an analysis of the indian fmcg industries

7/30/2019 An Analysis of the Indian FMCG Industries

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FMCG IN INDIA

OVERVIEW

The consumer product sector mainly consists of personal care,cosmetics and home products segments. The sector can be further sub-divided into dental care products, soaps, detergents, surface cleaning

products, skin care, and hair care products.

The sector is divided into two distinct segments - the premium segmentcatering mostly to urban higher/upper middle class and the popular segment

with prices as low as 25%-30% of the premium segment, catering to masssegments in urban and rural markets. The premium segment is fewer pricessensitive and more brands conscious.

India's rural markets have seen a lot of activity in the last few years.Since penetration levels are pretty high in most categories, future growth cancome only from deeper rural penetration. FMCG majors are aggressivelylooking at rural India since it accounts for 70% of the total Indianhouseholds.

The industry is volume driven and is characterized by low margins. The

products are branded and backed by marketing, heavy advertising, slickpackaging and strong distribution networks. Also, raw material prices playan important role in determining the pricing of the final product.

Despite the strong presence of MNC players, the unorganized sector hasa significant presence in this industry. In most categories, unorganized sectoris almost as big as the organized sector, if not bigger.

Brand building and extensive distribution network is a key factor. Asuccessful brand is a precious asset, which could fetch a price many timesthe cost of assets required to make the product. A study conducted by A&M-ORG-MARG reflects that the share of branded goods is high for a number ofdaily used products, and the share of unbranded products is shrinking, albeitslowly.


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The industry is very clearly sold on Dr. C. K. Parklands concept of'value at the bottom of the pyramid'. They recognize that India is a value ledmarket. There are numerous examples of buoyant growth if the price

proposition is right (telecom, home loans, and consumer durables).

Therefore, the focus was on improving efficiencies, reducing costs,improving supply chain efficiencies to look at giving value to consumers, ina bid to bring about internal factors led growth.

The Indian FMCG sector is the fourth largest sector in the economy witha total market size in excess of US$ 13.1 billion. The Indian FMCG marketis 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 productcategories like jams, toothpaste, skin care, hair wash etc in India is low

indicating the untapped market potential.Around 70 per cent of the total households in India (188 million) reside

in the rural areas. The total number of rural households is expected to risefrom 135 million in 2001-02 to 153 million in 2009-10. This presents thelargest potential market in the world. The annual size of the rural FMCGmarket was estimated at around US$ 10.5 billion in 2001-02. With growingincomes at both the rural and the urban level, the market potential isexpected to expand further.


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CONSUMPTION-EXPENDITURE PATTERN IN

INDIA


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CLASSIFICATION OF FMCG PRODUCTS IN

INDIA

Household Care Products

Fabric wash (laundry soaps and synthetic detergents); household cleaners(dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticidesand mosquito repellents, metal polish and furniture polish).

Food and Health beverages Products

Health beverages; soft drinks; staples/cereals; bakery products (biscuits, bread,cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks; processedfruits, vegetables; dairy products; bottled water; branded flour; branded rice;

branded sugar; juices etc.

Personal Care ProductsOral care, hair care, skin care, personal wash (soaps); cosmetics and toiletries;deodorants; perfumes; feminine hygiene; paper products.

POLICY


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FDI Policy for FMCG

Automatic investment approval (including foreign technologyagreements within specified norms), up to 100 per cent foreign equity or 100per cent for NRI and Overseas Corporate Bodies (OCBs) investment, isallowed for most of the food processing sector except malted food, alcoholic

beverages and those reserved for small scale industries (SSI). 24 per centforeign equity is permitted in the small-scale sector. Temporary approvalsfor imports for test marketing can also be obtained from the DirectorGeneral of Foreign Trade. The evolution of a more liberal FDI policyenvironment in India is clearly supported by the successful operation ofsome of the global majors like PepsiCo in India.

Reservation Policy and Removal of Quantitative

Restrictions

The Indian government has abolished licensing for almost all food andagro-processing industries except for some items like alcohol, canesugar, 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 thereserved list. The lifting of quantitative restrictions (QRs) on April 1,2001, in line with the World Trade Organization (WTO) guidelines islikely to provide a fillip to imports in the FMCG sector.

This has resulted in a boom in the FMCG market through marketexpansion and greater product opportunities.


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Central and State Initiatives

Various states governments like Himachal Pradesh, Uttaranchal and

Jammu & Kashmir have encouraged companies to set up manufacturingfacilities in their regions through a package of fiscal incentives. Jammu andKashmir offers incentives such as allotment of land at concessional rates,100 per cent subsidy on project reports and 30 per cent capital investmentsubsidy on fixed capital investment up to US$ 63,000. The HimachalPradesh government offers sales tax and power concessions, capitalsubsidies 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 introducedprogressively. Excise and import duty rates have been reduced substantially.Many processed food items are totally exempt from excise duty. Customsduties have been substantially reduced on plant and equipment, as well as onraw materials and intermediates, especially for export production. Capitalgoods are also freely importable, including second hand ones in the food-

processing sector.

