Fast Moving Consumer Goods

SUBMITTED BY GROUP 4

A Report

on

Analysis of FMCG Sector

By:

Name IDSumit Agarwal 13A3HP029Ayushi Agarwal 13A2HP010

Amit Gunjan 13A2HP019Aditya Jain 13A1Hp046

Abhay Nigam 13A1HP027Kaushik Cheekotey 13A1HP010

CLK Kiran 13A3HP053

Approved BY:

Mr. Nitin Gupta

A Report Submitted in Partial Fulfilment Of

The Requirement

Of Course BC-541 Report Writing

IMT Hyderabad

Acknowledgement

Our Team would like to express the gratitude to Dr. Nitin Gupta, Associate Professor and Area Coordinator-Marketing, Institute of Management Technology Hyderabad for allowing us to present this report on FMCG Sector and we would also like to thank him for introducing us to the format of report writing, giving us guidance in understanding formal report and provided materials in order to present it in a systematic way.

We would also like to thank our batch mates who helped in providing us the inner view of FMCG sector and constantly motivated us in completing this report.

Table Of Contents

AcknowledgementAbstract

1. Introduction1.1 Size Of FMCG Sector1.2 History of FMCG Sector in India

2. Growth Rate of the FMCG Sector3. Top 10 Companies in Sector with Turnover4. Major Players in FMCG5. Growth Drivers and Challenges for FMCG Sector

5.1 Growth Drivers5.2 Supply Side Drivers5.3 Systemic Drivers for Sectorial Growth5.4 Challenges

6. Top Personalities Of FMCG Sector7. FMCG Trends

7.1 Introduction7.2 Features and benefits 7.3Merger And Acquisition

8. Conclusions

AbstractThis report provides an overview on FMCG Sector, which is one of the multimillion dollar sectors. It spans over other specific sectors such as household care, personal care, food and beverages and health care. We have also tries to focus on percentage growth rate of FMCG, the growth drivers involved for this growth rate. Also, details about top market players and their strategy to capture Indian market, then to sustain in this competitive environment. The emphasis was also laid on top personalities, market trend, merger and acquisition, peculiarities and profitability.

FMCGPersonal Care

Household Care

Fabric Wash, Household Cleaners

Oral Care, Hair Care, Skin Care, Cosmetics/ deodorant, Feminine Hygiene & Paper Products

Health Beverages, Staples/ Cereals, Bakery Products, Snacks, Chocolates, Ice cream, Tea/coffee/soft drinks, processed fruits & Vegetables, Dairy ProductsOTC Products and Ethicals

Food & Beverages

Health CareIntroduction

Fast Moving Consumer goods are also called as consumer packaged goods that are sold quickly and relatively at low cost. FMCG is probably the most classic case of low margin/ high volume business. The Indian FMCG sector is the fourth largest sector in the economy with an estimated size of more than Rs1300 billion. India’s FMCG market is highly fragmented and considerable part of market comprise of unorganised players selling unbranded and unpackaged products.

FMCG Sector has four main segments:

Size of FMCG SectorThe Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1 billion. Well-established distribution networks, as well as intense competition between the organised and unorganised segments are the characteristics of this sector. FMCG in India has a strong and competitive MNC presence across the entire value chain. It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. The middle class and the rural segments of the Indian population are the most promising market for FMCG, and give brand makers the opportunity to convert them to branded products. Most of the product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumption as well as low penetration level, but the potential for growth is huge.

The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid urbanization, increased literacy levels, and rising per capita income.

The big firms are growing bigger and small-time companies are catching up as well. According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan Lever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft drink and cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top 100 brands.

Following is the market share of the top 5 FMCG Companies:

EXHIBIT 1

S.No. Company Name Turnover(in Rs. Crores)

For the period April 1,2010 to March 31, 2011

1 Hindustan Unilever Ltd. Rs.19,401 crores

2 ITC(Indian Tobacco Company) Rs. 3,629 crores

3 Nestle India Rs. 5,204 crores

4 GCCMF(Amul) Rs. 7,977 crores

5 Dabur Rs. 2,864 crores

Source: Step In Academy Title “FMCG Industry”

The companies mentioned in Exhibit I, are the leaders in their respective sectors. The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds.  There are 11 HLL brands in the 21, aggregating Rs. 3,799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India.

The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations

like softies in ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to have faster development than the stagnating personal care category. Amul, India's largest foods company, has a good presence in the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices.

In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodknight from Godrej, is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149 crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk.

Dabur is among the top five FMCG companies in India and is a herbal specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small Companies in the World.

Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Its popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space.

History of FMCG Sector in IndiaThe Indian FMCG industries witnessed significant changes through the 1990’s.Many players had to face severe problems on account of increased competition from small and regional players and also from slow growth rate across various product categories. As a result, most of the companies were forced to repair and edit their product, marketing, distribution and consumer serving strategies to strengthen their position in the market.

