Mar 14, 2007|
FMCG: The Indian opportunity...
India is an important market for FMCG players. The Indian FMCG sector is the fourth largest sector in the economy with a total market size of around US$ 13.1 bn. During 1950's to 1980's, there was low investment in the sector as the purchasing power was low. Also, the government had put a lot of emphasis on the development of the small-scale sector. The existing companies like HLL were purely focused on the urban areas. However, post liberalisation the scenario changed marking the entry of the MNCs into the country. Also, the focus shifted from the urban to the rural areas. In this article, we shall take a look at the importance of India for FMCG players.
Large base: With a population of 1 bn people, India is a big market for FMCG companies. Around 70% of the total households in India reside in the rural areas. The total number of rural households is expected to rise from 135 m in 2002 to 153 m in 2010, which represents the largest potential market in the world.
Rural and urban potential
|Population 2001-02 (m household)
|Population 2009-10 (m household)
|% Distribution (2001-02)
|Source: Statistical Outline of India (2001-02), NCAER
India - a large consumer goods spender: An average Indian spends around 40% of his income on groceries and 8% on personal care products. A larger part of the total spending pie along with a large base (in terms of population) makes India one of the largest FMCG markets.
Changing lifestyles: 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.
Low penetration and low per capita consumption: Due to the large size of the market, penetration level in most product categories like jams, toothpaste, skin care, hair wash etc. in India is low. This is more visible when 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.
||All India %
|Source: HLL investor meet 2006
Apart from low penetration, even the per capita consumption in most of the FMCG categories (including the high penetration categories) in India is low as compared to both the developed markets and other emerging economies. A rise in per capita consumption, with improvement in incomes and affordability and rising urbanisation is further expected to boost FMCG demand. Also, as the income rises, the shift from unbranded to branded products is expected to be more evident.
Outsourcing hub: India has a vast resource of raw materials across different products. Apart from the advantage in terms of ample raw material availability, existence of low-cost labour force also works in favour of India. Easy raw material availability and low labour costs have resulted in a lower cost of production. As a result India has become a base for many MNCs like HLL and P&G as an outsourcing hub.
Retailing-the new growth area: 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.
The FMCG sector is characterised by a well-established distribution network, intense competition between the organised and unorganised segments and low operational cost. As per the BRIC report, India's per capita disposable income currently stands at US$ 556 per annum, which will rise to US$ 1,150 by 2015. With the rise in the share of the middle class, the FMCG market is all set to treble from US$ 11.6 bn in 2003 to US$ 33.4 bn in 2015. However, poor infrastructure, the affordability of a product or a service to a rural consumer with low disposable income, intense competition would be the key challenges. Nevertheless, with the rapidly growing economy, rising disposable income, changing consumer expenditure pattern and increasing number of middle class families, the FMGC market is set to take a big leap in the coming years.
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