opportunity to makers
of branded products to convert consumers to branded products.
Growth is also likely to come from consumer 'upgrading' in the
matured product categories. With 200 million people expected to
shift to processed and packaged food by 2010, India needs around
US$ 28 billion of investment in the food-processing industry.
Executive summary
FAST MOVING CONSUMER GOODS PAGE 3
WHY INDIA
Large domestic market
India is one of the largest emerging markets, with a population of
over one billion. India is one of the largest economies in the world
in terms of purchasing power and has a strong middle class base of
300 million.
Rural and urban potential
Rural-urban profile
Urban Rural
Population 2001-02 (mn household) 53 135
Population 2009-10 (mn household) 69 153
% Distribution (2001-02) 28 72
Market (Towns/Villages) 3,768 627,000
Universe of Outlets (mn) 1 3.3
Source: Statistical Outline of India (2001-02), NCAER
Around 70 per cent of the total households in India (188 million)
resides in the rural areas. The total number of rural households are
expected to rise from 135 million in 2001-02 to 153 million in
2009-10. This presents the largest potential market in the world.
The annual size of the rural FMCG market was estimated at around
US$ 10.5 billion in 2001-02. With growing incomes at both the
rural and the urban level, the market potential is expected to
expand further.
India - a large consumer goods spender
An average Indian spends around 40 per cent of his income on
grocery and 8 per cent 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.
Consumption pie
Source: KSA Technopak Consumer Outlook 2004.
Even on an international scale, total consumer expenditure on food
in India at US$ 120 billion is amongst the largest in the emerging
markets, next only to China.
Consumer expenditure on food (US$ billion)
Source: Euro monitor.
Rapid urbanisation, increased literacy and rising per capita income,
have all caused rapid growth and change in demand patterns,
leading to an explosion of new opportunities. Around 45 per cent
of the population in India is below 20 years of age and the young
population is set to rise further. Aspiration levels in this age group
have been fuelled by greater media exposure, unleashing a latent
demand with more money and a new mindset.
Demand-supply gap
Currently, only a small percentage of the raw materials in India
are processed into value added products even as the demand
for processed and convenience food is on the rise. This demand
supply gap indicates an untapped opportunity in areas such as
packaged form, convenience food and drinks, milk products etc.
In the personal care segment, the low penetration rate in both
the rural and urban areas indicates a market potential.
Change in the Indian consumer profile
Consumer Profile
1999 2001 2006
Population (millions) 846 1,012 1,087
Population < 25 years of age 480 546 565
Urbanisation (%) 26 28 31
Source: Statistical Outline of India (2002-03).
FMCG Category and products
Category Products
Household Care Fabric wash (laundry soaps and synthetic
detergents); household cleaners (dish/utensil
cleaners, floor cleaners, toilet cleaners, air
fresheners, insecticides and mosquito repellents,
metal polish and furniture polish).
Food and Health beverages; soft drinks; staples/cereals;
Beverages bakery products (biscuits, bread, cakes); snack
food; chocolates; ice cream; tea; coffee; soft
drinks; processed fruits, vegetables; dairy
products; bottled water; branded flour; branded
rice; branded sugar; juices etc.
Personal Care Oral care, hair care, skin care, personal wash
(soaps); cosmetics and toiletries; deodorants;
perfumes; feminine hygiene; paper products.
INDIA COMPETITIVENESS AND

COMPARISON WITH THE WORLD
MARKETS
Materials availability
India has a diverse agro-climatic condition due to which there exists
a wide-ranging and large raw material base suitable for food
processing industries. India is the largest producer of livestock, milk,
sugarcane, coconut, spices and cashew and is the second largest
producer of rice, wheat and fruits & vegetables.
India also has an ample supply of caustic soda and soda ash, the raw
materials in the production of soaps and detergents - India
produced 1.6 million tonnes of caustic soda in 2003-04. Tata
Chemicals, one of the largest producers of synthetic soda ash in the
world is located in India. The availability of these raw materials gives
India the locational advantage.
Cost competitiveness
Labour cost comparison
Source: DIPP.
Apart from the advantage in terms of ample raw material availability,
existence of low-cost labour force also works in favour of India.
Labour cost in India is amongst the lowest in Asian countries. Easy
raw material availability and low labour costs have resulted in a lower
cost of production. Many multi-nationals have set up large low cost
production bases in India to outsource for domestic as well as
export markets.
Leveraging the cost advantage
Global major, Unilever, sources a major portion of its product
requirements from its Indian subsidiary, HLL. In 2003-04, Unilever
outsourced around US$ 218 million of home and personal care
along with food products to leverage on the cost arbitrage
opportunities with the West.
To take another case, Procter & Gamble (P&G) outsourced the
manufacture of Vicks Vaporub to contract manufacturers in
Hyderabad, India. This enables P&G to continue exporting Vicks
Vaporub to Australia, Japan and other Asian countries, but at
more competitive rates, whilst maintaining its high quality and cost
efficiency.
Presence across value chain
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
more cost competitive.
POLICY
India has enacted policies aimed at attaining international
competitiveness through lifting of the quantitative restrictions,
reduced excise duties, automatic foreign investment and food laws
resulting in an environment that fosters growth. 100 per cent export
oriented units can be set up by government approval and use of
foreign brand names is now freely permitted.
FDI Policy
Automatic investment approval (including foreign technology
agreements within specified norms), up to 100 per cent foreign
equity or 100 per cent for NRI and Overseas Corporate Bodies
(OCBs) investment, is allowed for most of the food processing
sector except malted food, alcoholic beverages and those reserved
for small scale industries (SSI). 24 per cent foreign equity is
permitted in the small-scale sector. Temporary approvals for
imports for test marketing can also be obtained from the Director
General of Foreign Trade. The evolution of a more liberal FDI policy
environment in India is clearly supported by the successful operation
of some of the global majors like PepsiCo in India.