By the 20th century, FMCG industry changed significantly. With the liberalization and growth of economy, the Indian customer witnessed an increasing exposure to new domestic and foreign products through different media, such as television and Internet. Also social changes such as increase in the number of nuclear families and growing number of working couples resulted in increased spending power which further contributed to increase in the Indian consumer’s Personal Consumption. The realization of Customer’s growing awareness and the need to meet changing requirements and preferences on account of changing lifestyle required the FMCG producing companies to formulate customer-centric strategies. These changes lead to rapid growth in the FMCG industry.

In India, companies like ITC, HUL, Cadbury, Colgate and Nestle have been a dominant force in the FMCG sector supported by less competition and high entry barriers(import duty was high).Thus, these companies were able to charge a premium for their products leading to high margins.

Growth Rate of the FMCG Sector

The fast moving consumer goods (FMCG) segment is the fourth largest sector in the Indian economy. The market size of FMCG in India is expected to grow from US$ 34.8 billion in 2011 to US$ 74 billion in 2018.

The FMCG sector in India generated revenues worth USD34.8 billion in 2011, a 15.2 per cent rise compared to the previous year.

The strong growth in 2011 should come as no surprise given the impressive performance of the sector over the years.

Over 2006-11, the sector’s revenues posted a CAGR of 17.3 per cent.

2006 2007 2008 2009 2010 20110

5

10

15

20

25

30

35

40

Trends in FMCG Revenues

Revenues in Billions (USD)

Source: Dabur, AC Nielsen, Aranca Research

Food products are the leading segment, accounting for 43 per cent of the overall market. Personal care (22 per cent) and fabric care (12 per cent) are the other leading segments.

Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the sector. Rural demand is set to rise with rising incomes and greater awareness of brands.

The Government of India has been supporting the rural population with higher minimum support prices (MSPs), loan waivers, and disbursements through the National Rural Employment Guarantee Act (NREGA) program. These measures have helped in reducing poverty in rural India and have thus propped up rural purchasing power.

CAGR- 17.3%

With rise in disposable incomes, mid- and high-income consumers in urban areas have shifted their purchasing trend from essential to premium products. In response, firms have started enhancing their premium products portfolio. Indian and multinational FMCG players are leveraging India as a strategic sourcing hub for cost-competitive product development and manufacturing to cater to international markets.

Food products and personal care together make up two-thirds of the sector’s revenues

→‘Food products’ is the leading segment, accounting for 43.0 per cent of the overall market

→Personal care (22.0 per cent) and fabric care (12.0 per cent) are the other leading segments

Food Products

43%

Personal Care22%

Fabric Care12%

Hair Care8%

Households4%

OTC Products4%

Baby Care2%

Others5%

Market break-up by revenues (2009)

Source: Dabur, Aranca Research

The urban market accounts for a major chunk of revenues:

→The urban segment is the largest contributor to the sector, accounting for over two-thirds of total revenue

→Semi-urban and rural segments are growing at a rapid pace; they currently account for 33.5 per cent of revenues

→FMCG products account for 53.0 per cent of total rural spending

66.5

3.2Urban-rural revenue break-up (2011)

URBANRURAL

Source: Dabur, AC Nielsen, Aranca Research

The rural segment is fast catching up:

→The urban FMCG market in India has been growing at a fairly steady and healthy rate over the years; encouragingly, the growth in rural markets has been more fast-paced

→During FY11, more than 80 per cent of FMCG products posted faster growth in rural markets as compared to urban ones

→Notable high growth sectors include salty snacks, refined edible oil, healthcare products, iodised salt, etc

→Hair oils, toothpastes and shampoos have significantly high penetration in both urban and rural markets

→Instant noodles, floor cleaners and hair dyes are picking up in the rural areas due to increased awareness.

→A total of 7.8 million retail outlets sell FMCG in India

→Grocers are the dominant retail format, accounting for 59.0 per cent

Biscuits

Refined

Oils

Salty

Snack

s

Non-Refined

Oils

Toilet

Soap

s

Washing P

owder

Package

d Tea

Iodised Sa

lt

Hair O

ils

Sham

poo0

10203040506070

Growth in urban and rural FMCG markets (FY11)

URBAN RURAL

Source: AC Nielson, Aranca Research

The burgeoning middle class Indian population, as well as the rural sector, presents a huge potential for this sector. The FMCG sector in India is at present, the fourth largest sector with a total market size in excess of USD 13 billion as of 2012. This sector is expected to grow to a USD 33 billion industry by 2015 and to a whooping USD 100 billion by the year 2025.

This sector is characterized by strong MNC presence and a well established distribution network. In India the easy availability of raw materials as well as cheap labour makes it an ideal destination for this sector. There is also intense competition between the organized and unorganized segments and the fight to keep operational costs low.

