FMCG New Opportunities

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FMCG Market – Historical Trends and Growth Drivers; North Zone Developments 01

Modern Trade 04

FMCG Market – Urban vs Rural 08

Information Technology and FMCG Companies 12

Innovation: A Framework for FMCG Companies 16

Sustainability Branding 19

Contents ForewordThe Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess ofUS$ 24 Bn. It has a strong MNC presence and is characterized by well established distribution networks, intense competition between the organized and unorganized segments and low operational cost.

All businesses face the twin issues of how to survive and grow in spite of the challenging external environment and intensifying competition. In view of this, successful companies continuously look for new operational paradigms. Coupled with this are rapidly evolving consumer tastes and preferences and regulatory, trade and logistics development. Given the changing scenario, FMCG companies need to look beyond their normal strategic frameworks and evaluate opportunities in areas where they may not have ventured earlier using innovation and new technologies as part of their arsenal for surmounting emerging challenges.

CII has undertaken various initiatives in the FMCG sector. Amongst them, some of the key activities have focused on GST, Environment Protection Act notification on use of plastics; Sugar Representation; Cross Border Taxation and the Competition Act. Today's conference will discuss New Opportunities, Wider Markets and Sustainable Business in the FMCG Sector.

The sub topics of this Conference would weave in the interrelated aspects of the Modern Trade; Market trends Urban Vs Rural; Integrated Role of Information Technology; Innovation and its critical impact on the FMCG business and the emerging role of Branding with Sustainability.

The Conference Programme and the White Paper prepared by our Knowledge Partner, YFactor would discuss how FMCG Companies can grow and prosper in times to come.

Wishing you all success for the event.

Mr. Divyaroop Bhatnagar

Managing Director

YFactor Marketing Private Ltd

Mr. Vikram Bakshi

Conference Chairman

Joint Venture Partner and

Managing Director

McDonald's India (North & East)

FMCG NEW OPPORTUNITIES

02

The FMCG Market in India is estimated at FMCG Market Growth is correlated with GDP growth 1around Rs 130,000 Crores (US$ 24Bn) in 2010. and we have seen acceleration from close to 6% to

India's robust consumption patterns ensure relatively over 15% in FMCG Market Growth from the middle of 2steady growth even in times of economic slowdown. the decade when India's GDP started growing faster.

Future projections indicate a projected growth rate of Per Capita Consumption for key FMCG Categories is 12 – 15% over the next few years leading to a very much lower than for other developing countries projected market size of Rs 230,000 – Rs 260,000 3indicating substantial headroom for growthCrores (US$ 42Bn – US 47 Bn) by 2015. Historically,

North Zone – FMCG Development

4 52011 Population 2011 GDP (RsCrores) Per capita GDP

Chandigarh 10,54,686 20,704 1,96,305

Haryana 2,53,53,081 2,57,793 1,01,681

Himachal Pradesh 68,56,509 52,426 76,462

Jammu & Kashmir 1,25,48,926 47,709 38,018

Delhi 1,67,53,235 2,58,808 1,54,482

Punjab 2,77,04,236 2,21,332 79,891

Rajasthan 6,86,21,012 3,03,358 44,208

Uttar Pradesh 19,95,81,477 5,88,467 29,485

Uttarakhand 1,01,16,752 77,580 76,685

North Zone 36,85,89,914 18,28,177 49,599

All India 1,21,01,93,422 73,06,990 60,379

North Zone % 30.5% 25.0%

US$ Per Capita China Indonesia India

Skin Care 7.9 4.3 0.8

Shampoo 2.3 2.1 0.6

Ice Cream 3.3 1.7 0.4

01

1US$ to INR assumed at 552Source Technopak and Booz Analysis3Source Euromonitor 2010 and HUL Presentation 20114Census of India 5VMW Analytics Services

Per Capita GDP is co-related with FMCG Market Size. States like UP, Rajasthan and J&K are below the As GDP increases, consumers tend to use more national average while Chandigarh, Haryana and sophisticated products especially in categories like Delhi are well above. This variation means that North Personal Care. The North Zone has 31% of India's Zone has a varied landscape for FMCG products and population but contributes only 25% of National GDP. all segments of the market have a presence here.

6Source AC Nielsen and Technopak

The FMCG landscape in North India is also very o Mrs Bector's has given a run for their vibrant due to the following reasons: money to the large MNCs with innovative

and well-presented food products.• Tax concessions provided by the hill states of J&K, HP and Uttarakhand have resulted in most o Bagrrys has come up with a range of FMCG companies moving their manufacturing healthy breakfast cereals, oats and muesli to these locations. This has resulted in significant for the health c o n s c i o u s m o d e r n I n d i a n employment generation and growth in GDP. consumer.Locations like Samba and Kathua (near Jammu),

o Ghari Detergents based in Kanpur have Baddi, Nalagarh and Parwanoo (in Himachal

become a major force in the Detergents Pradesh) and Haridwar, Pantnagar and

market by initially keeping a strong focus Dehradun in Uttarakhand have become m a j o r

on their home market of UP before centres for FMCG manufacturers. This has also

expanding to other parts of the country. resulted in many packaging and raw material

FMCG Sectors and Categoriessuppliers setting up their factories nearby. From the supply chain point of view, the region has Packaged Foods including Beverages account for seen steady growth. Many FMCG companies close to 45% of the total FMCG Market. Personal have established Mother Godowns in locations Care contributes 26% and Home Care 15%.like Zirakpur, Punjab to cater to all India logistics. The balance comprises of Tobacco products.