Food LawsConsumer protection against adulterated food has been brought to the

fore by The Prevention of Food Adulteration Act (PFA), 1954, whichapplies to domestic and imported food commodities, encompassing foodColour and preservatives, pesticide residues, packaging, labeling andregulation of sales.


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TRENDS & PLAYERS IN THE MARKET

The Indian FMCG sector is the fourth largest sector in the economy andcreates employment for three million people in downstream activities.Within the FMCG sector, the Indian food processing industry represented6.3 per cent of GDP and accounted for 13 per cent of the countrys exportsin 2003-04.

Critical Operating Rules

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 ruralareas have led to the mushrooming of the unorganized sector.


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Market Composition


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Most Indian FMCG companies focus on urban markets for value andrural 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. Ruraldemand constituted around 52.5 per cent of the total demand in 1998-99.Hence, rural marketing has become a critical factor in boosting bottom lines.As a result, most companies have offered low price products in convenient

packaging. These contribute the majority of the sales volume. Incomparison, the urban elite consume a proportionately higher value ofFMCGs, but not volume.


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Demand for FMCG products is set to boom by almost 60 per cent by2007 and more than 100 per cent by 2015. This will be driven by the rise inshare 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 consumercategories, further, indicates a latent demand for various product segments.For example, the upper end of very rich and a part of the consuming classindicate a small but rapidly growing segment for branded products. Themiddle segment, on the other hand, indicates a large market for the mass end

products.

The BRICs report indicates that Indias per capita disposable income,currently at US$ 556 per annum, will raise to US$ 1150 by 2015 - anotherFMCG demand driver. Spurt in the industrial and services sector growth is

also likely to boost the urban consumption demand.


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SEGMENTS & THE PLAYERS


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SOAPS The product categories can be classified into three segments; premium (Lux,

Dove), popular (Nirma, Cinthol), and economy (Nirma Bath, Lifebuoy). The

price differential between the premium and economy segments is about 2X.The popular and economy segments account for about 4/5ths of the entiremarket for soaps.

Penetration of toilet soaps is high at 88.6%. However per capita consumptionlevels remain low India's per capita consumption of soap at 460 gms perannum is lower than that of Brazil at 1,100 gms per annum.

Raw Materials

80% of the raw materials used in soap is oils. Since animal fats (which are

used worldwide and are far superior to vegetable oils and also cost effective)are banned in India, Indian soap manufacturers are forced to use vegetable fatsand hence settle for a poorer quality of soap. Various kinds of oils such as rice

bran, palm, soybean, neem, karanji, olive, kopra etc. are used formanufacturing of soap, depending upon its positioning. The most commonlyused oil is rice bran, followed by palm. Other oils are also added but in a smallquantity to get different variants of soaps.

Rice bran and palm oil are the most common base oil used in nearly all soaps;Apart from the base other additives used are perfumes, colour and other more

expensive oils in small quantities. Since these additives are added in smallquantities they do not make much difference to the cost structure. Thereforethe contribution (excluding packaging cost) on premium soaps vis--vis the

popular soaps are substantially higher.

Distribution network

Soaps are available in 5 m retail outlets in India, 3.75 m of which are in therural areas. Therefore availability of these products is not a problem. 75% ofIndia's population is in the rural areas; hence about 50% of the soaps are sold

in the rural markets. Growth

Rural demand growth is expected to occur mainly with consumers moving uptowards premium products. But in the past, the proportion of premium soapsto economy soaps has not changed much, in volume terms. This is because assome consumers move up the value chain with increase in disposable


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incomes, some consumers move down looking for cheaper substitutes asprices move up. This has been the case especially, as growth in soap priceshas generally outpaced overall consumer inflation.

DETERGENTS

The Indian fabric wash market consists of synthetic detergents (comprisingbars, powder and liquids) and oil-based laundry soaps.

Although the per capita consumption of detergents in India (2.7 kg pa) iscomparable to some countries like Indonesia, China and Thailand (around 2kg pa), it is lower than in others such as Malaysia, Philippines (3.7 kg) and theUSA (10 kg). The Indian detergent market is expected to grow at 7-9% pa involume terms.

The synthetic detergent market can be classified into premium (Surf, Ariel),mid-price (Rin, Wheel) and popular segments (Nirma), which account for15%, 40% and 45% of the total market, respectively. The product category isfairly mature and is dominated by two players, HLL and Nirma. Nirmacreated a revolution in the market by pioneering the concept of low-costdetergents. Currently, the market is highly segmented with the differential

between the premium and popular segments at almost 7X.

Growth

High consumer awareness and penetration levels will enable the market togrow at an average 8-10% per annum with slightly higher growth in the ruralareas. Higher penetration stems from popularity of low-cost detergents.Hence, besides increase in per capita consumption, there is tremendous scopefor movement up the value chain.

