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Strategic Management ­ FMCG Sector                                                                             

Project Report
On
Strategic Management –
FMCG SECTOR

Three Months Residential Training Program,


LNMIIT, Jaipur.

Presented By: - “Sanguine”

-Dhirendra Singh Parihar


-M.Kiran Kumar
-Rahul Ranjan
- Shazy Gudwani
-Suneet Ramnani

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Strategic Management ­ FMCG Sector                                                                             

PREFACE

We have introduced the Basics of Strategy, Mission Statement, Goals and Objectives of an
Organization and various other concepts of Strategic Management.

We have also given an introduction of FMCG Sector, its history in India, its evolution in India, current
position in India, growth over the last few years and future prospects and problems. We have carried
out the analysis of FMCG sector with respect to Strategic management and concepts associated with
Strategic management.

Also, we have carried out SWOT Analysis, industry analysis, Porter’s five forces Analysis and
Competitive Analysis of FMCG Sector. This would enable the reader to gain an insight of the FMCG
Sector and its strategies, objectives and Mission Statement.

We have also tried to focus some light on why India has been a huge market for FMCG Goods, India’s
Competitiveness in relation to World Market, Government Policy towards FMCG Sector and Future
Prospects in FMCG sector.

Overall, the project report will enable the reader to gain an understanding of FMCG Sector and various
concepts of Strategic Management related to FMCG Sector.

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Acknowledgement

At the outset we would like to acknowledge the administration of ‘Laxmi Niwas Mittal Institute
of Information Technology –Jaipur’ for providing us with a beautiful & serene atmosphere. We
are also thankful to them for providing us the best of the facilities and infrastructure where we
can nurture ourselves and groom up in the most fascinating manner.

We are also thankful to ‘The Institute of Chartered Accountants of India’ for providing us with
an opportunity to prepare a detailed analysis of the Strategic Management (FMCG Sector). We
are grateful to Mr. Nishant Saxena and Ms. Geetika Kapoor for giving us valuable inputs on
the subject and guiding us throughout the project work. We are also thankful to Mr.Shaleen
Suneja for providing us with guidance and support for completion of the project. We also
acknowledge the co-operation of Mr. Chitresh Banerjee.

With Warm Regards from the Team Members of Group “Sanguine”.

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Statement of Work Signed by each Member of Team

This is to certify that the under mentioned work was performed by the respective Team
member and there was no falsification of the understated task in any manner
whatsoever.

1. Dhirendra Singh Parihar


Introduction and overview of the FMCG sector.

2. M.Kiran Kumar
Major Strategies followed by the Companies in the sector
and CSR.

3. Rahul Ranjan
Whole Industry and Competitive Analysis of FMCG sector.

4. Shazy Gudwani
Introduction to Strategic Management and basic concepts
related to Strategic Management.

5. Suneet Ramnani
Current Scenario, Growth and Future Prospects of the
FMCG sector

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TABLE OF CONTENTS

Sl.No Particulars Page Nos.


1. Executive Summary 6–7
2. Introduction to Strategic Management. 8 – 15
3. Strategic Planning Process 16 – 24
4. Introduction and Overview of FMCG Sector in India 25 – 29
5. History of FMCG Sector in India 30 – 38
6. Indian Competitiveness 39 – 40
7. Industry Analysis 41 – 68
8. Competitive Analysis 69 – 80
9. Growth of FMCG Sector 81 – 85
10. Recent Developments in FMCG Sector 86 – 92
11. Challenges for FMCG Sector 93 – 97
12. Impact of Slow Down on FMCG Sector 98 - 104
13. Mergers & Acquisitions in FMCG Sector 105 – 112
14. Corporate Social Responsibility in FMCG Sector 113 - 120
15. Future Prospects 121 – 122

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1. EXECUTIVE SUMMARY

Strategic management is the art, science and craft of formulating, implementing and evaluating cross-
functional decisions that will enable an organization to achieve its long-term objectives. It is the
process of specifying the organization's mission, vision and objectives, developing policies and plans,
often in terms of projects and programs, which are designed to achieve these objectives and then
allocating resources to implement the policies, and plans, projects and programs. Strategic management
seeks to coordinate and integrate the activities of the various functional areas of a business in order to
achieve long-term organizational objectives.

The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess
of US$ 13.1 billion.

It has a strong MNC presence and is characterized by a well-established distribution network, intense
competition between the organized and unorganized segments and low operational cost. Availability of
key raw materials, cheaper labor costs and presence across the entire value chain gives India a
competitive advantage.

The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015.
Penetration level as well as per capita consumption in most product categories like jams, toothpaste,
skin care, hair wash etc in India is low indicating the untapped market Potential. Burgeoning Indian
population, particularly the middle class and the rural segments, presents an opportunity to makers of
branded products to convert consumers to branded products. Growth is also likely to come from
consumer 'upgrading' in the matured product categories. With 200 million people expected to shift to
processed and packaged food by 2010, India needs around US$ 28 billion of investment in the food-
processing industry.

India has a huge advantage in terms of cost factors such as raw material, labour cost etc. in comparison
to other countries.

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The FMCG sector is showing strong volume growth across product categories with improving pricing
power of leading payers. Many players have regained their pricing power and have implemented
successful price hikes during the quarter. Most companies have indicated a significant revival in rural
demand (rural market growing faster that the urban market). The recent correction in some of the key
raw materials like LAB, crude oil is expected to provide some respite to margins. However,
expectations of firm agri commodity prices are likely to put pressure on margins, especially for the
food companies.

The latest statistics on inflation showed that the same has cooled off to a 6-month low and come down
to single digits, primarily thanks to lower commodity prices. Since FMCG companies play a major role
in driving consumption growth, which is necessary for a slowing economy, we analyze what kind of
impact the inflation number can have on the FMCG sector.

THE flurry of activity in the fast moving consumer goods (FMCG) sector appears to augur well.
Whether it is the acquisition of Balsara businesses by Dabur India Ltd (DIL) or the global acquisition
of Gillette Company by Procter & Gamble, industry experts feel that consolidation will catalyze growth
and ultimately help the end consumer.

FMCG companies have now started taking Corporate Social Responsibility seriously. Most brands link
themselves with the social causes, thereby linking consumers with the brands and gaining goodwill in
the market.

FMCG sector is set on a high growth trajectory, projected to grow by over 60 percent by 2010, which
translated into an annual growth of 10 percent over a 5 year period. The categories like hair care,
household care, female hygiene, chocolates and confectionery are estimated to be the fastest growing
segments. The total size of the FMCG sector is expected to rise to Rs. 92,100 crores in 2010.

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2. INTRODUCTION TO STRATEGIC MANAGEMENT

Strategic management is the art, science and craft of formulating, implementing and evaluating cross-
functional decisions that will enable an organization to achieve its long-term objectives. It is the
process of specifying the organization's mission, vision and objectives, developing policies and plans,
often in terms of projects and programs, which are designed to achieve these objectives and then
allocating resources to implement the policies and plans, projects and programs. Strategic management
seeks to coordinate and integrate the activities of the various functional areas of a business in order to
achieve long-term organizational objectives. Strategic management is the highest level of managerial
activity. Strategies are typically planned, crafted or guided by the Chief Executive Officer, approved or
authorized by the Board of Directors, and then implemented under the supervision of the organization's
top management team or senior executives. Strategic management provides overall direction to the
enterprise and is closely related to the field of Organization Studies.

What is Strategy?
Strategy is about choice: choice to invest in some activities and not to invest in
others. The object of strategy choice is to create an activity system through which a firm is able to
provide a product or service to a chosen set of customers in an advantaged fashion. Advantage derives
from the manner in which the activities fit with and reinforce one another. The activity system is a
manifestation of the choice of How to Win. The chosen set of customers is a manifestation of Where to
Play. The most robust strategies are those in which the How to Win reinforces the Where to Play and
vice versa. The most satisfying strategies are those in which the core Where to Play and How to Win
choices meets the desired goals and aspirations. The most sustainable strategies are those in which the
Where to Play and How to Win choices are buttressed by appropriate capabilities development and
management systems.

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The interrelated set of cascading choices which produces a strategy can be represented as follows:

C a s c a d in g C h o ic e s

WW hhaatt aare re oouurr


ggooaalsls aanndd
aassppira
iratio
tionnss??

WW hheere re wwillill wwee


pplalayy??

HHooww wwillill wwee


wwinin inin cchhoosseenn
mm aarkrkeetsts??

WW hhaatt
ccaappaabbilitie
ilitiess
mm uusstt bbee inin
pplalaccee to
to wwinin??

WW hhaatt
mm aannaaggeemm eenntt
ssyysstetemm ss aare
re
re
reqquuire
iredd??

Unit of Analysis

A key question in strategy is the unit of analysis: For what unit of analysis should the cascading
choices be made? Choices can and should be made at a variety of levels. The lowest unit of analysis is
considered to be the classical single target market served by a single distinct system – like Deccan
Airlines serving a segment of customers in the low cost Indian airline industry.

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Strategy at this level is typically referred to as business-unit strategy, the narrowest unit of analysis.
This is a helpful -though somewhat artificial- distinction in that in the Deccan Airlines case, an
argument could be made that strategy could be considered at even a lower level, perhaps a region
within India, say, South India. However, if we identified the choices for two regions (or for business
and leisure travelers for that matter) the system would be virtually, if not entirely, identical.

In the most traditional definition of strategy, the top cascade is considered corporate strategy and the
bottom cascade business unit strategy. However in most large firms and even many smaller firms,
there are multiple levels of choice cascades, with the following an example of a three-level choice
cascade:

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C o rp o ra te S tra te g y : M u ltip le C h o ic e C a s c a d e s
C o rp o ra te WWhhaat t aare re oouurr
ggooaalsls aanndd
C a s ca d e aassp
p ira
iratio
tionns?s?

WWhheerere wwillill wwee


pplalay?
y?

HHooww wwillill wwee


wwinin inin cchhoose
s enn
S tra te g ic G ro u p WWhhaat t aare re oouurr
mmaarkrke e tsts?
?
Cascade ggooaalsls aanndd
WWhhaat t
aassp
p ira
iratio
tionns?s? ca
c appaabbilitie
ilitiess
mmuusstt bbee inin
WWhheere pplalace
ce toto wwinin??
re wwillill wwee
pplalay?
y? WWhhaat t
mmaannaaggeemmeennt t
HHooww wwillill wwee sys te mmss aare
s yste re
wwinin inin cchhoose
s enn re
reqquuire
iredd??
WWhhaat t aare re oouurr mmaarkrke e tsts?
?
B u s in e s s U n it ggooaalsls aanndd
C as c a d e aassp
p ira
iratio
tionns?s? WWhhaat t
ca
c appaabbilitie
ilitiess
mmuusstt bbee inin
WWhheerere wwillill wwee pplalace
ce toto wwinin??
pplalay?
y?
WWhhaat t
mmaannaaggeemmeennt t
HHooww wwillill wwee
sys te mmss aare
s yste re
wwinin inin cchhoose
s enn re
reqquuire
iredd??
mmaarkrke e tsts?
?

WWhhaat t
ca
c appaabbilitie
ilitiess
mmuusstt bbee inin
pplalace
ce toto wwinin??
WWhhaat t
mmaannaaggeemmeennt t
sys te mmss aare
s yste re
re
reqquuire
iredd??

While the strategy literature generally treats corporate-level strategy as distinct from other kinds of
strategy, it is not meaningfully different from the other intermediate levels of strategy. The most
distinct level of strategy is the level of the indivisible activity system. Above that level, all levels are
simply aggregations of indivisible activity systems – that is, the building from ‘atoms’ of ever-more
complex ‘molecules’ and ‘compounds’.

The following are key questions that should be considered under each of the five choice areas:

Goals and Aspirations

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 What are the company’s goals and aspirations in terms of size, profitability, impact on the world’s
consumers, impact on its employees/communities and status relative to competitors?

 In what ways do these goals reinforce/support versus contradict/undermine the goals and aspirations
of the individual Business Units (Bus)?

 What implications do these goals and aspirations have for the Where to Play/How to Win choices?

Where to Play

 Is the current choice of Where to Play –geographic scope, product scope, vertical scope,
customer/consumer scope- optimally reinforcing of our goals and aspirations?

 Does the current choice of Where to Play support the corporate How to Win choices?

 And, does the current choice of Where to Play support the Where to Play/How to Win choices of the
individual Business Units?

 If not, in what ways could the company reduce or expand its Where to Play scope to further
optimize?

 For example, are there additional product/service lines which could reinforce one or more of the
five advantages cited above?

 Or, would the dropping of certain product lines build superior advantage?

 Or, could broadening or narrowing vertical scope reinforce the advantages?

 Or, could broadening or narrowing the spectrum of customers/consumer served reinforce


advantages?

How to Win

 To what degree do the posited sources of advantage --Technological Superiority, Brand


Development Superiority, Global Customer Leverage, Global Financial Leverage, and Global Human
Resource Leverage-- contribute to advantage at the BU level?

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 Are there additional sources of winning at the corporate level?

 For each of the potential sources of competitive advantage:

• What is the nature and magnitude of advantage conferred?

• Across what range of the current portfolio of BUs does this corporate advantage apply/not
apply?

• Could this competitive benefit extend to additional new BU?

• In what ways does the company invest to maintain this advantage?

• Is the current investment sufficient/too little/too high?

 Given the sources of advantage available, what should be the company’s chosen How to Win?

 Given this chosen How to Win, what are the implications for corporate Where to Play?

Capabilities Required

 What set of capabilities must the company choose to maintain or build to fulfill its Where to
Play/How to Win choices?

 Is building that set of capabilities realistic?

 What choices are required to build the specific capabilities required?

 What trade-offs must be made in building the capabilities required?

 Based on these requirements, does the choice of Where to Play or How to Win need to be
revisited?

Management Systems Required

 What decision rights allocation, performance measurement systems, and reward and
punishment systems are required to support the building and maintaining of the requisite capabilities?

 What human resource development systems are required?

 What technology development systems are required?

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 What other management systems are required?

 Based on these requirements, does the choice of Capabilities Required need to be revisited?

What, then, is strategy? Is it a plan? Does it refer to how we will obtain the ends we seek? Is it a
position taken? Just as military forces might take the high ground prior to engaging the enemy; might a
business take the position of low-cost provider? Or does strategy refer to perspective, to the view one
takes of matters, and to the purposes, directions, decisions and actions stemming from this view?
Lastly, does strategy refer to a pattern in our decisions and actions? For example, does repeatedly
copying a competitor’s new product offerings signal a "me too" strategy? Just what is strategy?

Strategy is all these—it is perspective, position, plan, and pattern. Strategy is the bridge between
policy or high-order goals on the one hand and tactics or concrete actions on the other. Strategy and
tactics together straddle the gap between ends and means. In short, strategy is a term that refers to a
complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and
expectations that provides general guidance for specific actions in pursuit of particular ends. Strategy is
at once the course we chart, the journey we imagine and, at the same time, it is the course we steer, the
trip we actually make. Even when we are embarking on a voyage of discovery, with no particular
destination in mind, the voyage has a purpose, an outcome, an end to be kept in view.

Strategy, then, has no existence apart from the ends sought. It is a general framework that provides
guidance for actions to be taken and, at the same time, is shaped by the actions taken. This means that
the necessary precondition for formulating strategy is a clear and widespread understanding of the ends
to be obtained. Without these ends in view, action is purely tactical and can quickly degenerate into
nothing more than a flailing about.

Some Fundamental Questions

Regardless of the definition of strategy, or the many factors affecting the choice of corporate or
competitive strategy, there are some fundamental questions to be asked and answered. These include
the following:

Related to Mission & Vision Who are we?

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What do we do?
Why are we here?
What kind of company are we?
What kind of company do we want to become?
What kind of company must we become?
Related to Corporate Strategy What is the current strategy, implicit or
explicit?
What assumptions have to hold for the current
strategy to be viable?
What is happening in the larger, social and
educational environments?
What are our growth, size, and profitability
goals?
In which markets will we compete?
In which businesses?
In which geographic areas?
Related to Competitive Strategy What is the current strategy, implicit or
explicit?
What assumptions have to hold for the current
strategy to be viable?
What is happening in the industry, with our
competitors, and in general?
What are our growth, size, and profitability
goals?
What products and services will we offer?
To what customers or users?
How will the selling/buying decisions be made?
How will we distribute our products and
services?
What technologies will we employ?
What capabilities and capacities will we
require?

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Which ones are core?


What will we make, what will we buy, and what
will we acquire through alliance?
What are our options?
On what basis will we compete?

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3. The Strategic Planning Process

In today's highly competitive business environment, budget-oriented planning or forecast-based


planning methods are insufficient for a large corporation to survive and prosper. The firm must engage
in strategic planning that clearly defines objectives and assesses both the internal and external situation
to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary
to stay on track.

A simplified view of the strategic planning process is shown by the following diagram:

Mission & Objectives

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation & Control

Mission and Objectives

The mission statement describes the company's business vision, including the unchanging values and
purpose of the firm and forward-looking visionary goals that guide the pursuit of future opportunities.

Guided by the business vision, the firm's leaders can define measurable financial and strategic
objectives. Financial objectives involve measures such as sales targets and earnings growth. Strategic
objectives are related to the firm's business position, and may include measures such as market share
and reputation.

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Environmental Scan

The environmental scan includes the following components:

• Internal analysis of the firm


• Analysis of the firm's industry (task environment)
• External macro environment. (PEST Analysis)

The internal analysis can identify the firm's strengths and weaknesses and the external analysis reveals
opportunities and threats. A profile of the strengths, weaknesses, opportunities, and threats is generated
by means of a SWOT Analysis.

An industry analysis can be performed using a framework developed by Michael Porter known as
Porter's Five Forces Model. This framework evaluates entry barriers, suppliers, customers, substitute
products, and industry rivalry.

Strategy Formulation

Given the information from the environmental scan, the firm should match its strengths to the
opportunities that it has identified, while addressing its weaknesses and external threats.

To attain superior profitability, the firm seeks to develop a competitive advantage over its rivals. A
competitive advantage can be based on cost or differentiation. Michael Porter identified three industry-
independent generic strategies from which the firm can choose.

Strategy Implementation

The selected strategy is implemented by means of programs, budgets, and procedures. Implementation
involves organization of the firm's resources and motivation of the staff to achieve objectives.

The way in which the strategy is implemented can have a significant impact on whether it will be
successful. In a large company, those who implement the strategy likely will be different people from
those who formulated it. For this reason, care must be taken to communicate the strategy and the
reasoning behind it. Otherwise, the implementation might not succeed if the strategy is misunderstood
or if lower-level managers resist its implementation because they do not understand why the particular
strategy was selected.

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Evaluation & Control

The implementation of the strategy must be monitored and adjustments made as needed.

Evaluation and control consists of the following steps:

1. Define parameters to be measured


2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined standard
5. Make necessary changes

The Business Vision and Company Mission Statement

While a business must continually adapt to its competitive environment, there are certain core ideals
that remain relatively steady and provide guidance in the process of strategic decision-making. These
unchanging ideals form the business vision and are expressed in the company mission statement.

The mission statement communicates the firm's core ideology and visionary goals, generally consisting
of the following three components:

1. Core values to which the firm is committed


2. Core purpose of the firm
3. Visionary goals the firm will pursue to fulfill its mission

The firm's core values and purpose constitute its core ideology and remain relatively constant. They are
independent of industry structure and the product life cycle.

The core ideology is not created in a mission statement; rather, the mission statement is simply an
expression of what already exists. The specific phrasing of the ideology may change with the times, but
the underlying ideology remains constant.

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Three components of the business vision:

Business 
Vision 

Visionary 
Core values Core Purpose
Goals

1. Core Values

The core values are a few values (no more than five or so) that are central to the firm. Core values
reflect the deeply held values of the organization and are independent of the current industry
environment and management fads.

