How AI Will Impact the FMCG Sector. Everything You Need to Know...

The Indian Fast Moving Consumer Goods (FMCG) sector is on the cusp of a technological transformation, where Artificial Intelligence (AI) emerges as the guiding force reshaping every aspect of its landscape.

From the shelves that hold your morning cereal to the ads that catch your eye online, AI is revolutionizing how FMCG operates, adapts, and thrives in a dynamic market.

While the use of AI is still in early stages in the Indian FMCG industry, it is only a matter of time, that it will be used extensively.

With the inclusion of AI, the Indian FMCG industry could see an improvement in efficiency, reduction in costs, and better quality of products and services.

Here are some of the areas where, we at Equitymaster, believe that AI could bring significant growth -

#1 Supply Chain Optimization

AI-driven predictive analytics can streamline supply chain operations, forecasting demand with remarkable accuracy.

This reduction in uncertainty translates to minimized overstocking or stockouts, optimizing inventory management and ensuring smoother logistics.

#2 Manufacturing Excellence

AI's ability to process massive data sets swiftly can enhance manufacturing processes, leading to improved quality control, reduced defects, and increased output.

This not only heightens the standard of products but also contributes to cost-efficiency.

#3 Personalized Marketing

AI empowers FMCG companies to understand consumer preferences at a granular level.

By analyzing data from diverse sources, including social media and purchase history, AI can create personalized marketing campaigns that resonate with individual customers, driving higher engagement and brand loyalty.

#4 Customer Service Enhancement

Chatbots and virtual assistants powered by AI can offer round-the-clock customer support, swiftly addressing queries and concerns.

This seamless interaction fosters positive customer experiences and strengthens the brand-consumer relationship.

#5 Data-Driven Decision Making

AI-equipped algorithms can process intricate data patterns, guiding strategic decisions.

This data-driven approach enables FMCG companies to adapt swiftly to market shifts, ensuring that their offerings remain relevant and in demand.

#6 Innovative Product Development

AI's data analysis capabilities can identify emerging trends and unmet consumer needs. Armed with this knowledge, FMCG companies can develop innovative products that cater to evolving consumer preferences.

#7 Fraud Detection and Risk Management

AI algorithms can detect irregularities and anomalies in financial transactions, enhancing fraud detection and risk management practices within the industry.

Challenges impeding adoption of AI in the Indian FMCG industry

The adoption of AI in the FMCG industry also raises many concerns that need to be addressed. Here are some of the challenges we believe that the industry may face -

#1 Lack of Skilled Workforce

The scarcity of professionals with AI expertise is a significant barrier. Building and maintaining AI systems require specialized skills in data analytics, machine learning, and algorithm development. The industry faces a shortage of such talents, hindering the seamless integration of AI.

#2 Data Quality and Availability

AI thrives on data, but the FMCG industry often struggles with inconsistent, incomplete, or poor-quality data. AI models demand clean and extensive data sets for accurate predictions and insights. Inaccurate or insufficient data can lead to flawed outcomes.

FMCG companies often collect data from various sources, and missing or incomplete data can lead to inaccurate insights. For instance, incomplete purchase histories might hinder accurate demand forecasting.

Data inaccuracies can stem from manual entry errors, outdated information, or technical glitches which may yield faulty predictions or recommendations.

#3 Regulatory and Privacy Concerns

The FMCG industry deals with sensitive customer data, raising concerns about data privacy and compliance with regulations. Companies must ensure that AI applications align with data protection laws and industry standards.

Obtaining informed consent from consumers for data collection and AI-driven processing is a fundamental requirement. FMCG companies must clearly communicate how data will be used, ensuring consumers are aware of how AI influences their experiences and decisions.

#4 Complex Integration

The FMCG industry encompasses a wide range of operations, from manufacturing and supply chain management to marketing and sales. Integrating AI across these diverse processes requires customized solutions tailored to each aspect's unique requirements.

Many FMCG companies operate on legacy systems that may not be compatible with modern AI technologies. Integrating AI with these systems can be challenging, requiring updates, data migration, and ensuring interoperability.

#5 Customization for FMCG Dynamics

Off-the-shelf AI solutions may not always align perfectly with the specific dynamics of the FMCG industry. Tailoring AI algorithms and models to suit the industry's unique demands requires dedicated efforts.

#6 Ethical Considerations

AI decisions can sometimes lack transparency, leading to concerns about bias, fairness, and accountability. Addressing ethical issues in AI applications is crucial to building consumer trust.

