MIT Sloan

15.227B

Special Seminar in International

Management – India

The FMCG Industry

Name: Karen Kwan

Professor: Dr. Gupta

Date: April 12, 2004

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India liberalized its economic policies in 1991 and started a move towards the adoption of the free-

market economy model from the state-regulated model. In 2001, even though India’s per capita national

income was low (US $340), its purchasing power parity ranked 5th in the world1. Companies need to be

aware of this important feature of the Indian economy. During the Sloan India trip, it became very apparent

that there is great disparity in income and socio-economic conditions in different parts of India. The India

market offers a very complex marketing arena and companies might have to tailor to specific taste for many

different sub-markets. While many developments in certain urban parts of the country are good leaps forward,

most parts of the rural area remain very poor. Another observation is that India is a relatively young country,

with a considerable percentage of its population below 20 years old. The younger population (especially those

in cities) often constitutes a harder customer base to target. Companies in the fast moving consumer goods

sector (FMCG), be them multinational corporations like L’Oreal or locally started companies like Godrej need

to adopt strategies that take account of the aforementioned factors.

India has come a long way in mitigating restrictions on import of goods covered under the General

Agreement on Tariffs and Trade and in executing its market access commitments made to the WTO in 19952.

My first trip to India was very educational and I became especially interested in consumer products that are

not durable, such as food and beverages, hair products, and skin care.

Consumer Household Categorization

In order to better understand the Indian population’s consumption behavior and trends, we should

examine the structure of the Indian consumer households. Officially, the Indian population is classified into

give groups according to the annual income of household – lower income, three different subgroups of middle

income, and higher income. A more useful categorization of the Indian population was presented by the

1 “Overview of India’s Consumer Goods Sector”, Ace Global Private Limited, March 2001, www.ice.it/estero2/india/market.pdf p. 6

2 Ibid., p.2

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National Council for Applied Economic Research. Its methodology uses consumption indicators to classify

households3.

Figure 1: The Number of Indian Households (in millions)

Consumer

Category

Annual Income

in Rs 1996 2001

Projected

2007

The Rich Above

Rs 215,000 1.2 2.0 6.2

The Consuming Rs 45,000 –

215,000 32.5 54.6 90.9

The Climbers Rs 22,000 –

45,000 54.1 71.6 74.1

The Aspirants Rs 16,000 –

22,000 44.0 28.1 15.3

The Destitute Below

Rs 16,000 33.0 23.4 12.8

TOTAL 164.8 180.7 199.2Source: NCAER

“Overview of India’s Consumer Goods Sector”, Ace Global Private Limited, March 2001, www.ice.it/estero2/india/market.pdf p. 7

As we can see, the higher consuming classes (the rich, the consuming, and the climbers) are

growing in numbers, while those in the lower consuming classes (the aspirants and the destitute) are

decreasing. This signifies potential growth in the FMCG market. We should also look at the age

composition of the India population. Relative to several developed and developing countries, India is a

young nation. In 2001, over 45% of the population is below 20 years old (see Figure 2). The projected

percentage for 2006 is close to 42%4. The age distribution of India is one of the reasons that impulse

products and leisure-related consumer products have experienced increased demand in major cities.

FMCG companies need to pay close attention to this age group, which is expected to unlock some new

3 “Overview of India’s Consumer Goods Sector”, Ace Global Private Limited, March 2001, www.ice.it/estero2/india/market.pdf p.

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4 Ibid., p.8.

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waves of consumer demand. The changing distribution of the age groups for a particular market often

impacts demand, and warrants a strategy that accounts for this factor.

Figure 2: Age Distribution of India Population (in millions)

Year Kids

age 0-4

Children

age 5-14

Adolescent

s

age 15-19

Young

Adults

age 20-34

Mid-aged

age 35-54

Senior

55 and

above

Total

1996 119.5 233.2 90.7 224.0 178.1 88.7 934.2

2001 108.5 239.1 109.0 246.8 207.3 101.7 1012.4

2006 113.5 221.2 122.4 279.1 239.2 118.7 1094.1Source: “Overview of India’s Consumer Goods Sector”, Ace Global Private Limited, March 2001,

www.ice.it/estero2/india/market.pdf

p. 8

Figure 3: A Snapshot of India

1991 2000 2005

Population 846 million 1000 million 1087 million

Population

below 20

400 million 471 million 480 million

Urbanizatio

n

26% 32% 33%

Literacy

Level

52% 58% 65%

*Source: Hindustan Lever Limited Presentation to CLSA Investor Meet, Hong Kong, May 2001, p. 5

Especially in major cities, disposable income has been growing in the past few years. In 1991,

the urbanization of India was estimated to be around 26% while in 2005, it was expected to rise to 33%5.

Major cities like Mumbai, Delhi, Chennai, Hyderabad, Ahmedabad, and Bangalore account for most of

the upper strata consumers6. And the Eastern, Northeastern, and Central parts of India possess the

largest portion of less developed areas.