One way to determine whether a value is a core value to ask whether it would continue to be supported
if circumstances changed and caused it to be seen as a liability. If the answer is that it would be kept,
then it is core value. Another way to determine which values are core is to imagine the firm moving
into a totally different industry. The values that would be carried with it into the new industry are the
core values of the firm.

Core values will not change even if the industry in which the company operates changes. If the industry
changes such that the core values are not appreciated, then the firm should seek new markets where its
core values are viewed as an asset.

For example, if innovation is a core value but then 10 years down the road innovation is no longer
valued by the current customers, rather than change its values the firm should seek new markets where
innovation is advantageous.

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The following are a few examples of values that some firms have chosen to be in their core:

• excellent customer service


• pioneering technology
• creativity
• integrity
• social responsibility

2. Core Purpose

The core purpose is the reason that the firm exists. This core purpose is expressed in a carefully
formulated mission statement. Like the core values, the core purpose is relatively unchanging and for
many firms endures for decades or even centuries. This purpose sets the firm apart from other firms in
its industry and sets the direction in which the firm will proceed.

The core purpose is an idealistic reason for being. While firms exist to earn a profit, the profit motive
should not be highlighted in the mission statement since it provides little direction to the firm's
employees. What is more important is how the firm will earn its profit since the "how" is what defines
the firm.

Initial attempts at stating a core purpose often result in too specific of a statement that focuses on a
product or service. To isolate the core purpose, it is useful to ask "why" in response to first-pass,
product-oriented mission statements. For example, if a market research firm initially states that its
purpose is to provide market research data to its customers, asking "why" leads to the fact that the data
is to help customers better understand their markets. Continuing to ask "why" may lead to the
revelation that the firm's core purpose is to assist its clients in reaching their objectives by helping them
to better understand their markets.

The core purpose and values of the firm are not selected - they are discovered. The stated ideology
should not be a goal or aspiration but rather, it should portray the firm as it really is. Any attempt to
state a value that is not already held by the firm's employees is likely to not be taken seriously.

3. Visionary Goals

The visionary goals are the lofty objectives that the firm's management decides to pursue. This vision
describes some milestone that the firm will reach in the future and may require a decade or more to

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achieve. In contrast to the core ideology that the firm discovers, visionary goals are selected.

These visionary goals are longer term and more challenging than strategic or tactical goals. There may
be only a 50% chance of realizing the vision, but the firm must believe that it can do so. Collins and
Porras describe these lofty objectives as "Big, Hairy, Audacious Goals." These goals should be
challenging enough so that people nearly gasp when they learn of them and realize the effort that will
be required to reach them.

Most visionary goals fall into one of the following categories:

• Target - quantitative or qualitative goals such as a sales target or Ford's goal to "democratize
the automobile."

• Common enemy - centered on overtaking a specific firm such as the 1950's goal of Philip-
Morris to displace RJR.

• Role model - to become like another firm in a different industry or market. For example, a
cycling accessories firm might strive to become "the Nike of the cycling industry."

• Internal transformation - especially appropriate for very large corporations. For example, GE
set the goal of becoming number one or number two in every market it serves.

While visionary goals may require significant stretching to achieve, many visionary companies have
succeeded in reaching them. Once such a goal is reached, it needs to be replaced; otherwise, it is
unlikely that the organization will continue to be successful. For example, Ford succeeded in placing
the automobile within the reach of everyday people, but did not replace this goal with a better one and
General Motors overtook Ford in the 1930's.

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Competitive Advantage

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a
competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable
competitive advantage.

Michael Porter identified two basic types of competitive advantage:

• cost advantage
• differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at
a lower cost (cost advantage), or deliver benefits that exceed those of competing products
(differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for
its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they describe the firm's
position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a
competitive advantage that ultimately results in superior value creation. The following diagram
combines the resource-based and positioning views to illustrate the concept of competitive advantage:

A Model of Competitive Advantage

RESOURCES & COST VALUE


CAPABILITIES ADVANTAGE CREATION

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Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the firm must have
resources and capabilities that are superior to those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was doing and any advantage quickly would
disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that
few competitors can acquire easily. The following are some examples of such resources:

• Patents and trademarks


• Proprietary know-how
• Installed customer base
• Reputation of the firm
• Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is
the ability to bring a product to market faster than competitors. Such capabilities are embedded in the
routines of the organization and are not easily documented as procedures and thus are difficult for
competitors to replicate.

The firm's resources and capabilities together form its distinctive competencies. These competencies
enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to
create a cost advantage or a differentiation advantage.

Cost Advantage or Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either a lower cost
structure or a differentiated product. A firm positions itself in its industry through its choice of low cost
or differentiation. This decision is a central component of the firm's competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter formed a matrix
using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic
strategies that the firm can pursue to create and sustain a competitive advantage.

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Value Creation

The firm creates value by performing a series of activities that Porter identified as the value chain. In
addition to the firm's own value-creating activities, the firm operates in a value system of vertical
activities including those of upstream suppliers and downstream channel members.

To achieve a competitive advantage, the firm must perform one or more value creating activities in a
way that creates more overall value than do competitors. Superior value is created through lower costs
or superior benefits to the consumer.

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4. INTRODUCTION AND OVERVIEW OF FMCG SECTOR

Fast Moving Consumer Goods (FMCG)

Fast Moving Consumer Goods (FMCG) goods are popularly named as consumer packaged goods.
Items in this category include all consumables (other than groceries/pulses) people buy at regular
intervals. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving
products, shoe polish, packaged foodstuff, household accessories and extends to certain electronic
goods. These items are meant for daily of frequent consumption and have a high return.

‘Fast Moving’ is in opposition to consumer durables such as kitchen appliances that are generally
replaced less than once a year. The category may include pharmaceuticals, consumer electronics and
packaged food products and drinks, although these are often categorized separately. The term
Consumer Packaged Goods (CPG) is used interchangeably with Fast Moving Consumer Goods
(FMCG).

Fast Moving Consumer Goods are products that have a quick shelf turnover, at relatively low cost and
don't require a lot of thought, time and financial investment to purchase. The margin of profit on every
individual FMCG product is less. However the huge number of goods sold is what makes the
difference. Hence profit in FMCG goods always translates to number of goods sold. Three of the
largest and best known examples of Fast Moving Consumer Goods companies are Nestlé, Unilever and
Procter & Gamble. Examples of FMCG brands are Coca-Cola, Kleenex, Pepsi and Believe.

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Typically, a consumer buys these goods at least once a month. The sector covers a wide gamut of
products such as detergents, toilet soaps, toothpaste, shampoos, creams, powders, food products,
confectioneries, beverages, and cigarettes.

Typical characteristics of FMCG products are: -

1. The products often cater to 3 very distinct but usually wanted for aspects - necessity, comfort,
luxury. They meet the demands of the entire cross section of population. Price and income
elasticity of demand varies across products and consumers.

2. Individual items are of small value (small SKU's) although all FMCG products put together
account for a significant part of the consumer's budget.

3. The consumer spends little time on the purchase decision. He seldom ever looks at the technical
specifications. Brand loyalties or recommendations of reliable retailer/ dealer drive purchase
decisions.

4. Limited inventory of these products (many of which are perishable) are kept by consumer and
prefers to purchase them frequently, as and when required.

5. Brand switching is often induced by heavy advertisement, recommendation of the retailer or


word of mouth.

Fast Moving Consumer Goods Sector:-

The Fast Moving Consumer Goods (FMCG) sector is the fourth largest sector in the economy with a
total market size in excess of Rs 60,000 crore. This industry essentially comprises Consumer Non
Durable (CND) products and caters to the everyday need of the population.

The FMCG sector represents consumer goods required for daily or frequent use. The main segments of
this sector are personal care (oral care, hair care, soaps, cosmetics, and toiletries), household care
(fabric wash and household cleaners), branded and packaged food, beverages (health beverages, soft
drinks, staples, cereals, dairy products, chocolates, bakery products) and tobacco.

The Indian FMCG sector is an important contributor to the country's GDP. It is the fourth largest sector
in the economy and is responsible for 5% of the total factory employment in India. The industry also

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creates employment for 3 m people in downstream activities, much of which is disbursed in small
towns and rural India. This industry has witnessed strong growth in the past decade. This has been due
to liberalization, urbanization, increase in the disposable incomes and altered lifestyle. Furthermore, the
boom has also been fuelled by the reduction in excise duties, de-reservation from the small-scale sector
and the concerted efforts of personal care companies to attract the burgeoning affluent segment in the
middle-class through product and packaging innovations.

Unlike the perception that the FMCG sector is a producer of luxury items targeted at the elite, in reality,
the sector meets the every day needs of the masses. The lower-middle income group accounts for over
60% of the sector's sales. Rural markets account for 56% of the total domestic FMCG demand.

Many of the global FMCG majors have been present in the country for many decades. But in the last
ten years, many of the smaller rung Indian FMCG companies have gained in scale. As a result, the
unorganized and regional players have witnessed erosion in market share.

Key Drivers for the FMCG sector

As we all know, India’s per capita consumption of most FMCG products is well below the global
average. That is largely because of the economic conditions, i.e. the purchasing ability, and also
because of lack of awareness of these products.

 Logistic Strength
While the purchasing ability is a function of economic growth, awareness is a function of the product
reach and its usability. It is in this context, that a company’s logistics strength gains importance. But
logistics does not only mean a company’s reach in terms of retail outlets, it also means the level of
sophistication of this distribution reach.
For an FMCG company, once a distribution chain is set up, it is the quality of that set up that gives it an
edge. Using the same chain, an FMCG company can introduce more products and brands at a faster
pace and at a lesser cost, and optimize the channel benefits. In the long run, such a distribution network
will be more profitable as it helps the company to keep adding to its product folio at more or less the
same fixed cost.

 MNC Companies
MNC companies form almost half of the branded FMCG industry in India. In case of MNC companies,
therefore, it is relevant to look at the parent support and commitment to its subsidiary before taking an

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investment decision. Again, support and commitment alone is not enough. Have a look at the parent’s
product profile and what are its plans for its subsidiary in India. If the parent itself is present only in a
few categories globally, all its support is of little help owing to the product hindrance.
For all companies, be it domestic or otherwise, a look at the company's product introduction track
record is an eye-opener.

 Competitive strengths
FMCG companies’ success is often attributed to their marketing and branding skills. Ability to
continuously create successful brands and advertising which gets the message across often spells
success for a company. Once a brand is successful, it easier for a company to piggyback on its initial
success introduces more products and associates them with the known brand. As they say, ‘nothing
succeeds like successes.
As said earlier, the more the number of product offerings, the more each resource is utilized, be it the
distribution channel, the marketing or branding strengths. It is in this context, that single or a few
product companies are risky. Number one, they have to continuously be wary of competitors coming in
and weaning away market share. Therefore, they have to continuously spend higher on advertising and
marketing. This is a double whammy for a company under pressure. On one hand, revenues are under
pressure and on the other, costs go up and margins are squeezed. Also, due to this, the company is often
shy of investing in new products and expanding its distribution network. Bottom line, future growth
prospects get stunted.

Industry Segments

The main segments of the FMCG sector are:

 Personal Care: oral care; hair care; skin care; personal wash (soaps); cosmetics and toiletries;
deodorants; perfumes; paper products (tissues, diapers, sanitary); shoe care.

Major companies active in this segment include Hindustan Lever; Godrej Soaps, Colgate-
Palmolive, Marico, Dabur and Procter & Gamble.

 Household Care: fabric wash (laundry soaps and synthetic detergents); household cleaners
(dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticides and mosquito
repellants, metal polish and furniture polish).

Major companies active in this segment include Hindustan Lever, Nirma and Reckitt &

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Colman.

 Branded and Packaged Food and Beverages: health beverages; soft drinks; staples/cereals;
bakery products (biscuits, bread, cakes); snack food; chocolates; ice cream; tea; coffee;
processed fruits, vegetables and meat; dairy products; bottled water; branded flour; branded
rice; branded sugar; juices etc.

Major companies active in this segment include Hindustan Lever, Nestle, Cadbury and Dabur.
Spirits and Tobacco Major Companies active in this segment include ITC, Godfrey Philips, UB
and Shaw Wallace.

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5. HISTORY OF FMCG IN INDIA

In India companies like HUL, ITC, Colgate, Cadbury and Nestle have been a dominant force in the
FMCG sector well supported by relatively less competition and high entry barriers (import duty
was high). These companies were, therefore, able to charge a premium for their products. In this
context, the margins were also on the higher side. With the gradual opening up of the economy
over the last decade, FMCG companies have been forced to fight for a market share. In the
process, margins have been compromised, more so in the last six years.

Distinguishing features of Indian FMCG Business:-

 FMCG companies sell their products directly to consumers. Major features that distinguish
this sector from the others include the following:

1. Design and Manufacturing

• Low Capital Intensity - Most product categories in FMCG require relatively minor investment
in plan and machinery and other fixed assets. Also, the business has low working capital
intensity as bulk of sales from manufacturing take place on a cash basis.

• Technology - Basic technology for manufacturing is easily available. Also, technology for most
products has been fairly stable. Modifications and improvements rarely change the basic
process.

• Third-party Manufacturing - Manufacturing of products by third party vendors is quite


common. Benefits associated with third party manufacturing include (1) flexibility in
production and inventory planning; (2) flexibility in controlling labor costs; and (3) logistics -
sometimes it’s essential to get certain products manufactured near the market.

2. Marketing and Distribution

Marketing function is sacrosanct in case of FMCG companies. Major features of the marketing
function include the following: -

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• High Initial Launch Cost - New products require a large front-ended investment in product
development, market research, test marketing and launch. Creating awareness and develop
franchise for a new brand requires enormous initial expenditure on launch advertisements, free
samples and product promotions. Launch costs are as high as 50-100% of revenue in the first
year. For established brands, advertisement expenditure varies from 5 - 12% depending on the
categories.

• Limited Mass Media Options - The challenge associated with the launch and/or brand-
building initiatives is that few no mass media options. TV reaches 67% of urban consumers and
35% of rural consumers. Alternatives like wall paintings, theatres, video vehicles, special
packaging and consumer promotions become an expensive but required activity associated with
a successful FMCG.

• Huge Distribution Network - India is home to six million retail outlets, including 2 million in
5,160 towns and four million in 627,000 villages. Super markets virtually do not exist in India.
This makes logistics particularly for new players extremely difficult. It also makes new product
launches difficult since retailers are reluctant to allocate resources and time to slow moving
products. Critical factors for success are the ability to build, develop, and maintain a robust
distribution network.

3. Competition

• Significant Presence of Unorganized Sector: - Factors that enable small, unorganized players
with local presence to flourish include the following:
• Basic technology for most products is fairly simple and easily available.
• The small-scale sector in India enjoys exemption/ lower rates of excise duty, sales tax etc. This
makes them more price competitive vis-à-vis the organized sector.
• A highly scattered market and poor transport infrastructure limits the ability of MNCs and
national players to reach out to remote rural areas and small towns.
• Low brand awareness enables local players to market their spurious look-alike brands.
• Lower overheads due to limited geography, family management, focused product lines and
minimal expenditure on marketing.

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Advantage India
 Large Market: - India has a population of over 1 billion and 4 climatic zones. Several
religious and personal beliefs, 15 official languages, different social customs and food habits
characterize Indian consumer class. Besides, India is also different in culture if compared with
other Asian countries. Therefore, India has high distinctiveness in demand and the companies
in India can get lot of market opportunities for various classes of consumers. Consumer goods
marketers experience that dealing with India is like dealing with many small markets at the
same time.

India is one of the largest economies in the world in terms of purchasing power and has a
strong middle class base of 300 million. Indian consumer goods market is expected to reach
$400 billion by 2010. India has the youngest population amongst the major countries. There
are a lot of young people in India in different income categories. Consumer goods marketers
are often faced with a dilemma regarding the choice of appropriate market segment. In India
they do not have to face this dilemma largely because rapid urbanization, increase in demand,
presence of large number of young population, any number of opportunities is available. The
bottom line is that Indian market is changing rapidly and is showing unprecedented consumer
business opportunity .

 Rural Population: - Around 70 per cent of the total households in India (188 million) reside
in the rural areas. The total numbers of rural households are expected to rise from 135 million
in 2001-02 to 153 million in 2009-10. This presents the largest potential market in the
world. The annual size of the rural FMCG market was estimated at around US$ 10.5 billion
in 2001-02. With growing incomes at both the rural and the urban level, the market
potential is expected to expand further.

 Changing Profile of Consumer: With changing economic situation of India, its not that only
the rich are spending more and more but in fact its the great Indian middle class that's thrown
caution to the winds and enjoying themselves like never before and are on a spending
juggernaut.

Brand India is riding high. For Indians with disposable income in their pockets, happy times
are here. With the sun shining on them, thoughts of a rainy day have been banished. It’s a new

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mindset at play. Living for the day is the new motto. This translates into spending on a new
home, a new car, the latest digital camera, appliances for the kitchen, home decor etc. The
change is drastic compared to a generation back where saving for a rainy day was the usual
practice. There was a clear line drawn between necessities, which could be counted on the
fingertips of one hand, and luxuries. Loans were not forthcoming. Giving or taking one was
frowned upon. Never borrow, never lend was the favorite theme.

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on
personal care products. The large share of fast moving consumer goods (FMCG) in total
individual spending along with the large population base is another factor that makes India one
of the largest FMCG markets.

Even on an international scale, total consumer expenditure on food in India at US$ 120 billion
is amongst the largest in the emerging markets, next only to China.

Banks and credit card companies are vying with each other in offering loans to customers. The
credit card business is booming. Indians were sold 45,000 credit cards a day last year and
together they spent Rs 120 crore a day through credit cards during the year. The face of
changing India is reflected as FMCG companies are reworking strategies and slashing prices
to reach the low-end consumer in rural areas.

Consumer Profile

1999 2001 2006

Population (Millions) 846 1012 1087

Population less than 480 546 565


25 years of Age

Urbanization (%) 26 28 31

Rapid urbanization, increased literacy and rising per capita income, have all caused rapid
growth and change in demand patterns, leading to an explosion of new opportunities. Around
45 per cent of the population in India is below 20 years of age and the young population is set
to rise further. Aspiration levels in this age group have been fuelled by greater media exposure,
unleashing a latent demand with more money and a new mindset.

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 DEMAND SUPPLY GAP:

Currently, only a small percentage of the raw materials in India are processed into value added
products even as the demand for processed and convenience food is on the rise. This demand
supply gap indicates an untapped opportunity in areas such as packaged form, convenience
food and drinks, milk products etc. In the personal care segment, the low penetration rate in
both the rural and urban areas indicates a market potential.

INDIA'S POLICY TOWARDS FMCG SECTOR

India has enacted policies aimed at attaining international competitiveness through lifting of
the quantitative restrictions, reduced excise duties, automatic foreign investment and food
laws resulting in an environment that fosters growth. 100 per cent export oriented units can be
set up by government approval and use of foreign brand names is now freely permitted. A few
more initiatives taken by the Government to develop FMCG sector are as follows:-

 Foreign Direct Investment Policy


Automatic investment approval (including foreign technology agreements within specified
norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate
Bodies (OCBs) investment, is allowed for most of the food processing sector except malted
food, alcoholic beverages and those reserved for small scale industries (SSI). 24 per cent
foreign equity is permitted in the small-scale sector. Temporary approvals for imports for
test marketing can also be obtained from the Director General of Foreign Trade. The evolution
of a more liberal FDI policy environment in India is clearly supported by the successful
operation of some of the global majors like PepsiCo in India.

Growth of Pepsi Co due to FDI Policy:-


After a not so successful attempt to enter the Indian market in 1985, Pepsi re-entered in 1988
with a joint venture of PepsiCo, Punjab government-owned Punjab Agro Industrial
Corporation (PAIC) and Voltas India Limited. By 1994, Pepsi took advantage of the
liberalized policies and took control of Pepsi Foods by making an offer to both Voltas and
PAIC to buy their equity. The Indian government gave concessions to the company, Pepsi was
allowed to increase its turnover of beverages component to beyond 25 per cent and was no

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longer restricted by its commitment to export 50 per cent of its turnover. The government
approved more than US$ 400 million worth of investment of which over US$ 330 million has
already been invested. The government also allowed PepsiCo to set up a new company in
India called PepsiCo India Holdings Pvt Ltd, a wholly owned subsidiary of PepsiCo
International, which is engaged in beverage manufacturing, bottling and exports activities as
Pepsi Foods Ltd.