Market share of companies in a few FMCG categories

Market Leader Others

Hair Oil

42 %15% 8% 5%

Shampoo

46% 24% 10%6%

Oral Care 50%

23% 13%

Skin Care

59%7%

7%6%

Fruit Juice

52%35%

Source: Industry estimates

THE TOP 10 COMPANIES IN FMCG SECTOR:

1. Hindustan Unilever Ltd. 6. Asian Paints (India) 2. ITC (Indian Tobacco Company) 7. Cadbury India 3. Nestlé India 8. Britannia Industries 4. GCMMF (AMUL) 9. Procter & Gamble Hygiene and Health

Care 5. Dabur India 10. Marico Industries

Company Sales* in MN $

Segments

HUL 3921.5 Personal care, Food Products, Household, Baby Care, Fabric Care

Amul India 1771.1 Food and Beverage Products

Nestle India 1155.4 Food and Beverage ProductsITC** 305.7 Personal Care, Food Products

Britannia 759.9 Food ProductsDabur 635.9 Personal Care, Food Products, HouseholdMarico Industries

449.3 Personal Care, Food Products, Household

GSK Consumers

447.9 Personal Care, Food Products

Cadbury Industry

430.1 Food Products

Colgate Palmolive

391.8 Personal Care, Oral Care

P & G 388.5 Personal care, Food Products, Household, Baby Care, Fabric Care

Godrej 280.5 Personal Care, Fabric CareSource: Relevant company websites, IBEF report

*Yearly sales as of March 2010, ** FMCG business excluding tobacco

Major Players in FMCG

HUL

Overview

Hindustan Unilever Limited (HUL) is India's largest consumer goods company based in Mumbai, Maharashtra.It is owned by the British-Dutch company Unilever which controls 52% majority stake in HUL. Its products include foods, beverages, cleaning agents and personal care products.HUL is the market leader in Indian consumer products with presence in over 20 consumer categories such as soaps, tea, detergents and shampoos amongst others with over 700 million Indian consumers using its products. Eighteen of HUL’s brands featured in the ACNielsen Brand Equity list of 100 Most Trusted Brands Annual Survey (2012).

The company has a distribution channel of 6.3 million outlets and owns 35 major Indian brands.

ITC

Overview

ITC Limited is an Indian public conglomerate company (25.4% owned by British corporation, British American Tobacco) headquartered in Kolkata, West Bengal, India. Its diversified business includes four segments:

Fast Moving Consumer Goods (FMCG) Hotels, Paperboards Paper & Packaging Agri Business

ITC's annual turnover stood at $7 billion and market capitalization of over $34 billion. The company has its registered office in Kolkata. It started off as the Imperial Tobacco Company, and shares ancestry with Imperial Tobacco of the United Kingdom, but it is now fully independent, and was rechristened to Indian Tobacco Company in 1970 and then to I.T.C. Limited in 1974. It employs over 29,000 people at more than 60 locations across India and is listed on Forbes 2000. ITC Limited completed 100 years on 24 August 2010.ITC has a diversified presence in FMCG (Fast Moving Consumer Goods), Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business and Information Technology. While ITC is an outstanding market leader in its traditional businesses of Hotels, Paperboards, Packaging, Agri-Exports and Cigarettes, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.

Marico

Overview

Marico is an Indian consumer goods company providing consumer products and services in the areas of Health and Beauty based in Mumbai. Marico's own manufacturing facilities are located at Goa, Kanjikode, Jalgaon, Pondicherry, Dehradun, Baddi, Paonta Sahib and Daman.Key brands: Parachute, Saffola, Hair&Care, Nihar, Mediker, Revive, Manjal, Kaya Skin Clinic, Aromatic, Fiancee, HairCode, Eclipse, Xmen, Hercules, Caivil, Code 78 and Black Chic.The Board of Directors of Marico has approved the restructuring of businesses, corporate entities and the organization involving a) the demerger of Kaya Skin Care Solutions (Kaya) into a separate company by the name Marico Kaya Enterprises Ltd (Make) and b) formation of an unified FMCG business with operations in India and abroad, headed by a single CEO. The restructuring plan would be effective from April 1, 2013.Kaya to be demerged into a separate listed company: As per the proposed demerger plan for Kaya, Make will become the holding company of Kaya Ltd (India) and Kaya entities in theMiddle East and South East. Currently the promoters of Marico have a 60% stake in the company (Marico); post demerger the shareholding structure of Make will be identical to Marico’s current shareholding structure. Shareholders of Marico will be allotted one share of MaKE for every 50 shares held in Marico. Marico will not hold any stake in Make post demerger. The equity shares of MaKE will be listed after all the statutory approvals are obtained.