A Young Country with Scope for Increased Consumption

5 Hindustan Lever Limited Presentation to CLSA Investor Meet, Hong Kong, May 2001, p. 56 Overview of India’s Consumer Goods Sector, p.7, www.ice.it/estero2/india/market.pdf

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While it is important to note that the countries to be compared have different per capita income,

culture, and socio-economic conditions, India’s per capita consumption of the various consumer

products, food, and beverages are far below those in Brazil, Pakistan, and the US, except for its ice-

cream consumption relative to Pakistan. The numbers in Figures 4a and b give us a very rough idea that

there is still a large potential upside to India’s per capita consumption of perishable consumer goods.

Shampoo, an essential personal consumer product, has a per capita consumption of 16 ml in India,

relative to Brazil’s 444 ml (over 27 times) and the US’ 1018 ml (over 64 times)7. The scope for

increased consumption needs to be taken into consideration as India experiences growing disposable

income. In the FMCG market in India, there are strong local competitors with large scale and low cost

structures as well as the presence of major multinational corporations including P&G, Colgate, L’Oreal

and Nestle. The India consumer products market demands not only value, but also responds to

innovation.

Figure 4a: Per Capita Consumption of Consumer Products (2001)

Product

Category India Brazil U.S.

Personal

Wash

0.5 kg 1.1 kg 2.0 kg

Fabric Wash 2.6 kg 7.2 kg 13.1 kg

Toothpaste 40 ml 358 ml 299 ml

Shampoo 16 ml 444 ml 1018 ml

*Source: Hindustan Lever Limited Presentation to CLSA Investor Meet, Hong Kong, May 2001, p. 7

Figure 4b: Per Capita Consumption of Selected Food and Beverages (2001)

Product

Category India Pakistan U.S.

Ice Cream 0.98 liter 1.00 liter 22.0 liter

Edible Fats 7.7 kg 12.0 kg 33.0 kg

Tea 0.65 kg 0.95 kg 2.6 kg (UK)

*Source: Hindustan Lever Limited Presentation to CLSA Investor Meet, Hong Kong, May 2001, p. 8

The overall value of the India domestic market for consumer products was estimated to be over

US$27 billion in 2000. It could be broken down into: US$6.2 billion food products sector, US$5.4 billion

7 Hindustan Lever Limited Presentation to CLSA Investor Meet, Hong Kong, May 2001, p. 7 and 8.

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household goods sector, and $16.2 billion person products sector. Within the US$27 billion, exports

constituted less than US$10 billion and imports amounted to close to $2.7 billion8. Hindustan Lever,

which is the market leader in many consumer product categories (e.g., #1 in market share of personal

wash, hair care, skin care, ice-cream, and branded tea in 2000) and a strong number 2 in products like

oral care, hair oils, and instant coffee, put together a report that came to the following conclusions. It

needed to improve the profitability of its food business, grow in channels, and be more careful about its

brand and marketing strategies. These could shed some insight into the overall FMCG market. For

instance, the Indian food market is very different in that it has a low share of added-value products due

to lack of adequate storage and road infrastructure (so risks of spoilage, etc.) in many parts of India,

much direct consumption of agricultural outputs by farmers, and cooking habits. As a result, historically,

India has not been a particularly good market for added-value food products. But this sector could see

some growth in the next several years. Companies like HL are trying to focus on improving profitability

of food products by investing in new categories, setting up new ways of distributing ice cream, and

increasing the margin on more traditional products like tea9.

One way to look at the India market as a good location or not is to use Porter’s Diamond

framework. If we look at input factors, we see that there is low-cost labor in India. On the rivalry side,

there are a lot of relevant players, including both multinational consumer products companies and local

players. These two factors are both favorable for India as a location. However, on the infrastructure

side, the quality is still poor, especially in rural areas. And power supply and telecommunication

structures are not very reliable, causing many multinational corporations to develop their own power

resources. Poor infrastructure in the rural areas constitutes one reason that marketing and distributing

consumer goods effectively is a challenge. And the rural area market is very important for growing the

overall India consumer products market. On the market demand side of the Porter Diamond, we see

that even though India has a very big domestic market; due to the great disparity in tastes and market

conditions in different parts of the country, the market is actually very very complex.

8 Overview of India’s Consumer Goods Sector, p.13, www.ice.it/estero2/india/market.pdf9 Hindustan Lever Limited Presentation to CLSA Investor Meet, Hong Kong, May 2001, p. 29-32.

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Drive Market Expansion through New Channels and Geographies

The Tricky Rural Market

The rural population in India spans across different parts of the country and in close to 600,000

villages. In the rural area, there are over 3.8 million retail outlets (which could take the form of a hut, a

shack, a stall, or a store). Rural consumers’ expenditure is highly correlated to agriculture output, which

is affected by monsoons and other factors. These consumers tend to be highly sensitive to price and

thus prefer small consumption packages10. Historically, there has also been a tendency towards

discounting intangible benefits and more functional product attributes for the rural buyers.

