Industry Analysis Report FMCG

March 11

2014
Submitted By: Ankur Nag – P301412CMG388 Ansuman Singh – P301412CMG340 Ashish Khandelwal – P301412CMG349 Habib Khan – P301412CMG365 Lalatendu Pattnaik – P301412CMG377

Industry Analysis Report FMCG 2014
Contents
1. INDUSTRY PROFILE ........................................................................................................................................... 4 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2. Sector Overview ............................................................................................................................................... 4 Sector Size ........................................................................................................................................................ 4 Major Segments in FMCG Sector ...................................................................................................................... 6 Competitive landscape ...................................................................................................................................... 7 Supply & Demand and-side Drive .................................................................................................................... 9 Porters‘ Five Force Model .............................................................................................................................. 11 Critical Success Factors .................................................................................................................................. 12 Environmental scanning (PESTEL Analysis) ................................................................................................. 13

MARKET TREND AND OUTLOOK ................................................................................................................ 16 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 Indian FMCG Industry & Economic Indicators ............................................................................................. 16 Rising per capita income and changing lifestyle ............................................................................................ 16 Early monsoon ................................................................................................................................................ 17 Export potential .............................................................................................................................................. 17 Rupee depreciation and fluctuation in commodity prices ............................................................................... 17 Rural India Demography ................................................................................................................................ 17 Middle-Class household, the underlying factor for FMCG growth ................................................................ 18 Disposable income .......................................................................................................................................... 18 Budget (2013-14) Highlights and Impact on FMCG sector ........................................................................... 18 Increased outlays on rural development/ changes in lowest income slab ....................................................... 18 Changes in excise duties for cigarettes ........................................................................................................... 18 Outlook on domestic FMCG sector ................................................................................................................ 18 Outlook on Domestic FMCG Sector .............................................................................................................. 19 Current Trends in the FMCG sector ............................................................................................................... 19

3.

MAJOR SEGMENTS OF THE FMCG INDUSTRYAND THE TRENDS OBSERVED ............................. 21 3.1 3.2 3.3 Household Care .............................................................................................................................................. 21 Personal Care .................................................................................................................................................. 22 Current Trends Observed in the Food & Beverages segment ......................................................................... 23

4.

LEADING PLAYERS .......................................................................................................................................... 24 4.1 4.2 4.3 Hindustan Unilever Ltd .................................................................................................................................. 24 Nestle India ..................................................................................................................................................... 28 ITC Limited .................................................................................................................................................... 31 Page 2

FMCG

Industry Analysis Report FMCG 2014
4.4 4.5 4.6 5. 6. Dabur India Ltd............................................................................................................................................... 34 Godrej Consumer Product .............................................................................................................................. 37 Comparative Matrix ........................................................................................................................................ 40

INTERPRETATION ............................................................................................................................................ 41 REFERENCES ..................................................................................................................................................... 42

FMCG

Page 3

Industry Analysis Report FMCG 2014
1. INDUSTRY PROFILE
1.1 Sector Overview
The fast-moving consumer goods (FMCG) sector is an important contributor to India‘s GDP and it is the fourth largest sector of the Indian economy. Items in this category are meant for frequent consumption and they usually yield a high return. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, and household accessories and extends to certain electronic goods. The Indian FMCG sector is highly fragmented, volume driven and characterized by low margins. The sector has a strong MNC presence, well established distribution network and high competition between organized and unorganized players. FMCG products are branded while players incur heavy advertising, marketing, packaging and distribution costs. The pricing of the final product also depends on the costs of raw material used. The growth of the sector has been driven by both the rural and urban segments. India is becoming one of the most attractive markets for foreign FMCG players due to easy availability of imported raw materials and cheaper labour costs.

1.2 Sector Size
With a population of over one billion, India is one of the largest economies in the world in terms of purchasing power and increasing consumer spending, next to China. The Indian FMCG industry, with an estimated market size of ~`2 trillion, accounts for the fourth largest sector in India. In the last decade, the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated at compounded rate of ~17.3%. Strong Growth in the Indian FMCG Sector:  The FMCG sector in India generated revenues worth USD36.8 billion in 2012, a 5.7 per cent rise compared to the previous year. Source: Booz & Company, Dabur, AC Nielsen, Aranca The strong growth in 2012 should come as no surprise Research given the impressive performance of the sector over the years. Over 2006-12, the sector‘s revenues posted a CAGR of 15.2 per cent.