Formation of a unified FMCG business: Marico currently has three business verticals namely a) Indian consumer products b) The international FMCG business and c) Kaya with operations in India and abroad. Post the restructuring, Kaya would operate as a separate listed

entity (Make). The Indian and International FMCG businesses, which were till date headed by two different CEOs, will be unified and headed by a single CEO.

Britannia Industries

Overview

Britannia is one of the foremost food companies in India. The company is present across the biscuits, dairy products and breads segments and has recently forayed into the breakfast cereals category with the launch of Healthy Start. Britannia derives ~85% of its revenue from the biscuits segment, where it has formidable brands such as Tiger (glucose biscuits), Treat (cream biscuits), 50-50 (crackers), Good Day (premium cookies and the company's highest selling brand) and NutriChoice (premium high-fibre biscuits). During the first quarter of 2012, Britannia launched Bourbon, Cappuccino, Pure Magic Praline and a new range of creamy flavours for Treat.

Godrej Consumer Products Limited

Overview

Godrej Consumer Products Limited (GCPL) is an Indian consumer goods company based in Mumbai, India. GCPL’s product range includes soaps, hair colourants, toiletries and liquid detergents. Some of the leading brands are ‘Cinthol’, ‘Godrej Fair Glow’, ‘Godrej No.1’ and ‘Godrej Shikakai’ in soaps, ‘Godrej Powder Hair Dye’, ‘Renew’, ‘ColourSoft’ in hair colourants and ‘Ezee’ liquid detergent. GCPL has five manufacturing facilities in India at Malanpur (Madhya Pradesh), Guwahati (Assam), Baddi- Thana (Himachal Pradesh), Baddi- Katha (Himachal Pradesh) and Sikkim.

Growth Drivers and Challenges for FMCG Sector

Growth Drivers

The current economic trend, exhibiting modest demand and supply is likely to have a medium-term impact on the demand for FMCG products but promises revival and higher growth in the long term based on thefollowing fundamentals:

1. Expanding purchase basket resulting in higher penetration of products

2. Increased consumption with higher disposable household family income

Supply Side Drivers:Growth of Modern Retail

Labour Cost

Systemic Drivers:Favourable Changes in Government Policies.

Infrastructure Development

Demand Side Drivers:Increasing Consumer Income

High Private ConsumptionRising Urbanization

3. More consumers entering the market place (Rural and urban base of pyramid)

For these developments to catalyse faster there are two sides of the equation that need to come together– demand and supply along with other systemic factors.

Increasing Consumer Income:

Increase in income is largely a outcome of economic growth across sectors. Over the past few years India has increased economic growth, with a continuing and substantial impact on consumer disposable incomes enabling good growth of the FMCG sector, among others.

Annual Household Income

Annual Household

Income (‘000 INR p.a.)

2001-02(‘000 HH)

2005-06(‘000HH)

Growth(05-06/01-02)

2009-10(‘000 HH)

Growth(09-10/05-06)

<45 61351 52410 -15% 34623 -34%45-90 70196 79225 13% 79678 1%90-135 26159 33721 29% 49050 45%135-180 12797 16251 27% 21307 31%180-200 2258 3250 44% 4883 50%200-1000 10727 16251 51% 28409 75%1000+ 753 2235 197% 3995 79%Source: NCAER

High Private Consumption:

The Indian economy, unlike most Asian economies, has a very high rate of private consumption (61%) of that, a future 60% is due to retail spends-goods and products that people consumer, as opposed to service or essential consumption items like rent and education.

Source: Central Statistical Organization(CSO) and Technopak Analysis, On 31 March 2008

Rising Urbanization:

India has 70% of its population living in rural areas. With rising urbanization, more people will have exposure to modern products and brands and thus shift to branded and packaged goods and products.

GDP US$ 1.61 Bn*

Private Consumption US$ 708 Bn (61%)

Retail US$ 411Bn (58%)

Urban (5100 Cities) US$ 185Bn(45%)

Rurals (6,27,000 Vill) US$ 226Bn (55%)

Non Retail US$297 Bn(42%)

Public Spending & Gross Capital

Formation US$ 453 bn (39%)

Health CareTransportCommunicationRecreation Cultural ServicesEducationRent Utilities Other Services

FoodApparelsBeveragesFootwear Consumer DurablesKitchen UtensilsFurniture Sports GoodsPersonal Care

2007 20150%

10%

20%

30%

40%

50%

60%

70%

80%

UrbanRural

By 2015, An additional 25 million consumer will have moved into cities, not only buying FMCG for themselves but also serving as a conduit for information and goods for their families still in rural India.Source: Technopak Analysis

Supply Side Drivers:

Growth of Retail:

From US$ 410 billion in 2008 (Rs. 2,000,000 Crores), Indian retail is expected to grow to US$ 535 billion by 2013(Rs. 2,600,000 Crores) and US$755 billion by 2018 (Rs. 3,600,000 Crores).