Since then, the company has bought over bottlers in different parts of India along with Dukes,
a popular soft-drink brand in western India to consolidate its market share. This was followed
by an introduction of Tropicana juice in the New Delhi and Bangalore markets in 1999.
Currently, soft drink concentrate, snack foods and vegetable and food processing are the key
products of the company. Pepsi considers India, along with China, as one of the two largest
and fastest growing businesses outside North America. Pepsi has 19 company owned factories
while their Indian bottling partners own 21. The company has set up 8 green field sites in
backward regions of different states. PepsiCo intends to expand its operations and is planning
an investment of approximately US$ 150 million in the next two three years.

 Removal of Quantitative Restrictions and Reservation Policy


The Indian government has abolished licensing for almost all food and agro-processing
industries except for some items like alcohol, cane sugar, hydrogenated animal fats and oils
etc., and items reserved for the exclusive manufacture in the small scale industry (SSI) sector.
Quantitative restrictions were removed in 2001 and Union Budget 2004-05 further identified
85 items that would be taken out of the reserved list. This has resulted in a boom in the FMCG
market through market expansion and greater product opportunities.

 Central and State Initiatives


Various states governments like Himachal Pradesh, Uttaranchal and Jammu & Kashmir have
encouraged companies to set up manufacturing facilities in their regions through a package of
fiscal incentives. Jammu and Kashmir offers incentives such as allotment of land at
concessional rates, 100 percent subsidy on project reports and 30 per cent capital investment
subsidy on fixed capital investment upto US$ 63,000. The Himachal Pradesh government
offers sales tax and power concessions, capital subsidies and other incentives for setting up a
plant in its tax free zones.

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Wide-ranging fiscal policy changes have been introduced progressively. Excise and import
duty rates have been reduced substantially. Many processed food items are totally exempt
from excise duty. Customs duties have been substantially reduced on plant and equipment, as
well as on raw materials and intermediates, especially for export production. Capital goods are
also freely importable, including second hand ones in the food processing sector.

 Food Laws
Consumer protection against adulterated food has been brought to the fore by "The Prevention
of Food Adulteration Act (PFA), 1954", which applies to domestic and imported food
commodities, encompassing food colour and preservatives, pesticide residues, packaging,
labelling and regulation of sales.

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STEPS TAKEN IN UNION BUDGET 2007-08 AND ITS IMPACT ON FMCG SECTOR:-

 Partial excise for biscuits with MRP of less than Rs50 per kg.
Impact: - It is beneficial to the companies producing Biscuits. Especially it is beneficial for
Britannia earning substantial revenues from Low Value High Nutrition biscuits (Tiger brand of
Glucose biscuits) and ITC (Sunfeast brand).

 Full excise exemption to all kinds of food mixes including instant mixes
Impact:-Food Processing Industry to get thrust. Beneficial for ITC, Satnam Overseas, HUL.

 Full excise exemption to domestic water filters not using electricity.


Impact: - Marginally positive for HUL, which has identified its water purifier (Pureit) business
as a focus area for growth. However, Pureit contributes not more than 2% to the revenues of the
company.

 Exemption of crude and refined edilble oil from additional CV duty of 4%,
reduction in duty on crude & refined sunflower oil by 15%.
Impact:-Improve margins of edible oil refining companies like Ruchi Soya Industries Ltd
earning more than one-third revenues from sales of imported Palm Oil and Sunflower Oil.

 Full excise exemption to biodiesel


Impact:- Positive for Ruchi Soya Industries, which has spare capacity at its disposal and hence
plans to deal in all kinds and varieties of cash crops including Jathropha, Palm plantation,
medicinal plants, petro-chemicals, bio-diesel and all by-products thereof.

 Increased focus on rural and agricultural growth


Impact:-Boost rural and agricultural income and hence accelerate demand from these sections
for FMCG products, especially from Popular and Value for Money segments. Beneficial for
companies having presence in these segments and significant rural penetration like Ruchi Soya
Industries, GCPL, ITC, HUL.

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 Steps for induction of high yielding milch animals and related activities
Impact: - Provide thrust to dairy activities and increase milk production in the long term. India
is the largest milk producer in the world and also among the largest exporters of milk products.
Rising Casein exports to cater to growing global demand had led to sky-rocketing milk powder
prices. Ban on exports would cap the rise in prices to a certain extent in the near term while
increase in milk productions would ensure reasonable prices in the medium to long term.

 Increase in specific rates of duty on cigarettes by about 5%


Impact:-Marginally negative for cigarette manufacturers. However, considering buoyant
volume growth, we believe the brunt would be passed on to the end-user.

 Increase in duty (excluding cess) on non-machine made biris from Rs7 to Rs11 per
thousand and on machine made biris from Rs17 to Rs24 per thousand.

Impact: - Marginally positive for low-price cigarette manufacturers since higher cost of biris
could lead to gradual shift towards low-priced cigarettes.

 Reduction in customs duty on food processing machinery from 7.5% to 5%.

Impact:-Beneficial for new food processing companies as well as existing companies setting up
new units.

 Reduction in duty on titanium dioxide from 12.5% to 10% and on Pentaerithrol


and Pthalic Anhydride from 10% to 7.5%.

Impact: - Improve margins of domestic paint manufacturers using higher content of imported
raw materials. Beneficial for Asian Paints, Kansai Nerolac also due to housing & infrastructure
boom and positive outlook for Automobile and Consumer Durable sectors.

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6. INDIAN COMPETITIVENESS AND COMPARISON WITH THE WORLD MARKET


India has a huge advantage in terms of cost factors such as raw material, labour cost etc. in comparison
to other countries. A brief overview of such factors is as follows:-

1. Material Availability

India has a diverse agro-climatic condition due to which there exists a wide-ranging and large raw
material base suitable for food processing industries. India is the largest producer of livestock, milk,
sugarcane, coconut, spices and cashew and is the second largest producer of rice, wheat and fruits &
vegetables. India also has an ample supply of caustic soda and soda ash, the raw materials in the
production of soaps and detergents – India produced 1.6 million tonnes of caustic soda in 2003-04. Tata
Chemicals, one of the largest producers of synthetic soda ash in the world is located in India. The
availability of these raw materials gives India the locational advantage.

2. Labour Cost Competitiveness

Apart from the advantage in terms of ample raw material availability, existence of low-cost labour
force also works in favour of India.

Labour cost in India is amongst the lowest in Asian countries. Easy raw material availability and low
labour costs have resulted in a lower cost of production. Many multi-nationals have set up large low
cost production bases in India to outsource for domestic as well as export markets.

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3. Leveraging the cost advantage

Global major, Unilever, sources a major portion of its product requirements from its Indian subsidiary,
HLL. In 2003-04, Unilever outsourced around US$ 218 million of home and personal care along with
food products to leverage on the cost arbitrage opportunities with the West. To take another case,
Procter & Gamble (P&G) outsourced the manufacture of Vicks Vaporub to contract manufacturers in
Hyderabad, India. This enables P&G to continue exporting Vicks Vaporub to Australia, Japan and other
Asian countries, but at more competitive rates, whilst maintaining its high quality and cost efficiency.
4. Presence across the value chain
Indian firms also have a presence across the entire value chain of the FMCG industry from supply of
raw material to final processed and packaged goods, both in the personal care products and in the food
processing sector. For instance, Indian firm Amul's product portfolio includes supply of milk as well as
the supply of processed dairy products like cheese and butter. This makes the firms located in India
more cost competitive.

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7. INDUSTRY ANALYSIS OF INDIAN FMCG SECTOR

FMCG Sector is one of the most important sectors for each and every Economy. It plays a vital role
being a necessity and inelastic product which touches every life in one or the other aspect.

India's FMCG sector is the fourth largest sector in the economy and creates employment for more than
three million people in downstream activities. Its principal constituents are Household Care, Personal
Care and Food & Beverages. The total FMCG market is in excess of INR 85,000 Crores. It is currently
growing at double digit growth rate and is expected to maintain a high growth rate. FMCG Industry is
characterized by a well established distribution network, low penetration levels, low operating cost,
lower per capita consumption and intense competition between the organized and unorganized
segments.

The FMCG Industry remained insulated from inflation led demand slowdown. Inflation as measured by
the wholesale price index (WPI) shot up to 9.5 per cent in June 2008 quarter and further climbed up to
12.63 per cent in September quarter. In both these quarters, industry sales accelerated by more than 15
per cent backed by healthy growth in off take as well as price hikes affected. During this period, the
industry was largely able to hold on to margins through a combination of strategies such as reduction in
packaging cost and changes in product mix. Since October, inflation rate has been waning and fell to
5.91 per cent for the week ended 27 December 2008. Thus demand for personal care products is likely
to remain buoyant. Even during the slowdown of the economy, the FMCG sector has registered a
growth rate of 14.5 per cent for the year 2007-08.

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We have analyzed the this sector with the help of following parameters that gives
us the opportunity to broadly cover almost all aspects of FMCG industry

1. General features / basic conditions of the industry


2. Industry Environment
3. Industry structure
4. Industry attractiveness
5. Industry Performance
6. Industry Practices
7. Industry trends / the future of the industry.

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GENERAL FEATURES / BASIC CONDITIONS OF THE INDUSTRY

 FMCG industry, alternatively called as CPG (Consumer packaged goods) industry primarily
deals with the production, distribution and marketing of consumer packaged goods. The Fast
Moving Consumer Goods (FMCG) is those consumables which are normally consumed by the
consumers at a regular interval. Some of the prime activities of FMCG industry are selling,
marketing, financing, purchasing, etc. The industry also engaged in operations, supply chain,
production and general management.
• The Indian FMCG sector is the fourth largest sector in the economy with a total market size
of US$18 billion as of 2007.
• By 2015, the sector is predicted to scale up to US$33.4 billion.
• The sector generates 5% of total factory employment in the country and is creating
employment for three million people, especially in small towns and rural India1.
• Product differentiation is the surviving factor for most of the companies and they often
indulge in price wars resulting in low margins.
• Key Segments : The FMCG sector consists of three product categories, each with its own
hosts of products that have relatively quick turnover and low costs: (1) Household Care (2)
Personal Care (3) Food & Beverages
• The volume of money circulated in the economy against FMCG products is very high, as
the number of products the consumer use is very high.

• Competition in the FMCG sector is very high resulting in high pressure on margins.

• FMCG companies maintain intense distribution network. Companies spend a large portion
of their budget on maintaining distribution networks.

• New entrants who wish to bring their products in the national level need to invest huge sums
of money on promoting brands.

• Even dominant players in this segment cannot be complacent. That’s why players like HUL,
Godrej, ITC and P&G are one of the highest advertisement spenders year after year.

• One of the important feature of this industry is that manufacturing can be outsourced
resulting in some cost savings. Big players like HUL & Marico industries have used this

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facility to a large extent.

• A recent phenomenon in the sector was entry of multinationals and cheaper imports. While
this may not be absolutely true as some companies like Unilver, Coca- Cola & P&G are
some of the oldest players in this segment. Still after the liberalization of Indian economy in
the post 1991 era, there has been flooding of many foreign companies in this sector.

• Last but not least, the market is more pressurized with presence of local players in rural
areas and state brands. Imitation of big brands at rural level is quite poignant.

• Branding: Creating strong brands is important for FMCG companies and they devote
considerable money and effort in developing bands. With differentiation on functional
attributes being difficult to achieve in this competitive market, branding results in consumer
loyalty and sales growth.

• Distribution Network: Given the fragmented nature of the Indian retailing industry and the
problems of infrastructure, FMCG companies need to develop extensive distribution
networks to achieve a high level of penetration in both the urban and rural markets. Once
they are able to create a strong distribution network, it gives them significant advantages
over their competitors.

• Contract manufacturing: As FMCG companies concentrate on brand building, product


development and creating distribution networks, they are at the same time outsourcing their
production requirements to third party manufacturers. Moreover, with several items
reserved for the small scale industry and with these SSI units enjoying tax incentives, the
contract manufacturing route has grown in importance and popularity.

• Large unorganized sector: The unorganized sector has a presence in most product
categories of the FMCG sector. Small companies from this sector have used their locational
advantages and regional presence to reach out to remote areas where large consumer
products have only limited presence. Their low cost structure also gives them an advantage.

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INDUSTRY ENVIRONMENT:

Any Industries environmental scan includes the following components:


1. External macro analysis evident through PEST analysis and
2. Internal Analysis covering the strength, weakness, opportunities and threats in the sector.

EXTERNALENVIRONMENTAL ANALYSIS:-

A scan of the external macro-environment in which the firm operates can be expressed in terms
of the following factors:

 Political
 Economic
 Social
 Technological

The acronym PEST (or sometimes rearranged as "STEP") is used to describe a framework for
the analysis of these macro environmental factors. A PEST analysis fits into an overall
environmental scan as shown in the following diagram:

Environmental Scan

External Analysis Internal Analysis

PEST Analysis SWOT Analysis

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Political Factors

Political factors include government regulations and legal issues and define both formal and informal
rules under which the firm must operate.

Economic Factors

Economic factors affect the purchasing power of potential customers and the firm's cost of capital.

Social Factors

Social factors include the demographic and cultural aspects of the external macro environment. These
factors affect customer needs and the size of potential markets.

Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels, and
influence outsourcing decisions.

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The PEST factors discussed above could be described in a well manner through the help of following
table.

Political (Incl. Legal) Economic Social Technological

Environmental regulations Economic growth Income Distribution Government research


and protection spending

Tax policies Interest rates & monetary Demographics, Population Industry focus on
policies growth rates, Age technological effort
distribution
International trade Government spending Labor / social mobility New inventions and
regulations and restrictions development

Contract enforcement law Unemployment policy Lifestyle Changes Rate of technology transfer
Consumer protection
Employment laws Taxation Work/career and leisure Life cycle and speed of
attitudes technological obsolescence
Entrepreneurial spirit
Government organization / Exchanges Rates Education Energy use and costs
attitude

Competition regulation Inflation Rates Fashion, hypes Changes in) Information


Technology

Political Stability Stages of the Business Health consciousness & (Changes in) Internet
Cycle welfare, feelings on safety

Safety regulations Consumer Confidence Living Conditions (Changes in) mobile


technology

IMPACT OF INTERNATIONAL BUSINESS ENVIRONMENT ON UNILEVER AS A GLOBAL


EXAMPLE OF PEST ANALYSIS

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Every MNC is measured by the standard it set in the environment in which it operates. Unilever is not
an exception. Unilever has a mission to add value to life of both its present and potential customers.
Accomplishing this mission will not take place in a vacuum, but in an environment which is very
turbulence.

POLITICAL/LEGAL ENVIRONMENT-

Unilever, as a matter of policy, set a standard as to the way of tackling political issues. Unilever has its
tactical way of handling political issues. First, in the 1960s, many countries began to nationalize
foreign firms which also affected Unilever. This was a call for local equity participation in foreign
firms. Thus, so many companies were subject to local control on prices, imports, employment of
expatriates and so on. As a result of the adverse effect of nationalization policy, in the 1970, many US
companies e.g. IBM and coca cola left India. There was fear by foreign companies on certain issues
such as knowledge leakage, loss of trademark etc. This was also hazardous for Unilever as its control
over operation in the market was reduced. For example UAC, a subsidiary of Unilever, whose
operation was in many African countries (Cameroon, Ghana, Ivory Coast, Nigeria, etc.), was focused
on as its profit margin and rate of easy remittance of profit to its Anglo-Dutch parent was enormous.
Nationalizing UAC hampered Unilever’s control over the market where UAC operates. However,
Unilever use its experience and goodwill to make contacts in many countries to bargain with
government so as to modify their regulations. In central and south America, Unilever only engaged in
lobbying rather than active politicking. In other words, Unilever never get involved in sponsoring
political parties. Today, Unilever has gained political ground using its tactical strategy and experience.
Unilever is a member of many organizations all over the world. The aim is to create favorable business
environment, and also facilitate corporate reputation management.

ECONOMIC ENVIRONMENT

Unilever market environment is becoming highly competitive especially in the Western Europe. Procter
& Gamble (P&G) is one of the major competitors in the European market. More so, there are so many
discounters in the European market resulting from EU free trade policy. This has had adverse effect on
Unilever’s profit potentials. Retailers are pressurizing FMCG producers to reduce prices of their
products. Consumers on the other hand would not want to buy expensive product or brands due to
current economic tide. Competition in EU has grown so strong that Unilever is facing difficulties in
places like France, Netherlands. In the developing countries and the emerging economies (Asia and

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Africa), where there are political instability, Unilever has adopted its company strategy to ensure that
its profitability drive is sustained. Some products are packaged in small size for low or regular income
earner, for affordability. In some developing countries, Nigeria to be precise, there was uncertainty
about duties to be paid by companies due to inflation and fluctuation of currency. The effect on
Unilever was a decrease in profit in 2005 compared to 2004, though there was increase in turnover. In
2004 and 2005 the profit after tax were N2.167 billion (naira) and N1.616 billion (naira) respectively,
while in the turnover in 2004 and 2005 were N28.6 billion (naira) and N33.4 billion (naira)
respectively, which indicates increase in turnover but decrease in profit.

SOCIO-CULTURAL ENVIRONMENT

Unilever has continued to maintain momentum in its socio-cultural environment in line with its
sustainability drive. The company is working relentlessly to bring improve hygiene and better nutrition
to people in Asia, Africa and Latin America, especially the poor and obesity. Over 30% of Africa
population lives on less than $1 per day. By this, Unilever strengthens it goodwill. However, the low
literacy of consumers affects marketing vehicles such as advertisement in print media. This therefore
requires employment of more resources, for instance to enhance face-to-face communication. Besides,
Unilever employs about 100 nationalities. It ensures that diversity works for everybody both employees
and consumer alike. In order to achieve and ensure that diversity works amongst employees, Unilever
employed the strategy of diversity toolkit so as to manage and leverage diversity. Unilever is focused
on building an exclusive culture and embracing difference, which resulted in high demand of its
products in the developing and emerging markets.

TECHNOLOGICAL ENVIRONMENT

Right in the 1930s, Unilever continue to diversify. Business continue to boom in the 1950s with new
technology being invented to boast production and enhance quality products for consumer, competitors
improving their products using new inventions. Unilever did not relent its effort in R&D. Since 2000,
Unilever has been spending on IT to improve its business especially in the area of e-business so as to
improve brands, communication and market through internet, making transaction simple along chain.

Today, Unilever is trying to minimize cost through IT efficiencies at global level. In addition, Unilever
Technology Venture works in collaboration with Unilever R&D group to help Unilever meet
consumers’ needs. Area of concern is genomics, advanced bioscience, advanced materials science and
nano technology. In 2003, Unilever installed and commissioned “pallet live storage system” from Bitto

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Storage System Ltd. This was meant to store its frozen products. The facilities include: pallet live
storage systems, carton live storage systems, pallet racking, bolt-less shelving, plastic bins and
containers, wide span and heavy load shelving, cantilever racking, and multi-tier shelving systems.

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INTERNAL ENVIRONMENT ANALYSIS:-

A scan of the internal and external environment is an important part of the strategic planning process.
Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W),
and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of
the strategic environment is referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's resources and
capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy
formulation and selection.

SWOT Analysis Framework

Strengths

A firm's strengths are its resources and capabilities that can be used as a basis for developing a
competitive advantage. Examples of such strengths include:

1. patents
2. strong brand names
3. good reputation among customers
4. cost advantages from proprietary know-how
5. exclusive access to high grade natural resources
6. favorable access to distribution networks

Weaknesses

The absence of certain strengths may be viewed as a weakness. For example, each of the following
may be considered weaknesses:

• lack of patent protection


• a weak brand name
• poor reputation among customers
• high cost structure
• lack of access to the best natural resources
• lack of access to key distribution channels

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In some cases, a weakness may be the flip side of strength. Take the case in which a firm has a large
amount of manufacturing capacity. While this capacity may be considered a strength that competitors
do not share, it also may be a considered a weakness if the large investment in manufacturing capacity
prevents the firm from reacting quickly to changes in the strategic environment.

