Markets all over the world have been on a roll in 2003 and the Indian bourses are no

exception having gained almost 60% in 2003. During this period, while there are sectors

that have outperformed this benchmark index, there are also sectors that have under

performed. FMCG registered gains of just 33% on the BSE FMCG Index last year.

 

At the macro level, Indian economy is poised to remained buoyant and grow at more

than 7%. The economic growth would impact large proportions of the population thus

leading to more money in the hands of the consumer. Changes in demographic

composition of the population and thus the market would also continue to impact the

FMCG industry.

 

Recent survey conducted by a leading business weekly, approximately 47 per cent of

India's 1 + billion people were under the age of 20, and teenagers among them

numbered about 160 million. Together, they wielded INR 14000 Cr worth of

discretionary income, and their families spent an additional INR 18500 Cr on them every

year. By 2015, Indians under 20 are estimated to make up 55% of the population - and

wield proportionately higher spending power. Means, companies that are able to

influence and excite such consumers would be those that win in the market place.

 

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 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.

 

At the macro-level, over the long term, the efforts on the infrastructure front (roads,

rails, power, river linking) are likely to enhance the living standards across India. Till

date, India's per capita consumption of most FMCG products is much below world

averages. This is the latent potential that most FMCG companies are looking at. Even in

the much-penetrated categories like soaps/detergents companies are focusing on

getting the consumer up the value chain. Going forward, much of the battle will be

fought on sophisticated distribution strengths.

 

Structural Analysis Of FMCG Industry

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.

 

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

 

1. 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.

 

2.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.

 

3.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 its essential to get certain products manufactured near the market

S t r a t e g y : P o r t e r ' s F i v e Fo r c e s M o d e l : a n a l y s i n g i n d u s t r y s t r u c t u r eDefining an industry

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).

Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.

The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are

-The threat of entry of new competitors (new entrants)- The threat of substitutes- The bargaining power of buyers- The bargaining power of suppliers- The degree of rivalry between existing competitors

Threat of New Entrants

New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include

- Economies of scale- Capital / investment requirements- Customer switching costs- Access to industry distribution channels- The likelihood of retaliation from existing industry players.

Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:

- Buyers' willingness to substitute- The relative price and performance of substitutes- The costs of switching to substitutes

Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:

- There are many buyers and few dominant suppliers- There are undifferentiated, highly valued products- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)- Buyers do not threaten to integrate backwards into supply- The industry is not a key customer group to the suppliers

Bargaining Power of Buyers

Buyers are the people / organisations who create demand in an industry

The bargaining power of buyers is greater when

- There are few dominant buyers and many sellers in the industry- Products are standardised- Buyers threaten to integrate backward into the industry- Suppliers do not threaten to integrate forward into the buyer's industry - The industry is not a key supplying group for buyers

Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on:

- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader

- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting

- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry

- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier

- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less

- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.

Fast moving consumer goods (FMCG)  – or Consumer Packaged Goods (CPG) – are products that

are sold quickly and at relatively low cost. Examples include non-durable goods such as soft

drinks, toiletries, and grocery items.[1][2] Though the absolute profit made on FMCG products is relatively

small, they generally sell in large quantities, so the cumulative profit on such products can be substantial.

Contents

  [hide] 

1   Scope

2   References

3   See also

4   External links

[edit]Scope

The term FMCG refers to those retail goods that are generally replaced or fully used up over a short

period of days, weeks, or months, and within one year. This contrasts with durable goods or major

appliances such as kitchen appliances, which are generally replaced over a period of several years.

FMCGs have a short shelf life, either as a result of high consumer demand or because the product

deteriorates rapidly. Some FMCGs – such as meat, fruits and vegetables, dairy products and baked

goods – are highly perishable. Other goods such as alcohol, toiletries, pre-packaged foods, soft drinks

and cleaning products have high turnover rates.

The following are the main characteristics of FMCGs:[1]

From the consumers' perspective:

Frequent purchase

Low involvement (little or no effort to choose the item -- products with strong brand loyalty are

exceptions to this rule)

Low price

From the marketers' angle:

High volumes

Low contribution margins

Extensive distribution networks

High stock turnover