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The sector is divided into two distinct segments - the premium segment catering mostly to the urban upper middle class and the popular segment with prices as low as 40% of the premium segment, catering to mass segments in urban and rural markets. The premium segment is less price-sensitive and more brand conscious.
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India's rural markets have seen a lot of activity in the last few years. Since penetration levels are pretty high in most urban areas, future growth can come only from deeper rural penetration and higher consumption. As rural income increases and distribution network improves (in line with road development projects), the penetration levels are set to increase. At present, urban India accounts for 66% of total FMCG consumption, with rural India accounts for the remaining 34%. However, rural India accounts for more than 40% of the consumption in major FMCG categories such as personal care, fabric care and hot beverages.
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The industry is volume driven and is characterised by low margins. The products are branded and backed by marketing, heavy advertising, slick packaging and strong distribution networks. Also, raw material prices play an important role in determining the pricing of the final product.
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Despite the strong presence of MNC players, the unorganised sector has a significant presence in this industry. In most categories, the unorganised sector is almost as big if not bigger as the organised sector. Unorganised players offer higher margins to stockists in order to gain marketshare.
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| Supply |
Abundant supply in metros. Distribution networks are being beefed up to penetrate the rural areas.
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| Demand |
FMCG sector poised to grow 4-fold to $95 billion in 10 years, says Federation of Indian Chamber of Commerce and Industry-Technopak report.
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| Barriers to entry |
Huge investments in promoting brands, setting up distribution networks and intense competition, but the sector is not capital intensive.
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| Bargaining power of suppliers |
Some of the companies are integrated backwards, which reduces the supplier's clout. Manufacturing is largely outsourced.
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| Bargaining power of customers |
In case of branded products, there is little that the consumer can influence, but intense competition within the FMCG companies results in value for money deals for consumers (e.g. buy one, get one free concept).
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| Competition |
Competition: Competition is faced from both domestic, MNCs and also from cheaper imports, which are increasingly visible in urban markets. Price wars are a common phenomenon. |
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The Rs 1161 bn FMCG sector grew by 13.4% YoY in 2009. Higher penetration, per capita consumption, increasing population base, and household income continued to drive growth. The willingness to spend backed by the ability to do so was also instrumental in bolstering growth. The sector got further impetus by several tax sops, greater focus on infrastructure development as well as a boost to rural income.
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The rural markets were the main growth drivers. The number of households in rural areas using FMCG products went up from 136 m in 2004 to 143 m in 2007 implying a CAGR of 1.7% on the back of higher penetration. In 2009, the rural areas grew at a robust rate of 18% as compared to 11% growth in urban retail market. According to a McKinsey, rural India, would become bigger than the total consumer market in countries such as South Korea or Canada in another twenty years. While the per capita income in rural areas is lower than that in urban areas, the customer base is thrice that of urban areas.
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Most of the companies had faced competitive pressure during 2009. The companies had to take judicious price increases and also reduced the packet sizes and stock-keeping units (SKUs). Hence the growth seen by FMCG companies was almost entirely volume led. During the first half of the year, the raw material prices saw a fall. Hence in order to maintain the market share and volume growth the FMCG companies passed on the benefit of lower raw material prices to the consumers. Further, the reduction in excise duties also aided their performance. However, a sustained inflationary environment hurt margins.
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With the economy on a high growth flight, robust consumerism, greater rural penetration and rapidly growing organised retail, we remain bullish on the growth prospects of the FMCG space. While rural regions would drive consumption due to higher penetration, organised retailing in urban markets would help increase value growth led by demand of premium products. The shift from unorganised to organised and from unbranded to branded will add further impetus to growth in this segment. However, concerns remain with respect to the increasing competitive environment, input cost pressures and infrastructure bottlenecks. Companies, which have the ability to maintain and increase the market share, offset cost pressures without sacrificing volumes would stand to benefit.
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Rising per capita income, increased literacy and rapid urbanisation have caused rapid growth and change in demand patterns. 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% per annum. In fact by 2020 it is expected that the average age in India will be 29 years. 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.
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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 organised retailing picks up.
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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. Another key positive for the sector is the current government's focus making India the hub of agri-processing.
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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 organised 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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