Multinational corporations know that they need cheaper products for the rural buyer. The other

key thing is that word of mouth spreads fast within a village. “If one consumer is not happy, the entire

village will know and the company can then kiss that market goodbye,” commented Godrej’s Ghatak.11

What this means is that in addition to the product and its pricing, companies need to be careful about

how the customer is serviced. A bad customer experience can be spread quickly by word of mouth in a

village. The India market saw less than 1% of organized retail for consumer products. Even for the food

products market specifically, organized retail was responsible for less than 1.5% of it in 200112.

Organized retail might be growing especially for the upmarket customers, but it remains a relatively

small portion of overall retail. Consumer product companies realize that they need to pay attention to

the potential growth of organized retail for urban, more upscale customer segments, but that they need to

foster good relationships with the dispersed retail outlets and good word of mouth in the rural areas (for

example, by promoting a pleasant buying experience in individual outlets).

Be Sensitive to Fast-Growing Products that Can Be Unique to India or Parts of India:

The Example of Fairness Cream

According to some studies, “fairness products” which can range from skin lightening cream,

bleaching agents to sunscreen, make up close to 40% of India’s entire cosmetic industry’s profits. 10 Overview of India’s Consumer Goods Sector, p.8-10, www.ice.it/estero2/india/market.pdf 11 us.rediff.com/money/2004/apr/03spec1.htm12 Overview of India’s Consumer Goods Sector, p.12, www.ice.it/estero2/india/market.pdf

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Hindustan Lever – producer of the Fair & Lovely line – has about 50% of the market share.13 Fairness

cream and others are more popular in Asia than other parts of the world. The rise of various highly

exposed beauty queens provides some aspirational images of the beautiful women in India. Ranging

from Miss Universe 1994’s Sushmita Sen and Miss World 1994’s Aishwarya Rai to the more recent

Miss Universe 2000’s Lara Dutta and Miss World 2000’s Priyanka Chopra, these particularly tall, thin,

and honey-colored skin beauties represent an aspirational beauty to many Indian women who do not

look like that and who spend a lot of their time working in harsh conditions. There are many historical

and social reasons that give rise to the importance of beauty queens in the marketing of consumer

goods. The beauty queens are often spokesperson for cosmetics as well as other consumer products

like soaps and toothpaste. The beauty pageants themselves are also sponsored, such as the Palmolive

Femina Miss India and Colgate Gel Miss Body Beautiful14. Clearly, consumer products companies in

cosmetics and toiletries need to play the game of the market’s marketing ties with beauty queens and

the trend of fairness products. Another fast growing category in the India market is hair color. Figure 5

shows a selection of hair coloring products at Godrej.

Figure 5: Hair Products of Godrej

The Example of Package Innovation for Soda

13 Bollywood from Beyond: Beauty Queens and Fairness Creams. www.popmatters.com/columns/lal/03128.shtml14 Ibid.

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In the India market, we see small bottles of Pepsi and Coke, mainly for reasons for affordability.

In the US, we also see the recent development of smaller packages -- 6-pack and 18-pack 8-oz cans of

Pepsi, for instance, in Q1 2004. Dave Burwick, SVP and CMO of Pepsi, said that the smaller package

(in the US) “appeals to light users and offers portion controls for kids” so that parents can put an 8-oz

can in a lunch box for their kids15. Even though we see a similar development toward an introduction of

smaller containers for soda, it happened in India and the US for very different reasons. Consumer

goods marketers would make a big mistake if they believe that simply replicating western strategies in

India would work. They need to carefully deal with the India market in its own terms.

Adopt Marketing Strategies for Local Implementation

Marketing takes many forms in India, especially because things like TV penetration is not as

high as that in many countries. During the India trip, there were a lot of outdoor advertising, whether in

the form of billboard ads or just logos and ads plastered over individual stalls. As for indoors, there is

also quite a popular use of showcases of products, such as the one shown below for razors at a

domestic airport.

Figure 6: Showcase of Razors for Advertising Purposes

15 2004 HBS Marketing Conference, Sprangler Auditorium, April 17, 2004.

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FMCG companies, in coping with the complex needs and less-developed, though, growing

media penetration of India, need to find marketing strategies that suit the local needs. For example,

billboard and product showcase are marketing mechanisms that we have seen in our trip.

In conclusion, the Indian consumer goods market has a lot of market potential because of low

penetration and consumption level. India is also a very young country in terms of its population

composition and thus has interesting opportunities in categories like leisure-related and lifestyle

products. However, companies need to be very adaptive in understanding and satisfying local needs,

marketing, and distribution challenges of the complex and diverse market.

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