Opportunities

The external environmental analysis may reveal certain new opportunities for profit and growth. Some
examples of such opportunities include:

• an unfulfilled customer need


• arrival of new technologies
• loosening of regulations
• removal of international trade barriers

Threats

Changes in the external environmental also may present threats to the firm. Some examples of such
threats include:

• shifts in consumer tastes away from the firm's products


• emergence of substitute products
• new regulations
• increased trade barriers

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The SWOT Matrix

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better
chance at developing a competitive advantage by identifying a fit between the firm's strengths and
upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to
pursue a compelling opportunity.
[

To develop strategies that take into account the SWOT profile, a matrix of these factors can be
constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below:

SWOT / TOWS Matrix

Strengths Weaknesses

S-O strategies W-O strategies


Opportunities

S-T strategies W-T strategies


Threats

• S-O strategies pursue opportunities that are a good fit to the company's strengths.

• W-O strategies overcome weaknesses to pursue opportunities.

• S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to
external threats.

• W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it
highly susceptible to external threats.

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SWOT Analysis of Indian FMCG Sector:

FMCG is the fourth largest sector in the Indian Economy with a total market size of Rs. 60,000 crores.
FMCG sector generates 5% of total factory employment in the country and is creating employment for
three million people, especially in small towns and rural India.

Strengths:
1.Low operational costs
2. Presence of established distribution networks in both urban and rural areas
3. Presence of well-known brands in FMCG sector

Weaknesses:
1. Lower scope of investing in technology and achieving economies of scale, especially in small
sectors
2. Low exports levels
3. "Me-too" products, which illegally mimic the labels of the established brands. These products
narrow the scope of FMCG products in rural and semi-urban market.

Opportunities:
1. Untapped rural market
2. Rising income levels i.e. increase in purchasing power of consumers
3. Large domestic market- a population of over one billion.
4. Export potential
5. High consumer goods spending

Threats:
1. Removal of import restrictions resulting in replacing of domestic brands
2. Slowdown in rural demand
3. Tax and regulatory structure.

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INDUSTRY STRUCTURE

Industry analysis is carried out with the help of following parameters:

 No. of Players in the Industry


 Total Market Size
 Relative Market Share of the different Players
 Nature of Competition -Perfect/monopoly/monopolistic/oligopoly etc.
 Differentiation Practiced by Various Players

 NO. OF PLAYERS -
Indian FMCG industry the exact number of FMCG companies is difficult to find out but at the
same time it is also true that these top ten companies control most of the industry. These are as
follows:-

S. NO. Companies
1. Hindustan Unilever Ltd.
2. ITC (Indian Tobacco Company)
3. Nestlé India
4. GCMMF (AMUL)
5. Dabur India
6. Asian Paints (India)
7. Cadbury India
8 Britannia Industries
9. Procter & Gamble Hygiene and Health Care
10. Marico Industries

Apart from these there are many smaller companies that have some amount of control on the Indian
FMCG sector some of them are as follows :-

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1. Colgate-Palmolive (India) Ltd.


2. Godrej Consumers Product Ltd.
3. Nirma Ltd.
4. Tata Tea Ltd.
5. Parle Agro
6. H. J. Heinz

 TOTAL MARKET SIZE -


The Indian FMCG industry size was estimated to be around US$ 15 bn in 2007, as per
ASSOCHAM. Of this, close to US$ 8 bn was confined to the rural areas with US$ 4 bn in the
urban & metro area and almost US$ 3 bn in the semi-urban area. The large young population of
approximately 180 mn in the rural and semi-urban region is driving the Indian FMCG industry,
with the continuous rise in their disposable income, life style, food habit etc, among others. The
lifestyle of this section of the population is undergoing a rapid change on the back of rising
income levels.
According to ASSOCHAM, the market size of FMCG in the rural and semi-urban segment is
likely to jump up by 10% and 6% respectively by 2010. Currently, almost 52% of the rural
market size is captured by FMCG products and is projected to reach 57% in the next three
years. This size is further expected to grow by 10% in the next three years.

 RELATIVE SHARE OF THE PLAYERS-


This is discussed here segment wise so as to gain an in depth knowledge of who enjoys how
much power in the sector:-
Personal Wash
The market size of personal wash is estimated to be around INR 8,300 Cr. The personal wash
can be segregated into three segments: Premium, Economy and Popular. The penetration level
of soaps is 92% it is available in 5m retail stores, out of which, 75% are in the rural areas.
HUL is the leader with market share of ~53%; Godrej occupies second position with market
share of ~10%. With increase in disposable incomes, growth in rural demand is expected to
increase because consumers are moving up towards premium products. However, in the recent
past there has not been much change in the volume of premium soaps in proportion to economy

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soaps, because increase in prices has led some consumers to look for cheaper substitutes.

Detergents
The size of the detergent market is estimated to be INR 12,000 Cr. Household care segment is
characterized by high degree of competition and high level of penetration. With rapid
urbanization, emergence of small pack size and sachets, the demand for the household care
products is flourishing. The demand for detergents has been growing but the regional and small
unorganized players account for a major share of the total volume of the detergent market. In
washing powder HUL is the leader with 38% of market share. Other major players are Nirma,
Henkel and Proctor &Gamble.

Skin Care
The total skin care market is estimated to be around INR 3,400 Cr. The skin care market is at a
primary stage in India. The penetration level of this segment in India is around 20%. With
changing life styles, increase in disposable incomes, greater product choice and availability,
people are becoming aware about personal grooming. The major players in this segment are
Hindustan Unilever with a market share of ~ 54%, followed by CavinKare with a market share
of ~ 12% and Godrej with a market share of ~ 3%.

Hair Care
The hair care market in India is estimated at around INR 3,800 Cr. The hair care market can be
segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. Marico is the
leader in Hair Oil segment with market share of ~ 33%; Dabur occupies second position at
~17%.

Shampoos
The Indian shampoo market is estimated to be around INR 2,700 Cr. It has the penetration level
of only 13%. In India Sachet makes up to 40% of the total shampoo sale. It has low penetration
level even in metros. Again the market is dominated by HUL with around ~ 47% market share;
P&G occupies second position with market share of around ~ 23%. Anti-dandruff segment
constitutes around 15% of the total shampoo market. The market is further expected to increase
due to increased marketing by players and availability of shampoos in affordable sachets.
Oral Care
The oral care market can be segmented into toothpaste - 60%; tooth powder 23%; toothbrushes

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- 17%. The total toothpaste market is estimated to be around INR 3,500 Cr. The penetration
level of tooth powder/toothpaste in urban areas is three times that of rural areas. This segment is
dominated by Colgate-Palmolive with market share of ~ 49%, while HUL occupies second
position with market share of ~ 30%. Colgate and HUL together account for 85% of organized
toothpaste market. In tooth powders market, Colgate and Dabur are the major players. The oral
care market, especially toothpastes, remains under penetrated in India with penetration level
around 50 per cent. The industry is very competitive both for organized and smaller regional
players.

Food Segment
The foods category in FMCG is gaining popularity with a swing of launches by HUL, ITC,
Godrej, and others. This category has 18 major brands aggregating INR 4,600 Cr. Nestle and
Amul slug it out in the powders segment. The food category has also seen innovations like
softies in ice creams, ready to eat rice by HUL and pizzas by both GCMMF and Godrej
Pillsbury. This category seems to have faster development than the stagnating personal care
category.

Tea
The major share of tea market is dominated by unorganized players. More than 50% of the
market share is capture by unorganized players. Leading branded tea players are HUL and Tata
Tea.

Coffee
The Indian beverage industry faces over supply in segments like coffee and tea. However, more
than 50% of the market share is in unpacked or loose form. The major players in this segment
are Nestlé, HUL and Tata Tea.

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NATURE OF COMPETITION

In FMCG market there are many sellers selling differentiated products for example soaps used for
personal wash. Each brand has a specific characteristic, be it packaging, fragrance, look etc., though
the composition remains the same. This is the reason that each brand is sold individually in the
market. This shows that each brand is highly differentiated in the minds of the consumers. The
effectiveness of the particular brand may be attributed to continuous usage and heavy advertising.
This is the characteristic of Monopolistic Competition. So in FMCG sector the form of competition
prevalent is mainly Monopolistic. While this may be arguable to some extent in the case of
cigarettes where Oligopolistic competition is said to be prevailing still our earlier statement holds
true for most other products in FMCG sector.
As defined by Joe S.Bain ‘Monopolistic competition is found in the industry where there are a large
number of sellers, selling differentiated but close substitute products’. Take the example of Liril and
Cinthol. Both are soaps for personal care but the brands are different. Under monopolistic
competition, the firm has some freedom to fix the price i.e. because of differentiation a firm will not
lose all customers when it increases its price.
Monopolistic competition is said to be the combination of perfect competition as well as monopoly
because it has the features of both perfect competition and monopoly. It is closer in spirit to a
perfectly competitive market, but because of product differentiation, firms have some control over
price.

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DIFFERENTIATION PRACTICED BY VARIOUS PLAYERS

Consumer goods are available in a variety of styles and brands. Product differentiation refers to
such variations within a product class that (some) consumers view as imperfect substitutes. Product
differentiation is pervasive in FMCG market at a very large scale. Offered under different brands by
competing firms, products fulfilling the same need typically do not have identical features. The
differentiation of goods along key features and minor details is an important strategy for firms
to defend their price from leveling down to the bottom part of the price spectrum. At market level,
differentiation is the way through which the quality of goods is improved over time thanks to
innovation. Launching new goods with entirely new performances is a radical change, often leading
to changes in market shares and industry structures.

There are two types of Product differentiation followed by the Industry. They are

Vertical Differentiation
Vertical differentiation occurs in a market where the several goods that are present can be ordered
according to their objective quality from the highest to the lowest. It's possible to say in this case
that one good is "better" than another. An example could be Vanaspati oil and Refined oil.

Vertical differentiation can be obtained:

ü along one decisive feature;

ü along a few features, each of which has a wide possible range of (continuous or discrete)
values;

ü Across a large number of features, each of which has only a presence/absence "flag".

Horizontal differentiation
When products are different according to features that can't be ordered, a horizontal differentiation
emerges in the market. A typical example is the ice-cream offered in different tastes. Chocolate is
not "better" than lemon.

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INDUSTRY ATTRACTIVENESS

Industry attractiveness actually forms part of industry structure. The elements of industry structure
which constitute industry attractiveness are:

 Industry Potential – As we know that FMCG Industry is almost recession free and is fairly
potent to provide good profitability as well as good return on investment, it carries a very high
potential.

 Industry Growth- If we compare FMCG performance from year to year basis we see that
there has been a manifold increase in the rate at which it is growing.

 Industry Profitability- Because of monopolistic competition companies generally earns


higher profits in the long term rather than on short term basis. Margins are always thin in this
industry due to higher manufacturing & distribution costs.

 Likely Future Pattern of The Industry- In India there is a huge untapped rural market for
the FMCG industry as the demand in this segment is generally met by local players who thrive
on IMITATION instead of INNOVATION.

 Industry Barriers – Main barrier in FMCG industry is competition from some big &
dominant players like HUL, ITC, P&G, Godrej, Marico etc. which makes life difficult for the
new entrants to survive in the market.

 Forces Shaping Competition In The Industry- Diversified products and varied demand in
all parts of the sector.

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INDUSTRY PERFORMANCE

We have tracked the Performance of companies for the FY 07-08. All companies recorded double
digit revenue growth led by strong volume growth across segments.

Financial Year 2007-08 Key Highlights


Operating Growth
Revenues Growth
Company Profit Net Profit (%) In Net Profit
(Rs. In Crores) (YOY %)
Margin (%) (%)

Britannia 2617.7 12.92 7.5 9.2 77.51

Colgate 1558.16 14 19.6 14.87 45

Dabur 2396 15.19 18.5 13.9 18

Godrej 1102.06 16 19.83 14.44 19


Consumers

HUL 13717.75 13.34 13.4 12 15

ITC 14558.43 16.46 31.5 21.43 15.56

Marico 1907 22.48 16.82 8.86 49.56

Nestle 3529.8 24.43 17.7 11.7 31.3

Above table shows a consistent growth in top line, operating margin as well as Net Profit margin of
all the above major players in the industry. While it may be argued that it is a one year performance
but even if we track past 10 year performance of these companies they show an increasing trend
consistently. Main reason of such a splendid performance of these companies is that consumer
goods day to day demand never fall drastically. In the table we can see that Britannia Industries
made a growth in net profit ratio close to 80% while Marico Industries (makers of Parachute Oil)
registered 50% growth in Net Profit ratio.

The FMCG sector is showing strong volume growth across product categories with improving
pricing power of leading payers. Many players have regained their pricing power and have

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implemented successful price hikes during the quarter. Most companies have indicated a significant
revival in rural demand (rural market growing faster that the urban market). The recent correction
in some of the key raw materials like LAB, crude oil is expected to provide some respite to
margins. However, expectations of firm agri commodity prices are likely to put pressure on
margins, especially for the food companies.
It is believed the FMCG sector will continue its growth momentum going forward driven by strong
volume growth across segments. The players are spending heavily on promotions and new launches
while, fast growth of modern retail is also spurring consumption of branded goods. Three
consecutive years of good monsoon, rising standard of living, fast growth of modern retail and a
strong upsurge witnessed in rural demand would help keep the sector growth momentum intact.

Graphical Presentation of the FMCG Sector

INDUSTRY PRACTICES

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MARKETING AND DISTRIBUTION

Marketing function is sacrosanct in case of FMCG companies. Major features of the marketing
function include the following

 High Initial Launch Cost - New products require a large front-ended investment in product
development, market research, test marketing and launch. Creating awareness and develop
franchise for a new brand requires enormous initial expenditure on launch advertisements, free
samples and product promotions. Launch costs are as high as 50-100% of revenue in the first
year. For established brands, advertisement expenditure varies from 5 - 12% depending on the
categories.
 Limited Mass Media Options - The challenge associated with the launch and/or brand-
building initiatives is that few no mass media options. TV reaches 67% of urban consumers and
35% of rural consumers. Alternatives like wall paintings, theatres, video vehicles, special
packaging and consumer promotions become an expensive but required activity associated with
a successful FMCG.
 Huge Distribution Network - India is home to six million retail outlets, including 2 million
in 5,160 towns and four million in 627,000 villages. Super markets virtually do not exist in
India. This makes logistics particularly for new players extremely difficult. It also makes new
product launches difficult since retailers are reluctant to allocate resources and time to slow
moving products. Critical factors for success are the ability to build, develop, and maintain a
robust distribution network.

PRESENCE OF SMALL COMPANIES

The Indian FMCG market has been divided for a long time between the organized sector and the
unorganized sector. While the latter has been crowded by a large number of local players,
competing on margins, the former has varied between a two- player-scenario to a multi-player one.

Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a handful of
global players, India's Rs.460 billion FMCG market remains highly fragmented with roughly half the

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market going to unbranded, unpackaged home made products. This presents a tremendous opportunity
for makers of branded products who can convert consumers to branded products. However,
successfully launching and growing market share around a branded product in India presents
tremendous challenges.
Take distribution as an example. India is home to six million retail outlets and super markets virtually
do not exist. This makes logistics particularly for new players extremely difficult. Other challenges of
similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a structurally
unattractive industry in which to participate. Even so, the opportunity keeps FMCG makers trying.

BRAND EQUITY

Tough market situations and a more aware and savvier demanding consumer have necessitated that
yesterday's Brand Managers be transformed into Business Managers who understand consumers and
can innovate and be flexible to move with the consumer.
Gone are the days when brands could be made to gallop with a big budget media plan, a generous dose
of below-the-line and above-the-line activities and constant promotions and schemes in the market.
Consumers who have become demanding yet inscrutable in terms of attitudes, outlook, moods and
behavior have rendered conventional Brand Management tools obsolete.

DESIGN AND MANUFACTURING


• Low Capital Intensity - Most product categories in FMCG require relatively minor investment
in plant and machinery and other fixed assets. Also, the business has low working capital
intensity as bulk of sales from manufacturing take place on a cash basis.
• Technology - Basic technology for manufacturing is easily available. Also, technology for most
products has been fairly stable. Modifications and improvements rarely change the basic process.
• Third-Party Manufacturing - Manufacturing of products by third party vendors is quite
common. Benefits associated with third party manufacturing include (1) flexibility in production
and inventory planning; (2) flexibility in controlling labor costs; and (3) logistics - sometimes it’s
essential to get certain products manufactured near the market.

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INDUSTRY TRENDS

As the economy is facing the slowdown in demand, the FMCG sector is not witnessing any visible sign
of demand destruction, but is growing with healthy pace. During the July-September 08 quarter the
aggregate revenues increased by 22% despite cost inflation and aggregate net profit grew by almost
20% on yearly basis. The bunch of factors like increased spending power in rural markets, appropriate
pricing policies by companies, better product mix and organic and inorganic expansion has shown
consistent growth for the industry and is expected to continue the drive the growth further.

Following factors will lead this sector to further growth and momentum:

 BUOYANT RURAL SPENDING

Growth in rural India, where 50% of FMCG sales come from, has been quite strong. A lot of money is
being spent in rural India through employment generation schemes, while the loan waiver changes
sentiment substantially. The country has been blessed with good monsoons and good agricultural
production. The food inflation has also helped farmers with rise in income. Hence the purchase power
in rural areas has increased and spending behavior is also changing. These help FMCG companies with
more revenues, while higher and middle class urban consumers demand is inelastic for the goods and
services that FMCG companies offer, so slowdown in demand is not expected for FMCG.

 FAVOURABLE PRICING STRATEGIES

With the cost of almost every input ranging from palm oil and milk to packaging material zooming
upwards, FMCG companies had increased the price smoothly to mange cost escalation. Colgate, for
instance, had increased prices by 3-4% earlier this year while Dabur had upped prices of hair oil,
chyawanprash and toothpaste by 4% and shampoos by 7%. Marico had increased prices of Parachute
hair oil by 5-6% while Hindustan Lever too had upped prices of a few brands by about 1 to 28%.
Companies with large product portfolios and a presence across price points - Hindustan Unilever and
Dabur - managed to offset margin pressures through shifts in the product mix. With inflation showing
signs of easing, the companies, which have taken price increases on their products, are likely to benefit
in the forthcoming quarters.

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 DECREASE IN RAW MATERIAL PRICES -


During the second quarter the crude price has fell to almost $60 from record high of $ 147. For raw
materials such as palm oil and packaging material, where prices bear clear linkages to crude oil, it has
been big relief for FMCG companies. Though to match rising cost the companies had increased product
pricing, the operating margin has shrunk by 150-200 bps. However the companies made forward
purchases or built up additional inventories in the latter part of 2007 and in the first quarter of 2008, to
guard against a further rise. Dabur India, for which packaging is a key input, had covered most of its
requirements for the June quarter through forward purchases in the March quarter itself. Now, after this
challenging phase, FMCG makers may have less to worry about on the raw material front over the
next few months, as a range of inputs - palm oil, packaging plastics and petroleum derivatives have
seen a 20-30% price correction, tracking the meltdown in crude oil prices which will recover the
operating margins.

The government had also supported with decrease in peak import duty for raw materials and also excise
cut in packaging material. The tax holiday at Himachal Pradesh, Jammu and Kashmir, Uttarakhand will
be significant benefit for FMCG companies, which will also continue to improve bottom lines.

