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Consumer products are also known as Fast Moving Consumer goods (FMCG) as these are consumed on a daily basis. Consumer products are broadly classified into three categories namely home care products, personal care products and food products. On the basis of price, FMCG goods are divided into three segments- low priced, mid-priced/ mass or popular and high-priced/ premium end. Typically the lower segments of the market drive volumes. The premium segment is less price-sensitive and more brand conscious.
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The FMCG sector is valued at Rs 1463 bn or $33 bn (AC Nielsen report). At present, urban India still accounts for the major share of 66% of total FMCG consumption while rural India accounts for the remaining 34%. However backed by low unit packs & aggressive distribution, the resurgence in rural demand that started two years ago continued in 2010-11.
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In urban India, rising disposable income and increased aspirational levels has led to the phenomenon of value vaulting wherein after a threshold level of penetration, consumers move up the value chain rather than increase consumption. The trend of premiumization has been catalyzed by modern trade format and explosion of new launches and is particularly witnessed in personal-care and convenience food categories. According to Nielsen study, value vaulting has led to middling of the market and blurring of lines between the popular and premium segments.
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The industry is volume driven and is characterised by low margins. As the frequency of consumption is high, consumer products require high brand equity for a strong recall value. The development of brands requires 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. The implementation of Goods & Services Tax is likely to provide a level-playing field to the FMCG companies.
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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 to $74 bn by 2018, 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). Private labels which have an advantage of lower marketing expense are offered by retailers at a discount to mainframe brands. These brands are becoming increasingly popular in the current inflationary environment.
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| Competition: |
: Competition is faced from domestic unorganized players, MNCs and also from cheaper imports, which are increasingly visible in urban markets. Price wars are a common phenomenon. Private labels offered by retailers act as competition to undifferentiated and weak brands. |
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In FY11, the sector continued on a strong growth trajectory with the non-food and OTC segment of the industry recording a robust growth of 15% (AC Nielsen MAT March 2011). Demand was driven by higher disposable income and evolving consumer lifestyle in urban markets and improving penetration and rising income in rural markets.
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The rural markets continued to lead demand in personal care and oral care products. According to Nielsen's data, rural sales in washing powder, hair oil and shampoo each contributed more than a third of the overall category sales in FY11. Sales growth in rural markets surpassed that in urban markets in more than 50% of the FMCG categories. Nielsen has projected the size of the rural market to grow ten folds to $ 100 bn by 2025.
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In FY11, margins of FMCG companies were hit by unprecedented increase in price of crude and other commodities. As crude price spiralled above $100 a barrel, price of input crude-derivatives, transportation/freight and packaging costs increased sharply. Advertisement and promotional spends remained high on account of heightened competitive activity. The companies effected judicious price increases and also reduced the packet sizes and stock-keeping units (SKUs). Hence the growth seen by FMCG companies was mostly volume led. The reduction in surcharge from 7.5% to 5% and hike in the base MAT kept effective tax rates unchanged during the year.
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The FMCG industry has benefitted from rising domestic consumption. Total consumption expenditure forms a lion's share of 69% of GDP. Growing employment, rising disposable income, a relatively young population (median age of 26 years) and changing consumption pattern have led to higher domestic consumption. The FMCG industry grew at a compounded annual growth rate of 11% in the past decade.
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India is at the cusp of yielding the demographic dividend. As per the International Labour Organisation, India will have the highest working age population in the world by 2020. As per National Council of Applied Economic Research, the proportion of middle class population will swell from 13.1% at present to 37.2% by 2025-26. Thus higher working-age population and rising middle class will translate into higher purchasing power & boost consumerism.
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In the rural markets, deepening penetration and evolution in consumption pattern will drive demand. As per Associated Chambers of Commerce & Industry, the FMCG sector will witness more than 50% growth in rural and semi-urban segments by 2012. The per-capita expenditure in rural market is half that of the urban market. But at 150 million household, rural India is nearly three times bigger than urban India holding immense potential demand. The FMCG sector is expected to grow at a compounded annual growth rate of 12% and reach market size of $ 74 bn by 2018.
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While the homegrown companies are looking to expand overseas, the MNC subsidiaries are strengthening their domestic base to capitalize on the growing demand. Going forward more MNCs will enter India, as the government is likely to clear 51% FDI in multi-brand retail. Currently organized retail comprises only 5% of FMCG sales with the market dominated by more than 12 m small 'kirana' stores. Strong macroeconomic fundamentals, burgeoning disposable income, robust consumerism, greater rural penetration and growing organized retail will drive future demand in FMCG industry.
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