PepsiCo's India experience
After a not so successful attempt to enter the Indian market in
1985, Pepsi re-entered in 1988 with a joint venture of PepsiCo,
Punjab government-owned Punjab Agro Industrial Corporation
(PAIC) and Voltas India Limited. By 1994, Pepsi took advantage
of the liberalised policies and took control of Pepsi Foods by
making an offer to both Voltas and PAIC to buy their equity. The
Indian government gave concessions to the company, Pepsi was
allowed to increase its turnover of beverages component to
beyond 25 per cent and was no longer restricted by its
commitment to export 50 per cent of its turnover. The
government approved more than US$ 400 million worth of
investment of which over US$ 330 million has already been
invested. The government also allowed PepsiCo to set up a new
company in India called PepsiCo India Holdings Pvt Ltd, a wholly
owned subsidiary of PepsiCo International, which is engaged in
beverage manufacturing, bottling and exports activities as Pepsi
Foods Ltd.
Since then, the company has bought over bottlers in different
parts of India along with Dukes, a popular soft-drink brand in
western India to consolidate its market share. This was followed
by an introduction of Tropicana juice in the New Delhi and
Bangalore markets in 1999.
Currently, soft drink concentrate, snack foods and vegetable and
food processing are the key products of the company. Pepsi
considers India, along with China, as one of the two largest and
fastest growing businesses outside North America. Pepsi has 19
company owned factories while their Indian bottling partners own
21. The company has set up 8 greenfield sites in backward regions
of different states. PepsiCo intends to expand its operations and is
planning an investment of approximately US$ 150 million in the
next two-three years.
Removal of Quantitative Restrictions
and Reservation Policy
The Indian 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. Quantitative restrictions were removed in 2001 and
Union Budget 2004-05 further identified 85 items that would be
taken out of the reserved list. This has resulted in a boom in the
FMCG market through market expansion and greater product
opportunities.
Central and state initiatives
Various states governments like Himachal Pradesh, Uttaranchal
and Jammu & Kashmir have encouraged companies to set up
manufacturing facilities in their regions through a package of fiscal
incentives. Jammu and Kashmir offers incentives such as allotment of
land at concessional rates, 100 per cent subsidy on project reports
and 30 per cent capital investment subsidy on fixed capital
investment upto US$ 63,000. The Himachal Pradesh government
offers sales tax and power concessions, capital subsidies and other
incentives for setting up a plant in its tax free zones. Five-year tax
holiday for new food processing units in fruits and vegetable
processing have also been extended in the Union Budget 2004-05.
Wide-ranging fiscal policy changes have been introduced
progressively. Excise and import duty rates have been reduced
substantially. Many processed food items are totally exempt from
excise duty. Customs duties have been substantially reduced
on plant and equipment, as well as on raw materials and
intermediates, especially for export production. Capital goods
are also freely importable, including second hand ones in the
food-processing sector.
Food laws
Consumer protection against adulterated food has been brought to
the fore by "The Prevention of Food Adulteration Act (PFA), 1954",
which applies to domestic and imported food commodities,
encompassing food colour and preservatives, pesticide residues,
packaging, labelling and regulation of sales.
TRENDS AND PLAYERS
The structure
The Indian FMCG sector is the fourth largest sector in the economy
and creates employment for three million people in downstream
activities. Within the FMCG sector, the Indian food processing
industry represented 6.3 per cent of GDP and accounted for 13 per
cent of the country's exports in 2003-04.
A distinct feature of the FMCG industry is the presence of most
global players through their subsidiaries (HLL, P&G, Nestle), which
ensures new product launches in the Indian market from the
parent's portfolio.
Critical operating rules in Indian FMCG sector
• Heavy launch costs on new products on launch
advertisements, free samples and product promotions.
• Majority of the product classes require very low investment
in fixed assets
• Existence of contract manufacturing
• Marketing assumes a significant place in the brand building
process
• Extensive distribution networks and logistics are key to
achieving a high level of penetration in both the urban
and rural markets
• Factors like low entry barriers in terms of low capital
investment, fiscal incentives from government and low brand
awareness in rural areas have led to the mushrooming of
the unorganised sector
• Providing good price points is the key to success
Penetration and per capita consumption
Rural - urban penetration (2002)
Category Market Size Urban Rural Total
(US$ million) Penetration Penetration Penetration
(%) (%) (%)
High Penetration categories >50%: Drive upgradation and
consumption
Fabric Wash 1210 89.6 82.9 84.9
Personal
Wash 938 97.9 90.7 92.8
Packet Tea 635 91.2 82.2 84.9
Low penetration categories: Drive penetration
Toothpaste 409 69.8 32.3 43.5
Skin 312 36.6 19.8 24.7
Hair Wash 230 40.1 16.3 23.3
Talcum
Powder 148 66 36.8 45.1
Branded Atta 107 44 30.2 34.3
Dish Wash 102 54.6 11.5 24.4
Instant Coffee 55 - - -
R&G Coffee 30 - - -
Ketchups 25 12.5 0.7 4.2
Deodorants 19 - - -
Jams 13 - - -
Source: HLL, Indian Readership Survey.
Penetration level in most product categories like jams, toothpaste,
skin care, hair wash etc in India is 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 indicates the existence of
unsaturated markets, which are likely to expand as the income levels
rise. This provides an excellent opportunity for the industry players
in the form of a vastly untapped market.