 

1.2.1 Urban-Rural Market  Urban segment the biggest contributor to the sector’s revenue: The urban segment is the biggest contributor to the sector, accounting for two-thirds of total FMCG sector revenue. The semi-urban and rural segments which are growing at a brisk pace, currently account for 33.5% of revenues of the FMCG sector. FMCG products account for 53% of total rural spending. During FY 11, over 80% of FMCG products grew at a faster pace in rural markets as compared to urban ones with premium skin care brands growing twice as fast in rural areas than urban brands.

FMCG

Page 4

Industry Analysis Report FMCG 2014
 Growth in rural market bodes well for the FMCG sector: The rural market is currently worth approximately USD 9 billion in consumer spending in the FMCG space annually. Rural India accounts for 700 million consumers or 70% of the country‘s population, accounting for one -third of the total FMCG market. According to a report by Nielsen, the Indian rural market is tipped to grow more than ten-fold to USD 100 billion by 2025, presenting a huge opportunity for leading FMCG brands. One of the key drivers of the rural FMCG market has been the unprecedented growth of smaller packaging options. Lower priced packs have improved accessibility and increased the pace of penetration of FMCG products in rural areas. According to Nielsen, FMCG growth in the rural sector for the quarter ended March 2012, stood at 17.2%, surpassing the urban Source: Dabur, AC Nielsen, Aranca Research segment at 16.5%. The purchasing power in rural areas has outpaced that of urban areas as non-farm incomes improve, bolstering consumer spending on FMCG products. Rural consumption growth has outpaced urban consumption with the percentage increase in monthly per capita expenditure in rural markets surpassing its urban counterparts during the period 20092012. Significant progress in literacy levels, higher government spending on welfare programs, growing support to agricultural sector, which is the major occupation of rural India and better infrastructure and DTH and mobile connections have also acted as a catalyst in bolstering rural demand for FMCG products. Several measures taken by the government to support the rural population including higher minimum support prices (MSPs), loan waivers, and disbursements through the National Rural Employment Guarantee Act (NREGA) programme have bolstered the purchasing power of this segment. The urban segment is the largest contributor to the sector, accounting for over two-thirds of total revenue  Semi-urban and rural segments are growing at a rapid pace; they currently account for 33.5 per cent of revenues FMCG products account for 53.0 per cent of total rural spending Across the FY-2013, Growth in Rural market of FMCG products has outpaced the growth in urban market. Quarterly figures across the year for FY 2013, shows the margin of Rural growth over Urban market increasing Therefore, it can be said that, though urban market is the biggest contributor but rural market is catching up Source: Business Standard, 27th Feb, 2014 very fast.

 





FMCG

Page 5

Industry Analysis Report FMCG 2014
1.3 Major Segments in FMCG Sector

Source: Deon Global Research Report, 30th July‘2013

1.3.1

Household care

The fabric wash market size is estimated to be ~USD 1 billion, household cleaners to be USD 239 million, with the production of synthetic detergents at 2.6 million tonnes. The demand for detergents has been growing at an annual growth rate of 10 to 11% during the past five years. On account of convenience of usage, increased purchasing power, aggressive advertising and increased penetration of washing machines, the urban market prefers washing powder and detergents to bars. The regional and small unorganized players account for a major share of the total detergent market in volumes. Household Care category recorded robust volume and value growth during the year through focused innovation in the portfolio to provide greater consumer value. Vim bar continues to delight consumers by delivering superior performance and new offerings like the Anti-Germ Bar and the Monthly Tub Pack. Vim liquid continues to develop the liquid dish wash category driven by superior product quality and strong advertising. It has effectively accomplished the dual job of growing the liquids market by reaching out to more households, while increasing consumption in existing households. Domex continued to provide clean and germ free toilets to the consumers. 1.3.2 Personal Care (HPC)

The personal care products (PCP) market in India is estimated to be worth ~USD 4 bn p.a. Personal hygiene products (including bath and shower products, deodorants etc.), hair care, skin care, colour cosmetics and fragrances are the key segments of the personal care market. Each of these segments exhibits its unique trends and growth patterns. For example, the largest segment of personal hygiene products, largely dominated by bar soaps, has grown at ~5% p.a. over the last five years. In comparison, the second largest segment, hair care products has seen a much higher growth of ~9-10% p.a. during the same period.    The hair care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. The coconut oil market accounts for 72% share in the hair oil market. The skin care market is at a primary stage in India. With the change in life styles, increase in disposable incomes, greater product choice and availability, people are becoming more alert about personal grooming. The oral care market can be segmented into toothpaste – 60%; toothpowder – 23%; toothbrushes – 17%.