HLL, Nirma and P&G are the major players in the market with 40%, 30% and12% share, respectively. While HLL dominates the premium segment, Nirmais the leader in the popular segment.

PERSONAL CARE PRODUCTS

The annual value of personal products business in India, including oral care,hair cares and skin cares products, is currently estimated to be Rs 54.6 bn.

Just five years ago personal products were considered to be luxury items andattracted a high excise duty of 120% (except the oral care category). Gradual


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taxation reforms in India since 1991 have lowered the excise duty rates to areasonable 30%, making these products more affordable. At the same time,rising income levels have led to rising aspirations on the part on Indianconsumers. These factors have been the catalysts in the exponential growth

rate in the personal product category over the past five years. Personal care products are further divided into 6 categories: Oral care Hair care - oils Hair care - shampoos Skin care Cosmetics Feminine Hygiene

ORAL CARE

The oral care market can be segregated into toothpaste (60%), toothpowder(23%) and toothbrushes (17%). While 60% of toothpaste is sold on the family

platform, around 35% is sold on cosmetic propositions. On the other hand,while toothpowder accounts for 52% of the market, red toothpowder accountsfor 40% and black toothpowder accounts 8%. The penetration level oftoothpaste/powder in urban areas is 3X that in the rural areas. Traditionalmaterials such as neem and tobacco are popular for cleaning in the rural areas;Frequency of usage for toothpaste is only 1.5 times among other consumers,

compared with 2 times in the developed world. Per capita consumption oftoothpaste is only 70 gm compared with 300 gm in Europe and 150 gm inThailand.

Given the low per capita consumption and penetration rates, toothpastedemand is mainly being driven by the overall market growth of 8-10%.Toothpowder growth is also being driven by the rural segment.

HAIR CARE OILS

The hair oil market is huge, valued at Rs 6 bn. Due to the varied consumptionhabits of consumers across the country, where coconut oil and edible oil areinterchangeably used, the size of the market is likely to be higher thanestimated. More importantly, the market is growing at an impressive 6-7% involume terms despite the high penetration level.


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Usage of hair oil is a typical Indian traditional habit. It is perceived to offerbenefits of nourishment, hair strengthening, faster and better growth, andreduce the problem of falling hair. There are two types hair oil available in themarket; coconut oil and non greasy perfumed oil. Coconut oil comprises 2/3rd of the total market and the balance comprises the non greasy perfumed oil.

Usage of hair oil is an everyday habit with 50% of the population out of whichsome perceive that massaging the head with hair oil has a cooling impact. The

penetration of hair oil is fairly high at around 87% and evenly distributedamong the urban and rural areas.

HAIR CARE SHAMPOOS

The shampoo market in India is valued at Rs 4.5 bn with the penetration levelat 13% only. The market is expected to increase due to lower duties andaggressive marketing by players Shampoo is also available in a sachet, whichis affordable and makes upto 40% of the total shampoo sale.

The Indian shampoo market is characterized by a twin-benefit platform:cosmetic and anti-dandruff. It is basically an upper middle class product, as

more than 50% of the consumers use ordinary toilet soap for washing hair.While the awareness level is high, the penetration level is very low even in themetros which are only 30%. Urban markets account for 80% of the totalshampoo market, The penetration level is rapidly increasing due to decline inexcise duty, which was 120% in 1993 to 30% currently.

SKIN CARE

The skin care market is at a very nascent stage with basic requirements of theconsumers being protecting the skin from cold and dryness in winter, andimproving fairness of the skin. Most of the product categories are nichesegments.

While the awareness rate is high in both urban areas accounting for 60% andrural areas accounting for 30%, the penetration level is low for both. This is


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because of apprehensions that usage of skin care products may benefit in thelong run due to the chemical contents. Many households prefer to usetraditional and natural home made products.

Since the market is at a very nascent stage with very low penetration levels,the growth rates are expected to be higher at 24-255 over the next five years.

New players such as Avon and Oriflamme have entered the market with thenatural ingredient benefit platform, which could further spur growth.

COSMETICSThe cosmetic segment primarily comprises of colour cosmetics (face, eye, lipand nail care products), perfumes, talcum powder and deodorants. All theseare very small segments.

Talcum powder is the most popular cosmetic product in India. This market isestimated at Rs 3.5 bn and is yet growing at 10-12% pa. Awareness is veryhigh at 80%, with a penetration of 45.4% in urban areas and 25.2% in ruralareas. Pond's dominates the talcum market with a 70% share followed byJohnson & Johnson, which has a 15% market share.

Attar and alcoholic perfumes each account for 50% of the fragrance marketestimated at Rs 3 bn. In the alcoholic perfume market, 1/3rd represented by anunorganized, with the balance largely imported. The June 98 budget halved

duties to 50%. Lakme has a minor presence in the segment.