Underpenetrated categories such as Fruit Juices, • Per capita income and GDP growth has been Skin Care and Hair Care exhibit faster growth rates extremely high in the states of Punjab, than categories such as Cooking Oil, Toothpaste, Chandigarh, Haryana, Delhi and West UP. This Laundry and Toilet Soaps where usership is nearing has resulted in the development of sophisticated

6saturation.FMCG categories like Personal Care faster than the rest of the country. FMCG Players

• Innovative companies from the North Zone have The FMCG Sector comprises of five types of

driven growth in a variety of categories, Some players:

examples are given below:

o Dabur needs no introduction. They have leveraged the power of traditional Indian Ayurveda to create a who l e r ange o f • Entrenched, well established MNCs such as products that touch the hearts of Indian HUL, Reckitt Benckiser, ITC or Nestle who have consumers. developed a deep understanding of the Indian

Consumer over the years. They are good o Kashmir Apiaries based in Punjab are the examples of 'think global and act local' Pepsi largest exporters of honey in India. They and Coke also fall into this category though they have also pioneered a large range of are later entrants.honey varieties and blended products for

the Indian market including Organic Honey • Relatively new MNC entrants. Examples such as that has become very popular in the LÓreal, Amway, Kellogg or P&G. In general these Modern Trade. companies tend to be more global in outlook

and treat the Indian market as an integral part of o Bharat Box headquartered in Ludhiana, their Regional/Global Strategy.h a v e l e v e r a g e d t h e i r p r o d u c t

deve lopment , supply cha in and • Large Indian companies such as Dabur, Godrej, manufacturing capabilities to enter the Marico, Emami and CavinKare. Over the years market with a range of FMCG products.

FMCG Market Size and Growth

FMCG Market – Historical Trends and Growth Drivers

these companies have grown rapidly in scale Herbals, Crax, Forest Essentials and others who and sophistication and the quality of their are currently regional or limited players but are keen

7management is rapidly levelling the playing field. to scale up rapidly.

• Single category large Indian companies such as It would be fair to say that the MNCs are facing keen Nirma, Ghari, Power Detergents and Ruchi competition from local players in India. Access to Soya. technology, sophisticated design and packaging and

high quality advertising has narrowed the capability • Emerging Indian companies, better known for gap between local players and the MNCs. their brands such as Vasmol, Himgange, Lotus

“Modern/Organised retailing is growing at an base and expanding their business with newer aggressive pace in urban India, fuelled by organized retail formats and intense competition

8bourgeoning economic activity. Organized retail driving innovation in formats.”revenues are expected to increase from an estimated

Between 2005 and 2009, Organised Retail in India US$ 12.9 billion per annum in 2005-06 to more than 9has grown at 24% CAGR.US$ 43 billion by 2009-10. A large number of domestic and international players are setting up

03

Extrinsic Factors

Growth in GDP and Disposable Income

Increasing Urbanisation

Media Explosion

Rural Prosperity

Government Policy (NREGA, Tax Reform)

Growth of Modern Trade

Mega Trends in Health/Wellness and Environment Protection

Intrinsic Factors

Competition leading to:

• Cost effectiveness and keeping pricing in check

• Intense market activity (new launches, relaunches, advertising and sales promotion)

Innovation in product development, marketing and distribution strategies

Increasing usage of IT in FMCG companies

Integration of the product and service experience (Lakme, Streak, Kaya)

Encouraging Up Trading – HUL in Skin Care

It has often been said that India offers a bewildering affecting growth. The following issues that are of diversity in terms of languages, religions, castes, paramount importance will be taken up for discussion income stratification and education. This vibrant in this paper and in the conference today:marketplace has found a fitting resonance with • Impact of the Modern TradeFMCG Marketers. As the consumer market deepens

• Urban vs Rural Marketand matures marketers have hastened to widen their offerings to cater to all shades of this diversity. There is • Role of IT and Innovation inFMCG companiesa place for every kind of consumer product – at all

• Sustainability Brandingprice points, with every consumer benefit possible catering to myriad geographies.

Conference Themes

Several important themes emerge from the foregoing analysis of the FMCG Sector and the key drivers

Modern Trade

10Figure : Organized Retail Penetration in Select Economies

11Retail is an extremely significant part of the Indian Economy estimated at 39% of GDP. Yet organised retail contribution is only at 4.8% of the total market (2009) especially when compared to other developing countries. (Figure 1)

7Source YFactor Presentation

8IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in)9IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis10IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis11Confederation of Indian Industry & AT Kearney Report (2006)

4.80%

20%

30%

40%

55%

81%85%

India

China

Indo

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Mala

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Thaila

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Taiw

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FMCG Growth Drivers

The factors influencing growth of the FMCG Sector may be classified as Extrinsic or Intrinsic to the sector.

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Factors contributing to low penetration of store this could have an impact on yield per organised retail in India square foot or prof i tab i l i t y. Th is factor

effectively rules out setting up mega stores 1. Modern Trade is an Urban Business: 30-40 Km from the city centre as in mos t Urbanization is an integral part of the process of developed markets. Also such stores would economic growth. As in most countries, India's exclude the bulk of Indian consumers who do towns and cities make a major contribution to not have the means of transport to travel the country's economy. With less than 1/3 of and shop at such distances. India's people, its urban areas generate over 2/3

of the country's GDP and account for 90% of b. Increasing Property prices in Urban India: 13government revenues. Based on the above, city centric stores seem

to be the way forward. However, such city a. Congestion in Urban India: Lack of good centric locations hugely increase the cost of public transportation, traffic and parking real estate. Property prices in U r b a n I n d i a woes makes store access a factor. If stores have doubled in the last few years are 'destinations' then convenience of encouraging retailers to rent not buy. Rental access is an issue and they could be l imited clauses come with a 15% every three years to their catchment area only. For a very large 14escalation.