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.
Detergent per capita consumption (in kg) (2001)
Tea per capita consumption (in kg) (2001)
Personal wash per capita consumption (in kg) (2001)
Toothpaste per capita consumption (in kg) (2001)
Skin care products per capita consumption (in Rs) (2001)
US$ 1=Rs 47.2
Ice cream per capita consumption (in litre) (2001)
Shampoo per capita consumption (in kg) (2001)
Fabric wash per capita consumption (in kg) (2001)
FAST MOVING CONSUMER GOODS
The rural urban break-up
Source: Indian Market Demographic Report, NCAER.
Indian FMCG market - urban
Indian FMCG market - rural
PAGE 17
Most Indian FMCG companies focus on urban markets for value and
rural markets for volumes. The total market has expanded from US$
17.6 billion in 1992-93 to US$ 22 billion in 1998-99 at current
prices. Rural demand constituted around 52.5 per cent of the total
demand in 1998-99. Hence, rural marketing has become a critical
factor in boosting bottomlines. As a result, most companies' have
offered low price products in convenient packaging. These
contribute the majority of the sales volume. In comparison, the
urban elite consumes a proportionately higher value of FMCGs, but
not volume.
Rural markets: small is beautiful
By 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
Thus, a number of companies followed the strategy of launching
a wide range of package sizes and prices to suit the purchasing
preferences of India's varied consumer segments. Hindustan
Lever, a subsidiary of Unilever, coined the term nano-marketing
in the early nineties, when it introduced its products in small
sachets. Small sachets were introduced in almost all the FMCG
segments from oil, shampoo, and detergents to beverages.
Cola major, Coke, brought down the average price of its
products from around twenty cents to ten cents, thereby
bridging the gap between soft drinks and other local options like
tea, butter milk or lemon juice. It also doubled the number of
outlets in rural areas from 80,000 during 2001 to 160,000 the
next year, thereby almost doubling its market penetration from
13 per cent to 25 per cent. This along with greater marketing,
led to the rural market accounting for 80 per cent
of new Coke drinkers and 30 per cent of its total volumes.
The rural market for colas grew at 37 per cent in 2002, against a
24 per cent growth in urban areas. The per capita consumption in
rural areas also doubled during 2000-02.
Source: HLL, NCAER.
Household income distribution - 2003
Household income distribution - 2015
PAGE 19
Consumer-class boom
Demand for FMCG products is set to boom by almost 60 per cent
by 2007 and more than 100 per cent by 2015. This will be driven
by the rise in share of middle class (defined as the climbers and
consuming class) from 67 per cent in 2003 to 88 per cent in 2015.
The boom in various consumer categories, further, indicates a latent
demand for various product segments. For example, the upper end
of very rich and a part of the consuming class indicate
a small but rapidly growing segment for branded products.
The middle segment, on the other hand, indicates a large market for
the mass end products.
The BRICs report indicates that India's per capita disposable income,
currently at US$ 556 per annum, will rise to US$ 1150 by 2015 -
another FMCG demand driver. Spurt in the industrial and services
sector growth is also likely to boost the urban consumption
demand.
Source: Euro monitor, BRICs Report (Goldman Sachs).
Rise in Indian disposable income (US$/annum)
Identifying the segments in FMCG
A brief description of the Indian FMCG industry is given in the table below.
Segment Unit Size Key Players Share of
market
leader
(%)
Household care 62
Fabric wash market Mn tonnes 50 HLL, P&G, Nirma, SPIC 38
Laundry soaps/bars US$ mn 1102
Detergent cakes Mn tonnes 15
Washing powder Mn tonnes 26
Dish wash US$ mn 93 HLL 59
Personal care 58
Soap & Toiletries Mn tonnes 60 HLL, Nirma, Godrej
Personal wash market US$ mn 989 HLL, Nirma, Godrej
Oral care US$ mn 537 Colgate Palmolive, HLL 40
Skin care & cosmetics US$ mn 274 HLL, Dabur, P&G 58
Hair care US$ mn 831 Marico, HLL, CavinKare, 54
Procter & Gamble, Dabur, Godrej
Feminine hygiene US$ mn 44 Procter & Gamble, Johnson and Johnson
Food and Beverages
Bakery products Mn tonnes 30 Britannia, Parle, ITC
Tea 000 tonnes 870 HLL, Tata Tea 31
Coffee 000 tonnes 20 Nestle, HLL, Tata Tea 49*
Mineral water Mn crates 65 Parle Bisleri, Parle Agro, Coca Cola, Pepsi
Soft Drink Mn crates 284 Coca Cola, Pepsi
Branded atta 000 tonnes 750 Pillsbury, HLL, Agro Tech, Nature Fresh, ITC 15
Health beverages 000 tonnes 120 SmithKline Beecham, Cadbury, Nestle, Amul
Milk and Dairy products US$ mn 653 Amul, Britannia, Nestle
Chocolates US$ mn 174 Cadbury's, Nestle
Culinary products US$ mn 326 HLL, Nestle 78
Edible oil Mn tonnes 13 Ruchi Soya, Marico, ITC Agrotech 28
Note: *R&G Source: ORG Marg, AC Nielson, FICCI, India Stat
and HLL.
Product wise production (2004)
PAGE 21
Household care
The size of the fabric wash market is estimated to be US$ 1 billion,
household cleaners to be US$ 239 million and the production of
synthetic detergents at 2.6 million tonnes. The demand for
detergents has been growing at an annual growth rate of 10 to 11
per cent during the past five years. The urban market prefers
washing powder and detergents to bars on account of convenience
of usage, increased purchasing power, aggressive advertising and
increased penetration of washing machines. The regional and smallunorganised
players account for a major share of the total detergent
market in volumes.