FMCG

Page 6

Industry Analysis Report FMCG 2014
1.3.3 Food & Beverages Food processing industry is one of the largest industries in India, ranking fifth in terms of production, growth, consumption, and export. The total value of Indian food processing industry is expected to touch USD 194 billion by 2015 from a value of USD 121 billion in 2012, according to Indian Council of Agricultural Research (ICAR). The packaged food segment is expected to grow 9% annually to become a `6 lakh crore industry by 2030, dominated by milk, sweet and savoury snacks and processed poultry, among other products, according to the report by CII-McKinsey. The ready-to-drink tea and coffee market in India is expected to touch `2,200 crore in next four years, according to estimates arrived at the World Tea and Source: IBEF report on FMCG, August 2013. Coffee Expo 2013. Branding could drive the next growth wave in the country‘s food processing sector. The total soft drink (carbonated beverages and juices) market is estimated at ~USD 1 billion. The market is highly seasonal in nature with consumption varying from 25 million crates per month during peak season to 15 million during offseason. The market is predominantly urban with more than 25% contribution from rural areas. Coca cola and Pepsi dominate the Indian soft drinks market.    Personal Care and Food products together make up two-thirds of the sector‘s revenues. Personal care (22.0 per cent) and fabric care (12.0 per cent) are the other leading segments. ‗Food products‘ is the leading segment, accounting for 43.0 per cent of the overall market.

1.4 Competitive landscape
1.4.1 Overview

Indian FMCG Market is characterized by three well identified set of players.    Foreign Players who are present in India through their Subsidiaries Strong Indian Players with established national presence. Regional or Small Domestic Players.

According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan UniLever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). India presents significant potential to overseas FMCG firms - and some, like PepsiCo, Cadbury and United Biscuits have built big businesses in the market. However, India has its own domestic titans while there are smaller firms that can compete by offering products that are different to bigger foreign brands.

FMCG

Page 7

Industry Analysis Report FMCG 2014
MNCs in FMCG Sector in India are doing very good business. The major FMCG companies in India are mostly Multi-National Companies (MNC), such as Nike, Reebok, Puma, Pepsi Co, L'Oreal, etc. The experts believe that in the future the MNCs would dominate the FMCG sector India. An international parent‘s stronger brand equity, premium products, and the fact that they can add localisation to their FMCG products and leverage international expertise, have combined to give MNCs a competitive edge over domestic players. Inching their way across the Indian market for the past 20 years, FMCG multinationals managed to take great strides in the 1990s and during the turn of the millennium, which coincided with the opening up of the Indian economy and whetted consumer appetite for international brands. Though for several years multinationals had been intent on building brand loyalty with new consumers, they could do this more easily by tapping into the rising aspirations of the middle class with an appetite for international brands. Domestic consumption is and will continue to remain the biggest and the most resilient pillar of India‘s growth story in the coming years. A younger population, a growing and aspiring middle-class, rising disposable incomes and increasing rural wealth has made India one of the world‘s most sought-after FMCG consumer markets for multinationals. 1.4.2 Competition

The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HUL brands in the 21, aggregating Rs. 3,799 crore or 54% of the personal care category. The foods category in FMCG is gaining popularity with a swing of launches by HUL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, chapattis by HUL, ready to eat rice by HUL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to have faster development than the stagnating personal care category. Amul, India's largest foods company has a good presence in the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices. In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodknight from Godrej is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149 crore.In the shampoo category, HUL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk.

FMCG

Page 8

Industry Analysis Report FMCG 2014
1.5 Supply & Demand and-side Drive
1.5.1  Demand Side Drivers Consistent per Capita Income: Continuous income growth coupled with an increased willingness will push consumer up trading and demand for higher priced, better quality product.





Higher private consumption: Though consumer spending reached an eight-year low in the September quarter of fiscal 2013 (FY13). Private final consumption expenditure (PFCE), an official estimate of consumer spending, slowed to 3.68%, compared with other sectors; the consumption story remains intact. Higher consumption drives the growth in the demand of FMCG product. Rising urbanization: India's urban population grew by 2.8% annually between 2000 and 2012, compared to the 1.6% per year rise in the total population, thanks to rapid economic growth and strong rural-urban migration in order to look for better job opportunities and improving lifestyles.