 BETTER PRODUCT MIX


The companies are improving its product mix with changing dynamics of consumer behavior. As
consumers are becoming health conscious, the manufacturers are ready to woo them by offering more
Ayurvedic and Herbal products.
Change in life-style affluent Indians have also spurred the growth for FMCG products with increasing
‘premiumisation’ of portfolios and categories like anti-aging solutions, hair colors etc. Besides, the
Indian rural regions too are witnessing change in lifestyle, further pushing up the FMCG sales.

 EXPANSION TO CONTINUE
Though the news of plant shut down and expansion project getting delayed of the major Indian
companies are getting more space in Indian media, the FMCG majors are going ahead with expansion
Plans organically and inorganically.

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FUTURE OUTLOOK

Indian FMCG sector is fourth largest sector in the economy. Over a period of time with growth in GDP,
Change in lifestyle and with established distribution system across the country this sector is also
growing with new market horizons and also seize sustained growth in coming years. Indian FMCG
market experienced 16% growth in FY 07-08 and expected to grow by roughly 20% in FY 08-09.

In the Industry all the major players are growing consistently. The companies are having almost
negligible debt proportion in their balance-sheet. It makes very safe and strong case for anyone to
invest.

Among heavyweights HUL has strong presence in the Indian FMCG market so one can hold the stock
or buy at decline. ITC is still having major part of revenues from cigarette business. Its FMCG
business is still in the investment phase.

Colgate is the market leader in the oral care segment with consistently holding significant market share
in the segment. Dabur is diversifying in to many segments with increasingly adding presence in global
market as well. Marico is also the leader in hair care market and aggressively increasing its presence
in overseas market organically and inorganically. P&G is increasing penetration in Indian markets
especially in health care and feminine hygiene.

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8. COMPETITIVE ANALYSIS OF FMCG INDUSTRY

Porter's Five Forces Model - The model of pure competition implies that risk-adjusted rates of return
should be constant across firms and industries. However, numerous economic studies have affirmed
that different industries can sustain different levels of profitability; part of this difference is explained
by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces. The
strategic business manager seeking to develop an edge over rival firms can use this model to better
understand the industry context in which the firm operates.

Diagram of Porter's 5 Forces

Threat from
New Entrants

Suppliers’ Rivalry Buyers’


Power of Power
Firms

Threat from Power of other


Substitutes Stakeholders

Rivalry among Competing Firms


In the Fast Moving Consumer Goods (FMCG) Industry, rivalry among competitors is very fierce. There
are scarce customers because the industry is highly saturated and the competitors try to snatch their
share of market. Market Players use all sorts of tactics and activities from intensive advertisement

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campaigns to promotional stuff and price wars etc. Hence the intensity of rivalry is very high.

Potential Entry of New Competitors

FMCG Industry does not have any measures which can control the entry of new firms. The resistance
is very low and the structure of the industry is so complex that new firm s can easily enter and also
offer tough competition due to cost effectiveness. Hence potential entry of new firms is highly viable.

Potential Development of Substitute Products


There are complex and never ending consumer needs and no firm can satisfy all sorts of needs alone.
There are plenty of substitute goods available in the market that can be replaced if consumers are not
satisfied with one. The wide range of choices and needs give a sufficient room for new product
development that can replace existing goods. Every other day there is some short of new product,
variants and design. This leads to higher consumer’s expectation.

Bargaining Power of Suppliers

The bargaining power of suppliers of raw materials and intermediate goods is not very high. There is
ample number of substitute suppliers available and the raw materials are also readily available and
most of the raw materials are homogeneous. There is no monopoly situation in the supplier side
because the suppliers are also competing among themselves.

Bargaining Power of Consumers

Bargaining power of consumers is also very high. This is because in FMCG industry the switching
costs of most of the goods is very low and there is no threat of buying one product over other.
Customers are never reluctant to buy or try new things off the shelf.

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COMPETITORS' STANDINGS IN THE INDUSTRY

We have selected the following five companies for the competitive analysis of Indian FMCG sector

 Hindustan Unilever Limited (HUL)


 Godrej Consumer Products Limited (Godrej)
 Dabur India Limited (Dabur)
 Procter & Gamble Hygiene & Health Care Limited (P&G)
 Nirma Limited (Nirma)

Hindustan Unilever Limited (HUL)

Company Description
Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods (FMCG)
Company, touching the lives of two out of three Indians with over 20 distinct categories in Home &
Personal Care Products and Foods & Beverages. In FY ending 2007 the Company generated net sales
of INR 13,913.40 Cr. and a profit of INR 1,914.88 Cr.

HUL is also one of the country's largest exporters in FMCG product; it has been recognized as a
Golden Super Star Trading House by the Government of India. The mission that inspires HUL's over
15,000 employees, including over 1,300 managers, is to "add vitality to life." HUL meets every day
needs for nutrition, hygiene, and personal care with brands that help people feel good, look good and
get more out of life.

HUL's brands - like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Sunsilk, Clinic,
Pepsodent, Close-up, Lakme, Brooke Bond, Kissan, Knorr-Annapurna, Kwality Wall's are household

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names across the country and span many categories - soaps, detergents, personal products, tea, coffee,
branded staples, ice cream and culinary products. They are manufactured over 40 factories across India.
The operations involve over 2,000 suppliers and associates. HUL's distribution network comprises of
about 4,000 redistribution stockists, covering 6.3 million retail outlets reaching the entire urban
population, and about 250 million rural consumers.

Key Financial Result for the Financial Year Ending Dec’ 07

The company has reported total income of INR 14,366.54 Crores as compare to last year of INR
12,803.90 Crores to report a growth rate of ~12 per cent. The company is among one of the fastest
growing in FMCG Industry. Whereas, Profit after taxes were at INR 1,767.66 Crores as compare to last
year of INR 1523.16 Crores to register a growth rate of ~16 per cent.
The Company sale has registered a CAGR (compounded Annual Growth Rate)of 9.67 per cent across
the last three years .whereas the profit after taxes has registered a CARG 13.83 per cent over the last
three years.

Outlook
The Company is the largest FMCG player and market leader in most of the product category. The
Company has registered a robust growth rate over last few years and has wide market coverage. HUL
believe in product innovation and entrance into niche market. Recently company has launch Pureit, a
water purifier, received a good response from the market. The company has a good growth rate.

Company Financials (Figures are in Rs. Cr.)


Particulars\Year Dec-04 Dec-05 Dec-06 Dec-07

Total Revenue 10902 11878 12804 14367

Expenditure 9108 10128 10799 12009

EBITDA 1794 1750 2005 2357

PAT 1141 1323 1523 1768

EPS (In Rs.) 544 640 841 873

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Godrej Consumer Products Limited (Godrej)


Company Description

Godrej Consumer Products Limited (GCPL) continues to be one of the leading FMCG companies in
the country. One in three households in India uses a Godrej product every day. The company is a leader
in hair colour category and Liquid Detergent category and is among the largest marketer of toilet soaps
with leading brands such as Cinthol, Fairglow, Godrej No 1.
The company has wide market coverage and by the means of acquisition the company is building a
presence in different countries. The company is presently exporting there products to 30 different
countries. The acquired arms of Godrej like Keyline, Rapidol and Kinky are expected to create synergy
and larger market share. The company launches some new products that include Godrej Expert Powder
and Liquid hair colors, Cinthol Musk and Godrej Ezee Bright and Soft.
The mission that inspires Godrej's over 950 employees, spread over 3 state-of-the-art manufacturing
facilities at different location, is to “Deliver Superior Stakeholder Value by providing solutions to
existing and emerging consumer needs in the Household & Personal Care business.

Recent Major Action


The Board of Directors of Godrej Consumer Products Limited (GCPL) has approved the acquisition of
50 per cent stake of its joint venture partner SCA Hygiene Products’ stake in Godrej SCA Hygiene
Limited. After the transaction, the Joint Venture which owns the‘Snuggy’ brand of baby diapers will
become a 100 per cent subsidiary of GCPL.
Apart from the above the Company has bought back 23.83 Lakhs shares for INR 3.11 Crores under its
buy back offer. The share represents 20.89 per cent of the INR 14.9 Crores offer.

Key Financial Result for the Financial Year Ending Mar’ 08

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The company reported sales of INR 1,102.57 Crores to register a jump of ~16 per cent compare to INR
951.52 Crores last year. Where as the profit after taxes were at INR 159.23 Crores grew by ~11 per cent
from INR 144.03 Crores last year The Company sale has registered a CAGR of 25.11 per cent across
the last three years where as the profit after taxes has registered a CARG of 20.80 per cent over the last
three years.

Outlook
The company is one of the largest FMCG player and market leader in hair colour category and liquid
detergent category. It has also moved into some international acquisitions. The company has entered
into several new categories during the year and expects to add significant values to the company.
The company registered decrease in profit mainly on account of high raw material prices, now as the
prices are down, the company will be able to maintain its margins.

Company Financials (Figures are in Rs. Cr.)


Particulars\Year Mar-05 Mar-06 Mar-07 Mar-08

Total Revenue 563 700 952 1103

Expenditure 408 565 782 901

EBITDA 155 135 170 202

PAT 90 121 144 159

EPS (In Rs.) 3.95 5.37 6.38 7.05

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Dabur India Limited (Dabur)

Company Description
Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care,
Personal care and Food products. Dabur has build on a legacy of quality and experience for over 120
years, today Dabur has powerful brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and
Real & Active.

Dabur is a market leader for Dabur Chyawanprash and packaged juice - Real & Active. The Company
never limits itself to power branded product but believes to strength in other business opportunities by
growing in niche segments. The company has entered into Health and Beauty Retail segment which is
an emerging retail category in India. The Company has opened 7 H&B stores and has plan to setup 160
stores by 2010. Hindustan Unilever Ltd (Ayush) and Marico (Kaya Skin) have presence in Health and
Beauty Retail segment.
.
The mission that inspires Dabur’s over 3500 employees is to “Dedicated to the Health and well being
of every household”. Dabur posses Strong capabilities which are reflected by Strong R&D
infrastructure, 14 manufacturing units and wide distribution network which covers 2.5 million retailers.

Recent Major Action


Dabur foray into health drink - Dabur has entered into the malted food drink market with the launch of
a new health drink “Dabur Chyawan Junior”. According to the company, they expect to capture a
market share of 10 per cent of the INR 1,900 Crores malted food drink market over the next two years.

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Acquisition of Fem - Dabur has acquired 72.15 per cent of Fem Care Pharma Ltd (FCPL), a leading
player in the women’s skin care products market, for Rs 203.7 Crores in an all-cash deal. The company
is expected to create synergy by this deal.

Dabur to set up new medicine manufacturing in Himachal Pradesh


Dabur got approval from Government of Himachal Pradesh to set up another medicine manufacturing
unit. The project has an expected investment of INR 130 Crores.

Key Financial Result for the Financial Year Ending Mar’ 08


Dabur has achieved a turnover of INR 2,396.30 Crores compare to INR 2080.3 Crores last year to
register a growth rate of ~15 per cent and Profit after Tax of INR 332.90 compare to INR 281.7 Crores
last year to registered a growth rate of ~18 per cent.

Over the last five years, the company has reported compound annual growth rates of robust growth
rate 18 per cent in Net Revenues and 33 per cent in Profit after Tax. The Company sale has registered a
CAGR of 19.15 per cent across the last three years where as the profit after taxes has registered a
CARG 28.76 per cent over the last three years.

Outlook
The Company is well known for ayurvedic brand which have existence of over 120
years. The major product of the company is Dabur Chyawanprash and packaged juice. The acquisition
of Fem will add synergy to the company and will help the company to capture market in women’s
products too. Recently the company has entered into Health and Beauty Retail segment. The company
has registered a continuous and high growth rate. There is growth in Profit margin also.

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Company Financials (Figures are in Rs. Cr.)


Particulars\Year Mar-05 Mar-06 Mar-07 Mar-08

Total Revenue 1417 1757 2080 2396

Expenditure 1200 1457 1704 1953

EBITDA 217 300 376 443

PAT 156 214 282 333

EPS (In Rs.) 5.4 3.7 3.3 3.9

Procter & Gamble Hygiene & Health Care Limited (P&G)

Company Description
Procter & Gamble Hygiene & Health Care Limited (P&G) is one of Fast Moving Consumer Goods
(FMCG) Company having a portfolio of a Billion dollar brands such as Vicks & Whisper. With a
turnover of INR 653.00 Crores, the Company has carved a reputation for delivering high quality, value-
added products to meet the needs of consumers.

The company has presence in Feminine care and Health care. In Health care the company was rated as
“India’s Most Trusted Brand” by the Advertising & Marketing Magazine and continues to be among
the top of the charts of Brand-Equity surveys.

The philosophy that inspires P&G’s employee is to “Touching Lives, Improving Life” and every year
the company had tried and gone a little further in their effort to advance more and more lives for the
betterment.

Key Financial Result for the Financial Year Ending June’ 08

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Building on the robust performance of last year, both Health Care and Feminine Care business
continued to deliver very healthy growth.

The sales for Health Care category reported to INR 312.3 Crores reflected a record market. Jump of 16
per cent compare to INR 268.7 Crores last year where as the Feminine Care sales of INR 340 Crores
reflected a record jump of 21 per cent compare to INR 282 Crores last year. This year PAT at INR
131.41 grew by 46 percent from INR 89.8 Crores last year.
The Company sale has registered a CAGR of 4.66 per cent across the last five years where as the profit
after taxes has registered a CARG 9.87 per cent over the last five years.

Outlook

The company was having presence mainly into women products before P&G acquire Gillette. This was
a step by P&G took the step towards getting into men products. The company has a little market share
in Indian market. The company is planning to come up with 20 new plants out of which mainly will be
in emerging markets and most of them would be in Brazil, Russia, India, and China (BRIC) nations.
The company has a huge development plans in India. The company is planning to launch 13 products
in India. The company have good growth prospect in Indian market.

Company Financials (Figures are in Rs. Cr.)


Particulars\Year June-05 June-06 June-07 June-08

Total Revenue 738 597 553 653

Expenditure 552 437 400 467

EBITDA 186 160 153 186

PAT 125 140 90 131

EPS (In Rs.) 38.39 42.98 27.67 40.48

Nirma Limited (Nirma)


Company Description

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Nirma Limited (Nirma) is one of the largest players of Indian household product. It is among some of
the brands which have created a wave in the Indian market and has been labeled as ‘Marketing Miracle’
of an era. The company launched detergent powder at priced INR 3 per kg, when the available cheapest
brand in the market was INR 13 per kg. Nirma gave a tough competition to HUL.

Nirma has a strategy of self sufficiency by way of backward integration to facilitate the control over the
cost of key products and key raw materials such as Soda Ash and LAB, which find application in the
production of detergents. Nirma marketed its product by two networks. One which consists of about
450 exclusive distributors and is one of the low cost, fastest & flexible in distributing FMCG
distribution channels of the country. Whereas the other network comprises of more than 2000
distributors and posses wider reach, speedy market intelligence, competitive edge and better focus.

Key Financial Result for the Financial Year Ending Mar’ 08


The gross sales of the company registered a growth rate by 4.32 per cent to INR 2650.78 Crores against
INR 2541.05 Crores last year. Whereas net profit has registered a growth of mare than 100 per cent.
The Net Profit for the year ended was INR 229.73 Crores against INR 109.12 Crores last year.

Outlook

There is growth rate in top line of the company but the company is losing the market share as HUL has
become the market leader in Household care.

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Company Financials (Figures are in Rs. Cr.)


Particulars\Year Mar-05 Mar-06 Mar-07 Mar-08

Total Revenue 1835 1949 2340 2371

Expenditure 1325 1449 1954 1989

EBITDA 510 500 386 382

PAT 285 241 109 230

EPS (In Rs.) 35.93 30.38 13.83 13.66

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9. GROWTH OF FMCG SECTOR

 The FMCG sector will continue to grow well as the economy will clearly continue to do well. The
consumer is getting more and more affluent, which will accelerate growth. The sector will not only
continue to grow, but the growth rate will become faster in times to come.

 Besides the economy growing strongly, the other factor that has helped growth is the indirect tax
reforms. The introduction of VAT around a year ago has aided the sector considerably, as small
players, who could earlier evade taxes, have ended out of business. Further, five new states have
implemented VAT from April 1, 2006 onwards. Also, with the introduction of Goods and Services
Tax (GST) latest by April 1, 2010, it will certainly further add to the growth for the sector.

 Some categories such as soaps and detergents are already heavily penetrated, and hence going
forward, these two categories will grow in single digits. However, under penetrated categories will
grow faster in time to come. Growth rate will come from population increase, income increase and
penetration increase. The lower the penetration of products, higher will be the growth rate.

 Organized retailing is currently 4% of total FMCG off take, and is growing at 30% per annum, while
general retailing is growing at 10% per annum. Going forward, the trend will be that share of
ones82zed retailing will increase; however this is going to be a slow growth of approximately 1% a
year. Organized retailing will be an important factor only if their share accounts for 20%. Also, this
20% will need to have 1 or 2 large national players and not be divided between 50 different retailers.

 Private labels, could affect branded players. However, typically worldwide personal care is not a
very big contributor to private labels, and happens more so in food products, hence personal care
and household care are not really affected. Modern retailing gives very good display for FMCG
companies and impulse buying is very important. Modern retailing will benefit the FMCG sector
especially in relatively up market products.

 One should never be satisfied with the pace of reforms. There is a lot more that can be done and a lot
more that should be done. I think that the government has tackled reforms, especially in view of the
political difficulties, and with the support from the outside, they have handled it very well. I think
the fact that there is a constant pace of reforms, is exhibiting itself in a high growth for three years in
a row now. So I think, they have done a relatively good job.

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Outlook
 There is a huge growth potential for all the FMCG companies as the per capita consumption of
almost all products in the country is amongst the lowest in the world. Again the demand or prospect
could be increased further if these companies can change the consumer’s mindset and offer new
generation products. Earlier, Indian consumers were using non-branded apparel, but today, clothes
of different brands are available and the same consumers are willing to pay more for branded quality
clothes. It’s the quality, promotion and innovation of products, which can drive many sectors.

 Marketing of FMCGs (Fast Moving Consumer Goods) plays a pivotal role in the growth and
development of a country irrespective of the size, population and the concepts which are so
interlinked that, in the absence of one, the other virtually cannot survive. It is a fact that the
development of FMCG marketing has always kept pace with the economic growth of the country.
Both have experienced evolutionary changes rather than revolutionary changes. The objective of
modern marketing is to make profits by delighting the consumers by satisfying their needs and
wants. Hence, the marketers of FMCGs have to understand the real needs, wants, beliefs and
attitudes of the consumers towards their products and services. Today, network marketing is a multi-
billion dollar business. A number of companies have adopted this business model. It is one of the
main driving forces of the 21st century economy. This article highlights the characteristics of rural
respondents in terms of demographic, political, economic and sociocultural background. Finally,
before concluding, it also analyzes the consumption patterns, brand usage and brand shifting of
different FMCGs.

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We believe that the sector is poised for sustained growth considering the following growth
drivers:

 The favorable demographics, higher incomes, low penetration and growing per capita
consumption. India’s per capita consumption remains the lowest in the world across categories.

 Strong rural growth backed by higher agricultural incomes and increase in the value of land
which is leading to more money in the hands of farmers. The recent revival in monsoon augurs
well for the sector as it would help keep rural growth intact.

 Increase in pricing power as most companies have passed on the cost push inflation to
consumers via a judicious blend of price hikes, package size reduction and change in product
mix.

The segment wise growth of the FMCG sector is as follows:

The FMCG Sector is broadly divided into the following sectors:-


ü Personal Care including Oral Care, Hair Care, Skin Care and Personal Wash.
ü Household care fabric wash including laundry soap and synthetic detergents.
ü Food and Beverages.

The FMCG industry has shown a considerable growth in all the three segments. A brief indication of
segment wise growth is as follows:-

 Personal Care
The size of the personal wash products is estimated at US$ 989 million; hair care products at US$ 831
million and oral care products at US$ 537 million. While the overall personal wash market is growing
at one per cent, the premium and middle-end soaps are growing at a rate of 10 per cent. The leading
players in this market are HUL, Nirma, Godrej Soaps and Reckitt & Colman. The oral care market,
especially toothpastes, remains under penetrated in India (with penetration level below 45 per cent) due
to lack of hygiene awareness among rural markets. The industry is very competitive both for
84ones84zed and smaller regional players.