Personal care
The size of the personal wash products is estimated at US$ 989
million; hair care products at US$ 831 million and oral care products
at US$ 537 million. While the overall personal wash market is
growing at one per cent, the premium and middle-end soaps are
growing at a rate of 10 per cent. The leading players in this market
are HLL, Nirma, Godrej Soaps and Reckitt & Colman. The oral care
market, especially toothpastes, remains under penetrated in India
(with penetration level below 45 per cent) due to lack of hygiene
awareness among rural markets. The industry is very competitive
both for organised and smaller regional players.
The Indian skin care and cosmetics market is valued at US$ 274
million and dominated by HLL, Colgate Palmolive, Gillette India and
Godrej Soaps. This segment has witnessed the entry of a number of
international brands, like Oriflame, Avon and Aviance leading to
increased competition. The coconut oil market accounts for 72 per
cent share in the hair oil market. In the branded coconut hair oil
market, Marico (with Parachute) and Dabur are the leading players.
The market for branded coconut oil is valued at approximately US$
174 million.
Food and Beverages
Food
According to the Ministry of Food Processing, the size of the Indian
food processing industry is around US$ 65.6 billion including US$
20.6 billion of value added products. Of this, the health beverage
industry is valued at US$ 230 billion; bread and biscuits at US$ 1.7
billion; chocolates at US$ 73 million and ice creams at US$ 188
million.
The size of the semi-processed/ready to eat food segment is
over US$ 1.1 billion. Large biscuits & confectionery units, soyaprocessing
units and starch/glucose/sorbitol producing units have
also come up, catering to domestic and international markets.
The three largest consumed categories of packaged foods are
packed tea, biscuits and soft drinks.
Beverages
The Indian beverage industry faces over supply in segments like
coffee and tea. However, more than half of this is available in
unpacked or loose form. Indian hot beverage market is a tea
dominant market. Consumers in different parts of the country
have heterogeneous tastes. Dust tea is popular in southern India,
while loose tea in preferred in western India. The urban-rural split of
the tea market was 51:49 in 2000. Coffee is consumed largely
in the southern states. The size of the total packaged coffee market
is 19,600 tonnes or US$ 87 million. The urban rural split
in the coffee market was 61:39 in 2000 as against 59:41 in 1995.
The total soft drink (carbonated beverages and juices) market is
estimated at 284 million crates a year or US$ 1 billion. The market
is highly seasonal in nature with consumption varying from 25 million
crates per month during peak season to 15 million during offseason.
The market is predominantly urban with 25 per cent
contribution from rural areas. Coca cola and Pepsi dominate the
Indian soft drinks market.
Mineral water market in India is a 65 million crates (US$ 50 million)
industry. On an average, the monthly consumption is estimated at
4.9 million crates, which increases to 5.2 million
during peak season.
Exports
India is one of the world's largest producers for a number of FMCG
products but its exports are a very small proportion of the overall
production. Total exports of food processing industry was US$ 2.9
billion in 2001-02 and marine products accounted for 40 per cent of
the total exports. Though the Indian companies are going global,
they are focusing more on the overseas markets like Bangladesh,
Pakistan, Nepal, Middle East and the CIS countries because of the
similar lifestyle and consumption habits between these countries and
India. HLL, Godrej Consumer, Marico, Dabur and Vicco laboratories
are amongst the top exporting companies.
Investment in the FMCG sector
The FMCG sector accounts for around 3 per cent of the total FDI
inflow and roughly 7.3 per cent of the total sectoral investment. The
food-processing sector attracts the highest FDI, while the vegetable
oils and vanaspati sector accounts for the highest domestic
investment in the FMCG sector.
Source: SIA Newsletter, DIPP.
Investments in the FMCG sector (August 1991-April 2004)
Domestic players
Britannia India Ltd (BIL)
Britannia India Ltd was incorporated in 1918 as Britannia Biscuit Co
Ltd and currently the Groupe Danone (GD) of France (a global
major in the food processing business) and the Nusli Wadia Group
hold a 45.3 per cent equity stake in BIL through AIBH Ltd (a 50:50
joint venture). BIL is a dominant player in the Indian biscuit industry,
with major brands such as Tiger glucose, Mariegold, Fifty-Fifty, Good
Day, Pure Magic, Bourbon etc.
The company holds a 40 per cent market share in the overall
organised biscuit market and has a capacity of 300,000 tonne per
annum. Currently, the bakery product business accounts for 99.1
per cent of BIL's turnover. The company reported net sales of US$
280 million in 2002-03. Britannia Industries Ltd (BIL) plans to
increase its manufacturing capacity through outsourced contract
manufacturing and a greenfield plant in Uttaranchal to expand its
share in the domestic biscuit and confectionery market.
Dabur India Ltd
Established in 1884, Dabur India Ltd is the largest Indian FMCG
and ayurvedic products company. The group comprises Dabur
Finance, Dabur Nepal Pvt Ltd, Dabur Egypt Ltd, Dabur Overseas
Ltd and Dabur International Ltd. The product portfolio of the
company includes health care, food products, natural gums
& allied chemicals, pharma, and veterinary products. Some of its
leading brands are Dabur Amla, Dabur Chyawanprash, Vatika,
Hajmola, Lal Dant Manjan, Pudin Hara and the Real range of fruit
juices. The company reported net sales of US$ 218 million in 2003-
04. Dabur has firmed up plans to restructure its sales and
distribution structure and focus on its core businesses of fast-moving
consumer good products and over-the-counter drugs. Under the
restructured set-up, the company plans to increase direct coverage
to gap outlets and gap towns where Dabur is not
present. A roadmap is also being prepared to rationalise the
stockists' network in different regions between various products and
divisions.
