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The consumer products sector mainly consists of personal care (oral care, hair care, soaps, cosmetics and toiletries) and household care (fabric wash and household cleaners).
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The sector is divided into two distinct segments - the premium segment catering mostly to urban higher/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 categories, 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. FMCG companies cannot overlook these households as they account for 12.2% of the world’s population.
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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 as the organised sector, if not bigger. Unorganised players offer higher margins to stockists in order to gain marketshare. Also, these players have deeper penetration in key regional markets as compared to larger players.
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Brand building and extensive distribution network is a key factor. A successful brand is a precious asset, which could fetch a price many times the cost of assets required to make the product. A study conducted by A&M-ORG-MARG reflects that the share of branded goods is high for a number of daily used products, and the share of unbranded products is shrinking, albeit slowly.
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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 |
HLL expects the FMCG market to triple in market size by FY10, which highlights the potential.
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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 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 Indian FMCG industry has been witnessing a strong growth in volume across its categories like shampoo, biscuits and skin care. The FMCG sales grew from Rs 585 bn in 2005 to Rs 713 bn in 2006, a growth of 22%. Besides demand, prices went up. Increased disposable income has also resulted in select consumers moving up the value chain (basically, upgrades). Also, rural India's dependence on monsoon (due to irrigation facilities) has reduced. Around half of the rural GDP is derived from non-agricultural activities. This has boosted rural incomes, which in turn has led to higher demand and increased penetration.
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The FMCG companies faced pressure on the raw material costs. Though as percentage of sales, the costs have remained stable, the companies have taken necessary price hikes to offset the costs.
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Modern trade accounts for 9% of FMCG sales in metros. Overall they account for approximately 4% of FMCG sales today. With nearly 220 malls expected to come up in the next four to five years in the country, the demand for products is expected to be higher.
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The changing demographics, higher disposable incomes, and growth in rural demand will lead to growth in consumption demand for FMCG products across categories. We believe the share of discretionary items in the Indian consumer’s wallet has increased gradually over the past few years. This willingness to spend on oneself, backed by the ability to spend, is likely to lead to higher growth in personal products and processed foods segments. However competition especially in the personal care segment is likely to increase as ITC and P&G are entering with new brands.
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Rising per capita income, increased literacy and rapid urbanisation have caused rapid growth and change in demand patterns. The rising aspiration levels, increase in spending power has led to a change in the consumption pattern. Apart from the demand for basic goods, convenience and luxury goods are growing at a fast pace too. The urban population between the ages of 15 to 34 years is expected to increase from 107 m in 2001 to 138 m in 2011, an increase of 30%. This would unleash a latent demand with more money and a new mindset. With growing incomes at both the rural and the urban level, the market potential is expected to expand further.
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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.
| Category |
Market Size (Rs bn) |
Major players |
| Fabric Wash | 57 | HLL |
| Skin care | 13 | HLL |
| Personal Wash | 46 | HLL |
| Hair Care | 28 | Marico |
| Oral Care | 23 | Colgate |
* Source: CII
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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. The average consumption by rural households is much lower than their urban counterparts. Existence of unsaturated markets provides an excellent opportunity for the industry players in the form of a vastly untapped market as the income rises.
Penetration %
| Category |
All India % |
Urban % |
Rural % |
| Deodorants | 2.1 | 5.5 | 0.6 |
| Toothpaste | 48.6 | 74.9 | 37.6 |
| Skin Cream | 22 | 31.5 | 17.8 |
| Shampoo | 38 | 52.1 | 31.9 |
| Utensil Cleaner | 28 | 59.9 | 14.6 |
| Instant Coffee | 6.6 | 15.5 | 2.8 |
| Washing Powder | 86.1 | 90.7 | 84.1 |
| Detergent Bar | 88.6 | 91.4 | 87.4 |
| Toilet Soap | 91.5 | 97.4 | 88.9 |
Source: HLL investor meet 2006
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With the implementation of VAT from 1st April 2005, brands will become more affordable in times to come and is a big positive for the sector, as unorganised players will stand to loose. Although, there will be some hiccups in the initial phase of implementation, the full advantage of VAT will take a year or two to reflect in the numbers.
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Another key positive for the sector is the current government's focus on rural India. The aim is to make India the hub of agri-processing. The e-choupal (ITC) and Shakti (HLL) initiatives by corporates is likely to shape the dynamics of what farmers produce going forward, with improved efficiency. The interest of Groups like Bharti and Reliance to invest in this sector points to the potential.
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