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The Indian skin care and cosmetics market is valued at US$ 274million and dominated by HUL,
Colgate Palmolive, Gillette India and Godrej Soaps. This segment has witnessed the entry of a number
of international brands, like Oriflame, Avon and Aviance leading to increased competition. The coconut
oil market accounts for 72 per cent share in the hair oil market. In the branded coconut hair oil market,
Marico (with Parachute) and Dabur are the leading players.
Mineral water market in India is a 65 million crates (US$ 50 million) industry. On an average, the
monthly consumption is estimated at 4.9 million crates, which increases to 5.2 million during peak
season. The market for branded coconut oil is valued at approximately US$174 million.

 Household Care
The size of the fabric wash market is estimated to be US$ 1 billion, household cleaners to be US$ 239
million and the production of synthetic detergents at 2.6 million 85ones. The demand for detergents has
been growing at an annual growth rate of 10 to 11 per cent during the past five years. The urban market
prefers
Washing powder and detergents to bars on account of convenience of usage, increased purchasing
power, aggressive advertising and increased penetration of washing machines. The regional and small-
unorganized players account for a major share of the total detergent market in volumes.

 Foods and Beverages


Food
According to the Ministry of Food Processing, the size of the Indian food processing industry is around
US$ 65.6 billion including US$ 20.6 billion of value added products. Of this, the health beverage
industry is valued at US$ 230 billion; bread and biscuits at US$ 1.7 billion; chocolates at US$ 73
million and ice creams at US$ 188 million. The size of the semi-processed/ready to eat food segment is
over US$ 1.1 billion. Large biscuits & confectionery units, soya- processing units and
starch/glucose/sorbitol producing units have also come up, catering to domestic and international
markets. The three largest consumed categories of packaged foods are packed tea, biscuits and soft
drinks.
Beverages
The Indian beverage industry faces over supply in segments like coffee and tea. However, more than

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half of this is available in unpacked or loose form. Indian hot beverage market is a tea dominant
market. Consumers in different parts of the country have heterogeneous tastes. Dust tea is popular in
southern India, while loose tea in preferred in western India. The urban-rural split of the tea market was
51:49 in 2000. Coffee is consumed largely in the southern states. The size of the total packaged coffee
market is 19,600 tonnes or US$ 87 million. The urban rural split in the coffee market was 61:39 in
2000 as against 59:41 in 1995. The total soft drink (carbonated beverages and juices) market is
estimated at 284 million crates a year or US$ 1 billion. The market is highly seasonal in nature with
consumption varying from 25 million crates per month during peak season to 15 million during off-
season. The market is predominantly urban with 25 per cent contribution from rural areas. Coca cola
and Pepsi dominate the Indian soft drinks market. Mineral water market in India is a 65 million crates
(US$ 50 million) industry. On an average, the monthly consumption is estimated at 4.9 million crates,
which increases to 5.2 million during peak season.

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10. RECENT DEVELOPMENTS IN FMCG SECTOR

FMCG sector is no doubt registering an up trend in growth. According to CNBC, FMCG sector
growth story will continue because of the positive budget. Nevertheless, there are some barriers
to the growth of the sector. Indirect taxes constitute no less than 35% of the total cost of
consumer products - the highest in Asia. Last year, Finance Minister proposed to introduce an
integrated Goods and Service Tax by April 2010.This is an exceptionally good move because
the growth of consumption, production, and employment is directly proportionate to reduction
in indirect taxes.

ü Rural markets beat cities in FMCG sales growth

 Rural consumers are displaying considerable resilience in spends on fast-moving


consumer goods (FMCG) despite the economic slowdown, say top industry officials. While
overall consumer spends (urban+rural) on FMCG are showing smart rates of growth, the
growth in rural markets at 20% plus has overtaken urban markets, which is growing at 17-18%,
according to industry estimates. Industry watchers attribute the growth to rise in rural
disposable incomes, following three consecutive years of good agricultural growth. Also, top
industry officials said the government has pumped in a lot of investments into rural areas.

 In recent years, FMCG companies have invested significantly in effective distribution


and tailoring their products and prices to geographic nuances to increase their return on
investment (RoI) geographically. These efforts may now be paying off.

 AC Nielsen numbers for the April-September 2008 period show that across a wide range
of sectors, including skin creams and lotions, hair oils, toothpaste and candies, volume and
value growth in rural markets have been significantly higher than urban markets. Skin creams
and lotions, for example, grew 26.3% by volumes in rural markets compared with 12.5% in
urban markets for the April-September period. In value terms also, rural markets grew faster
than their urban counterparts in skin creams and lotions, according to Nielsen numbers.

 Godrej group chairman Adi Godrej said, “The overall FMCG market, both urban and
rural, have recorded robust growth rates. Urban markets have been relatively weaker in some

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segments because the growth of certain sectors has been affected lately. But good agricultural
growth and government focus on these markets have led to higher disposable incomes with
rural consumers.”

 Consumer spends on FMCG in urban markets, through both traditional trade and
modern trade, have been upbeat in recent months. But modern trade footfalls in Mumbai have
been listless in the past few days, owing to the terror attack.

 However, kiranas, or traditional formats, continue to report robust numbers. Traditional


trade contributes over 90-95% of the total FMCG business. Modern trade (formats like Food
Bazaar or Spencer’s) contributes 10% to total FMCG business in metros and around 5% to total
industry sales.

 CavinKare CMD CK Ranganathan said, “We have been surprised by strong consumer
undertones at a time when inflationary trends would have otherwise hit demand. There are no
signs of downtrading. Consumer purchases in rural India have been quite impressive in recent
months.”

 Rural India clocked 19.1% growth for hair oils in April-September against 11.4% in
urban markets by volume. Similarly, among toothpaste, the all-India rural volume growth was a
healthy 17% compared with just 6% in all-India urban markets. The gap in growth rates was
even wider among candies. In the April-September period, rural markets registered 26.5%
growth against a minuscule 3.6% growth in urban India. It was the same story with value
growth.

 At a recent analysts meet, Dabur CEO Sunil Duggal said, “Everyday products, which
are priced at popular price points, have not seen any drop in consumer demand, whether it is
urban or rural. But rural market seems to have actually done better, growing at a much faster
pace. While the rural growth story has remained completely intact and has even accelerated a
bit, the urban market has been affected by lower off takes in modern trade. But we believe the
traditional trade should take up the slack.”

 Companies are now working on stepping up distribution in smaller towns and increasing
focus on marketing and operations programme for semi-urban and rural markets. Seventy per
cent of the total households in India is in rural areas.

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 Industry watchers say the increased consumption is also the result of a growing middle
class base in these markets. The total number of rural household is expected to rise to 153
million in 2009-10 from 135 million in 2001-02, suggesting a huge market.

 According to an NCAER report, the numbers belonging to ‘lower middle income’ group
in rural areas is almost double compared with urban areas. This is a large consuming class,
constituting 41% of the Indian middle class and having 58% of the total disposable income.

ü FMCG majors pursue growth strategy

 FMCG majors ITC Ltd, Dabur India and Marico Ltd are going ahead with their
aggressive growth strategy this fiscal, despite the economic slowdown.

 ITC Personal Care is gearing up to enter multiple categories in the FMCG sector.

 Meanwhile, competitor Dabur India Ltd is getting ready to foray into the branded
personal care sector after acquiring Fem Care Pharma Ltd.
 The company is also planning to invest in its overseas business as part of its growth
strategy. Clearly, it is survival of the smartest in the Rs 85,000 crore Indian FMCG industry.

 Yet another FMCG major, Marico Ltd, is also charging ahead with its growth strategy
despite the economic downturn. As part of its inorganic growth strategy, Marico is now scouting
for acquisitions in both domestic and international markets.

 According to analysts, clever FMCG companies are trying to gain market share with
innovative products and high-voltage advertising plans during turbulent times.

ü FMCG pulls out all the stops to woo modern trade

 Hindustan Unilever (HUL), GlaxoSmithkline Consumer Healthcare (GSKCH), Godrej


Consumer Products (GCPL), Dabur, Nestle and other FMCG companies are lining up initiatives
to maximize returns from modern trade channels (MTC) including hypermarkets and
supermarkets. From in-store promotion and special retail packages to spinning off specialized
teams for modern trade, FMCG companies are leaving no stone unturned.

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 Sales from MTC formats account for over 30 per cent of revenue for the retail players,
and have started to contribute larger volumes for FMCG players.

 FMCG companies find it easier to manage sales at the point-of-purchase because of


effective inventory management systems that characterize the modern format. It is easier for a
company to introduce a new product through a large retail chain having national presence. It
can give the initial visibility support that can translate into sales. The other advantage is - for
companies, it is easier to push premium products through modern retail as against the regular
kirana store.

 In a fragmented retail environment as in India, it is important for FMCG companies to


focus on point-of-purchase and get consumer insights to evolve a retail approach. Modern retail
format allows that space for on-ground promotion and other initiatives, which help in consumer
connect. Further, it allows the company to collect consumer insights and data to measure its
success.

 GlaxoSmithkline Consumer Healthcare, for instance, has hired an international firm -


Glen dinning Management Consultants - to advise on its modern trade arena, apart from
spinning off a separate division to work only on this sales route.

 Similarly, Dabur initiated a programme christened DARE (Driving Achievement of


Retail Excellence) to improve its effectiveness in organized retail. For many players, modern
retail offers better shelf-space and visibility, whereby they can introduce more economical
packs and the right stock-keeping-unit strategies.

 Modern trade accounts for about 5-10 per cent of urban sales for FMCG companies and
this can go up to 25 per cent for southern markets, where the channel has a stronger presence.
The industry expects contribution from modern trade to double in the coming few years.

ü Branding in FMCG companies

 Branding is extremely important for FMCG companies. It is the name of the game and is
all about your offering. If a company makes a better offering, then the brand will be perceived
to be more useful to consumers. However, it has never been seen that a totally unknown brand
making a big offer and succeeding. If a big brand makes a good offer, it will be successful. The

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level of competition is the same today, as what it was five years back. However, the main
strategic strength comes from differentiation, which could be price based, communication based
or product based. Thus the barriers to entry are strong brands, strong technology and strong
position. The most important challenge today is to keep the brand contemporary and strong as
branding in FMCG today has become even more important than five years back.
 The criticality of monsoon has become much less than in the past and will become less
and less going forward. Although, it does influence the FMCG sector, but is no longer critical.
Today, agricultural income to total GDP is down to only 18%, thus agriculture itself is not that
important to the economy. Also, Kharif monsoon crop was earlier almost double the size of the
irrigated crops. However, today it is exactly the opposite; the irrigated Rabi crop is double the
size of the Kharif crop. Thus, this indicates that the influence of monsoon is much less. Further,
agriculture proportion of rural income is diminishing considerably. Animal husbandry is rapidly
increasing. Despite the worst monsoon in about 30 years in 2002, India’s GDP grew by 4.5%,
but a similar case in 1970’s would have resulted in GDP falling by 10%!

ü FMCG companies growing hungry for 'eat – out' market

 Out-of-home consumption is fast emerging as a new segment in the FMCG sector.


Companies like Coke, ITC, and Dabur are exploring this avenue and coming up with new
products and new packaging in this sector.
 As meal-time habits continue to evolve and the concept of three core meal is becoming
less and less relevant, consumers have started eating away from home and during transit. On
most occasions time is a constraint, as a result, people eat on their desk while working or while
they are traveling.
 Apart from work pressure, another factor that is driving out of home consumption
northwards is the trend to go out. With outings in malls and multiplexes becoming very
common, the FMCG companies are targeting this segment to improve their bottom lines.
 Companies are providing convenient packaging of the products that they are positioning
as on the go. More products are designed to take advantage of out of home demand. These are
packs with 1-2 servings of food or beverage instead of the larger packs for in-home
consumption.
 "For beverages the pack size varies from 200cc to 300cc and for snacks the pack size is

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around 50gms to 100gms", said Ravishankar. Coca-Cola India has recently launched Sprite
Express in 350 ml pet packs. “This will be followed by Coca-Cola, Diet Coke, Thums Up,
Maaza and Kinley Club Soda in the first phase followed by Fanta, Limca and Minute Maid
Pulpy Orange in the second phase”, said Coke sources.
 According to industry sources, the total away consumption for beverages is 58.3% out
of which only 6% is available. Thus there is huge opportunity waiting to be tapped. The
consumption at home is 41.7%. It can also be a roll or burger that one can pick up and have it
while traveling. Greater width and depth of availability of products, be it in railway stations,
airports, malls, or other public places is another reason for the growth of this segment. Rise in
household incomes is a major boost for the growth of this segment.

ü FMCG companies extends brands to boost growth, gain market share

 In a bid to garner higher market share and sustain long-term growth, fast moving
consumer goods (FMCG) companies such as Coca-Cola, Nestle, PepsiCo, Dabur, Marico and
Godrej have adopted a brand extension strategy amid negative factors such as high inflation and
the global financial crisis.
 According to marketing research company IMRB, the FMCG companies launched 251
products (223 variants and 28 brands) in calendar year 2007 as against 191 (173 variants and 18
brands) in 2006. The industry pegs the number of variants and extensions launched this year to
be in line with 2007.

 For instance, Nestle launched a record number of variants this year — from its Maggi
Cuppa Mania (the instant cup noodles), Maggi Pichkoo (a tomato ketchup pouch pack) to
Maggi Bhuna Masala (a readymade cooking aid). It also introduced NesVita Pro-Heart, a fat-
free packaged milk product in Delhi/NCR region.

 Other FMCG leading players such as Marico had launched Saffola Functional Food for
‘diabetics management’ and Britannia launched NutriChoice 5 Grain, a biscuit made from five
“healthy cereals”.

 Dabur too unveiled a pudina variant of its popular Hajmola brand apart from extending
its Gulabari skin-care range.

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 Beverage Company Coca-Cola India introduced apple flavour for its ‘Fanta’ brand as its
rival PepsiCo chose to introduce apple flavour for its ‘Tropicana Twister’ range. PepsiCo’s food
wing, Frito Lay, extended its Kurkure range with Desi Beats apart from introducing new
flavours for Quaker Oats.

 Godrej Consumer Products (GCPL) stretched its Ezee brand as a daily wash liquid
detergent under the new variant, Bright & Soft, and it intends to further extend it to the post-
wash category.

 Among the other launches, GlaxoSmithKline Consumer Healthcare India introduced


Eno Orange, while Reckitt Benckiser chose to relaunch Clearasil brand.
 Soup was another category which witnessed a lot of action. While HUL launched a
range of Knorr soups targeted at mass markets, Nestle launched a slew of local variants of its
Maggi soup. Rising income and growing aspirations, coupled with lower penetration levels,
have fueled strong demand for lifestyle and value-added products.
 Industry observers also feel that for most of the brand variants, manufacturers need to
marginally tweak the production line to accommodate the new product as against a new brand
which may require more infrastructures.

 In terms of categories, brand extensions in personal-care, household-care and processed


foods drove growth in the FMCG sector.

 Analysts believe that most of the new launches next year will also happen under these
categories. In the processed foods segment, ‘health and wellnesses has been the major theme
playing out, with most players rolling out products around this platform.

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11. CHALLENGES FOR FMCG SECTOR IN THE FUTURE

The following are the four basic concepts and why it could be of major reckoning in the future. These
are:

1. Excellence in operations - through Value Chain De-Verticalisation


2. Rural marketing
3. Distributions
4. Brand managers to Business managers

 Excellence in operations - Value Chain De-Verticalisation

Excellence in Operations remains an illusion for most FMCG companies. This will be remaining as
long as they stay confined within the organizational structures and mindsets associated with today's
vertically integrated business model.

According to a McKinsey report based on problems and opportunities relating to operational


excellence, the study comes out with the following findings: -

1. Operations issues get neglected from top-management two main business processes of customer
management and consumer management. It suggests that Operations issues get a lot less than
20% of the Executive Committee's agenda time. To compound the problem, only around 10% of
top executives in FMCG companies have direct personal experience in Operations. It is hardly
surprising; therefore, that the commitment to drive radical change may not be as strong in
Operations as it is in the other two business processes.
2. Organization structure of many MNC's makes it's tough to optimize decision-making or to spread
best practices across units or countries. Around 10% of FMCG companies have a global
Operations director with full responsibility for both operational improvement and strategic
resource allocation.
3. Most of the top quartile talent is siphoned for handling marketing or finance functions.
Operations functions are short of management talent. High potential generalists often find FMCG
Operations too internally focused and too technical. At the other end of the scale, senior
Operations experts are often attracted to other industries - such as electronics, automotive or
engineering - where Operations is both more highly regarded and more highly rewarded.

These problems are not new. What is new is that a potential solution - the combination of
organizational separation and value chain de-verticalisation.

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De-verticalisation
Multinational FMCG companies that are able to achieve organizational separation are functionally
organized national companies. This effectively means outsourcing your supply chain activities to a
third party. Typically this will involve selling the existing Operations assets and activities, including
procurement, manufacturing, primary distribution, and process R&D, to a financial buyer, a third party
manufacturer or a joint venture with other FMCG companies. In essence, this leaves an 'asset light'
FMCG company and an 'asset heavy' supply company.

How will it create value?

From the perspective of the FMCG Company, the supply company of its will now be in a position to
address the above-mentioned operational issues. A strongly incentivised management team often
directly accountable to the capital markets - will be better able to attract and motivate talented
operations managers, focus 100% of its attention on Operations issues and build operational skills. And
operational excellence will translate directly into bottom-line impact.

Thus de-verticalisation allows the management of the FMCG company to focus entirely on customer
and consumer management - the main engines of growth - while sharing in progressive Operations cost
improvements through either an equity stake or 'open book' supply contracts. From the financial
perspective this would also help the FMCG Company get a quantum leap in return on capital
employed.

However, there certainly is a trend at present and a visible scope in the future wherein private equity
firms, raw material suppliers and specialist manufacturers, constrained by growth in their traditional
markets, are now actively exploring the FMCG de-verticalisation opportunity.

One big challenge remains in managing the interfaces between the two companies - for example,
product development, forecasting and order processing. However, the lesson from multinationals that
have successfully implemented organizational separation - and those that already make extensive use of
co-packers or third party logistics providers - is that this challenge is far less daunting than it may at
first appear. E-enablement technologies aid to disaggregate the value chain without losing the
connectivity between its component parts. About the new product development process - that can be
addressed by retaining a pilot plant in-house".

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 Rural marketing

Rural marketing has become the latest marketing mantra of most FMCG majors. True, rural India is
vast with unlimited opportunities. All waiting to be tapped by FMCGs. Not surprising that the Indian
FMCG sector is busy putting in place a parallel rural marketing strategy. Among the FMCG majors,
Hindustan Lever, Marico Industries, Colgate-Palmolive and Britannia Industries are only a few of the
FMCG majors who have been gung-ho about rural marketing. 70% of the nation's population, that
means rural India can bring in the much-needed volumes and help FMCG companies to log in volume-
driven growth. That should be music to FMCGs who have already hit saturation points in urban India.
Not just rural population is numerically large; it is growing richer by the day.

Food grain production touched 200 million tonnes during fiscal 1999 against 176 million tonnes logged
during fiscal 1991. Not just improved crop yields; tax-exemption on rural income too has been
responsible for this enhanced rural purchasing power.

Value-volume trade-off

Rural marketing could open the doors of paradise, but the path is paved with thorns. One major
limitation here is this: most FMCG players just do not have the critical size for going all out for rural
marketing. That is why most FMCG players are expected to concentrate both on rural and urban
marketing: focus on urban markets for value and focus on rural markets for volumes. One result-
oriented marketing strategy here is this: offer value-additions to existing lines to lure the urban
consumer and alongside offer the rural consumer wide-ranging choices within a single product
category in a bid to generate high volumes.