Indian Tobacco Corporation Ltd (ITCL)
Indian Tobacco Corporation Ltd is an associate of British American
Tobacco with a 37 per cent stake. In 1910 the company's operations
were restricted to trading in imported cigarettes.
The company changed its name to ITC Limited in the mid seventies
when it diversified into other businesses. ITC is one of India's
foremost private sector companies with a turnover of US$ 2.6
billion. While ITC is an outstanding market leader in its traditional
businesses of cigarettes, hotels, paperboards, packaging and agriexports,
it is rapidly gaining market share even in its nascent
businesses of branded apparel, greeting cards and packaged foods
and confectionary. After the merger of ITC Hotels with ITC Ltd, the
company will ramp up its growth plans by strengthening its alliance
with Sheraton and through focus on international projects in Dubai
and the Far East. ITC's subsidiary, International Travel House (ITH)
also aims to launch new products and services
by way of boutiques that will provide complete travel services.
Marico
Marico is a leading Indian Group incorporated in 1990 and operating
in consumer products, aesthetics services and global ayurvedic
businesses. The company also markets food products and distributes
third party products. Marico owns well-known brands such as
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. In 2003-04,
the company reported a turnover of US$ 200 million. The overseas
sales franchise of Marico's branded FMCG products is one of the
largest amongst Indian companies.
It is also the largest Indian FMCG company in Bangladesh.
The company plans to capture growth through constant realignment
of portfolio along higher margin lines and focus on volume growth,
consolidation of market shares, strengthening flagship brands and
new product offerings (2-3 new product launches are expected in
2004-05). It also plans to expand its international business to
Pakistan.
Nirma Limited
Nirma Ltd, promoted by Karsanbhai Patel, is a homegrown FMCG
major with a presence in the detergent and soap markets. It was
incorporated in 1980 as a private company and was listed in fiscal
1994. Associate companies' Nirma Detergents, Shiva Soaps and
Detergents, Nirma Soaps and Detergents and Nilnita Chemicals
were merged with Nirma in 1996-1997. The company has also set
up a wholly owned subsidiary Nirma Consumer Care Ltd, which is
the sole marketing licensee of the Nirma brand in India. Nirma also
makes alfa olefin, fatty acid and glycerine. Nirma is one of the most
successful brands in the rural markets with extremely low priced
offerings. Nirma has plants located in Gujarat, Madhya Pradesh and
Uttar Pradesh. Its new LAB plant is located in Baroda and the soda
ash complex is located in Gujarat. Nirma has strong distributor
strength of 400 and a retail reach of over 1 million outlets. The
company reported gross sales of US$ 561 million in 2003-04. It
plans to continue to target the mid and mass segments for future
growth.
Foreign players
Cadbury India Ltd (CIL)
Cadbury Indian Ltd is a 93.5 per cent subsidiary of Cadbury
Schweppes Plc, UK, a global major in the chocolate and sugar
confectionery industry. CIL was set up as a trading concern in 1947
and subsequently began its operations with the small scale
processing of imported chocolates and food drinks. CIL is currently
the largest player in the chocolate industry in India with a 70 per
cent market share. The company is also a key player in the malted
foods, cocoa powder, drinking chocolate, malt extract food and
sugar confectionery segment. The company had also entered the
soft drinks market with brands like 'Canada Dry' and 'Crush', which
were subsequently sold to Coca Cola in 1999. Established brands
include Dairy Milk, Perk, Crackle, 5 Star, Éclairs, Gems, Fructus,
Bournvita etc. The company reported net sales of US$ 160 million in
2003. The company plans to increase the number of retail outlets
for future growth and market expansion.
Cargill
Cargill Inc is one of the world's leading agri-business companies with
a strong presence in processing and merchandising, industrial
production and financial services. Its products and geographic
diversity (over 40 product lines with a direct presence in over 65
countries and business activities in about 130 countries) as well as its
vast communication and transportation network help optimise
commodity movements and provide competitive advantage. Cargill
India was incorporated in April 1996 as a 100 per cent subsidiary of
Cargill Inc of the US. It is engaged in trading in soyabean meals,
wheat, edible oils, fertilisers and other agricultural commodities
besides marketing branded packaged foods. It has also set up its own
anchorage facilities at Rosy near Jamnagar in Gujarat for efficient
handling of its import and export consignments.
Coca Cola
Coca-Cola started its India operations in 1993. The Coca-Cola
system in India comprises 27 wholly company-owned bottling
operations and another 17 franchisee-owned bottling operations.
A network of 29 contract-packers also manufacture a range of
products for the company. Leading Indian brands Thums Up, Limca,
Maaza, Citra and Gold Spot exist in the Company's international
family of brands along with Coca-Cola, Diet Coke, Kinley, Sprite and
Fanta, plus the Schweppes product range. During the past decade,
the Coca-Cola system has invested more than US$ 1 billion in India.
In 2003, Coca-Cola India pledged to invest a further US$ 100
million in its operations.
Colgate-Palmolive India
Colgate Palmolive India is a 51 per cent subsidiary of Colgate
Palmolive Company, USA. It is the market leader in the Indian oral
care market, with a 51 per cent market share in the toothpaste
segment, 48 per cent market share in the toothpowder market and
a 30 per cent share in the toothbrush market. The company also
has a presence in the premium toilet soap segment and in shaving
products, which are sold under the Palmolive brand. Other wellknown
consumer brands include Charmis skin cream and Axion dish
wash. The company reported sales of US$ 226 million in 2003-04.