Perception of damage to skin on account of chemical ingredients restrictsusage of face care products. The nail polish market is the largest at Rs 1.25bnfollowed by the lipstick market at Rs 0.7 bn. All segments in this category aregrowing at Rs 25-30%.

Deodorants have a very negligible presence in the Indian market with anestimated of Rs 0.3 bn. Worldwide, deodorants is the largest market followed

by skin care, shampoos and toothpaste. HUL has launched a couple ofproducts in this segment.

Feminine Hygiene Most women use cloth during their menstruation days.This is because price is the biggest entry barrier. A pack of 10 sanitarynapkins would cost Rs 30-40. Therefore, average spending during themenstruation days would be around Rs 48, which is expensive by Indian


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standards.

While awareness in the urban areas would be reasonable given the substantialadvertising, the penetration rate is abysmally low at 10%. The product isvirtually absent in rural markets.

Given the low base and increasing awareness of hygienic products, the marketis growing at a robust 20-25%. Entry of cheaper brands, at Rs. 20 for a packof 10, has spurred market growth. Currently, the market is mainly urban.


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INVESTMENTS

The FMCG sector accounts for around 3 per cent of the total FDI inflowand roughly 7.3 per cent of the total sectoral investment. The food-processing sector attracts the highest FDI, while the vegetable oils andvanaspati sector accounts for the highest domestic investment in the FMCGsector.

DOMESTIC PLAYERS

There are various investors including names like Britannia India Limited(BIL), Dabur India Limited, Indian Tobacco Corporation Limited (ITCL),Marico, Nirma Limited etc.

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 foodprocessing business) and the Nusli Wadia Group hold a 45.3 per cent equitystake in BIL through AIBH Ltd (a 50:50 joint venture). BIL is a dominant


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player in the Indian biscuit industry, with major brands such as Tigerglucose, Mariegold, Fifty-Fifty, Good Day, Pure Magic, Bourbon etc.

The company holds a 40 per cent market share in the overall organizedbiscuit market and has a capacity of 300,000 tonne per annum. Currently, the

bakery product business accounts for 99.1 per cent of BILs turnover. Thecompany reported net sales of US$ 280 million in 2002-03. BritanniaIndustries Ltd (BIL) plans to increase its manufacturing capacity throughoutsourced contract manufacturing and a greenfield plant in Uttaranchal toexpand its share in the domestic biscuit and confectionery market.

Dabur India Ltd

Established in 1884, Dabur India Ltd is the largest Indian FMCG andayurvedic products company. The group comprises Dabur Finance, Dabur

Nepal Pvt Ltd, Dabur Egypt Ltd, Dabur Overseas Ltd and DaburInternational 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 structureand focus on its core businesses of fast-moving consumer good products andover-the-counter drugs. Under the restructured set-up, the company plans toincrease direct coverage to gap outlets and gap towns where Dabur is not

present. A roadmap is also being prepared to rationalise the stockistsnetwork in different regions between various products and divisions.

Indian Tobacco Corporation Ltd (ITCL)

Indian Tobacco Corporation Ltd is an associate of British AmericanTobacco with a 37 per cent stake. In 1910 the companys operations wererestricted to trading in imported cigarettes. The company changed its nameto ITC Limited in the mid seventies when it diversified into other

businesses. ITC is one of Indias foremost private sector companies with aturnover of US$ 2.6 billion. While ITC is an outstanding market leader in its


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traditional businesses of cigarettes, hotels, paperboards, packaging andagriexports, it is rapidly gaining market share even in its nascent businessesof branded apparel, greeting cards and packaged foods and confectionary.After the merger of ITC Hotels with ITC Ltd, the company will ramp up itsgrowth plans by strengthening its alliance with Sheraton and through focuson international projects in Dubai and the Far East. ITCs subsidiary,International Travel House (ITH) also aims to launch new products andservices by way of boutiques that will provide complete travel services.

Marico

Marico is a leading Indian Group incorporated in 1990 and operating inconsumer 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 Silrange of processed foods. It has six factories, and sub-contract facilities for

production. In 2003-04, the company reported a turnover of US$ 200million. The overseas sales franchise of Maricos branded FMCG productsis one of the largest amongst Indian companies.

It is also the largest Indian FMCG company in Bangladesh. The companyplans to capture growth through constant realignment of portfolio along

higher margin lines and focus on volume growth, consolidation of marketshares, strengthening flagship brands and new product offerings (2-3 new

product launches are expected in 2004-05). It also plans to expand itsinternational 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 incorporatedin 1980 as a private company and was listed in fiscal 1994. Associatecompanies Nirma Detergents, Shiva Soaps and Detergents, Nirma Soapsand Detergents and Nilnita Chemicals were merged with Nirma in 1996-1997. The company has also set up a wholly owned subsidiary NirmaConsumer Care Ltd, which is the sole marketing licensee of the Nirma brandin India. Nirma also makes alfa olefin, fatty acid and glycerin. Nirma is one


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of the most successful brands in the rural markets with extremely low pricedofferings. Nirma has plants located in Gujarat, Madhya Pradesh and UttarPradesh. Its new LAB plant is located in Baroda and the soda ash complex islocated in Gujarat. Nirma has strong distributor strength of 400 and a retailreach 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 masssegments for future growth.