What should the FMCG players do now?

They should not only price their products competitively, but also offer their rural prospects maximum
value for money spent. Certainly, reaching out to 3.33 million retail outlets is an uphill task. The only
way out for Indian FMCG players: put in place an aggressive cost structure that would enable them to
offer low-price and value-for-money products. But then, FMCG is a low-margin business with a high
cost of raw materials. Consider the case of Marico: its material cost works out to a high of 59 per cent
on sales. Therein lays the rural marketing paradox.

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However, customer-centric and market-savvy FMCG companies have always chased prospects when
they perceive there is a latent demand. For instance, Hindustan Lever's Rin, Surf and Lux are available
even in India's most obscure villages.

Hindustan UniLever had given shape to its rural strategy a few years ago when it perceived that its
urban market was shrinking due to an industrial slowdown. It’s Operation Bharat that focused on
personal care products made the most out of surging rural incomes.

The result was there for all to see. The company has been able to clock in double-digit profits every
three years and log in double-digit revenues every four years. Britannia with its Tiger brand of biscuits
and Colgate-Palmolive with its low-priced and conveniently-packaged products designed for the rural
masses have been other pioneers in rural marketing.

 Distribution

One of the age-old problems that FMCG has been facing not only in India but globally is that of
distribution. Integrating operations with your distributors and channel partners is a Herculean task. Few
ways to reduce pain involved in this link: -

• Reducing supply chain costs by reducing intermediaries - Organized retail chains have set up
systems for inventory management and quick servicing, thereby offering the opportunity for a
company/supplier to reduce distribution cost by reducing intermediaries such as
wholesalers/distributors and supplying directly to the warehouse of retail chain.
• Increasing sales by driving channel width - The relative share of grocers to FMCG sales has
dropped from over 50% in the early 90's to 35% in the late 90's. On the other hand the
contribution of chemist outlets and paan outlets has been increasing. This has been a result of
both SKU's (sachets) and hardware (mini dispensers) being specifically designed to facilitate
entry to these outlets and increase consumer interface.

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 Brand Managers To Business Managers

Tough market situations and a more aware and savvier demanding consumer have necessitated that
yesterday's Brand Managers be transformed into Business Managers who understand consumers and
can innovate and be flexible to move with the consumer.

Gone are the days when brands could be made to gallop with a big budget media plan, a generous dose
of below-the-line and above-the-line activities and constant promotions and schemes in the market.
Consumers who have become demanding yet inscrutable in terms of attitudes, outlook, moods and
behaviour have rendered conventional Brand Management tools obsolete.

This makes it all the more important for Brand Managers to develop strong consumer insights and
constantly innovate. This requires immersing oneself in the consumer's life space and understanding
her to open up new opportunities. These opportunities are hidden in seemingly insignificant
behavioural patterns, which open up wide new opportunities for the brand.

Developing strong consumer insight basically requires one to

a) Align oneself to the challenge, in terms of correctly identifying the key issues and objectives.

b) Leverage all that one knows and understands from available sources.
c) Immerse oneself in the consumer's life space.

d) Connect this insight to a usable platform/ idea.

e) Executing it in a format that solves the challenge he started with.

The above four are by no means an exhaustive list of new and radical approaches which organization
are re-inventing or discovering. It’s no denying that the FMCG space will be for time to come, remain a
glamorous sector, but also be testimony to new innovations and excellence through-out the value-chain.

A spate of new product launches, new schemes, brand extensions and new marketing initiatives across
companies indicate that only the fittest ideas survive "Only the Paranoid Survive ", the famous line by
Andy Grove seems relevant to this space.

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12. IMPACT OF SLOW DOWN ON FMCG SECTOR

Consumer goods industry bullish on hiring, R& D spend

 While most companies are trying to find strategies to beat the global slowdown, consumer goods
companies have not only decided to increase manpower, but also to scale up their research and
development (R&D) spends.

 For instance, Korean consumer durables company LG Electronics plans to invest $50 million
(around Rs 250 crore) to enhance its manpower and R&D in India by 2009. "To compete more
strongly in the market, we need to progressively enhance our technology and provide insight-based
products to the consumers. For this, we need to strengthen our R&D capability," reasons V
Ramachandran, director-marketing, LG Electronics India.

 However, Godrej Appliances has maintained its R&D spend at 5 per cent of its turnover every year.
"There is a pressing need to accelerate the sluggish demand in the market through innovation and
better technology that would generate greater consumer interest," says Godrej Appliances Chief
Operating Officer George Menezes.

 When demand slows down, companies look at improving efficiencies mainly through price
corrections, process reengineering, packaging optimization, logistics savings, material usage
efficiency and even better supply chain management, explain industry observers.

 Decreasing manpower may not be the right solution, but hard times leave companies with
unpleasant choices, they added.

 On the FMCG front, beverage and snack food company PepsiCo — hurt by the continued weakness
in beverages off take in the US and Canada — announced 3,300 job cuts, roughly 1.8 per cent of its
185,000 work force. But, this move will not affect its India growth plans.

 Milind Sarwate, Chief-HR and Strategy, Marico, says, "The economic slowdown, which most
people are afraid of, would impact the talent sourcing strategies of most companies. However, as a
large company in the consumer products and services space, we believe that the slowdown would
impact our sector the least and therefore we may not significantly alter our hiring plans."

 According to ITC's sustainability report, ITC's payroll expenses grew from Rs 541 crore in FY06 to

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Rs 630 crore in FY07 and Rs 733 crore in FY08 and the company remains bullish on hiring.

Impact of Slowdown and Inflation and Changing Strategies in FMCG Sector

 The latest statistics on inflation showed that the same has cooled off to a 6-month low and come
down to single digits, primarily thanks to lower commodity prices. Since FMCG companies play a
major role in driving consumption growth, which is necessary for a slowing economy, we analyze
what kind of impact the inflation number can have on the FMCG sector.

 The major input prices for the FMCG companies have declined from their peak rates, though some
are yet higher on the YoY basis. The FMCG companies had been witnessing margin pressure right
from the beginning of this year. The companies had implemented various options like price hikes,
cost saving techniques like change in product mix, reducing the pack sizes and better sourcing of
raw materials to offset the input cost impact.

 However during the September quarter, on account of fear of lower volumes, the companies had
restricted taking further price hikes thereby leading to decline in operating margins. The combined
margins of large companies (HUL, Nestle, Dabur, Marico, Britannia and Godrej Consumers)
declined by 2% on a YoY basis for the September quarter.

 The raw material prices accounted nearly 54% of the sales in the last quarter, which was
considerably higher than the previous quarters. Hence, the recent correction in some of the key raw
material prices comes as good news to these companies. Players present in soaps, shampoos,
detergents and toothpastes have signaled that they will not raise prices in the next 6 to 12 months
because of input costs coming down considerably. However, firm agri commodity prices are likely
to continue pressuring the food companies.

 FMCG players are, however, not likely to reduce prices in the near term, as there is considerable
amount of stock in the trade channel at any given point. If prices are reduced immediately,
companies have to compensate all the market stocks, making it very complex. Hence easing cost
pressures combined with retention of pricing power could lead to marginal upside in operating
margins.

 Though the FMCG companies have a strong balance sheet, the improvement in margins would
further give a boost to the cash flows. While companies in other sectors are struggling for working
capital, FMCG companies are comfortably placed. This would help the companies to look at

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inorganic growth opportunities. Indian FMCG companies have made global headlines by acquiring
international companies and brands in the last few years. With signs of slowing demand worldwide,
companies like Godrej Consumer Products, Tata Tea and Dabur are looking at acquiring new brands,
tweaking promotion spends and expanding distribution network to mop up more sales. This could
now get a further boost as more companies could be up for grabs at better valuations. It would also
provide them opportunity to enter new growth areas or pay higher dividends to the share holders.

 The FMCG companies had witnessed higher sales growth in inflation environment indicating
resilience of consumer spends on FMCG. Rural income and sentiments (rural consumers account for
50% of FMCG consumption) are on an uptick due to food price inflation, farm loan waiver,
satisfactory monsoon and employment generation schemes. Hence the long term fundamentals of
the sector, both in terms of breadth (number of consumers using) and depth (existing consumers)
continue to remain strong.

 With the cooling of the commodity prices, FMCG companies have further reason to cheer. Products
with high brand loyalty in categories like coconut oil, oral care, skin care products would benefit
with the reversal of commodity prices on account of lower competition. However, the hair and soap
segment and biscuits may witness only a marginal improvement due to intense competitive
environment.

 The recent financial crisis has impacted several industries across the globe. Here we would like to
address the impact of financial crisis on FMCG sector in India and the changing strategies which are
being considered to counter the meltdown.

Having said that let us discuss what possible impact can be there on FMCG sector.

• Marginal Slowdown in products with low perceived value


Can you think of consumers stop consuming Atta in North and Rice in South in the current
scenario? Will consumers stop bathing and washing their clothes? The answer is No!! The
simple reason being it’s a necessity. Now the next question is whether consumer will buy
expensive/ premium detergents or the basic ones. I think that if the perceived value from the
offer is high, consumers will not downtrade to cheaper brands. This means that “Value for
Money” products will not be impacted. Here “Value for Money” is independent of the price.
There may be products that are inexpensive, but may offer less value to the consumers. Those

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will get impacted.

• Therefore, large mass FMCG segment, which deliver value, may be insulated from the vagaries
of the financial market; the under-penetrated premium-end category could face the heat.
• From 2005, we have seen willingness in consumers to move to evolved products/ brands,
because of changing lifestyles, rising disposable income etc. This was the key reason for FMCG
companies like HUL, P&G, Marico focusing lot on value-added products and premium-end
products to drive their growths. We all have seen big launches of two premium Anti-Ageing
brands, namely Olay and Pond's Age Miracle.

In the current scenario, there may be some hit to the premium FMCG brands, because of
mainly two reasons:

1. Products which are not differentiated and have low perceived value will be impacted. Consumer
may reconsider buying expensive skin care products, high-end food items.

2. Some consumers who were ready to upgrade from popular to premium brands may hold, as they
may find more value in popular brands. In a nutshell, consumer will look for value and not the
MRP.

• Rural FMCG Sales: The growth engine


In last few months we have several FMCG categories like shampoos, toothpaste, hair oils etc
growing faster in rural than urban markets. This is attributed to higher prices of farm produce, farm
loan waiver and rising rural income. These consumers are not impacted with the global slowdown.
The rural consumers are upgrading to higher end products, which is driving the volume sales of
FMCG companies.

Now to understand the impact on FMCG sales, let us see the split. Rural, semi-urban and urban
contributed 57%, 21% and 22% respectively in 2007-08. Rural with the highest base is growing the
fastest. So even if there is marginal drop in premium and value-added products (as mentioned in the
previous point), the overall sales would not be impacted much. Therefore, FICCI’s prediction of
growth of FMCG sector by 16% may marginally come down, because of less than expected growth

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rates in the premium segments.

Changing Strategies in FMCG Sector


The overall impact on the FMCG sales will be marginal. Heavy dependence on the agri-sector and
FMCG not being very capital-intensive are among the factors that have insulated the sector from
the downturn. But rising input prices, inflation and increased commoditization of products are
forcing FMCG companies to adopt new strategies, to have a viable business proposition. Let us
enlist few of the strategies which companies have adopted and the outcome of the same.

1. Increase in price: Due to increase in raw material prices, many companies were forced to
increase their prices and pass on the cost to the consumers.

• HUL: Hiked the price of its detergent bar Surf Excel (120 g) earlier known as Rin Supreme
from Rs 13 to 15. They have also increased some of their toilet soap brands.
• Tea Companies: Tata Tea and Duncans Tea have also hiked prices for select brands in their
stables. Even regional players like Royal Girnar and Society Tea have increased prices of their
brands to compete with national players.
• Britannia: Hiked the price of its popular brand ‘Britannia NutriChoice Digestive’ from Rs 14
to 15.
Some companies have been able to maintain the prices. Parle Agro has not changed the price of
Frooti in spite of upward pressure on prices.
It may be easy to increase the prices of premium products but in case of popular products, the
preferred choice is between reducing grammage and maintaining the same price points or
introducing another price point to suit consumer pockets.

2. Introduction of lower SKUs: To prevent down trading, the companies have introduced packs
with lower SKUs so that per unit purchase does not pinch the consumer’s wallet. With that
companies are sharpening their focus on the existing smaller packs and increase their availability.

a) Henkel: Introduced a new 400 gm pack of Henko washing powder at Rs 40 and withdrawn the
500 gm pack that used to sell for Rs 46. As quoted by Henkel, “A family of four requires only 400-

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425 gm of washing powder in a month. We withdrew the 500 gm packs as they were making
consumers spend more and consume more”. They have reintroduced Pril liquid for Rs 50 (425 gm
bottle), down from Rs 55 (500 gm). They recently brought out its popular Fa deodorant in 75 ml
and Margo soap in 40 grams.
b) Procter & Gamble: P&G has reduced the pack size of its flagship detergent brand ‘Tide’ from 1
kilo to 850 gm while maintaining the price point at Rs 62. They have also also reduced the size of
its 500 gm to 480 gm at the same price.

3. Cost Cutting Strategies: While companies resorted to price hike, many companies are exploring
ways to cut down cost.

a) Companies are busy in strengthening their distribution and logistics, by bringing in more
efficiency and innovation in the supply chain. Companies are closely monitoring their stock
levels and loading patterns.
b) Soap companies have shifted to cheaper options of raw materials to source their products at a
competitive price.
c) Some companies have cut down their spends on advertisement.

4) Mergers and Acquisitions: The turmoil in global markets seems to have a favorable impact on
Indian FMCG majors’ acquisition. While many big FMCG companies find this situation an ideal
opportunity to go for acquisitions, there are others who are cautious to invest in M&A. CK
Ranganathan, chairman & managing director, CavinKare Pvt Ltd said that the global melt down
will have a favorable impact for Indian companies’ acquisition plans. According to him, it’s an
opportunity for them to acquire companies as they get good value for money. The current financial
crisis may offer more opportunities because of better valuation.

5) Restructuring to leverage synergies: With the ‘power of one’ strategy, PepsiCo is aligning its
beverages and snacks businesses under a common leadership. This will help them to maximize
synergies of the two businesses across key functions such as procurement, agriculture and
production, which will lead to production efficiencies. This will help them to minimize the price
hike.

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Outcome: FMCG sales & profit unaffected despite mayhem


In the June quarter, FMCG companies saw an impressive topline growth. However, rising input
prices and inflation impacted their profitability. To counter the decreasing profitability, as
mentioned above, companies adopted multiple strategies.

As an outcome, if we look at September quarter results, it clearly shows that the FMCG sector is
not impacted, despite rise in raw material cost; credit crisis and the global meltdown. The combined
net profit of 12 Bombay Stock Exchange (BSE) FMCG index companies has increased by 14% as
compared to the same quarter last year. In fact, net profit of 350 BSE-500 companies increased 7%
in the July-September 2008 quarter, as compared to the same period last year.

The robust net profit was boosted by a 21% increase in net sales of these 12 companies, despite the
fact that raw material cost increased by 29% as compared to the same period last year. This clearly
indicates that companies were able to offset the input cost hike by passing it on to the consumers as
retail prices of goods in this segment increased on an average by 10-20% in the last few months.
The sector is showing strong volume growth across product categories.

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13. MERGERS & ACQUISITIONS IN FMCG SECTOR

Acquisitions of companies and brands – FMCG Sector

“Growth is Life” is not just a punch line of Reliance, but it’s what every business/ sector/ company
strives for and FMCG sector/ companies are no exception to this.

We have seen a transformation in the percentage growth of FMCG sector from single to double digit
growth. This definitely shows us signs of good times. Let me give you some statistics.

What is running this sector in the past few years? There exist only two growth paths– Organic
(Innovation) or Inorganic.

We have seen FMCG behemoths like P&G to be proponent of organic growth. As per global CEO of
P&G AG Lafley said “Organic growth is more valuable because it comes from your core competencies.
Organic growth exercises your innovation muscle. It is a muscle. If you use it, it gets stronger.”

On the other hand, Dabur India announced the acquisition of Balsara Hygeine and Home Care
businesses. The CEO, Sunil Duggal mentioned that Balsara's acquisition is certainly not the last one
and there may be more strategic takeovers in future.

So after briefly hearing the different viewpoints from the CEOs of FMCG majors, can there be a unique
strategy for FMCG companies to grow. Obviously, the answer is No. But in recent past we have seen a
skewed trend towards acquisition of companies and brands by FMCG companies and opting for the
inorganic route.

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We will give reasons with several case studies to why these companies are following this path.

Reasons for Inorganic growth by FMCG companies

1. Cheap Exercise: Building a brand from grass-root level asks a lot. Just think of small FMCG player
who can dare to give a fight or even stand still in front of Home and Personal Care juggernaut, HUL.
Do these small players have the financial capacity to build a new brand and get a decent market share?
It really asks a lot. Also, riper is the product category, more it is difficult for other FMCG players to
enter that space, because of huge competition.

Acquiring brands from other companies will not require them to spend exorbitant money on brand
building to get the space in the mind of the consumer.

It’s not only saving money on brand building but cost savings as well. P&G expected revenue gains
and cost savings of $14-16 billion from the merger with Gillette, due to elimination of overlapping
functions and a planned 6,000 job cuts.

2. Time Constraints: It takes much time for FMCG companies to launch a new brand from scratch.
FMCG companies are not ready to afford time to do the inevitable market research, understanding the
consumer behavior, pilot testing at selected places etc. Also the market is very dynamic and the needs
of the consumers keep changing. With the organic route the innovative brands gets outdated with
market needs by the time they are launched.

3. Product Related: Diversification of existing product portfolio and complementing current product
portfolio are the two reasons to go for inorganic route. It is the quickest way to increase a company’s
basket. It gives the companies a straight license to step into new product categories. For example
Godrej has bought Keyline's brands such as Endocil, Inecto, Skyhydra and Aapri. Now GCPL is not
just soap and hair colour. Its kitty include Erasmic shaving products, Cuticura talcum powder, Adorn &
Nulon. They had been looking at the Nihar brand of hair oil as it fits into Godrej's portfolio since it is
has been marketing the Anoop brand. P&G's acquisition has given it access to Gillette's portfolio
comprising shaving products, Oral-B toothbrushes and Duracell batteries, among others. This has
helped P&G to upgrade from household products like soaps, detergents and cleaners, to a company that
is into "lifestyle" products in the personal care and grooming segments. Gillette's basket of hi-tech
shaving systems for men and women, powered tooth-brushes and male grooming products will
complement P&G' set of brands in the beauty, personal care and feminine hygiene segments. Gillette
will also add more high-margin products to the P&G portfolio, making for more robust profit margins

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than its rivals.


4. Size/ Scale related: There are different parameters which lead to increase in size/ scale of an
organization with inorganic route. They are:

 Increase Turnover/ Profits


 Increase Market Capitalization
 Increase Market Share
 Presence on world map

4.1 Increase Turnover/ Profits:


The objective of every company is to increase the turnover and thereby the profits of the company.
Acquisition of the companies and Brands of the companies is definitely one of the options to meet the
needs of the company.

For example GCPL through Keyline’s buyout, expected that their sales turnover will go up 20 per cent
and profits should increase by 10 per cent.

4.2 Increase Market Capitalization

Share Value
Share Value
(Prev Close) % Growth in
Organization Post
on the day of share value
Acquisition
acquisition

Dabur - Balsara 99.05 157.75 59.2%

Godrej -Keyline 498.9 728.05 45.9%

Marico -Nihar 401.75 540.8 34.6%

The above figures clearly shows a positive impact on the share prices after the above three acquisitions.

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Especially it’s interesting to see 35% growth in the case of Marico in just 3 months.

 The market cap of GCPL raised by 10 per cent post the Keyline acquisition
 The above companies have been rewarded with premium valuations, which earlier use to be
enjoyed only by multinationals

4.3 Increase Market Share


Through inorganic route companies acquiring the brands of other companies were also able to increase
their market share of the products.