AI models often operate as 'black boxes,' making it challenging to understand how decisions are reached. This lack of transparency can erode consumer trust.

FMCG companies must strive to develop AI systems that are explainable, allowing consumers to understand the basis of recommendations and decisions.

Indian FMCG Companies leading the way with early AI adoption

Now that you know about both the opportunities and challenges that AI poses in the FMCG industry, let’s look at the Indian FMCG Companies that are at the forefront of this revolution.

Here are the top three -

#1 Hindustan Unilever

The company has been a leader in using big data and analytics as a tool to drive sustainable growth.

It drives organisation-wide digital transformation agenda under the umbrella of ‘Re-Imagine HUL’ to capture the digital opportunities.

Pre-empting the imminent disruption, it has established a sharp digitalisation agenda in each function. These include those around its core Enterprise Resource Planning (ERP) platform using Cloud, Artificial Intelligence, and other digital technologies.

HUL is now reconfiguring its entire supply chain to enable just-in-time delivery of products by using new digital technologies, including machine learning, artificial intelligence and data analytics.

This will enable it to customise products available at millions of stores based on the customers in the vicinity.

The company is deploying data and technology to feed real-time information to its entire supply chain, including factories and fulfilment centres to be able to do precision marketing, depending on where the demand is.

The value chain, which was linear in nature, is now becoming more circular.

#2 Marico

Marico is not only using automation but also relying heavily on analytics and artificial intelligence (machine learning, in particular) to grow its own business and that of its distributors.

The automation has helped the distributor reduce the inventory days and pare costs by helping trim the sales staff strength and doing away with the need for data entry operators.

Marico’s exclusive launches with e-commerce companies are also helping it in this “predictive and prescriptive analytics" task by leveraging the real-time insights that online companies provide.

The company launched a new range of premium products called Studio X under its male grooming brand, Set Wet, on Amazon in May, and another brand True Roots on Flipkart in September.

Besides this, the company is also using the real-time online insights to launch new offline products, expand categories, and even create new categories.

For example, as an FMCG company, it traditionally never sold subscription-based products. Today, it can do that, at least in modern trade.

E-commerce (which contributed over 1% to the company’s domestic business in fiscal year 2017-18) has also taught it to build a loyalty programme and make an offer in modern trade.

#3 Nestle India

The company is using AI to assess multiple types of data that give insights down to a postal code and demographic level. This level of customisation has benefitted it as well as its customers and consumers.

It has also scaled this capability and rolled it out to several other markets worldwide. In each of these markets, Nestle is seeing tangible gains.

The company is now looking at turning digitalisation into a source of competitive advantage across its value chain, in the sourcing of raw materials, product development, manufacturing, operations, sales, pricing and distribution.

The future of AI in the Indian FMCG industry

The future of AI in the Indian FMCG industry is promising and transformative.

AI-driven solutions are poised to revolutionize various facets of the industry, from supply chain optimization and demand forecasting to personalized marketing and customer engagement.

Automation will enhance manufacturing efficiency and reduce costs, while AI-powered analytics will provide deeper consumer insights for targeted product development.

Virtual shopping assistants and chatbots will elevate customer experiences, and predictive analytics will refine inventory management.

As AI technology matures, Indian FMCG companies can harness its potential to streamline operations, innovate product offerings, and create more engaging connections with consumers in this rapidly evolving market.

In conclusion

The impact of AI on the FMCG sector is poised to be nothing short of revolutionary. As AI technologies continue to advance, they will reshape the way companies operate, from optimizing supply chains and improving production processes to delivering personalized marketing and enhancing customer interactions.

The fusion of AI with the FMCG industry holds the potential to drive innovation, efficiency, and competitiveness to new heights.

However, this transformation also necessitates adaptability and careful integration strategies to harness AI's full potential.

Ultimately, embracing AI-driven solutions will not only redefine the FMCG landscape but also create more tailored, convenient, and satisfying experiences for consumers in the digital age.

List of AI Stocks in India

The details of listed AI companies can be found on the NSE and BSE website.

For a more direct and concise view of this information, you can check out our list of AI stocks.

You can also check out Equitymaster's Powerful Indian stock screener for filtering the best AI stocks in India and the best FMCG stocks in India.

And our article on the Top 5 Artificial Intelligence Stocks to Add to Your Watchlist.

If you’re looking for the top unconventional AI stocks, you can check out Richa Agarwal’s video on the same.

Richa is the Editor of Hidden Treasure, Equitymaster’s smallcap recommendation service.