The company's strategy is to focus on growing volumes by
improving penetration through aggressive campaigning and
consumer promotions. The company plans to launch new products
in oral and personal care segments and is prepared to continue
spending on advertising and marketing to gain market share. Margin
gains are being targeted through efficient supply chain management
and bringing down cost of operations.
H J Heinz Co
A US$ 8.4 billion American foods major, H J Heinz Co comprises
4,000 strong brand buffet in infant food, sauces and condiments.
The company was the first to commence manufacturing and bottling
of tomato ketchup in 1876. In India, Heinz has a presence through
its 100 per cent subsidiary Heinz India Pvt Ltd. Heinz acquired the
consumer products division of pharmaceutical major Glaxo in 1994.
Heinz's product range in India consists of Complan milk beverage,
health drink Glucon-D, infant food Farex and Nycil prickly heat
powder, besides the Heinz ketchup range.
Hindustan Lever Ltd (HLL)
Hindustan Lever Ltd is a 51 per cent owned subsidiary of the
Anglo-Dutch giant Unilever, which has been expanding the scope of
its operations in India since 1888. It is the country's biggest
consumer goods company with net sales of US$ 2.4 billion in 2003.
HLL is amongst the top five exporters of the country and also the
biggest exporter of tea and castor oil. The product portfolio of the
company includes household and personal care products like soaps,
detergents, shampoos, skin care products, colour cosmetics,
deodorants and fragrances. It is also the market leader in tea,
processed coffee, branded wheat flour, tomato products, ice cream,
jams and squashes. HLL enjoys a formidable distribution network
covering over 3,400 distributors and 16 million outlets. In the future,
the company plans to concentrate on its herbal health care portfolio
(Ayush) and confectionary business (Max). Its strategy to grow
includes focussing on the power brands' growth through consumer
relevant information, cross category extensions, leveraging channel
opportunities and increased focus on rural growth.
Nestle India Ltd (NIL)
Nestle India Ltd a 59.8 per cent subsidiary of Nestle SA,
Switzerland, is a leading manufacturer of food products in India.
Its products include soluble coffee, coffee blends and teas,
condensed milk, noodles (81 per cent market share), infant milk
powders (75 per cent market share) and cereals (80 per cent
market share). Nestle has also established its presence in chocolates,
confectioneries and other processed foods. Soluble beverages and
milk products are the major contributors to Nestle's total sales.
Some of Nestle's popular brands are Nescafe, Milkmaid, Maggi and
Cerelac. The company has entered the chilled dairy segment with
the launch of Nestle Dahi and Nestle Butter. Nestle has also made a
foray in non-carbonated cold beverages segment through placement
of Nestea iced tea and Nescafe Frappe vending machines. Exports
contribute to 23 per cent of its turnover and the company reported
net sales of US$ 440 million in 2003.
PepsiCo
PepsiCo is a world leader in convenient foods and beverages,
with revenues of about US$ 27 billion. PepsiCo brands are available
in nearly 200 markets across the world. The company has an
extremely positive outlook for India. "Outside North America two
of our largest and fastest growing businesses are in India and China,
which include more than a third of the world's population"
(Pepsico's annual report). PepsiCo entered India in 1989 and is
concentrating on three focus areas - soft drink concentrate, snack
foods and vegetable and food processing. PepsiCo's success is the
result of superior products, high standards of performance and
distinctive competitive strategies.
Procter & Gamble Hygiene and Health Care Limited
Richardson Hindustan Limited (RHL), manufacturer of the Vicks
range of products, was rechristened 'Procter & Gamble India' in
October 1985, following its affiliation to the 'Procter & Gamble
Company', USA. Procter & Gamble Hygiene and Health Care
Limited (PGHHCL) acquired its current name in 1998, reflecting the
two key segments of its business. P&G, USA has a 65 per cent stake
in PGHHCL. The parent also has a 100 per cent subsidiary, Procter
& Gamble Home Products (PGHP). The overall portfolio of the
company includes healthcare; feminine-care; hair care and fabric care
businesses. PGHH operates in just two business segments - Vicks
range of cough & cold remedies and Whisper range of feminine
hygiene. The detergent and shampoo business has been relocated
globally to Vietnam. The company imports
and markets most of the products from South East Asian countries
and China, while manufacturing, marketing and export of Vicks and
sanitary napkins has been retained in India. The company reported
sales of US$ 91 million in 2002-03. The parent company has
announced its plan to explore further external collaborations
in India to meet its global innovation and knowledge needs.
MARKET OPPORTUNITIES
FOR INVESTMENT
Measuring the opportunity: Domestic FMCG
market to treble
Source: HH Panel data
According to estimates based on China's current per capita
consumption, the Indian FMCG market is set to treble from
US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominance
of Indian markets by unbranded products, change in eating habits and
the increased affordability of the growing Indian population presents
an opportunity to makers of branded products, who can convert
consumers to branded products.
The investment potential in rural markets
The Indian rural market with its vast size and demand base offers a
huge opportunity for investment. Rural India has a large consuming
class with 41 per cent of India's middle-class and 58 per cent of the
total disposable income. With population in the rural areas set to rise
to 153 million households by 2009-10 and with higher saturation in
the urban markets, future growth in the FMCG sector will come
FMCG Market Size (US$ billion)
from increased rural and small town penetration. Technological
advances such as the internet and e-commerce will aid in better
logistics and distribution in these areas. Already Indian corporates
such as HLL and ITC have identified the opportunity and have
initiated projects such as 'Project Shakti' and 'e-Choupal' to first,
expand rural income, and then, to penetrate this market.