2. Current Shopping Habits of Urban Indians: The b. Larger product range for an increasingly urban Indian is very used to convenience demanding urban consumer o f the

16catered to by traditional retailing with primary “many Indias”.presence of neighbourhood 'kirana' stores,

But replacing current shopping habits is not easy. And 15push-cart vendors, 'melas' and mandis' .They with high costs there is an increasing need to make offer home delivery, easy access and a personal modern trade profitable faster. For FMCG products, touch. Indians also tend to buy frequently, opportunities could be in:especially food and in the case of the lower income strata small volume, low unit price packs. The weekly or fortnightly shopping habit does not work in India, where 'fresh' food items are bought virtually on a daily basis.

FMCG and Modern Trade

Can Modern Trade compete with current traditional sales distribution networks?

1. De-intermediation: By directly supplying products to stores, companies are effectively

a. Home Del ivery: The highest level of cutting out the wholesaler margins and can offer convenience – no traffic, no parking. You better rates to Modern Trade which could result could guarantee t icket s izes by having in increased profitability.minimum orders and reduce costs by

2. Economies of Scale: Directly supplying stores servicing orders directly from warehouses.results in lower transportation costs, savings on

b. Smaller convenience stores that have easy time and increased efficiency.access to consumers. Prime locations are

3. Intensity of Interaction and Measurement: unlikely to be in malls which attract footfalls Modern Trade offers an opportunity for bent more on entertainment than grocery companies to directly i n t e r a c t w i t h t h e shopping, but more in res ident ia l a re a s consumer. Observe trends, run promotions, which can then cater to an everyday need. assess the effectiveness of promotional The target would be for repeat consumers, activities and promote general awareness of constant footfalls and high conversion rates. their brands. Companies should also view their Such stores would need to differentiate shelf space as a platform for this kind of themselves from traditional m o m a n d p o p interaction and take advantage of it. shops by offering better hygiene, consistent

products availability, longer working hours Challenges to Modern Trade in current Market and a t t rac t i ve p r i c ing based on a situationconsolidated supply chain.

1. Convenience of Access: Challenges of Urban 2. Supply Chain: Organized retailers are going to Living in India are those of space and time.

be increasingly interested in reducing time-to-Congestion, traffic and parking woes are a market. To achieve this, it will be important to reality. Kirana stores and other traditional 'mom invest in inventory management and related and pop' outfits are more convenient with their technology for capturing sales data, forecasting easy access (walking distance) and home demand and gene ra t i ng au toma t i c delivery systems. Modern Trade could have replenishment. Decreasing inventory levels will some distinct advantages:also require strong backward integration with

a. Hygienic, clean shopping environment distributors or manufacturers. Retailers will also 12 ZENITH International Journal of Multidisciplinary Research Vol.2 Issue 1, January 2012, ISSN 2231 578013 :http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21207992~pagePK:141137~piPK141127~theSitePK:295584,00.html14International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 24 (2009)© EuroJournals Publishing, Inc. 200915IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in) 16FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 31

Retail spending habits in India

12Figure : Retail Categories

There is clearly a huge opportunity for growth in all these categories in the Organised Retail Sector.

Home, 3% Pharma, 2% Entertainment, 1%

Health & Beauty, 1%Books, Music & Gifts, 3%

Durables, 10%

Footwear, 13%

Clothing &Textile, 36%

Watch & Jewellery, 17%

Food &Grocery, 14%


Retail spending habits in India

0807

To face this challenge, FMCG players will need to estate in India and customers' shopping habits. exploit their brand power, develop relationships with FMCG companies have faced challenges too due to their retail partners, provide better rates and invest the increasing power of the modern retailer. As the more in developing and expanding their categories. presence of Modern Trade deepens and intensifies,

FMCG companies need to understand how to Summary and Key Takeawayspartner with them to maximise mutual benefits.

Modern Trade has been growing rapidly in India. It has faced challenges too based on the high costs of real

Here's a simple statistic. Over 300 million Urban capital income is 4X that of rural income, you start Indians live in 5,000 metros, cities and towns with an understanding the concentration of purchasing average population density of 5,000 people per sq. power in urban areas – why marketing to urban km. But 800 million Rural Indians live in 627,000 consumers has been the 'low hanging' fruit, while villages with an average population density of only rural marketing has faced huge economic challenges. 150 people per sq. km. When you factor in Urban per

18Figure : Private Label Share in overall Organised Retail Sales

FMCG Market – Urban Vs Rural

Overview

The Urban and Rural segments of the Indian FMCG • explosion in cable TV, newspapers, mobiles and Market have always had different growth paths. internet => higher media penetrationUrban 'India', although much smaller, in absolute • easier distribution access =>lower distribution household numbers, had much higher per capita costs and better controlsincomes and so traditionally accounted for the largest

FMCG consumers were rapidly getting penetrated segment (if not majority) by value for most FMCG and simultaneously trading up to better (and higher companies. Key drivers of urban markets weremargin) products. This was a ready market with

• increasing urbanization => more absolute visible drivers, and everyone wanted their share. households Classical marketing strategies were 'trickle down' –

• industry & services grew faster than agriculture focused on penetrating Metros, then working down => faster growth of urban incomes Tier I and II towns to smaller markets over time.

17FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 3718FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 38,Technopak, Booz & Company analysis

Number of Villages and UAS / Towns by size class and their population

Ranges No. of Villages Population Ranges No. of UAs/Towns Population

Total 593,615 742,490,639 Total 4,378 286,119,689

Less than 100 45,276 2,274,375 Less than 5000 192 667,772

100-199 46,276 6,912,023 5,000-9,999 879 6,658,356

200-499 127,511 43,960,187 10,000-19,999 1,346 19,458,295

500-999 145,402 105,274,341 20,000-49,999 1,163 35,154,857

1,000-1,999 129,977 183,294,133 50,000-99,999 404 27,832,412

2,000-9,999 80,413 239,184,866 1,00,000-4,99,999 320 60,554,358

5,000-9,999 14,799 98,112,136 5,00,000-9,99,999 39 27,503,626

10,000 & above 3,961 63,478,578 10,00,000-& above 35 108,290,013

Source: Primary Census Abstract, India, Census of India 2001.