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FOREIGN PLAYERS

Foreign firms include names like Cadbury India Limited (CIL), Cargill,Colgate- Palmolive India Limited, Coca Cola, Hindustan Unilever Limited(HUL), Nestle India Limited (NIL), PepsiCo, Procter & Gamble and HealthCare Limited etc.

Cadbury India Ltd (CIL)

Cadbury Indian Ltd is a 93.5 per cent subsidiary of Cadbury Schweppes

Plc, UK, and a global major in the chocolate and sugar confectioneryindustry. CIL was set up as a trading concern in 1947 and subsequently

began its operations with the small scale processing of imported chocolatesand food drinks. CIL is currently the largest player in the chocolate industryin India with a 70 per cent market share. The company is also a key player inthe malted foods, cocoa powder, drinking chocolate, malt extract food andsugar confectionery segment. The company had also entered the soft drinksmarket with brands like Canada Dry and Crush, which were subsequentlysold to Coca Cola in 1999. Established brands include Dairy Milk, Perk,

Crackle, 5 Star, clairs, Gems, Fructus, Bournvita etc. The companyreported net sales of US$ 160 million in 2003. The company plans toincrease the number of retail outlets for future growth and market expansion.

Cargill

Cargill Inc is one of the worlds leading agri-business companies with astrong presence in processing and merchandising, industrial production andfinancial services. Its products and geographic diversity (over 40 productlines with a direct presence in over 65 countries and business activities inabout 130 countries) as well as its vast communication and transportationnetwork help optimize commodity movements and provide competitiveadvantage. Cargill India was incorporated in April 1996 as a 100 per centsubsidiary of Cargill Inc of the US. It is engaged in trading in soybeanmeals, wheat, edible oils, fertilizers and other agricultural commodities


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besides marketing branded packaged foods. It has also set up its ownanchorage facilities at Rosy near Jamnagar in Gujarat for efficient handlingof its import and export consignments

Coca Cola

Coca-Cola started its India operations in 1993. The Coca-Cola system inIndia comprises 27 wholly company-owned bottling operations and another17 franchisee-owned bottling operations. A network of 29 contract-packersalso manufactures a range of products for the company. Leading Indian

brands Thums Up, Limca, Maaza, Citra and Gold Spot exist in theCompanys international family of brands along with Coca-Cola, Diet Coke,Kinley, Sprite and Fanta, plus the Schweppes product range. During the pastdecade, 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 itsoperations.

Colgate-Palmolive India

Colgate Palmolive India is a 51 per cent subsidiary of Colgate PalmoliveCompany, USA. It is the market leader in the Indian oral care market, with a51 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 inshaving products, which are sold under the Palmolive brand. Other well-known consumer brands include Charmis skin cream and Axion dish wash.The company reported sales of US$ 226 million in 2003-04. The companysstrategy is to focus on growing volumes by improving penetration throughaggressive campaigning and consumer promotions. The company plans tolaunch new products in oral and personal care segments and is prepared tocontinue spending on advertising and marketing to gain market share.Margin gains are being targeted through efficient supply chain managementand bringing down cost of operations.


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H J Heinz CoA US$ 8.4 billion American foods major, H J Heinz Co comprises 4,000

strong brand buffet in infant food, sauces and condiments. The companywas the first to commence manufacturing and bottling of tomato ketchup in1876. In India, Heinz has a presence through its 100 per cent subsidiaryHeinz India Pvt Ltd. Heinz acquired the consumer products division of

pharmaceutical major Glaxo in 1994. Heinzs product range in Indiaconsists of Complan milk beverage, health drink Glucon-D, infant foodFarex and Nycil prickly heat powder, besides the Heinz ketchup range.

Hindustan Unilever Ltd (HUL)

Hindustan Unilever Ltd is a 51 per cent owned subsidiary of the Anglo-Dutch giant Unilever, which has been expanding the scope of its operationsin India since 1888. It is the countrys biggest consumer goods companywith net sales of US$ 2.4 billion in 2003. HUL 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 careproducts like soaps, detergents, shampoos, skin care products, Colourcosmetics, deodorants and fragrances. It is also the market leader in tea,

processed coffee, branded wheat flour, tomato products, ice cream, jams andsquashes. HUL enjoys a formidable distribution network covering over3,400 distributors and 16 million outlets. In the future, the company plans toconcentrate on its herbal health care portfolio (Ayush) and confectionary

business (Max). Its strategy to grow includes focusing on the power brandsgrowth through consumer relevant information, cross category extensions,

leveraging channel opportunities and increased focus on rural growth.