Boosting rural income - novel experiments by
Indian corporates
PROJECT SHAKTI
FMCG giant Hindustan Lever initiated 'Project Shakti' to spur
growth and increase the penetration of its products in rural
India while changing lives and boosting incomes. Through a
combination of micro-credit and training in enterprise
management, women from self-help groups turned direct-tohome
distributors of a range of HLL products and helped the
company test hitherto unexplored rural hinterlands. The project
was piloted in Nalgonda district in Andhra Pradesh (AP) in
2001, it has since been scaled up and extended to over 5,000
villages in 52 districts in AP, Karnataka, Gujarat, Chattisgarh,
Orissa and Madhya Pradesh with around 1,000 women
entrepreneurs in its fold. The vision is to create about 11,000
Shakti entrepreneurs covering 100,000 villages and 100 million
rural consumers by 2010.
For HLL, greater penetration in rural areas is also imperative
since over 50 per cent of its incomes for several of its product
categories like soaps and detergents come from rural India. The
project has borne fruit for HLL. In Andhra Pradesh, so far, since
the experiment began, HLL has seen 15 per cent incremental
sales from rural Andhra, which contributes 50 per cent to
overall sales from Andhra of HLL products.
e-CHOUPAL
An example of the successful application of IT is the e-Choupal
experiment kicked off by diversified tobacco giant ITC. ITC has
designed and set up internet kiosks called e-Choupals to
support its agricultural product supply chain.
The e-Choupals are totally owned and set up by ITC with
the operators not having any investment or risk of their own.
There are four kinds of e-Choupals tailored for shrimps, coffee,
wheat and soyabeans. The focus is on creating internet access
for global market information to guide production and supply
decisions. It provides price information and thus, price certainty
to the farmers. In addition, the farmers get access to
operational information, developed by ITC experts, pertaining
to cropping, seeds, fertilisers etc.
The initial benefits of the ITC effort include a substantial
reduction in transaction costs, from 8 per cent to just 2 per
cent. These gains are shared roughly equally between ITC and
individual farmers. The longer-term goal is to use
e-Choupals as sales points for soyabean oil and a range of
other consumer goods. ITC has also set up its first rural mall
near Bhopal, where it distributes products of other FMCG
majors as well. Hence, incomes generated through
e-choupals will be targeted by the FMCG major to drive their
product sales.
Export potential
India has a locational advantage that can be exploited to use it as
a sourcing base for FMCG exports. Export of pre-prepared meals
with Indian vegetables for large Asian ethnic population settled in
developed countries is a very big opportunity for India. South East
Asia, which is presently being catered to by USA and EU, can be
sourced from India due to its lower freight cost.
Investments can also be made in Indian dairy industries to
manufacture and package dairy food (through contract or local
collaboration) for export to Middle East, Singapore, Malaysia,
Indonesia, Korea, Thailand and Hong Kong. Commodities like dry
milk, condensed milk, ghee and certain cheese varieties that are
utilised as ingredients in foreign countries can also be exported.
These markets can be expanded to include value-added ingredients
like packaged cheese sauce and dehydrated cheese powders. Large
export potential also exists in the soya products industry.
Sectoral opportunities
According to the Ministry of Food Processing, with 200 million
people expected to shift to processed and packaged food by 2010,
India needs around US$ 28 billion of investment to raise foodprocessing
levels by 8-10 per cent. In the personal care segment,
the lower penetration rates also presents an untapped potential.
Key sectoral opportunities are mentioned below:
• Staple: branded and unbranded: While the expenditure
on mass-based, high volume, low margin basic foods such
as wheat, wheat flour and homogenised milk is expected to
increase substantially with the rise in population, there is also
a market for branded staples is also expected to emerge.
Investment in branded staples is likely to rise with the popularity
of branded rice and flour among urban population.
• Dairy based products: India is the largest milk producer
in the world, yet only 15 per cent of the milk is processed.
The US$ 2.4 billion organised dairy industry requires huge
investment for conversion and growth. Investment opportunities
exist in value-added products like desserts, puddings etc. The
organised liquid milk business is in its
infancy and also has large long-term growth potential.
• Packaged food: Only about 8-10 per cent of output is
processed and consumed in packaged form, thus highlighting
the huge potential for expansion of this industry. Currently, the
semi processed and ready to eat packaged food segment has a
size of over US$ 70 billion and is growing at 15 per cent per
annum. Growth of dual income households, where both spouses
are earning, has given rise to demand for instant foods, especially
in urban areas. Increased health consciousness and abundant
production of quality soyabean also indicates a growing demand
for soya food segment.
• Personal care and hygiene: The oral care industry, especially
toothpastes, remains under penetrated in India with penetration
rates below 45 per cent. With rise in per capita incomes
and awareness of oral hygiene, the growth potential is huge.
Lower price and smaller packs are also likely to drive potential
uptrading. In the personal care segment, according to forecasts
made by the Centre for Industrial and Economic Research
(CIER), detergent demand is likely to rise to 4,180, 000 metric
tonnes by 2011-12 with an annual growth rate of 7 per cent
between 2006 and 2012. The demand for toilet soap
is expected to grow at an annual rate of 4 per cent between
2006-12 to 870,000 metric tonnes by 2011-12. Rapid
urbanisation is expected to propel the demand for cosmetics
to 100,000 metric tonnes by 2011-12, with an annual growth
rate of 10 per cent.