Switzerland UK Germany Spain France Australia USA India World Average

46%

40%

35%

29%27%

21% 20%

11%

20%

need to optimize logistics further in terms of penetration in India is quite low as compared to other warehousing and transportation etc. For this it countries indicating a potential for future growth. (See

17will be imperative to increase supplier collaborations. Figure 3) This could pose a major challenge to FMCG companies in the future.

3. In Store Brands: They give a retailer the highest profitability as margins on these brands are 30-35%. They also help distinguish between retailers as they are unique to the store. Current


Unfortunately, the entry of new MNC companies, and and larger P&Ls, they could invest in small distributor Large and Emerging Indian companies, turned or rural wholesaler coverage programs, coupled with marketing in Urban “India” into an expensive slugging rural consumer activation programs such as match with your competitors. sampling. In many cases they were the 'first and only'

rural brands. Subsequently, strategic thinking like By contrast, the lure of tapping large numbers of “Goldmine at the Bottom of the Pyramid” has under penetrated consumers in Rural “Bharat” has become mainstream. Considering that only 38% of always fascinated marketers. Traditionally, the India's population will be Urban by 2020, rural Entrenched MNC's were active in rural markets, keen marketing is an essential part of every FMCG to fuel growth by seeding their brands amongst new company's plans.consumers and building competitive advantage

through consumer loyalty. With their higher volumes

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Exploiting the under penetrated potential of 'Bharat' run rural distribution systems have a natural verses 'India' represents an obvious opportunity for 'economic reach', beyond which the stockist loses brands; however the marketing and distribution methods money. Any distribution activity beyond this natural to reach those remote customers are not so clear. 'economic reach' has to be supported by the

company, otherwise it won't happen. As an example, Challenges of Rural Markets - Reachonly 3% of India's villages, with a population above

The biggest single challenge of 'Bharat' is the ability of 5,000, were found to be viable for rural distribution by marketers to profitably reach and sell to these leading FMCG companies. Thus, most of the FMCG consumers and retailers. Typically, revenue per day products reaching rural retailers and consumers per rural sales route may be only 25% that of urban move still move through the wholesale markets. This routes – and van distribution costs like fuel and leads to a lack of control and focus that is of concern salaries may be 50% higher. The combination of to FMCG companies.lower revenue and higher costs means that, company

Penetration and per capita consumption (Rural - urban penetration 2002)

Category Market Size Urban Rural Total(US$ million) Penetration (%) Penetration (%) Penetration (%)

High Penetration categories >50% Drive upgradation and consumption

Fabric Wash 1210 89.6 82.9 84.9

Personal Wash 938 97.9 90.7 92.8

Packet Tea 635 91.2 82.2 84.9

Low Penetration categories: Drive Penetration

Toothpaste 409 69.8 32.3 43.5

Skin 312 36.6 19.8 24.7

Hair Wash 230 40.1 16.3 23.3

Talcum Powder 148 66 36.8 45.1

Branded Atta 107 44 30.2 34.3

Dish Wash 102 54.6 11.5 24.4

Instant Coffee 55 - - -

R&G Coffee 30 - - -

Ketchups 25 12.5 0.7 4.2

Deodorants 19 - - -

Jams 13 - - -

Source: HLL, Indian Readership Survey.

FMCG Distribution System

Super StockistStockistKey Accounts

UrbanWholesaler

UrbanRetailer

VanSales

Modern Trade

ProjectShakti

SubStockist

Urban Retailer

RuralWholesaler

RuralRetailer

RuralConsumer

RuralRetailer

RuralRetailer

C&FA

Factory

Bulk of Rural Sales

19YFactor Client

Over the years FMCG companies have tried various • Van operations that are partially or fully methods to directly reach the rural areas. On the subsidised by the companyMarketing side since the reach of traditional media

• HUL has started Operation Shakti that is aimed used to be poor they went in for:

at directly reaching rural consumers• Wall and shop paintings

• Rural oriented supermarkets like Hariyali and • Cinema and demonstration vans Khushali

• Participation in rural fairs and festivals • E Choupal

With increasing penetration of TV and other It is fair to say that direct reach to the rural areas is still conventional media, reliance on these activities has limited. The key challenge is that any one company's come down to some extent but has not been turnover is not sufficient to pay for the higher costs eliminated altogether. that rural distribution entails. As explained above,

direct 'economic reach' to the rural areas is limited to On the distribution side, FMCG companies have

the largest villages while the large extent of rural India experimented with several techniques:

is still fed through wholesale markets.

‘Wholesale on Wheels' – The United Villages retailers had to visit the nearest town to procure 81% 19Experience of the goods that they were selling. These visits were

typically made twice a month leading to a large As discussed above only 3% of India's villages are

amount of cost and disruption in their operations.accessible through conventional single company run direct distribution systems. UV found that rural United Villages has set up a pilot project in Jaipur


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IT has become an essential part of operations in IT • How to choose the right one for my business? companies. Broadly, the role of IT encompasses the

• Implementation is difficultfollowing aspects:

• Failure rates are high• Financial accounting, MIS, planning and control

21Experience suggests that an FMCG company in • Sales force automation and analytics

India with a turnover of over Rs 200 Crores may be • Communication – Since this aspect pervades ready for an ERP installation. Such a company will in

through all companies, not only FMCG, it will not all probability have:be discussed here.

