Consulting Club IIM Calcutta

Industry analysis : FMCG

ByGaurav Garg Siddhesh Joglekar [23/08/2007]

Industry analysis : FMCG

What is FMCG ? Fast Moving Consumer Goods (FMCG), are products that have a quick turnover and relatively low cost. Basically ,the quantity sold of FMCG products compensates for the relatively small profits that firms make on individual products. The strength of any established FMCG firm is the cumulative profits of all such products combined which makes such a firm a powerful force in the industry. Distinguishing feature of FMCG industry is the coexistence of complements and substitutes side-by-side.

Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, teeth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products and drinks, greetings, gifting, stationery, safety matches, cigarettes ,foods , lifestyle retailing although these are often categorized separately.

Some of the best known examples of Fast Moving Consumer Goods companies are ITC , Nestl, Unilever, Procter & Gamble, Coca-Cola, Carlsberg, Kleenex, General Mills, Pepsi , Mars, Reckitt-Benckiser. Unlike other economy sectors, FMCG share float in a steady manner irrespective of global market dip, because they generally satisfy rather fundamental as opposed to luxurious - needs. INDUSTRY ANALYSIS OF FMCG IN INDIA - 3 most imp points: Strengths: FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Huge untapped potential indicated by low penetration levels. Availability of raw materials, cheap labour, presence across all segments of value chain => a Huge competitive advantage. Weaknesses: 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 Page 2 of 5

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. Key issues for survival of a firm in this sector:

H1

The more intense the competition in a product category, the greater its negative influence on a line extension's success.

H2

The more power retailers have compared to the company introducing the line extension, the greater the negative influence on the line extension's success.

H3

The higher the level of variety seeking behavior of consumers, the higher the positive influence on the line extension's success.

H4

Dominant (i.e. very strong) brands benefit more from high levels of variety-seeking behavior than less dominant (i.e. less strong) brands.

H5

The higher the extra, extension-specific advertising expenditure for an extension, the more positive the influence on the line extension's success.

H6

The larger a company's marketing budget, the more positive the influence on the line extension's success.

H7

The larger the number of previous line extensions by the company, the more positive its influence on the line extension's success.

H8

The better the (product and concept) fit between a line extension and its parent brand, the more positive the influence on the line extensions success.

H9

The later an extension's market entry the more negative the influence on the line extension's success.

H10

The stronger the parent brand, the more positive the influence on the line extension's

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success. H11 Line extensions of a strong parent brand introduced late are more successful than line extensions of a weak parent brand introduced early.

CHOOSING THE RIGHT DISTRIBUTION MODEL :

The above figure shows the different Distribution models adopted by different sectors in the FMCG sector according to customer / market sophistication. TRENDS IN INDIA : A) Facts : An average Indian spends around 40 per cent of his income on grocery and 8 per cent on personal care products. On an international scale ,total consumer expenditure on food in India at US $120 billion is among the largest in the emerging markets , next only to China. B) Challenges : Major challenge facing Indian FMCG companies is how to attract the rural consumer who remains a very potent but yet and extremely under serviced and under utlilised market component.

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As demand booms , more and more new firms will set shop , how to tackle the challenge of surviving the onslaught of newer and newer firms which will result in margings getting wafer thin another looming question.

Challenge posed by retail sector : As seen in USA and Europe ,all the retail chains start manufacturing their own FMCG products which on an average account for 2530% of the revenues of the retail chain. In the process , the products of established FMCG companies are in grave danger of being purposely undersold or intentionally sidelined. Looking at the retail boom in in India , a replication of such a situation cannot be totally denied. How to tackle and survive in such a scenario?

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. REFERENCES: 1. India%20Symposium_IBEF_Sectoral%20Reports_FMCG.pdf from www.ciionline.com 2. CreatingDistributionAdvantageinIndiaMay07.pdf from www.bcgindia.com 3. http___www.emeraldinsight.com_Insight_ViewContentServlet_Filename=Published_Em eraldFullTextArticle_Pdf_0070330501.pdf

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