Year 2008 Year 2013 Year 20180

100

200

300

400

500

600

700

800

410

535

755Growth of Retail (US$ Billion)

Source: Technopak Analysis

Low Labor Cost:

India has by far the lowest labour cost compared to many emerging countries giving it an edge for establishing manufacturing base for both Domestic and International FMCG brands. Average labourcost in India is ~US$ 90/month compared to US$190/month in China, US$ 210/month in Thailand and even higher US$1,300/month in Taiwan.

India China Thailand Taiwan US0

500

1000

1500

2000

2500

3000

89 188 210

1301

2766

Labour Cost(US$ P.M.)

Source:CEIC, Morgan Stanley Research and Investment Commission of India, 2008

Systemic Drivers for Sectorial Growth:

Several other factors are also encouraging for FMCG sector growth in the long run, such as policy change and investments in infrastructure development.

1. Favourable changes in Government Policies:

The Indian government has been trying to foster the growth of various categories of FMCG by way of making policy changes. Some of the policy changes include:

•Automatic investment approval (including foreign technology agreements within specified norms), up to 100 per cent foreign equity for most of the food processing sector.

•Quantitative restrictions removed

•Five-year tax holiday for new food processing units in fruits and vegetable processing.

•Customs duties reduced on plant and equipment, raw materials and intermediates, especially for export production.

• Capital goods freely importable, including second hand ones.

2. Infrastructure Development

The government has invested a considerable amount in the Golden quadrilateral project to connect the four corners of the country, of which over 96% has been completed. 50% of existing highways are being improved and expanded. An outlay of Rs. 59,000 crores was earmarked for road development projects in the 10th Plan, between the aforementioned projects as well as projects to develop the National highways (Primary system), the state highways (secondary system), major district roads and rural roads. The railways are also increasing capacity through increasing tracks, improving existing tracks and adding more freight compartments to enable better carrying of goods and products.

Challenges:

There are many challenges faced by the FMCG sector in today’s world. In India there are many complicated policies and regulation, by the government, which are very difficult to follow and also structure of the market is totally different from comparison to other well

developed countries. Here are some key challenges which are faced by the FMCG Sector in India are:-

1. Tax Structure - Complicated tax structure, high indirect tax, lack of uniformity, high octroi & entry tax and changing tax policies.

2. Infrastructural Bottlenecks - Agriculture infrastructure, power cost, transportation infrastructure and cost of infrastructure.

3. Counterfeits and Pass-offs

4. Emergence of Private Labels

5. Regulatory Constraints

6. Price of Inputs

1.Tax Structure:

i. Complicated Tax Structure - In India, problems are exacerbated by the complicated tax structure. There is a VAT which is to be levied at state level, there are other state taxes such as octroi and entry taxes and then centre levies excise duties and service tax. As a result, no product cost is exactly the same from one state to the next.

ii. High Indirect Tax - Indirect Tax levels are quite high, especially in light of the fact that the sector provides goods meant for daily consumption. China, for instance, levies a tax of 10%(Source: Mr.RajanVerma, CFO, Dabur India Ltd) on average,whereas in India, the average is around 30%.

iii. Lack of uniformity - Despite VAT states does not implement rates and procedures uniformly. Each state still continues to approach taxation differently, and thus moving goods from one state to another is like moving them from one country into another. The taxation rate policies on many FMCG goods differ from state to state and centre to state. Centre has classified many FMCGproducts under Merit (VAT exempt) list, such as processed foods, tooth powder, sanitary napkins but states levy on the same products high rate of 12.5%(Source:Mr. Krishnan S, Parle Agro).

iv. High Octroi& Entry Tax - There are Octroi and Entry Tax at city and state entry points in a few states, which leads to an increase in pricing and affords opportunities for arbitrage. For instance, Mumbai has octroi of 4-6% on goods produced outside of Mumbai. Thus, a bottle of mineral water produced by Coke or Pepsi which have their plants in Thane, which is considered outside the city limits of Mumbai, have to pay this extra charge, while Parle, which has a bottling plant within the city limits does not. So Bisleri is sold in Mumbai for Rs. 12, while Kinley or Aquafina cost Rs. 13,just because of the factory location. This opens up possible arbitrage opportunities, apart from causing a genuine grievance to the consumer.

v. Changing Tax Policies - Tax policies keep changing which makes it difficult to plan for the long term. For instance, tax havens were created in J&K some years ago and many companies opened facilities there. However, recently part of the exemption was withdrawn by the government, thusleading to a sudden hike in costs.