• Multiple manufacturing plantsNot so long ago, financial accounting and MIS were

• Distribution in more than one region. There will handled manually in most FMCG companies.

be a HO and Regional OfficesThereafter accounting packages like Tally started

• Distributed purchasing – there may be a HO making their appearance. Many companies went in purchase function but there is likely to be local for computerization of their accounting systems but purchasing at the plant levelfailed to integrate the supply chain and sales. Later

on, this led to a plethora of software 'fixes' most of • 200+ employeesthem developed in house. As companies grew, it has

In our view, one of the most critical issues facing led to a number of spread sheet based systems that FMCG companies is that over the years they have have become very cumbersome and complex to

20 developed 'work around' solutions for many handle.accounting and other matters. Similarly, they may

The earliest ERP systems started out as MRP have a multiplicity of distribution systems. As an (Manufacturing Resource Planning) systems. They 22example Company X has the following distribution have now evolved into fully integrated ERPs systems in place:encompassing all aspects of a company's working.

• Delhi/NCR – C&FAAll the larger FMCG companies have adopted ERP systems already. Smaller companies have been • Rest of North India – CSAslower to move in this direction. There are many

• Mumbai – 3rd party outsourced systemapprehensions about ERP systems that have been expressed by smaller FMCG companies: • South India – Super Stockists

• ERP systems are very expensive The field force is a blend of in house Territory Sales

11

Information Technology and FMCG Companies

20YFactor Analysis 21YFactor experience spread over several FMCG companies22YFactor Client

(Rajasthan) catering to 5000 rural retailers near also carried by the UV system.Jaipur. The pilot has now been extended to Kota and

• Orders are taken on a mobile phone application will extend other parts of the state by the year end.

specially developed for UV. These orders are The salient features are:

sent to the central computer and serviced within • UV Sales Executives operating on motorcycles 2 days. The mobile based application provides

procure orders from rural retailers operating on a rich information for the company's operations.weekly or fortnightly contact cycle.

• Since goods are aggregated across companies • Goods are procured from Cash & Carry stores the combined sales volume is sufficient to pay

(Carrefour, Metro and Walmart) on a daily basis. for distribution costs.No inventory is maintained by UV. The product

• UV is leveraging its rural reach to extend other range is carefully selected and includes FMCG

services for its rural customers as well as products from major companies as well as

extending marketing support for its distribution smaller ones. Durables and store brands are

partners.

Summary and Key Takeaways

As competition in the urban areas intensifies, the rural various systems for reaching the rural areas with market represents a major opportunity for FMCG varying degrees of success. With an underpenetrated companies. However, the high cost of distribution has rural population and growing rural incomes this been a barrier for direct distribution. Most of rural segment will continue to be of high interest to FMCG demand is still being met through the wholesale marketers in future.trade. FMCG companies have experimented with


Incharges and outsourced Sales Personnel. Objective decision processPurchase has a multiplicity of vendors with varying

The criteria and the scoring system must be agreed in trading terms for the same material at different

advance prior to viewing any potential systems. The locations. Materials are not coded and there is no

criteria must be wide-ranging and decided upon by standardization. In such an environment, it becomes

as many objective people as possible within and difficult to proceed with implementation of an ERP

external to the enterprise.system immediately. Our experience suggests that it

Full involvement by all personnelis better to undertake a comprehensive Business Process Review (BPR) before embarking on an ERP The decision on the system must be made by all implementation. In general, the less the stakeholders within the enterprise. "It requires top customization required for an ERP the better would management leadership and participation… it involves be the implementation. virtually every department within the company".If an 'in principle' decision to evaluate the benefits of 24Implementationan ERP implementation has been taken in the

There are several pitfalls to avoid during company, the following steps may be required for implementation. While there is no 'one size fits all' taking it forward:solution, the following issues are very important:

• Discussion on whether to go with a BPR. In • Reference to the Business Case – keep what many cases, the companies who undertake

you had agreed earlier with respect to the cost BPRs are also ERP implementers and the benefits always in mind while implementing.discussion will help to clarify the way forward.

• Choose your implementation partner with great • Preliminary discussions with a few ERP vendors. care.This will help to obtain a ball park idea of cost and

a first cut feel of the various ERP solutions. Site • Have a core in-house team dedicated full time to visits to reference clients will also be helpful. the implementation. This must be a cross

functional team drawn from all departments • Formation of a core in-house team headed by involved with the ERP. There must be an internal the CEO/CFO/CIO to evaluate ERP solutions. champion – preferably the CIO.The same team should be enhanced later for

implementation. • Have frequent reviews with top management.

• Structured evaluation of ERP options. Many • Don't be wedded to your own processes even if methodologies are available for this purpose and you have gone through a BPR. There is a high it is outside the scope of this article to present risk and cost attached to customization. them. However, some of key principles to be

23 • Avoid the 'big bang' approach. Most smaller followed are:companies don't have the resources to handle

Structured approach all the implementation in one go.

A detailed document outlining all the steps that will be followed for the evaluation should be prepared by the core team prior to starting the evaluation process.

Focused demonstrations

There is no point in demonstrations by vendors that do not pertain to the FMCG Business. Similarly, site visits to reference FMCG clients is a good idea.

1413

Sales force targets, retail schemes and product The advent of hand held devices and improved promotions are usually based on Secondary Sales. communication technology has changed the This is done in order to prevent dumping at the scenario in the last few years. The front line sales stockist level. Primary Sales which actually generate person now carries a hand held device on which he revenue for the company are on a replenishment books retail orders (Secondary Sales). These are basis for the stockist. Hitherto most companies used downloaded into the Stockist's computer at the end to follow a manual system of recording and of the day and serviced the next day. Compilation is monitoring secondary sales. The company Territory done automatically and a wealth of information is Sales in Charge would fill up a daily sales report which available for analysis including details of sales would record all sales made to retailers on that day. personnel working, productivity, schemes and target Subsequently a 'Stockist Sales and Stock Control achievement. One example of a hand held system

26Statement' would be prepared every month. Figures implemented by Hemas, Sri Lanka is shown below. would be manually compiled upto the national level. Many modifications are possible to suit a particular These systems have remained virtually unchanged for company's requirements.the last 40 – 50 years.