Nestle India Ltd (NIL)


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Nestle India Ltd a 59.8 per cent subsidiary of Nestle SA, Switzerland, isa leading manufacturer of food products in India. Its products includesoluble coffee, coffee blends and teas, condensed milk, noodles (81 per centmarket share), infant milk powders (75 per cent market share) and cereals(80 per cent market share). Nestle has also established its presence inchocolates, confectioneries and other processed foods. Soluble beveragesand milk products are the major contributors to Nestls total sales. Some of

Nestls popular brands are Nescafe, Milkmaid, Maggi and Cerelac. Thecompany has entered the chilled dairy segment with the launch of NestleDahi and Nestle Butter. Nestle has also made a foray in non-carbonated cold

beverages segment through placement of Nestea iced tea and NescafeFrappe vending machines. Exports contribute to 23 per cent of its turnoverand the company reported net sales of US$ 440 million in 2003.

PepsiCo

PepsiCo is a world leader in convenient foods and beverages, withrevenues of about US$ 27 billion. PepsiCo brands are available in nearly200 markets across the world. The company has an extremely positiveoutlook for India. Outside North America two of our largest and fastestgrowing businesses are in India and China, which include more than a thirdof the worlds population (PepsiCos annual report). PepsiCo entered India

in 1989 and is concentrating on three focus areas - soft drink concentrate,snack foods and vegetable and food processing. PepsiCos success is theresult of superior products, high standards of performance and distinctivecompetitive 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 itscurrent name in 1998, reflecting the two key segments of its business. P&G,


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USA has a 65 per cent stake in PGHHCL. The parent also has a 100 per centsubsidiary, Procter & Gamble Home Products (PGHP). The overall portfolioof the company includes healthcare; feminine-care; hair care and fabric care

businesses. PGHH operates in just two business segments - Vicks range ofcough & cold remedies and Whisper range of feminine hygiene. Thedetergent and shampoo business has been relocated globally to Vietnam.The company imports and markets most of the products from South EastAsian countries and China, while manufacturing, marketing and export ofVicks and sanitary napkins has been retained in India. The companyreported sales of US$ 91 million in 2002-03. The parent company hasannounced its plan to explore further external collaborations in India to meetits global innovation and knowledge needs.


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POTENTIAL INVESTMENTS

Rural Markets

The Indian rural market with its vast size and demand base offers a hugeopportunity for investment. Rural India has a large consuming class with 41

per cent of Indias middle-class and 58 per cent of the total disposableincome. With population in the rural areas set to rise to 153 millionhouseholds by 2009-10 and with higher saturation in the urban markets,future growth in the FMCG sector will come from increased rural and smalltown penetration. Technological advances such as the internet and e-commerce will aid in better logistics and distribution in these areas. AlreadyIndian corporate such as HLL and ITC have identified the opportunity andhave initiated projects such as Project Shakti and e-Choupal to first,expand rural income, and then, to penetrate this market.

PROJECT SHAKTI

o FMCG giant Hindustan Lever initiated Project Shakti to spurgrowth and increase the penetration of its products in ruralIndia while changing lives and boosting incomes. Through acombination of micro-credit and training in enterprisemanagement, women from self-help groups turned direct-to-home distributors of a range of HUL products and helped thecompany test hitherto unexplored rural hinterlands. The projectwas piloted in Nalgonda district in Andhra Pradesh (AP) in2001, it has since been scaled up and extended to over 5,000villages in 52 districts in AP, Karnataka, Gujarat, Chattisgarh,Orissa and Madhya Pradesh with around 1,000 women


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Entrepreneurs in its fold. The vision is to create about 11,000Shakti entrepreneurs covering 100,000 villages and 100 millionrural consumers by 2010.

For HUL, greater penetration in rural areas is also imperativesince over 50 per cent of its incomes for several of its productcategories like soaps and detergents come from rural India. The

project has borne fruit for HUL. In Andhra Pradesh, so far,since the experiment began, HUL has seen 15 per centincremental sales from rural Andhra, which contributes 50 percent to overall sales from Andhra of HUL products.

E-CHOUPAL

o An example of the successful application of IT is the e-Choupalexperiment kicked off by diversified tobacco giant ITC. ITChas designed and set up internet kiosks called e-Choupals to

support its agricultural product supply chain. The e-Choupalsare totally owned and set up by ITC with the operators nothaving any investment or risk of their own. There are fourkinds of e-Choupals tailored for shrimps, coffee, wheat andsoybeans. The focus is on creating internet access for globalmarket information to guide production and supply decisions. It

provides price information and thus, price certainty to thefarmers. In addition, the farmers get access to operationalinformation, developed by ITC experts, pertaining to cropping,seeds, fertilizers etc. The initial benefits of the ITC effort

include a substantial reduction in transaction costs, from 8 percent to just 2 percent. These gains are shared roughly equally

between ITC and individual farmers. The longer-term goal is touse e-Choupals as sales points for soybean oil and a range ofother consumer goods. ITC has also set up its first rural mallnear Bhopal, where it distributes products of other FMCGmajors as well. Hence, incomes generated through e-choupals


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will be targeted by the FMCG major to drive their productsales.

