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Analysis of FMCG Industry

Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars. Indias 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 Rs. 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 Rs 85,000-crore Indian FMCG industry is expected to register a healthy growth in the third quarter of 2008-09 despite the economic downturn. The industry is expected to register a 15% growth in Q3 2008-09 as compared to the corresponding period last year. Unlike other sectors, the FMCG industry did not slow down since Q2 2008. the industry is doing pretty well, bucking the trend. As it is meeting the every-day demands of consumers, it will continue to grow. In the last two months, input costs have come down and this will reflect in Q3 and Q4 results. Market share movements indicate that companies such as Marico Ltd and Nestle India Ltd, with domination in their key categories, have improved their market shares and outperformed peers in the FMCG sector. This has been also aided by the lack of competition in the respective categories. Singleproduct leaders such as Colgate Palmolive India Ltd and Britannia Industries Ltd have also witnessed strength in their respective categories, aided by innovations and strong distribution. Strong players in the economy segment like Godrej Consumer Products Ltd in soaps and Dabur in toothpastes have also posted market share improvement, with revived growth in semi-urban and rural markets.

Fundamental analysis
The past few months have not only seen a major fluctuation in the prices of FMCG products such as detergents, soaps, shampoos, but also in the colour television and refrigerator segments. "The intrinsic nature of both the industries is different. While FMCG products are low involvement purchases, consumer durables are high-involvement purchases," Mr Anil Arora, Head (Marketing), LG Electronics India Pvt Ltd, pointed out.

"Durables were considered luxuries and the Government taxes them heavily. Only now duties on durables have been brought down considerably, making them affordable," Input costs, assembling costs and freight are large components in the price besides duties, Mr Shankar explained, adding that the "FMCG price structures are governed by retailer margins, distribution and advertising costs. Input costs are not high per unit, so a comparison is not possible. Price wars are common in the FMCG market to prevent brand switches at point of sale." Following are the steps undertaken under fundamental analysis:
1) Economic analysis 2) Industry analysis 3) Industry life cycle

lets discuss these one by one.

Economic analysis: GDP and FMCG:

The FMCG sector continues to perform very well for FY09 despite fall in GDP number and poor performance by the other industries. India's GDP growth has been decelerating from 9.9% in FY06-07 to 9.05% in FY07-08, which has come down further to 6.7% in FY08-09. But increase in domestic consumption and rural sector story helped FMCG companies to closed the year with good double digit growth. The analyst expects hike in excise duty in cigarette by 7% to 10%. There might be rise in tax incidence on alcohol beverages, i.e. excise and sales tax. The government may revised the cut in excise duty from 14% to 8% which it took during the last two stimulus package due to upward trend in oil prices. The government may announce some package for the rural development, for rural employment and for farmers, which is good news for FMCG sector.

Industry expectations

Focus on rural sector through employment generation and infrastructure spending. To increase personal tax exemption limit above Rs 1.5 lakh (Rs 150,000). Want reduction on dividend distribution tax. Rationalizing the Value Added Tax (VAT) across the food processing industry. Expects tax holiday for food processing industry. Expects tax incentive for Research & Development in food processing industry. Reduction in VAT from 12.5% to 4% on biscuit, bread, bhujia, namkeen, jam, jellies and fruit juice Removal of fringe benefit tax.

Maintain the 2010 timeline for implementation of GST and replace the redundant and cumbersome multiple tax system Reclassification of tobacco products and address differential tax structure. Maintain current level of excise duty on cigarette.

Despite the economic recession, the Rs 86,000-crore Indian FMCG industry is expected to register a double digit value growth in the last quarter of 2008-09. The industry is expected to register a value growth of 14 % in Q4 as compared to the corresponding period last year. We expect the industry to register 16 to 17 % value growth for the financial year 2008-2009. There's no clear trend for margins as different companies will post different margins depending upon the commodity prices, said Akhil Kejriwal, an analyst with Enam Securities. So far the economic recession has not impacted the India FMCG industry and the Industry captains are quite optimistic about the industry's performance in Q4. Adi Godrej, chairman of the Godrej Group, said, I think there will be a strong growth both by value and volumes in Q4 FY09. I think the margins will also improve in According to Amit Burman, vice chairman of Dabur India, the Indian FMCG industry will register a double digit growth in value in Q4. I think the industry will post 12 to 15% value growth in Q4. I expect a lot of growth coming from rural India. I think the FMCG industry has not seen the recession because of value-for money products, he said. Echoing similar sentiments, Harsh Mariwala, chairman of Marico Ltd said, I think the results will be pretty good in the last quarter of FY 09. With price cuts being the order of the day, the FMCG industry is expected to post moderate growth of 12.8% y-o-y, predict industry analysts. While most categories would see strong volume growth, categories that are discretionary in nature (eg paints) and that have witnessed significant price increases (eg washing powder) could see volume dip. We expect HUL to deliver muted sales of 9.6%. ITC is likely to register robust growth of16%, added analysts....