23Adapted from Wikipedia24Adapted from Michael Burns – 180 Systems

25R.A. Anthony 26YFactor Client

Factory

Secondary Sales

C&FA

Stockist

Retailer

PrimarySales

Benefits of ERP Implementation • Facilitate day to day management

There are 3 key areas in which ERP implementation o Real time information access25will help the company o Reporting

• Help reduce operating cost o Data integrity and commonality across all o Reduce inventory parts of the company

o Lower production costs o Activity based costing

o Manpower savings in finance and planning • Support strategic planningareas o Mid-term forecasting

Sales Force Automation retailer and are hence not the sales that are recorded in the company's books.

FMCG companies are strongly driven by Secondary Sales. These refer to sales made by the stockist to the


16

“Innovation is the specific act of entrepreneurship. It is • Amul who introduced the concept of milk co-the act that endows resources with a new capacity to operatives and helped reduce milk shortages.create wealth” Peter F. Drucker

• HUL who innovated the world's first fairness All of us are aware of the tremendous power of cream (Fair & Lovely) that tapped into a deep innovation. It is a well-known fact that a powerful new seated need of Asian and African consumers. concept gains high market shares while followers Now all FMCG companies have fairness have to make do with much smaller figures. One of products as a major part of their portfolio.the most striking examples of innovation in the recent

• Reckitt Benckiser who successfully extended past has been the success of Apple. Products such

the germ-kill property of Dettol into toilet soap.as I Phone and I Pad were world firsts and have

• Hygienic Research Institute who introduced hair resulted in the company achieving a valuation of $600 27 dye in a hair oil form liked by Indians. Their Bn . Companies like Reckitt Benckiser and J&J have

28 product, Super Vasmol is a block buster.a strong focus on innovation. One of the key metrics used is the percentage of turnover coming from new • Low cost manufacturing:products launched in the last 36 months. For most

29 o The Nanosuccessful companies this should be at least 15% . Some of the most successful examples of FMCG o Pharmaceuticalsinnovation in India have been:

o Product development of low cost FMCG • Nirma who pioneered the concept of an products by an Indian company for a US MNC

economical and effective detergent powder as How do we identify an innovative company or what an alternative to laundry soap and built a are the factors required for fostering an innovation revolutionary demand pull model based on culture within an organization? This paper examines intensive advertising.two aspects:

• HUL who realized that Indian housewives prefer • How do we evaluate where our company stands washing their clothes without soaking them in a

on innovation? Are we good at it or not and in bucket while still wanting better performance what directions to we need to improve. than laundry soap. This resulted in the launch of

Rin detergent bar. Later, similar thinking led to • How to create an innovation oriented culture and the introduction of Vim as a dish wash bar. process within the company?

15

Advantages • Data is transferred at the end of the day to the company from all parts of the country. It can also

• Order booking at the retail level is fast and be real time if the hand held device 'talks' directly

accurate. The sales person is well aware of to the central computer.

product availability, schemes and his daily target. Pricing is also controlled as it is built in Summary and Key Takeawaysinto the system. Information technology is rapidly changing the way

• The hand held device records all control that FMCG companies operate. ERP systems are information like time of first and last call, time becoming more affordable and even mid-size spent in the market and productivity of the companies can take advantage of the increased sales person. efficiency that they provide. Similarly, Sales Force

Automation using hand held devices can • Replenishment for the Stockist is automatic and

revolutionize the way that companies manage their works on a re-order level mechanism. The

secondary sales systems. stockist's c o m p u t e r t h ro w s a n o rd e r automatically to the C&FA and goods are dispatched accordingly. The hand held system links seamlessly with the company's ERP.

Innovation: A Framework for FMCG Companies

27CNN Money 10.04.1228YFactor Analysis29YFactor Analysis30YFactor Client

Hand HeldSystem Operation


18

conventionally structured with a constituted leader or Stage-Gate Processdecision making process. However, senior Cross functional teams are best used in conjunction management review and feedback is critical for the with an established Stage Gate or Innovation Funnel team to function effectively. Cross Functional Teams process. It is a well-known fact that barely 1 in 10 new have been used successfully through the entire product launches actually succeed. In order to innovation process. From ideation to evaluation to increase the percentage of success companies need implementation. to implement a structured stage gate process.

17

The first important issue is that innovation is not Innovation Radar' that identifies 12 key vectors or restricted to product innovation alone. Nirmalya directions of innovation in a company.In essence,

31Kumar talks about India's 'invisible innovation' innovative ideas should pervade through the comprising of work that we do not see – the 'Intel organization and employees need to strive to do

32 things differently and better in all aspects of their Inside' concept. Mohan Sawhney of North Western work.University has propounded the concept of 'The

The Innovation Radar – Mohan Sawhney

Using the Innovation Radar to evaluate your important for building innovation capability. In our 33company's innovative strength in all areas of activity view, innovation rarely comes from the outside. It

34 emerges from a deep understanding of consumer can help companies in the following ways:needs and organizational capabilities. Thus, the twin • Innovation Diagnostic Tool - Assess your concepts of ideation and filtration are the key drivers company's innovation performance and of the innovation process:discover overlooked opportunities • Cross functional teams for relevant ideation and • Expert Assessment - Discover how your

follow through.customers, vendors, distributors, and network 35participants perceive your innovation capabilities • The 'Stage Gate' or Innovation Funnel process

for providing a systematic filtration technique for • Competitive Assessment - Analyze the new ideas.innovation capabilities of competitors

A cross-functional team is a group of people drawn • Brainstorming Catalyst - Explore dimensions of from various departments within the organization innovation in a systematic & holistic manner such as R&D, Marketing, Sales, HR, Finance or IT. It

• New Venture Design Guide - Design and track will include people at varying levels and may also the development of complete business systems include outside stakeholders like Advertising and MR

agencies, Suppliers or external consultants. The • Portfolio Tool - Manage innovation efforts as a team thus constituted is multidimensional in nature. It portfolio across your company responds best to directional guidelines rather than

