Executive Summary

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. FMCG majors are aggressively looking at rural India since it accounts for 70% of the total Indian households.

This would mean creating innovative distribution channels and dependence on ‘out-of-the-box’ thinking. It would also entail ramping up teams and training them with velocity.

Despite the strong presence of MNC players, the unorganised sector has a significant presence in this industry. In most categories, unorganized sector is almost as big as the organised sector, if not bigger.

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.

Here again, innovation has been the key. Medium sized players have fuelled their growth based on strong innovative practices.

This was a year of mid sized companies, with names like Marico, Pidilite and Dabur showing aggressiveness both in the domestic, as well as international markets.

The consumer product sector mainly consists of personal care, cosmetics and home products segments. The sector can be further sub-divided into dental care products, soaps, detergents, surface cleaning products, skin care, and hair care products.

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 25%-30% of the premium segment, catering to mass segments in urban and rural markets. The premium segment is less price sensitive and more brand conscious.

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. FMCG majors are aggressively looking at rural India since it accounts for 70% of the total Indian households.

The industry is volume driven and is characterized 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.

Despite the strong presence of MNC players, the unorganised sector has a significant presence in this industry. In most categories, unorganized sector is almost as big as the organised sector, if not bigger.

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.

The industry is very clearly sold on Dr. C. K. Prahlad's concept of 'value at the bottom of the pyramid'. They recognise that India is a value led market. There are numerous examples of buoyant growth if the price proposition is right (telecom, home loans, consumer durables). Therefore, the focus was on improving efficiencies, reducing costs, improving supply chain efficiencies to look at giving value to consumers, in a bid to bring about internal factors led growth.

Colgate

Dabur

Henkel Spic

Godrej

Hindustan Lever

Marico

Nirma

P&G (Gillette)

Pidilite

Reckitt and Colman

RayBan Sun Optics

The year 2004 was a landmark in the Indian FMCG industry's history. Due to the improving economic growth and stable rainfall, expectations of a demand improvement were rife. However, an unprecedented 50% cut in prices of shampoos and detergents by P&G, saw the industry reverberating in the after shocks. FMCG major, HLL, reported over 2% decline in topline. But profits shrunk by a shocking 32% year on year.

Most FMCG companies in India are debt free. On the other hand, their depreciation charges are slowly showing signs of an increase. This is an indication that these companies are making new investments and expanding capacity, underlining their confidence in the sector's future growth potential in the country.

Most companies have either opened plants in Baddi (Himachal Pradesh) or are in the process to do so, owing to the region's tax incentives.

This was a year of mid sized companies, with names like Marico, Pidilite and Dabur showing aggressiveness both in the domestic, as well as international markets. All these companies have had a wonderful year so far, each reporting double-digit topline and bottomline growth

Managing Teams: The Automobile industry requires interacting with a lot partners in the manufacturing and distribution field. This includes managing vendors and distributors. Managing external partners and stakeholders is critical for the auto industry.

Leadership: Increasingly companies in the auto sector will look at employees providing leadership at all levels to face off competition and when the market plateaus after the surge in growth rates.

Innovation: Will be the name of the game as the industry faces up to increased competition, plateauing growth rates and threatening fuel prices. Innovation will drive profitability and constant revenue growth.

Leadership: This is a highly ‘people’ intensive industry, though being in the manufacturing sector. Hence leading people is a challenge all the time, leading internally as well as externally with channel members and suppliers.

Relationship Management: Is essentially an aspect of managing sales, but it extends to other internal aspects as well. Apart from incentivising the channels of distribution, maintaining and leveraging relationships are critical.

Innovation: Innovation is the buzzword. Product, process all the innovations that are likely to enhance revenues and increase profitability are used in this industry on a regular basis. Sharpening these skills is extremely essential.

Managing Stress: Stress levels in the FMCG industry are known to be high, due to the intense competition and the need to be ready. For the management, it is pertinent to recognise this and impact it.

1. Leadership
a. Vision based
b. Innovation
c. Motivation
d. Managing teams / conflict

2. Communication / Presentations
a. Negotiations
b. Building Teams

3. Sales (generic selling/ channel management)

4. Customer service

5. Stress Management

As per NCAER estimates, the ratio of the consuming class to total households will touch 46% by 2007 (17.4% in 1995). With per capita consumption low in most categories and expectations of the consuming class growing in significant numbers (as per NCAER estimates), the FMCG sector in India has immense growth potential in the long term.

While the home-grown companies are looking to expand beyond the Indian shores, the MNC subsidiaries are likely to look for greater leverage of the parent strengths. Since India is a big potential market, none of the big MNC's can afford to ignore the region for long. The decade ahead is likely to see more MNC's looking to enter India, as organised retailing picks up.

It is likely that companies will opt for consolidation to generate growth. Bigger players are consolidating both brands and the distribution networks. The P&G - Gillette merger globally is likely to set the tone for the Indian shores as well.

The industry grouse of double taxation etc is likely to go away in a few years as VAT gets implemented. The Finance Minister himself has indicated his support for 'single country tax'. Though VAT in its current avatar is not without flaws, here too the movement can only be forward.

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 Group's like Bharti and Reliance in investing in this sector points to the potential.

Companies are increasingly using information technology for supply chain management. This is likely to result in a reduction in inventory levels and an improvement in the working capital cycle. The aim is to evolve just in time delivery systems. This will benefit companies by controlling costs and improving margins.

Some MNCs have set up 100% subsidiaries (for example Procter & Gamble), which is a cause for concern for the listed subsidiaries, as new product launches are largely set to take place through these subsidiaries.

The rising penetration of satellite and cable networks will also fuel demand for a wide variety of consumer products. E-commerce will bring in procurement efficiencies and will reduce overheads finally allowing the companies to reduce their prices. With new brands being launched rapidly and competition becoming very aggressive, only those companies, who can spend on research and development to innovate and develop new products and processes, will gain in the long term

Last updated:

May 2005.

Appendices