EXPORT POTENTIAL

India has a location advantage that can be exploited to use it as asourcing base for FMCG exports. Export of pre-prepared meals with Indianvegetables for large Asian ethnic population settled in developed countries isa very big opportunity for India. South East Asia, which is presently beingcatered to by USA and EU, can be sourced from India due to its lowerfreight cost.

Investments can also be made in Indian dairy industries tomanufacture and package dairy food (through contract or localcollaboration) for export to Middle East, Singapore, Malaysia, Indonesia,Korea, Thailand and Hong Kong. Commodities like dryMilk, condensed milk, ghee and certain cheese varieties that are utilized asingredients in foreign countries can also be exported. These markets can beexpanded to include value-added ingredients like packaged cheese sauce anddehydrated cheese powders. Large

Export potential also exists in the Soya products industry.

SECTORAL OPPURTUNITIES

According to the Ministry of Food Processing, with 200 million peopleexpected to shift to processed and packaged food by 2010, India needsaround US$ 28 billion of investment to raise food processing levels by 8-10

per cent. In the personal care segment, the lower penetration rates alsopresent an untapped potential. Key sectoral opportunities are mentionedbelow:

Staple: branded and unbranded: While the expenditure on mass-based, highvolume, low margin basic foods such as wheat, wheat flour andhomogenized milk are expected to


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Increase substantially with the rise in population, there is also a market forbranded staples is also expected to emerge. Investment in branded staples islikely 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, yetonly 15 per cent of the milk is processed. The US$ 2.4 billion organizeddairy industry requires huge investment for conversion and growth.Investment opportunities exist in value-added products like desserts,

puddings etc. The organized liquid milk business is in its infancy and alsohas 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 forexpansion 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 at15 per cent per annum. Growth of dual income households, where bothspouses are earning, has given rise to demand for instant foods, especially inurban areas. Increased health consciousness and abundant production ofquality soybean also indicates a growing demand for Soya food segment.

Personal care and hygiene: The oral care industry, especially toothpastes,remains under penetrated in India with penetration rates below 45 per cent.With rise in per capita incomes and awareness of oral hygiene, the growth

potential is huge. Lower price and smaller packs are also likely to drivepotential up trading. In the personal care segment, according to forecastsmade by the Centre for Industrial and Economic Research(CIER), detergent demand is likely to rise to 4,180, 000 metric tonnes by2011-12 with an annual growth rate of 7 per cent between 2006 and 2012.The demand for toilet soapis expected to grow at an annual rate of 4 per cent between 2006-12 to870,000 metric tonnes by 2011-12. Rapid urbanization is expected to propel

the demand for cosmeticsto 100,000 metric tonnes by 2011-12, with an annual growth rate of 10 percent.


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Beverages: The US$ 2 billion Indian tea market has been growing at 1.5 to2 per cent annually and is likely to see a further rise as Indian consumersconvert from loose tea to branded tea products. In the aerated drinkssegment, the per capita consumption of soft drinks in India is 6 bottlescompared to Pakistan's 17 bottles, Sri Lanka's 21, Thailand's 73, thePhilippines 173 and Mexico's 605. The demand for soft drink in India isexpected 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 coffeeconsumption in India is being promoted by the coffee chains and by the

emergence of instant cold coffee. According to CIER, demand for coffee isexpected to rise to 535,000 metric tonnes by 2012, with an annual growthrate of 5 per cent between 2006-12.

Edible oil: The demand for edible oil in India, according to CIER, isexpected to rise to 21 million tonnes by 2011-12 with an annual growth rateof 7 per cent per annum.

Confectionary: The explosion of the young age population in India willtrigger a spurt in confectionary products. In the long run the industry isslated to grow at 8 to 10 per cent annually to 870,000 metric tonnes by 2011-12.


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MERGERS AND ACQUISITIONS IN THE

FMCG SECTOR IN INDIA

There were 27 deals in total amounting to Rs 34.2 billion( $786million)

The deal activity in the sector was dominated by the spirits sub-sector,mainly due to exit sales by the Jumbo Group to the UB Group andSAB Miller, deals that the market ha been expecting for the last 10years.

Vijay Mallya's United Breweries Group (through Group entities McDowell & Co, Phipson Distillery, United Spirits and United BreweriesHoldings) acquired a controlling stake in the Jumbo Group's ShawWallace & Company for a total deal value of Rs 16.2 billion ($371.6million). The deal is made up of an acquisition of a 50 per cent stakefrom the promoters (including a non-compete premium) a tender offerfor an additional 25 per cent from other shareholders, and theacquisition of two distribution subsidiaries.

The other Jumbo Group Company to be sold was Shaw WallaceBreweries. SAB Miller increased its stake by 50 percentage points to99 per cent in the company through its Indian subsidiary, MysoreBreweries. The stake was held by Shaw Wallace & Company and,hence, had SAB Miller not undertaken this acquisition, Shaw Wallace

Breweries would effectively have been a joint venture between tworivals UB and SAB Miller.