FMCG

Page 9

Industry Analysis Report FMCG 2014



Increasing Discretionary spends: India has witnessed increase in the discretionary spends. It has increased from 27% in year 2003 to 32% in year 2013.





Favourable changes in the Government Policy: Many policy changes like 100% FDI, Quantitative restrictions, De-reservation of most FMCG categories from SSI, 24% equity permitted in small sector and many other incentives offered by different states of India help to foster the growth of FMCG. New Launches & Emerging category: Consumer and retail companies are also expanding into new geographies and categories. Hindustan Unilever Ltd (HUL) recently launched Dove hair oil—a segment hitherto dominated by companies such as Marico Ltd, known for Parachute hair oil, and Dabur India Ltd that sells Vatika. Emerging category such as oats, conditioners, liquid fabric conditioners, and liquid soaps and face wash compared with staple soaps and deodorants also boost the growth of FMCG sector. Supply side Drivers Growth of Modern retail: As per the estimate of Indian retail report 2011, the modern retail by 2016 would have 19.3% share of total retail market. For some leading consumer product companies, modern retailers contributes about 10% of their total sale nationally and about 20% in top 10 cities. With the advent of modern technology in the emerging

1.5.2 

FMCG

Page 10

Industry Analysis Report FMCG 2014 markets, have witnessed development in the area of technology transfer, enhanced quality level of produce, product at competitive price better procurement process and enhanced employment opportunity. Infrastructure development: The government had set a five-year target of investing $1 trillion in infrastructure by 2017, with half coming from private sector, in a bid to lift economic growth to 8.4%. Investment projects worth a combined $52 billion are at least now starting to move forward, out of the $80 billion cleared last year. A better infrastructure will strengthen the growth of FMCG sector. Low Labour Cost: Indian has lower labour cost as compared to many other emerging companies. Average labour cost in India is US$ 90/month compared to US$ 190/month in China and US$ 210/month in Thailand. Low labour cost attracts the foreign players.





1.6 Porters’ Five Force Model
To determine industry attractiveness and long-run industry profitability of the Indian FMCG Industry, we chose to apply the Porter‘s five forces in our analysis. Porter‘s five forces are: (1) Barriers to Entry and exit, (2) Threat of substitutes, (3) Buyer bargaining power, (4) supplier bargaining power, and (5) Industry Competition.  Barriers to Entry and exit: The Indian FMCG Industry is characterized with modest entry and exit barriers. Integrated business model and increasing capital requirement in the industry restrict new entrants. Huge investments in setting up distribution networks and promoting brands and competition from Source: Deon Global - Research Report 2013 established companies.  Threat of substitutes: Being an essential commodity the demand for consumer products is elastic. Multiple brands positioned with narrow product differentiation. Companies entering a category /trying to gain market share compete on pricing which increases products substitution. Hence, threat of substitute is high in the industry.  Buyer bargaining power: High brand loyalty for some products, thereby discouraging customer‘s products shift. But low switching cost and aggressive marketing strategies under intense competition within the FMCG companies, induce Customers to switch between products, thereby driving value for money deals for consumers.  Supplier bargaining power: Prices are generally governed by international commodity markets, making most FMCG companies price takers. Due to the long term relationships with suppliers etc., FMCG companies negotiate better rates during times of high input cost inflation  Industry Competition: Competitiveness among the Indian FMCG players is high. With more MNCs entering the country, the industry is highly fragmented. Advertising spends continue to grow and marketing budgets as well as strategies are becoming more aggressive. Private labels offered by retailers at a discount to mainframe brands act as competition to undifferentiated and weak brands.