2. Infrastructural Bottlenecks:

i. Agricultural Infrastructure - Agriculture infrastructure in India is particularly weak. Firstly, irrigation and modern farming methods are not widespread and thus agriculture in India is at the mercy of nature. Thus, it makes for grossly varying amounts of harvest of critically needed inputs into FMCG manufacture, from one season to the next and one year to the next.

ii. Power Costs - Power costs in India are very high and they contribute substantially to cost of goods sold. They are 3-4 times the optimal costs.

iii. Transportation Infrastructure - To compound this problem is the poor transportation and roadways infrastructure – many of the villages are extremely poorly connected with means of transportation – either road, rail or sea – so the amount of time it takes for the harvest to be transported to the FMCG manufacturers is unpredictable, and results in substantial spoilage of the goods. For example, it costs nearly 12 days to transport goods from Baddi in Himachal Pradesh to South India, a distance of 3000 km. The lack of a cold chain adds to this problem, because it means a tremendous amount of farm output actually rots or gets spoiled in transit. Nearly 8% -10% of dairy produce is lost to pilferage.

iv. Cost of Infrastructure - It takes almost Rs. 7- 8 crores to lay 1km. of road. Along with this problems in land acquisition due to fragmented land holding further delay development of road and rail infrastructure increasing the cost associated.

3. Counterfeit and Pass-offs:

Counterfeit products are another issue for the FMCG sector. Taking advantage of the lack of literacy and consumer knowledge, several small manufacturers churn out spurious products which they label akin to the big brands, Lifebuoy or Lax soap or Fivestar chocolate bars, Vicky balm, for instance. Thesespurious pass off products affect large, high quality brands which have actually invested money in research and development to create their products and build brand equity. These account for almost 10% - 15% (Source:ICCI-BPC initiated ORG study)of the total sector revenue and pose serious challenge to its growth and also impact government’s tax revenue significantly. But the only recourse available to FMCG manufacturers against counterfeit and pass off products is to file an FIR. There are no Bureau of Industrial Standards norms laid out for each product category which could help prevent the mushrooming of counterfeit products. And an FIR results only in local action, if at all, while the source of the counterfeit products continues to remain in existence.

4. Emergence of Private Labels:

Apart from the pressure on margins, the biggest fear of FMCG players when facing MR is the introductionof private labels or own brands. The fear is justified because world over, private labels have served to lower the consumer’s price points, particularly at the mass level. Moreover, there are inevitable conflicts of interest when a retail chain has its own label whose packaging looks like category leaders and stocks brands of other manufacturers, in terms of display space, promotions etc. A Technopak analysis undertaken across product categories revealed that private labels could constitute as much as one fourth of all sales in the FMCG category by 2011. While the exact year could shift marginally, there is no denying the fact that private label FMCG goods will be here and will constitute a formidable threat to add to the already fierce competition in the FMCG category. Brands which currently appeal to price conscious value shoppers will be facing the highest risk with advent of store brands.

5. Regulatory Constraints

i. State borders cause a lot of delays and it is common for 2-3 days of finished goods inventory out of 20 -30 days’ total stuck on various state borders due to a requirement for multiplicity of permits and licenses.

ii. The Indian labour laws were drafted in the 1940s and take no note of modern manufacturing methods and strategies. They need to be changed on a more dynamic basis to reflect present realities.

iii. There is lack of uniformity in definitions, and these do not follow international norms either. Currently, drugs and cosmetics come under the same set of laws when in fact they need to be treated differently. Weights and Measures used under FDA do not conform to those under the Weights and Measures Act followed in India. Some products come under the OTC category internationally but come under Schedule H drugs in India, requiring doctor’s prescription and require to be distributed only in drug licensed stores

iv. Acquiring manufacturing licenses is a long and painful process, beset with red tape and corruption. It takes 10-12 months to get multiple licenses and to set up a manufacturing unit.

v. Reservation of jobs for employees creates many problems. For instance, Himachal Pradesh has a reservation of 70% of jobs for people domiciled in Himachal Pradesh. Since they are few in number, attrition happens for as little as Rs. 50 pm, and it becomes a problem to maintain the requisite labour force.

vi. Export procedures are cumbersome and lengthy. There is no single-party interface so multiple departments and officers have to be followed up with to get the requisite licenses. A transport permit has to be sourced for each consignment rather than assigning a blanket permit for a period of time.

vii. Subsidies are announced by the government but to avail of them is both confusing and time consuming.

a. Firstly, the amount of subsidy is restricted to Rs. 50 lakhs, regardless of the total quantum of investment required by a project. Thus, if large projects and small get the same incentives, large projects may not find takers.

b. Secondly, the release of the said monies is not time-bound and gets done in an ad-hoc basis.