McLeod Russell India (part of the B. M. Khaitan Group)acquireda 90 per cent stake in Williamson Tea Assam for Rs 2.1 billion($48.2 million). Of this, a 70 per cent stake came through theacquisition of holding company Borelli Tea Holdings from


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Williamson Tea of UK, while the rest is to be acquired by a tenderoffer to other shareholders.

P&Gs recent acquisition of Gillette for 31 billion, of which only4 billion was for tangible assets. This clearly demonstrates howcrucial marketing should be to an organizations corporate future. Ofthe remaining 27 billion of intangible assets, only part of it wasattributed to the strength of their brands. This has created the world'slargest consumer products company.

Acquisition of Balsara by Dabur

Balsara has three oral care brands - Promise which has a uniqueclove oil positioning, Babool toothpaste in the value segment andMeswak toothpaste in the premium segment. Together, the companyholds 6% share of the oral care market. Balsara's were the pioneers inherbal oral care products launched in the seventies. Balsara's herbaloral care range is a good strategic fit for Dabur whose products arealso positioned on the herbal platform.

The acquisition enables Dabur to enter the Rs.20 bn household carebusiness through well-entrenched brands. Balsara has a diverseportfolio of brands in extremely attractive categories which aregrowing at a CAGR of 15-25% pa.

45% of Balsara revenues are from west & south. These wouldcomplement Dabur's regional saliency, as Dabur has a higher revenuesshare coming from the markets in the north and the east. Balsara has a

direct distribution reach of 340,000 and 1.5 mn indirect reach.

Economies of scale from combined business

The acquisition would provide several synergies to Dabur on themanufacturing and marketing front:


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Balsara has three manufacturing facilities at Silvasa (Home Products),Kanpur (Home products) and Baddi (Oral Care products). Rs.150 mnhave been invested in the Baddi unit and fiscal benefits will startflowing in from the FY06.

Combined business would provide economies of scale in marketing,sales and distribution.

Herbal equity of brands like Babool and Meswak fits well withDabur's herbal specialist strategy.

Backend synergies in supply chain, operations, purchase, IT, etc.

Balsara's international business, which is currently 15% holds goodgrowth potential. Balsara does some private label manufacturing forglobal companies, which could be a future area of growth.

The acquisition also marks Dabur's entry into niche segments ofhousehold care products providing it completely new area of growth which could be capitalized on in the future.


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CONCLUSION

The organized FMCG industries are facing lot of opposition from traders,

politicians and the government has to formulate a separate policy for the

industry.

FDI needs to be encouraged and land acquisition rules required

modification. FMCG has to be recognized as a separate industry and to be

given fair treatment by all.

The first step should be to acknowledge that the FMCG industries need a

healthy balance between predictability and innovation.

Predictability, as much as is possible in sourcing, could be represented by

relationships with known and trusted suppliers. It would take a very strong

individual, and a very large safety net, to work every season with large

numbers of unknown, new suppliers. It would also require a lot of

management time and effort to keep educating new suppliers about the

business and its needs.

However, equally, it must be acknowledged that the FMCG business is not

like automobile or aircraft businesses where practically the entire market and

supply base is known.


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Nor is it as expensive to develop new products or product components. Inthe FMCG industry cost hundreds of millions of dollars to develop - and

with such high stakes, buyers tend to select their suppliers carefully and,

once the relationship is established, stick to the relationship for a fairly long

period of time, with both parties investing resources in it for mutual long-

term gain.

In the FMCG industry, on the other hand, most product development

investment does not exceed a few thousand dollars. This is well within the

capability of not only the largest preferred suppliers of the large chain of

customers, but most of the supply base around the world. Whether design-

led or technology-led, new products and new looks are constantly being

created. Similarly, innovative business practices that generate more

responsive factories improve quality or reduce costs, are not the sole domain

of large, old and established companies.

A focus on cost / margin / profitability management: how can we make the

management of sourcing more efficient in terms of effort and cost?

An eye towards innovation and risk-management: how can we tap into newsuppliers without expending too much effort in development only to find

that the relationship does not work out?


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There are many answers to these questions. One of them, which provide a

structure or framework in which to work, is the link between product-type

and sourcing strategy.

BIBLIOGRAPHY

www.daubur.com

www.itcl.com

www.hul.com

www.hul.com

www.aon.com

www.google.com

www.msn.com

The times of India

Economic times

Books
http://www.proquest.com/http://www.proquest.com/http://www.proquest.com/http://www.proquest.com/http://www.proquest.com/http://www.google.com/http://www.msn.com/http://www.proquest.com/http://www.proquest.com/http://www.proquest.com/http://www.proquest.com/http://www.proquest.com/http://www.google.com/http://www.msn.com/

an analysis of the indian fmcg industries

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