Inflation :
India's fast moving consumer goods industry is hoping the upcoming federal budget will bring in concrete measures to tame spiralling inflation and viable tax structure to ensure continued growth. The 130-billion-rupee industry, which is the fourth largest sector in the Indian economy, has been reeling under the pressure of surging input costs and subsequent impact on profit margins. "Prices of agri-commodities are on the rise. Prices have risen by 30-35 percent in the past two years...there is also simultaneous rise in freight rates and packaging costs," said Chitranjan Dar, chief executive of foods business, ITC.

"If growth has to continue, then the problem of inflation has to be tackled," he said. Companies are hoping for full or partial exemption in excise duty on commodities such as biscuits, condensed milk, sugar confectionary and packaged water. However, analysts said excise on cigarettes is likely to go up by 6-8 percent. The industry also wants an increase in allocation for various rural development programmes in a bid to enhance rural income and revision of tax slabs in order to boost discretionary consumption. "The industry is expecting the allocations under various schemes such as NREGA ( National Rural Employment Guarantee Act) to continue as for all FMCG companies 30-50 percent of their consolidated revenues come from rural India," an analyst with brokerage Sharekhan said.

Interest rates:
The December quarter results of Indian Inc. are almost out. By and large, these results were in line with analysts expectations. Earnings have registered strong growth on account of increased sales. Margins too have remained strong during the quarter despite rising input costs as companies have been able to pass on part of the price rise to customers or have delayed the impact through hedging. During the quarter, interest costs have been marginally higher compared to the previous quarter. All this is likely to result in margins getting squeezed in the ensuing quarters. Foreign Direct Investments 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). There is a continuous growth in net FDI Inflow. There is an increase of about 150 per cent in Net Inflow for Vegetable Oils & Vanaspati for the year 2008. Despite the economic slowdown, Indias Fast Moving Consumer Goods (FMCG) sector has grown consistently during the past three to four years, reaching a size of $25 billion (Rs 120,000 crore) at retail sales in 2008. The industry is poised to grow 10-12 per cent yearly for the next 10 years to reach $43 billion (Rs 206,000 crore) by 2013 and $74 billion (Rs 355,000 crore) by 2018.Implementation of the proposed Goods and Services Tax (GST) and opening of Foreign Direct Investment (FDI) are expected to fuel growth further and raise the industrys size to $47 billion (Rs 225,000 crore) by 2013 and $95 billion (Rs 456,000 crore) by 2018, according toew Ficci-Technopak report. The FMCG sector is also one of the major contributors to the exchequer with $6.5 billion (Rs 31,000 crore) paid through direct and indirect taxes.

At the first look, the Union budget 2010-11 aims at providing further booster to the economic growth with a tight grip on the broadening fiscal deficits. Measures such as broadening of income tax slabs and plenty of bounties for rural India provide fresh liquidity in the economy and are aimed at lubricating the growth engines with rippling multipliers. However, the impact of this budget on the FMCG industry is surely one gray area which can only be unfolded with time. Pinaki Mukherjee, Lead Consultant - Consumer Markets, Datamonitor India felt, the impact of the budget on the FMCG industry will be far reaching than it is thought and may as well enforce the companies to have a re-look at their broader strategies in the medium to short term. Most of the big FMCG companies in India including HUL and Dabur have manufacturing facilities in the excise-free zones. Therefore, although 2% excise hike may not pinch them at all, rising fuel and other input costs may result in further bleeding of margins if the incremental cost is not passed on to the consumers. In addition, a hike in MAT and bringing in products such as chocolates, biscuits, sanitary napkins, diapers and toilet papers under fresh or additional tax net will definitely result in companies having to pay higher tax in the current fiscal. So the most important question, will the companies resort to increasing product prices? "Indian consumers have always preferred certain price points for the lower SKUs. Companies therefore may not like

to alter the popular price points of Rs. 2, 5 and 10, but higher volume products will definitely see a price hike. However, a robust monsoon later this year may soften the pressure on the input costs", commented Mukherjee. Prices of daily consumption products like soaps, talcum powder, shampoos, hair colour, diapers and sanitary napkins are set to go up 2-5%. Products like diapers and sanitary napkins which were fully exempt from excise will now attract duty of 10%. But deodorants and perfumes could get cheaper by 5%, as excise duty on medicinal and toilet preparations act is being reduced from 16% to 10%.

Cheap labor and quality product & services have helped India to represent as a cost ad-vantage over other Countries. Even the Government has offered zero import duty on capital goods and raw material for 100% export oriented units.Multi National Companies out-source its product requirements from its Indian company to have a cost advantage. India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew apart from being the second largest producer of rice, wheat, fruits & vegetables. It adds a cost advantage as well as easily available raw materials

Industry analysis
Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG

may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars. A subset of FMCGs are Fast Moving Consumer Electronics which include innovative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These are replaced more frequently than other electronic products. White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music Systems, etc. In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India. According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and 2005.