Having identified the key areas where your company specific goals. Such teams gather information lacks innovative depth, two key concepts are through a multiplicity of sources and they may not be

“A Stage-Gate Process is a conceptual and • Where mediocre projects are culled out and operational roadmap for moving a new-product resources are allocated to the best projectsproject from idea to launch. Stage-Gate divides the • Focused on three key issues: quality of effort into distinct stages separated by management execution; business rationale; and the quality of decision gates. Cross-functional teams must the action plansuccessfully complete a prescribed set of related

• Where scorecards and criteria are used to cross-functional tasks in each stage prior to obtaining 37evaluate the project's potential for success”management approval to proceed to the next stage

of product development. Stage-Gate divides this Conclusions and Key Takeawaysprocess into a series of activities (stages) and

36 • Innovation is not restricted to product decision points (gates).development but encompasses all areas of a

Stages are: company's operations. It is vital to create a culture of innovation.• Where the action occurs - the project team

completes key activities to advance the project • Companies should undertake a review of their to the next gate position on innovation and identify areas of

improvement.• Cross-functional (there is no R&D or marketing stage) and each activity is undertaken in parallel • A structured innovation process needs to be put to accelerate speed into place using cross functional teams for:

• Where risk is managed - vital information is o Identifying innovative ideas for improving all gathered - technical, market, financial, aspects of business operations including new operations - to manage risk product development.

• Incremental - each stage costs more than the o A stage gate or innovation funnel process preceding one resulting in incremental should be instituted to reduce risk and commitments. As uncerta int ies decrease, increase the chances of s u c c e s s f u l expenditures are allowed to rise and risk is innovation.managed

Gates are:

• Where the Go/Kill and prioritization decisions are made

31http://www.ted.com/talks/lang/en/nirmalya_kumar_india_s_invisible_entrepreneurs.html32 Mohan Sawhney – The Innovation Radar33http://sloanreview.mit.edu/the-magazine/2006-spring/47314/the-different-ways-for-companies-to-innovate/34http://www.devoteam.se/index.php?option=com_content&task=view&id=280&pays=se&Itemid=480&lang=535Stage Gate International

36Stage Gate Navigator37Stage Gate International

Stage-Gate® Product Innovation Process

Scoping Build

Business Case Development Testing and Validation

Second Screen

Go to Development

Go to Testing

Go to Launch

Launch

Idea Screen

GATE 1 GATE 2 GATE 3 GATE 4 GATE 5STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

• Supply Chain• Channel • Ecosystem

• Product• Platform• Solution

• Management • Value Capture • Process

• Customer • Interaction• Marketing Communication

Partnerships Offerings

Operations Customer


20

There is a need to define exactly what 'Sustainability in the public interest and will profit from doing so is Branding' is. In the recent past there have been a fundamentally flawed.” - AneelKarnaninumber of references to 'Green Brands' and to Contrast these views with the concept of trusteeship 'Sustainable Brands' The commonly accepted view at put forward by Mahatma Gandhi:this point seems to be:

“Supposing I have come by a fair amount of • Green Brands are those brands that consumers wealth—either by way of legacy, or by means of trade

associate with environmental conservation and and industry—I must know that all that wealth does 38sustainable business practices. not belong to me; what belongs to me is the right to • The terminology 'Sustainable Brands' can be an honourable livelihood, no better than that enjoyed

misleading as 'Sustainable' may refer to the by millions of others. The rest of my wealth belongs to brand having been around for a long time the community and must be used for the welfare of without any reference to its commitment to the community.”sustainable values. It may be argued, and rightly so, that the views of

• Sustainability Brands (the most commonly Michael Porter and others are more practical and accepted term) are products and services that relevant in today's materialistic world. However, the are branded to signify a special added value in same gurus will also agree that what is important is terms of environmental and social benefits to the what consumers want. Ultimately, businesses and customer and thus enable the differentiation therefore brands will evolve as the consumer wishes from competitors. them to and it is here that the most fundamental

changes are taking place. It may be argued that the The Case for SustainabilityIndian consumer has not reached the stage of

Traditionally, many management gurus have argued willingness to pay a premium for Sustainability Brands that the primary objective of business is to generate (Body Shop was built on this premise). However, profit for its shareholders and that they should not fundamental changes are taking place. Fab India, attempt to assume a larger societal role. Forest Essentials, and a host of 'organic' products

are making their mark in India.“No business can solve all of society's problems or bear the cost of doing so.” - Michael Porter and Mark There is an ever increasing concern for the Kramer environment and for social equity. At a conceptual

level it finds expression in movements like Anna “…the idea that companies have a responsibility to act

Definitions

19

Sustainability Branding

Hazare and TV shows like SatyamevJayate. It finds • financial (economic) sustainability.resonance in campaigns to Save the Tiger and to The first tentative steps are being taken in this plant a million trees in the national capital. There is an direction. Pepsi states that they put back more increasing concern for what we are doing as citizens groundwater than they consume. Coke mentions that and as human beings. We have started realising that a large percentage of the plastic used in their bottles the earth does not have infinite resources for man to is recycled. These may be small steps, but they are exploit. It is in that context that many companies are part of a larger movement that is waiting to happen.moving towards a wider definition of what is success.

Unilever – A corporate paradigmThe triple bottom line as opposed to a narrow financial objective is often quoted in this context: Unilever has expressed the case for case for the 'triple

bottom line' graphically in the following way:• ecological (environmental),

• social (equity), and

They have also developed a 'Vitality Framework' to measurable way. This also focuses Brand 39help them deliver their mission in a systematic and Development along the lines of Sustainability.