• Beverages: The US$ 2 billion Indian tea market has been growing
at 1.5 to 2 per cent annually and is likely to see a further rise as
Indian consumers convert from loose tea to branded tea
products. In the aerated drinks segment, the per capita
consumption of soft drinks in India is 6 bottles compared to
Pakistan's 17 bottles, Sri Lanka's 21, Thailand's 73, the Philippines
173 and Mexico's 605. The demand for soft drink
in India is expected to grow at an annual rate of 10 per cent per
annum between 2006-12 with demand at 805 million cases by
2011-12. Per capita coffee consumption in India is being
promoted by the coffee chains and by the emergence of instant
cold coffee. According to CIER, demand for coffee is
expected to rise to 535,000 metric tonnes by 2012, with
an annual growth rate of 5 per cent between 2006-12.
• Edible oil: The demand for edible oil in India, according
to CIER, is expected to rise to 21 million tonnes by
2011-12 with an annual growth rate of 7 per cent
per annum.
• Confectionary: The explosion of the young age
population in India will trigger a spurt in confectionary
products. In the long run the industry is slated to grow at
8 to 10 per cent annually to 870,000 metric tonnes by
2011-12.
ANNEXURE: APEX CONTACT AGENCIES
Indian Dairy Association (IDA)
Established in 1948, Indian Dairy Association is the apex body
of the dairy industry in India. The key functions of IDA are
transmission of technical/scientific information to the members, both
individuals as well as institutions, to organise periodic conferences,
seminars and workshops on subjects of current interest and to
undertake consultancy projects both overseas
as well as in the country whenever such a request is received
from any central ministry of the Government of India. IDA also
intervenes on the policy issues like presentation of pre-budget
memorandum, addressing issues arising out of the tariff rates, import/
export, sanitary standards including PFA issues etc.
Indian Dairy Association (IDA)
Sector IV, R.K. Puram (Near Syndicate Bank),
New Delhi - 110 022
India
Tel: +91 11 26165355 / 26165237 / 26170781
Fax: +91 11 26174719
Web: http://www.indairyasso.org/
The Solvent Extractors' Association of India (SEA)
The Solvents Extractors' Association is an all India body of solvent
extraction industry having wide representative membership
consisting of processors of rice bran, oilcakes, minor oilseeds and
soybean. SEA is the Trade Promotion Organisation for the exports
of various de-oiled meals (feed ingredients), animal and poultry feeds
and minor oils (fats) from India. SEA acts as a catalyst between
international buyers and local exporters and is responsible for export
promotion and performs various
export promotion functions.
The Solvent Extractors' Association of India
Premier Association of Vegetable Oil Industry & Trade
142, Jolly Maker Chambers No.2,
14th Floor, 225 Nariman Point,
Mumbai 400 021
India
Tel: +91 22 2202 1475/ 2282 1692
Fax: +91 22 2202 1692
Web: www.seaofindia.com
E-mail: solvent@vsnl.com
OTHERS
Indian Soap & Toiletries Manufacturers Association
Raheja Centre, 6th Floor, Room No. 614, Backbay Reclamation,
Mumbai - 400 021
India
Tel: +91 22 2824115
Fax: +91 22 2853649
E-Mail: istma@bom3.vsnl.net.in
Vanaspati Manufacturers Association of India
903, Akashdeep Bldg,
26-A, Barakhamba Road, New Delhi
India
Tel : +91 11 23312640, 23310758
Fax : +91 11 011-65521
E-mail: vmai.vanaspati@smy.sprintrpg.ems
All India Food Preservers Association
206, Aurobindo Place Market Complex
Hauz Khas, New Delhi - 110 016
India
Tel: +91 11 26510860/26518848
Fax: +91 11 26510860
Web: http://www.aifpa.com/
All India Bread Manufacturers Association
Commercial Complex,
9A, Connaught Place, New Delhi
India
Tel: +91 11 23327421
Fax: +91 11 23324483
Federation of Biscuit Manufacturers of India
9A, Connaught Place, New Delhi.
India
Tel: +91 11 26863801
Fax: +91 11 26863135
Indian Soft Drinks manufacturers' Association
New Delhi.
India
Tel: +91 11 23716782
Fax: +91 11 23327747
DISCLAIMER
This publication has been prepared for the India Brand Equity Foundation (“IBEF”).
All rights reserved. All copyright in this publication and related works is owned by IBEF.
The same may not be reproduced, wholly or in part in any material form (including
photocopying or storing it in any medium by electronic means and whether or not
transiently or incidentally to some other use of this publication), modified or in any
manner communicated to any third party except with the written approval of IBEF.
This publication is for information purposes only. While due care has been taken
during the compilation of this publication to ensure that the information is accurate
to the best of IBEF’s knowledge and belief, the content is not to be construed in any
manner whatsoever as a substitute for professional advice.
IBEF neither recommends nor endorses any specific products or services that may have
been mentioned in this publication and nor does it assume any liability or responsibility
for the outcome of decisions taken as a result of any reliance placed
on this publication.
IBEF shall in no way, be liable for any direct or indirect damages that may arise due
to any act or omission on the part of the user due to any reliance placed
or guidance taken from any portion of this publication.
The India Brand Equity Foundation is a public-private partnership
between the Ministry of Commerce and Industry, Government of India and
the Confederation of Indian Industry. The Foundation's primary objective
is to build positive economic perceptions of India globally.
India Brand Equity Foundation
c/o Confederation of Indian Industry
249-F Sector 18
Udyog Vihar Phase IV
Gurgaon 122015 Haryana
INDIA
Tel +91 124 501 4087 Fax +91 124 501 3873
E-mail ajay.khanna@ciionline.org
Web www.ciionline.org
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