6. Prices of Inputs:

i. Commodity prices fluctuate, which make it difficult to finalise raw material prices, affecting the final price of the product. The petroleum price fluctuation also impacts the cost of supply of materials.As a result, the entire supply chain dynamics need to be constantly planned afresh with the changing prices.

ii. Indian consumers are more price-sensitive and value conscious, making it difficult for FMCG firms to pass on the inc

Top Personalities Of FMCG Sector

Kishore Biyani- A postgraduate in Marketing, Kishore Biyani heads Future Group. He made his foray in modern retailing in 1997 with the opening of the first Pantaloon outlet in Kolkata. Today future group employs over 30,000 people and operates around 11 million square feet of retail space, has over 1000 stores across 63 cities and 65 rural locations in India. The group covers the entire Indian consumption space through its multiple business verticals including Future Retail, Future Capital, Future Brands.

Mohan- Mohan is AVP of Business Development at Pine Labs. He heads One desk, a VAS payment platform for small merchants. Prior to joining Pine labs, Mohan was a Senior Associate with The Boston Consulting Group in Mumbai, where he specialised the financial services sector. Mohan began his career as Project manager at ITC. He is an MBA from IIM Calcutta and holds a Bachelors Degree in Mechanical Engineering from IIT Madras

DPS Kohli-– Koutons Retail India Ltd. is the founding pillar of Koutons which has taken Koutons from a relatively small beginning to a dominant player in the organised fashion retail industry. Prior to the formation of Koutons Kohli was involved with his family business. He was joined by his brother in law B.S Sawhney and thereafter ‘Charlie Creations’ was born in 1994. In 2002, Kohli launched Koutons with a focus on complete men’s wardrobe at the advent of organised retail industry in India with the presence of exclusive brand outlets in almost every city in the country. DPS Kohli is a graduated Mechanical Engineer from Sambalpur University in Orissa.

Y C Deveshwar- Under his leadership, ITC's Sustainability initiatives were given shape by fashioning corporate strategies that not only enhance shareholder value but add significantly to the development of natural and social capital. ITC is a global exemplar in sustainable business practices and is the only company in the world, of comparable dimensions to be 'carbon positive', 'water positive' and 'solid waste recycling' positive.

Mr. Nitin Paranjpe- Mr. Paranjpe was appointed as the Managing Director and Chief Executive Officer of the Company in April 2008. He is also an Executive Vice President of Unilever Companies in South Asia. Mr. Paranjpe holds a Bachelor Degree in Engineering (Mechanical) and MBA in Marketing from JBIMS, Mumbai. Mr. Paranjpe is a member of the Nomination & Remuneration Committee, Stakeholder Relationship Committee and Corporate Social Responsibility Committee of the Company.

FMCG TRENDS

Introduction

India is changing rapidly as a society and as a consumer culture. An understanding of these changes and the causes behind them will be key to success for a FMCG player in India, so as to focus on the key trends, product categories and consumer segments, to profit the most from the positive economic climate.

Features and benefits

- India specific insights that help derive a richer appreciation of the nature and direction of Indian consumerism- Tracks seven key trends that will define the Indian FMCG industry's growth trajectory, in terms of product, market and consumer-related aspects- Insights from an annual consumer survey among Indians respondents, coupled with macro-economic indicators, to showcase market potential

Facts & Future

Fast moving consumer goods will become a Rs 400,000-crore industry by 2020. A Booz & Company study finds out the trends that will shape its future

Consider this. The anti-ageing skincare category grew five times between 2007 and 2008. It’s today the fastest-growing segment in the skincare market. Olay, Procter & Gamble’s premium anti-ageing skincare brand, captured 20 per cent of the market within a year of its launch in 2007 and today dominates it with 37 per cent share. Who could have thought of ready acceptance for anti-ageing creams and lotions some ten years ago? For that matter, who could have thought Indian consumers would take oral hygiene so seriously? Mouth-rinsing seems to be picking up as a habit — mouthwash penetration is growing at 35 per cent a year. More so, who could have thought rural consumers would fall for shampoos? Rural penetration of shampoos increased to 46 per cent last year, way up from 16 per cent in 2001.

Consumption patterns have evolved rapidly in the last five to ten years. The consumer is trading up to experience the new or what he hasn’t. He’s looking for products with better functionality, quality, value, and so on. What he ‘needs’ is fast getting replaced with what he ‘wants’. A new report by Booz & Company for the Confederation of Indian Industry (CII), called FMCG Roadmap to 2020: The Game Changers, spells out the key growth drivers for the Indian fast moving consumer goods (FMCG) industry in the past ten years and identifies the big trends and factors that will impact its future.

The report estimates the FMCG sector witnessed robust year-on-year growth of approximately 11 per cent in the last decade, almost tripling in size from Rs 47,000 crore in 2000-01 to Rs 130,000 crore now (it accounts for 2.2 per cent of the country’s GDP). Growth was even faster in the past five years — almost 17 per cent annually since 2005. It identifies robust GDP growth, opening up of rural markets, increased income in rural areas, growing urbanisation along with evolving consumer lifestyles and buying behaviours as the key drivers of this growth.