S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. Companies

Hindustan Unilever Ltd. ITC (Indian Tobacco Company) Nestl India GCMMF (AMUL) Dabur India Asian Paints (India) Cadbury India Britannia Industries Procter & Gamble Hygiene and Health Care


Marico Industries

The following steps are taken under this: 1) Five Forced model 2) Industrial Life Cycle

3) Swot Analysis

1) Five Forced Model: a) Degree of rivalry:

Rivalry among Competing Firms: In the 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 campaigns to promotional stuff and price wars etc. Hence the intensity of rivalry is very high. FMCG players are forced to spend more than what they earn.The statement though a little surprising, represents the accurate picture of the market scenario that is prevalent in the FMCG market. The rough competition has pushed the players to spend more money on the ads and promotions. The ads budgets exceed the earning figures sadly.

b) Threat of substitutes:
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 re-placed 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. This leads to higher consumers expectation. Price advantage Performance improvement Coir decreased demand synthetic fiber Substantial invest - R&D Limit price & profitability c) Barriers to entry: 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 firms can easily enter and also offer tough competition due to cost effectiveness. Hence potential entry of new firms is highly viable. Huge investments in promoting brands, setting up distribution networks and intense competition, but the sector is not capital intensive. 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. Existence of unsaturated markets provides an excellent opportunity for the industry players in the form of a vastly untapped market as the income rises.

d) Suppliers power:
Specialized product Limited supply Affects cost of raw materials Industry attractiveness & profitability.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. Most large FMCG companies have established nation wide distribution networks comprising company's C&F agents, distributors, wholesalers and retailers. These intermediaries ensure widespread presence for the brand so that products are available to consumers where they want them. The influx of the modern retail formats (organized retail) in the country is likely to catalyze acceleration of growth in FMCG categories where consumer interaction with products.

e) Buyers power:
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. The top-lines of leading Fast Moving Consumer Goods (FMCG) companies are likely to grow by 15.3 per cent year-on-year (YoY) in Q1, FY'11, a research report by brokerage firm Sharekhan said."The top-line growth will be aided partially by the acquisitions made by Tata Tea and Godrej Consumer Products Ltd (GCPL) in the recent past. In the absence of price increases, the organic revenue growth for almost all the FMCG companies (except Tata Tea) will be driven largely by volumes," Sharekhan research analyst Ashish Upganlawar said. "We believe the progress of the monsoon and its likely positive impact on kharif output will be a key driver for sustaining the rural growth, especially as rural India remains one of the key focal points for garnering consistent growth for FMCG companies,

2) Industrial life cycle:


SWOT Analysis of FMCG Industry:

The size of the Indian fast-moving consumer goods (FMCG) sector is close to Rs 600 bn. The northern and the western regions of the country account for more than half of the market for consumer goods. Barring the fastest-growing personal care segment, no other product segment has seen the entry of so many players. In the past decade, the personal care industry has witnessed a consumer boom. This has been due to liberalization, urbanization, and an increase in the disposable incomes, and altered lifestyles, especially a heightened level of awareness among the rural community, consequent to the onslaught of satellite television. Furthermore, the boom has also been fuelled by the reduction of excise duties, dereservation from the small-scale sector and the concerted efforts of personal care companies to woo the burgeoning affluent segment of the middle class through product and packaging innovations. Unlike in the past, when domestic companies were not perceived as competitive vis--vis multinational corporations (MNCs), the scenario is gradually changing, with some domestic companies, like Nirma, Marico and Jyothi Labs, standing up to their MNC counterparts. Also, competition amongst the MNCs has

intensified, leading to shrinkage of margins. The personal and home care segment has very low entry barriers of technology and capital requirements. This attracts new players and has resulted in intensifying competition. Despite this, the strong distribution networks and heavy investments needed for brand building remain key deterrents to new players. Low margins and high volumes characterize the industry. While the level of disposable incomes determines the overall sector growth, the market has already been segmented and sub-segmented. Companies have launched products at a number of price points to drive up volumes. New products are being launched in niche segments, and old products re-launched. Brand equity drives...

Swot Analysis Strengths:

Low operational costs Presence of established distribution networks in both urban and rural areas Presence of well-known brands in FMCG sector

Lower scope of investing in technology and achieving economies of scale, especially in small sectors Low exports levels "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.

Untapped rural market Rising income levels, i.e. increase in purchasing power of consumers Large domestic market- a population of over one billion. Export potential High consumer goods spending Threats: Removal of import restrictions resulting in replacing of domestic brands Slowdown in rural demand Tax and regulatory structure