38Wikipedia 39Source: Presentation by Santiago Gowland, Unilever


22

Core Consistency

Sustainability should be tied to the core business If sustainability is the key to brand positioning, this through assessing the socio-ecological impacts of requires a kind of integrated approach to products along the entire life-cycle of the products sustainability communication: it is important to and finding out the socio-ecological “hot-spots” of communicate in a consistent way, including e.g. the product-life-cycle. adve r t i s i ng , pe rsona l se l l i ng o r on l i ne

communication. In addition to that, the sustainability Co-operativeproduct brand has to be consistent with the overall

The solutions to the main socio-ecological problems environmental and social performance of the associated with products along the entire life cycle company.require - both in the process of innovating and

Commitmentmarketing sustainable products and services - co-operation with suppliers, retailers, consumers, Sustainability branding not only requires the scientists, and other non-market actors (e.g. NGO's). commitment of the PR department and the

sustainability officers but also requires the Crediblecommitment of top management and marketing

Fundamentals of credibility are first the solving of key decision makers.socio-ecological problems associated with

Continuitycompanies' products and second tying sustainability to the core business. Co-operations with trustworthy Sustainability must reflect the core values of the brand partners and the use of independent, third-party and contribute to delivering the brand promise over labels (e.g. labels like Bio or MSC) such as a high level the long-term. This means that a brand cannot of transparency (e.g. through an online tracking change its sustainability focus too often, or engage in system, which enables consumers to see the world of too many non-related areas.behind the product) can additionally increase the Summary and Key Takeawayscredibility of sustainability brands.

The case for Sustainability Branding is really based on Consumer Benefits evolving consumer needs and preferences. In all Socio-ecological characteristics or attributes of aspects of life, people are looking for products and products usually just play an auxiliary role (no core services that are less damaging to the environment benefits). To broaden the appeal of sustainability and evoke respect from society. Marketers would be brands, the companies should emphasize the well advised to take cognizance of this trend and to inherent consumer benefits of socio-ecological initiate the transformation within their own attributes, including efficiency and cost effectiveness, organisations. Sustainability Branding is a holistic health and safety, symbolism and status. Further they process wherein the entire business has to move should align socio-ecological attributes with benefits towards the new paradigm of environment, social and such as functionality, design, and durability to create financial well-being.Sustainability Branding is in its “motive alliances”. infancy in India. However, we are not immune from the

global trend of concern for the environment, social Conversationalequity and economic uplift. A small beginning has

Sustainability branding is more effective as a two-way already been made and we can foresee it becoming a conversation, rather than a one-way announcement. much larger area in future. Inviting consumers to enter into dialogues about the sustainability process strengthens the brand-consumer relationship.

21

It allows brand managers to explore opportunities to or sustainable' Sofia Reberio of Kiwano Marketing innovate and improve their brands in three ways: says that sustainability should be everywhere in the

company:• Boosting people's personal vitality and well-being • Products/Services: the products or professional

services that the company offers and the • Addressing social issuesmarkets/clients that it serves.

• Reducing environmental impacts• Business Standards: the unique tools,

Four 'Vitality Metrics' measure the framework's processes, business strategies, delivery performance: methods, knowledge base, core values and

techniques that the company brings to a project.• Greenhouse gas emissions• Company Style: the organization's personality, • Water

the way that businesses communicate and • Waste relate to the marketplace, and the distinct flair

that the company possesses.• Sustainable Sourcing

Martin Belz and others have propagated the concept Sustainability Constructof “8 C's” of sustainability branding which can serve

Sustainability has to pervade through all aspects of a as a guide for companies that are interested in company for it to be successful. It is not sufficient that 40Sustainability Branding:one of the company's brands projects itself as 'green

40Source Wikipedia


2423

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.

CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 117 years ago, it is India's premier business association, with a direct membership of over 7000 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations.

CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few.

The CII Theme for 2012-13, 'Reviving Economic Growth: Reforms and Governance,' accords top priority to restoring the growth trajectory of the nation, while building Global Competitiveness, Inclusivity and Sustainability. Towards this, CII advocacy will focus on structural reforms, both at the Centre and in the States, and effective governance, while taking efforts and initiatives in Affirmative Action, Skill Development, and International Engagement to the next level.

With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

YFactorYFactor provides Management Advisory Services focused on FMCG and Consumer Facing Businesses in India and South Asia. The company was promoted by Debu Bhatnagar (IIT Kanpur, IIM Calcutta) and Shashi Kalathil (DCE, IIM-Bangalore) who are both seasoned professionals in consumer oriented businesses. Their professional experience spans companies such as Hindustan Lever, Pepsi, RPG, Tata, Future Group and Hemas Sri Lanka. YFactor's services cover three key areas:

• Management Advisory

• Private Equity Placement

• India Entry Strategies for foreign companies

YFactor clients range from companies in Packaged Foods, Home & Personal Care and OTC. YFactor's work includes formulation of launch strategies for branded FMCG, Organization Restructuring, Distribution System Revamp, Development and implementation of advertising and support plans, Techno-Commercial feasibility studies for setting up a Personal Care Factory in India for an MNC and Company Turnaround. Most of the engagements are medium to long term in nature covering Diagnostics, Strategy Formulation and Implementation. The approach is multi-dimensional in nature providing support to clients in all aspects of business. YFactor has created a vibrant eco-system of Partners and Advisors to provide management capabilities that entrepreneurs running consumer facing businesses can immensely benefit from.

YFactor Marketing Private Limited

1176 Sector A, Pocket A, Vasant Kunj New Delhi 110070 (India)

Tel: +91 11 2613 6369; Mob: +91 97177 74290 (Debu Bhatnagar)

E -mail: [email protected]

Website: www.yfactor.in

The white paper was written by YFactor associates:

Debu Bhatnagar ([email protected])

Ajay Khanna ([email protected])

Priya Sinha ([email protected])

Confederation of Indian Industry

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E-mail: [email protected] Website: www.cii.in

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No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to the notice of CII for appropriate corrections.

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