The report further estimates that the FMCG industry will grow at least 12 per cent annually to become Rs 400,000 crore in size by 2020. Additionally, if some of the factors play out favourably, say, GDP grows a little faster, the government removes bottlenecks such as the

goods and services tax (GST), infrastructure investments pick up, there is more efficient spending on government subsidy and so on, growth can be significantly higher. It could be as high as 17 per cent, leading to an overall industry size of Rs 620,000 crore by 2020.

Mergers and acquisitions of FMCG sector: KPMG

The food, drinks and consumer goods industry is likely to see a consolidation in the coming months, with large size firms looking to improve margins by acquiring smaller peers, according to global consulting firm KPMG.

"The Indian household and personal care market is likely to continue to see deal interest from strategic players in 2010 because it requires significant marketing and advertising spend, as well as distribution channel investments, to build scale," said a recent global KPMG report on mergers and acquisitions in consumer markets.A report, says that it is a busy market driven by consolidation and economic growth. Another reason for consolidation is the expanding footprint of large organised retailers such as the Future Group, Shopper's Stop, Reliance Retail and Aditya Birla Retail.

The retail chains are squeezing the margins of food, drink and consumer goods (FDCG) companies. Though foreign players are barred from operating in the multi-branded retail segment, global retailers such as Wal-Mart, Metro and Tesco have still entered India through franchises and partnerships in their cash and carry wholesale businesses. Add to this the pressure from multi-national behemoths like Hindustan Unilever and Procter & Gamble, which are taking the pricing war to smaller Indian firms."This has pushed Indian FDCG businesses into consolidation as many believed they had reached the limit of their growth. We believe the pressures behind this will continue throughout 2010 and result in increased transaction volumes," practice head, consumer and retail corporate finance, KPMG in India."However, the lack of large acquisition targets and the number of acquirers looking for opportunities means valuations will continue to be at a premium," The food and drink sector in India is, however, unlikely to see any large deals because the local brands have not scaled up beyond the $20-25- million mark and the larger deals have already taken place. Since French food and facilities management firm Sodexo SA acquired Radhakrishna Hospitality Services for $125 million in March 2009, activity in this sector has been relatively slow.Indian Consumer goods are now increasingly looking beyond their shores for the next growth wave. Godrej, Wipro, Dabur and Marico have made several acquisitions across Asian and African markets.

India will continue to see merger and acquisitions (M&A) and private equity activity within the FMCG sector both on a domestic and cross-border basis, notwithstanding the global economic slowdown, according to a report by consulting firm PwC.

"The fast growing and differentiated Indian FMCG sector will continue to receive interest from financial investors, who will remain focused on the demand being created by Indian consumers, and western corporate who need to look at emerging markets to meet wider growth aspirations," said the report.

As per the report titled 'The Indian Consumer Sector: What's the deal?', it established that Indian corporates will continue to seek out acquisitions in overseas markets. "While the slow

growth and mature profile of western markets is unlikely to be appealing, Indian companies are likely to continue to focus on high growth markets such as South-East Asia, Africa, Latin America," the report added.

Acquirers can gain significantly from choosing to follow an inorganic growth route, said PwC. There is an opportunity to gain market share and footprint in other fast growing countries/regions through acquisitions and also access to an established and well invested distribution infrastructure capable of leveraging existing products that will be adaptable to the new geography, the report added.

Example: Companies that was active in acquisitions

Indian FMCG companies have been active in overseas acquisitions with the likes of Godrej and Wipro taking the lead. While Godrej had made a series of acquisitions in the past three years in Indonesia, Africa and Argentina, Wipro Ltd acquired Singapore based LD Waxon, which sells skincare and healthcare products, in December 2012. Wellness and beauty company VLCC acquired Malaysia's Wyann International in November, 2012. On the other hand, multinationals have also been in M&A activities in India. After acquiring Ahmadabad-based FMCG firm Paras Pharmaceuticals in 2011, Reckitt Benckiser had sold part of it home-grown firm Marico Industries

Conclusions

This sector will continue to see growth as it depends on ever increasing internal market for consumption and demand remains more or less constant, irrespective of recession or inflation. Hence the sector will grow though it may not continue at same pace, due to the present worldwide economic slowdown, rising inflation and fall of rupee. The sector’s hiring will continue to remain robust.

A look at some sectors that will drive growth in this sector:

• Increasing rate of urbanization, expected to see major growth in coming years.

• Rise in disposable incomes, resulting in premium brands having faster growth and deeper penetration.

• Innovative and stronger channels of distribution to the rural segment, leading to deeper penetration into this segment.

• Increase in rural non-agricultural income and benefits from government welfare programs.

• Investment in stock markets of FMCG companies, which are expected to grow constantly.