4.4 Presence on world map


By acquiring companies the presence of the companies are being made worldwide. For example

TATA Tea Ltd acquired Good Earth Corporation few years back. The traditional strength of Tetley in
the US market had been in areas such as New Hampshire and Boston. Good Earth offered the company
presence in the attractive California market, which has been open to new and innovative offerings in
tea.

To expand further, companies are going global. But that’s not the only one. The other reasons for going
global are:

4.4.1 Ready made global brands: with the acquisition of Brands and the companies the acquirer
company gets the brands which are having a global presence. Thereby companies can easily enter into
the global markets.
The move to acquire Keyline Brands marks GCPL's foray into the global market with ready made
brands.

4.4.2 Sharing of brands between 2 different markets:

With the inorganic route the companies are able to share the brands between two markets. The
companies which have a Domestic presence of their Brands entered into the Global market and the
companies by acquiring the Foreign Brands introduced the Foreign Brands into their Domestic market.

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This helped the companies to increase the market share of their of their Brands.

• Domestic to new markets: GCPL has decided to take its hair powder dyes and Fairglow soap
to the UK, where there is a substantial Indian population.

• Entry of foreign brands to enter domestic markets: Godrej is planning to introduce few of its
Keyline brands i.e. Erasmic and Cuticura in India, as customers are already aware of them.

4.4.3 Targeting Ethnic population:

Brand in domestic market will definitely attract the ethnic population residing in the target countries.
Companies in India are hoping to cash in by introducing their Brands in these target countries. While
entering the markets of the other the companies should also customize their Brands according to the
needs of the local markets.

Godrej with its huge brand equity in India will spill over to create brand pull among the British Afro-
Asian population. GCPL is hoping to cash in on the current craze for "ethnic Indian" by introducing
sandalwood and ayurvedic variants of Godrej No. 1 in British supermarkets.

Due to large Indian population in the UK, Godrej’s should customized its products to suit the Indians in
UK.

4.4.4 Increased Learning Curve: Once a company enters into a new country’s retail area, it can learn a
lot like

2. Different retails format prevailing there.

3. Insights on planning and meeting global delivery schedules

4. Doing business in a alien land

5. Access to new consumers and understand offer schemes to attract more customers

6. How do margins, discounts vary across geographies

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7. Right Shelf space to get more customers

So the companies need to learn the retail trends and apply them in domestic market. Bring back a new
set of skills to tackle the nuances of manufacturer and retailers. Unlike in India, distribution is not
fragmented overseas like in US, UK etc. Manufacturers deal with fewer retailers. So it requires
different skill sets.

In case of Godrej, they will bring back the learning of organized retail and will apply that in India as
the share of sales through organized retail chains is growing rapidly. They can bring home the best
practices. This will give an opportunity to give a tight competition to multinationals in India, as they
are familiar with these practices since they have a presence across the world. Also Godrej will enhance
its skills in managing modern trade channels.

5. Enhanced Distribution

Distribution is always a key for success in mass markets in FMCG sector. If the acquired company's
distribution network is complementary to the company's own, it can easily be leveraged to vend
existing brands to new consumers.

5.1 Dabur pursued Balsara for its distribution reach in the West and the South. Dabur’s past
distribution network had better penetration in the Northern and Western regions. Balsara has a direct
distribution reach of 340,000 and 1.5mn indirect reach. Now, Dabur will be in a better state to
distribute its products in southern markets.

5.4 P&G will have a greater say over display and shelf-space with retailing giants such as Wal-Mart,
Carrefour etc. They will also get greater bargaining power in its negotiations with raw material
suppliers and the advertising media.

6. Economies of Scale
With inorganic growth companies can bring in the Economies of Scale in various areas of their
business like Marketing, Sales and Distribution. These economies will reduce the costs of the company.

Dabur’s combined business with Balsara would provide economies of scale in marketing, sales and

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distribution. Combined advertisement will reduce costs.

Keyline outsources about half of its manufacturing to various units in the UK. According to press,
GCPL's manufacturing costs are 30-40 per cent lower than those in the UK. This has forced GCPL to
shift some of Keyline's production to its Vikhroli, Mumbai plant.

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Mergers hold promise for FMCG sector, consumers

THE flurry of activity in the fast moving consumer goods (FMCG) sector appears to augur well.
Whether it is the acquisition of Balsara businesses by Dabur India Ltd (DIL) or the global acquisition
of Gillette Company by Procter & Gamble, industry experts feel that consolidation will catalyze growth
and ultimately help the end consumer.

Dabur India Limited's acquisition of the three Balsara group companies has given it access to seven
well-entrenched brands — toothpastes Promise, Babool and Meswak, Odonil air freshener, Odopic
utensil cleaner, Sanifresh toilet cleaner and Odomos insect repellent. P&G's acquisition has given it
access to Gillette's portfolio comprising shaving products, Oral-B toothbrushes and Duracell batteries,
among others.

DIL and P&G — gain on account of a much larger scale of operations; the two companies will be
compelled to make investments in product development as well. Consolidation and acquisitions should
help the FMCG sector to grow faster in India. Such activity drives companies to invest in developing
new products and generally augurs well for a market which is, at present, highly fragmented. If there
are two, three large consolidated players in each product segment, the consumer is bound to benefit
because of improved value equation and enhanced product research.

DIL has already indicated that it will be investing substantially in the acquired brands, to occupy all
price points in the oral care market. Similarly, P&G is also expected to benefit from the larger scale of
operations after the acquisition of Gillette is complete.

This endeavor of acquiring more brands to enter into new product categories will not stop in the
coming years. FMCG companies have their eyes set to fill in the gaps in the existing brand portfolio by
acquiring companies with set of brands complementing the existing portfolio.

But as mentioned in introduction some have followed the other route of organic growth. It will be
interesting to see more acquisitions of brands in Indian as well as in global market, especially by those
who have not experiment with it.

But one thing is very visible out there – many FMCG companies are definitely not going to leave any
opportunity to grow as fast as possible – by acquiring companies/ brands.

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14. CORPORATE SOCIAL RESPONSIBILITY BY THE COMPANIES IN FMCG SECTOR

FMCG companies have now started taking Corporate Social Responsibility seriously. Most brands link
themselves with the social causes, thereby linking consumers with the brands and gaining goodwill in
the market.
For instance, to encounter domestic violence, Ponds has tied up with the United Nations Development
Fund (UNDF) for Women. Surf Excel is funding the education of children.

The Corporate Social Responsibility techniques adopted by the two major companies in the FMCG
sector is

Hindustan Unilever Limited

 HUL is one of the major player in the FMCG sector. Over these decades, while HUL has
benefited from the developments in the country, it has contributed equally to these
developments.HUL has consciously woven India's imperatives with the company's strategies
and operations. The company's main contributions include developing and using relevant
technologies, stimulating industrialization, boosting exports, adding value to agriculture and
generating productive employment and income opportunities.

 HUL has been proactively engaged in rural development since 1976 with the initiation of the
Integrated Rural Development Programme in the Etah district of Uttar Pradesh, in tandem
with the company's dairy operations. This Programme now covers 500 villages in the district.
Subsequently, the factories that HUL continued establishing in less-developed regions of the
country have been engaged in similar programmes in adjacent villages. The company has
acquired a wealth of experience and learning from these activities.

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HUL's initiatives in Corporate Social Responsibility

 Corporate Social Responsibility (CSR) in Hindustan Unilever Limited (HUL) is rooted in its
Corporate Purpose - the belief that "to succeed requires the highest standards of corporate
behaviour towards our employees, consumers and the societies and world in which we live".

 This philosophy is embedded in its commitment to - consumers, employees, the environment


and the society that we operate in. We believe that it is this commitment which will deliver
sustainable, profitable growth.

 We are committed to undertaking those CSR initiatives that are sustainable, have long-term
benefits and an ongoing business purpose linked to them. We are focused on health & hygiene
education, women empowerment, and water management.

 In addition to these important platforms, we are also involved in a number of community


support activities, like education and rehabilitation of special or underprivileged children, care
for the destitute and HIV-positive, and rural development.

Some of the CSR initiatives by HUL is as follows:

Greening Barrens – Water Conservation and Harvesting

 Water scarcity is one of the biggest crises in India in terms of spread and severity. Water
conservation and harvesting in HUL's own operations will help conserve and regenerate this
scarce resource.

HUL's Water Conservation and Harvesting project has two major objectives:

• To reduce water consumption in its own operations and regenerate sub-soil water tables at its
own sites through the principles of 5R - Reduce, Reuse, Recycle, Recover and Renew

• To help adjacent villages to implement appropriate models of watershed development.

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 Water management is a focus area for all HUL factories. Water conservation has been made one
of the key performance indicators of an HUL factory. Through a series of technology
innovations and novel processing routes HUL has reduced its ground water consumption by
over 50%. HUL has also applied technologies that recycle effluent water after treatment – 70%
of HUL sites are now zero discharge sites. There are many other measures - Reverse Osmosis
Plants and Solar Evaporation Ponds to name a few. A simultaneous benefit is saving in energy
that otherwise would have been consumed in drawing, pumping or converting water into steam
- HUL's energy consumption per unit of production has come down by 61% since 1996. Since
2003, all HUL sites have begun to harvest rain water. Rain water falling on factory premises is
accumulated in ponds, thereby renewing sub-soil water tables.

 HUL is also committed to extending its efforts on water management to the larger community,
and has engaged in community projects in water adjacent to manufacturing sites.

 The Khamgaon soap factory is located in a dry and arid region of Maharashtra and gets limited
rainfall. Seven years back the factory started a pilot on 'Watershed Management' on a 5-hectare
plot to prevent soil degradation and conserve water. The efforts have resulted in the creation of
a green belt, which is the only visible green patch in the area. The 5-hectare green belt is now a
veritable forest of about 6300 trees, including over 1400 ornamental plants and over 600 fruit-
bearing plants. There has also been a remarkable improvement in the quality of soil, and
significant conservation of water. This has been documented in a booklet, 'Greening Barrens', so
that industry, government bodies and communities adopt this widely. Encouraged by the results,
HUL has extended the model to a neighbouring village, Parkhed, in association with the TERI
and the Bharatiya Agro Industries Foundation. The community at Parkhed has already
constructed 47 percolation bunds, 1600 trenches, 6000 running meters of continuous contour
trenching over 100 hectares and a permanent check dam. About 30,000 saplings have been
planted since 2003. Villagers are now able to collect water and utilize it for irrigation post
monsoon. The initiative received appreciation at the Johannesburg World Summit on
Sustainable Development.

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 In association with an NGO, Vanrai, HUL's Silvassa manufacturing hub (in the Union Territory
of Dadra & Nagar Haveli) too has embarked on a long-term project of water harvesting, which
aims to dramatically change water availability, taking it up to year-round availability from 4
months at present. At Karchond village, near the Silvassa site, the community has built 42
bunds since 2003. Seven of them are on a river running through the village, and 11 smaller ones
at different water run-off points. This has enabled the community to sow a second crop, thereby
significantly increasing their incomes. Through an Integrated Village Development Programme,
the project's ambit also includes alternate income-generating activities through SHGs, forestry
management, education of children, nutrition.

 The programme of watershed management is being progressively extended to other factories.


The Hosur Coffee Factory has set an example in low-cost water harvesting methods. Another
example is the Yavatmal Personal Products Factory, which has worked with the Social Forestry
Department of the Maharashtra Government to improve sub-soil water table in the area.

 HUL's vision is to continuously innovate technologies to further reduce water consumption and
further increase conservation in its operations. Simultaneously, HUL sites will progressively
help communities, wherever required, to develop watersheds.

Shakthi – Changing Rural Lives in Rural India


 Shakti is HUL's rural initiative, which targets small villages with population of less than 2000
people or less. It seeks to empower underprivileged rural women by providing income-
generating opportunities, health and hygiene education through the Shakti Vani programme, and
creating access to relevant information through the iShakti community portal.
 Started in 2001, Shakti has already been extended to about 80,000 villages in 15 states - Andhra
Pradesh, Karnataka, Tamilnadu, Maharashtra, Gujarat, Madhya Pradesh, Chattisgarh, Uttar
Pradesh, Rajasthan, Punjab, Haryana, West Bengal, Orissa, Bihar & Jharkhand.
 The objective of Project Shakti is to create income-generating capabilities for underprivileged
rural women, by providing a sustainable micro enterprise opportunity, and to improve rural
living standards through health and hygiene awareness. A crucial lesson learnt was that rural
upliftment depended not on successful infusion of credit, but on its guided usage for better

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investment opportunities. This is where HUL's Project Shakti is playing a role in creating such
profitable micro enterprise opportunities for rural women.
 In general, rural women in India are underprivileged and need a sustainable source of income.
NGOs, governmental bodies and other institutions have been working to improve the status of
rural women. Shakti is a pioneering effort in creating livelihoods for rural women, organized in
Self-Help Groups (SHGs), and improving living standards in rural India. Shakti provides
critically needed additional income to these women and their families, by equipping and
training them to become an extended arm of the company's operation.
 Shakti already has about 25,000 women entrepreneurs in its fold. A typical Shakti entrepreneur
earns a sustainable income of about Rs.700 -Rs.1,000 per month, which is double their average
household income. Shakti is thus creating opportunities for rural women to live in improved
conditions and with dignity, while improving the overall standard of living in their families. In
addition, it involves health and hygiene programmes, which help to improve the standard of
living of the rural community. Shakti's ambit already covers about 15 million rural population.
Plans are also being drawn up to bring in partners involved in agriculture, health, insurance and
education to catalyze overall rural development.
 HUL's vision for Shakti is to scale it up across the country, covering 100,000 villages and
touching the lives of 100 million rural consumers.
 Shakti Vani is a social communication programme. Women, trained in health and hygiene
issues, address village communities through meetings at schools, village baithaks, SHG
meetings and other social fora. In 204, Shakti Vani has covered 10,000 villages in Madhya
Pradesh, Chattisgarh and Karnataka.
 IShakti, the Internet-based rural information service, has been launched in Andhra Pradesh, in
association with the Andhra Pradesh Government's Rajiv Internet Village Programme. The
service is now available in Nalgonda, Vishakapatnam, West Godavari and East Godavari
districts. IShakti has been developed to provide information and services to meet rural needs in
medical health and hygiene, agriculture, animal husbandry, education, vocational training and
employment and women's empowerment.

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Corporate Social Responsibility by ITC

ITC's E-Chaupal

 Envisioning a larger societal purpose has always been a hallmark of ITC. The company sees no
conflict between the twin goals of shareholder value enhancement and societal value creation.
The challenge lies in fashioning a corporate strategy that enables realization of these goals in a
mutually reinforcing and synergistic manner.

 In 2000, harnessing the empowering force of information technology and its scalability, ITC
launched e-Choupal – a knowledge portal providing farmers with a range of information and
services. Designed to enable them to bargain collectively and enhance their transactive power,
e-Choupal became the much needed and easily adoptable tool farmers had been waiting for.
Today e-Choupal is a vibrant and rapidly growing zone of business and interaction for over 4
million farmers.

 A powerful illustration of corporate strategy linking business purpose to larger societal purpose,
e-Choupal leverages the Internet to empower small and marginal farmers – who constitute a
majority of the 75% of the population below the poverty line.

 By providing them with farming know-how and services, timely and relevant weather
information, transparent price discovery and access to wider markets, e-Choupal enabled
economic capacity to proliferate at the base of the rural economy.

 Today 4 million farmers use e-Choupal to advantage – bargaining as virtual buyers’ co-
operatives, adopting best practices, matching up to food safety norms. Being linked to futures
markets is helping small farmers to better manage risk. E-Choupal has been specially cited in
the Government of India’s Economic Survey of 2006-07, for its transformational impact on
rural lives.

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The Value Chain - Farm to Factory Gate:

 ITC’s strategic intent is to develop e-Choupal as a significant two-way multidimensional


delivery channel, efficiently carrying goods and services out of and into rural India. By
progressively linking the digital infrastructure to a physical network of rural business hubs and
agro-extension services, ITC is transforming the way farmers do business, and the way rural
markets work.

 The network of 6,500 e-Choupal centers spread across 40,000 villages has emerged as the
gateway of an expanding spectrum of commodities leaving farms – wheat, rice, pulses, soya,
maize, spices, coffee, aqua-products. The reverse flow carries FMCG, durables, automotives,
banking and insurance services back to villages. E-Choupal is one of the top five alternative
channels for LIC Policy sales, and accounts for 10% of the national weather insurance market.

 ITC has been using e-chaupals to market its entire product range, including Ashirwad flour, salt,

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candies, urea, DAP fertilizers and also other products. The e-Choupals also serve the purpose of
procurement of raw material, including wheat, which the company procures directly from
farmers and sells back to them in finished form.

ITC Gains

 The commissions paid to the agents under the mandi system were not excessive, but because of
the inefficiencies discussed earlier, the true cost of intermediation through the mandi system
was between 2.5 and 3% of procurement costs. While retaining commissions paid for the
sanchalaks’ services, the 0.5% commission paid to them is significantly less than the costs
associated with the mandi system. Direct reimbursement of transport costs to the farmer is
estimated to be half of what ITC used to pay the commission agents for transport to their
factory. Removal of intermediary manipulation of quality and the ability to directly educate and
reward quality in the customer base results in higher levels of quality in e- Choupal
procurement. This results in higher oil yields, which, in turn, lead to higher profits for ITC.

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15. FUTURE PROSPECTS OF THE SECTOR

• Rising per capita income, increased literacy and rapid urbanization have caused rapid growth
and change in demand patterns. The rising aspiration levels, increase in spending power has led
to a change in the consumption pattern. Apart from the demand for basic goods, convenience
and luxury goods are growing at a fast pace too. The urban population between the ages of 15
to 34 years is expected to increase from 107 m in 2001 to 138 m in 2011, an increase of 30%.
This would unleash a latent demand with more money and a new mindset. With growing
incomes at both the rural and the urban level, the market potential is expected to expand
further.

• While the homegrown companies are looking to expand beyond the Indian shores, the MNC
subsidiaries are likely to look for greater leverage of their respective parent’s strength. Since
India is a big potential market, none of the big MNCs can afford to ignore the region for long.
The decade ahead is likely to see more MNCs looking to enter India, as organized retailing
picks up.
• Due to the large size of the market, penetration level in most product categories like jams, skin
care, toothpaste, hair wash etc. in India is low. This is more visible when a comparison is done
between the rural and the urban areas. The average consumption by rural households is much
lower than their urban counterparts. Existence of unsaturated markets provides an excellent
opportunity for the industry players in the form of a vastly untapped market as the income
rises.
• Another key positive for the sector is the current government's focus on rural India. The aim is
to make India the hub of agri-processing. The e-choupal (ITC) and Shakti (HUL) initiatives by
corporates is likely to shape the dynamics of what farmers produce going forward, with
improved efficiency.
• FMCG products are witnessing a retailing revolution in recent times. While some retail chains
have large retail formats enabling huge volumes, some are focused on affordability which has
resulted in margins getting squeezed. The Indian market is dominated by more than 12 m small
‘mom and pop’ retail outlets. However only 4% is in the organized sector, thereby reducing the
reach. With FDI expected to be allowed, the share from the retail formats is expected to
increase.

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To conclude we can say that the FMCG sector is set on a high growth trajectory, projected to
grow by over 60 percent by 2010, which translated into an annual growth of 10 percent over a
5 year period. The categories like hair care, household care, female hygiene, chocolates and
confectionery are estimated to be the fastest growing segments. The total size of the FMCG
sector is expected to rise to Rs. 92,100 crores in 2010. Further, the estimates for 2010 show a
distinct change in the long term composition of the sector from a dominant ' home and personal
care' sector to one with a relatively higher share of 'foods'. Within the ' home and personal care
category', the skin care, household care and feminine hygiene categories are expected to grow
at relatively faster rates. Within the foods segment, it is estimated that processed foods, bakery
and dairy are long term growth drivers.

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