FMCG

Page 11

Industry Analysis Report FMCG 2014
1.7 Critical Success Factors
 Product mix: The companies with a presence in segments such as toothpastes, soaps, and detergents that are essential items with a recurrent need tend to have stable sales; the companies with a presence in discretionary segments such as perfumes and cosmetics, on the other hand, tend to have a dip in sales during times of recession. A player's presence in niche categories, where competition is fairly low, strengthens its market position. The Indian market is extremely price-sensitive. Segmentation in product portfolios, into popular and premium categories, therefore assumes importance. A wide portfolio, with products at a variety of price points, helps companies mitigate risks associated with any particular segment. A wide range of products enables FMCG companies to balance growth objectives and competitive pressures. For instance, soft drink majors such as The Coca Cola company and PepsiCo, and companies such as Colgate-Palmolive Company and Cadbury India Limited have relatively smaller product portfolios than those of companies such as Hindustan Unilever Ltd (HUL) and Nestle Company; the fact that companies with smaller portfolios have also been successful indicates that other factors also critically influence a company's performance. Innovation track record: To maintain customer interest and to stay ahead of the competition, companies need to constantly introduce new and better products. One good indicator of innovation is the contribution to revenues, of brands that have been introduced in the last three to five years. New product introductions that permit a company to build an early lead in any category offer greater cash flow benefits than innovations that represent a minor variation of existing products. Differentiation: The first and foremost factor about a product, is a it's perceived benefit and differentiation vis- a-vis others in the market. A product can command a premium only if the consumers are convinced of its superiority. Market share: A consistently high market share has several advantages. It ensures a stable relationship with and better control over the distribution channel. Also, the company does not need to offer very high margins to the trade since this is compensated by higher volumes. Established products with high market share also entail lower marketing and advertising expenses since it is cheaper to maintain an established brand than to create a new one. The rate of acquisitions in the FMCG industry is higher than that in other industries. Acquisitions strengthen the acquirers' business risk profiles by enhancing their product offerings and geographical reach. Pricing Power: High market shares do not necessarily translate into price protection. Companies with small market shares can still pose strong price competition to the market leaders. Brand equity: Brand Equity is the degree of consumer loyalty that a company's products maintain. This is an important factor since established brands act as high entry barriers. If brand loyalty is strong, consumers tend to be willing to pay a high price for the product, and are reluctant to switch to competitive products. Factors such as the management's willingness and ability to spend on advertising and other sustained brandbuilding efforts are examined. During periods of slow growth and economic recession, the companies are often tempted to show higher short-term profits by reducing their advertising expenditure. The companies with successful brands have an edge over their competitors, supported by greater association with customers and lower advertising expenses. Operating efficiency : Page 12











 FMCG

Industry Analysis Report FMCG 2014
Wide and extensive distribution reach, continuous cost-cutting efforts, optimal manufacturing facilities and efficient raw material sourcing are critical elements that determine an FMCG company's operating efficiency. Distribution network: The distribution network's reach is assessed to ascertain the geographical diversity of sales. Greater sales diversity reduces geographical risks, especially those arising from changes in customer preferences in some areas. In India, a good rural-urban sales mix helps even out the effect of an uncertain monsoon on the consumers' purchasing power. A wide dealer network enhances the reach of products. The companies can use the same network to distribute new products, and thus benefit from a head start. The companies, whose products have strong export potential, also have an advantage, especially during downtrends in the domestic market. Supply chain management: The ability to offer a product when the consumer wants to purchase it is the most important factor that drives sales and promotes consumer loyalty. It also motivates retailers and wholesalers to stock the company's products. In the recent past, many FMCG players in India have invested resources in supply chain-related information technology (IT) initiatives, which have translated into better inventory management and collection efficiencies. Manufacturing facilities: The manufacturing process in the FMCG industry is not capital intensive. Most companies have a combination of in-house production and outsourcing. The decision to outsource or produce inhouse depends on issues such as transportation costs and access to raw materials. Typically, high-technology products are made in-house, while others are sourced from vendors. The product's shelf-life determines whether a company will opt to set up a production facility of its own or continue to outsource production. Raw material sourcing: The management of raw material costs is an important aspect for FMCG companies, especially for products that are dependent on commodities such as sugar, cereals and oil. Efficient raw material sourcing is essential, especially in businesses, where the margins are thin. For items like edible oil, where there is high import dependence, effective risk management systems on the procurement side are critical, and are, therefore, analyzed in detail. A wide sourcing base, which ensures the quality and quantity of purchase at the best possible price, is considered a positive factor in the rating analysis.









1.8 Environmental scanning (PESTEL Analysis)
1.8.1   Political Political stability: Political Stability is one of the important most factors which influence the growth of business. India is going to see the most prominent federal election in its history, which is being watched by everyone across the world. By completing the full five year term and ready for handing-over the governance to the new leader democratically putting India politics on the crest. The recent surveys show outstanding performance of the BJP and India‘s Political Outlook has been rated as "Stable". Taxation policy: The implementation of the Goods and Services Tax (GST) is expected to benefit the sector immensely by reducing the overall incidence of taxation. GST aims to reduce the cascading effect by replacing a multitude of indirect taxes such as central excise, service tax, VAT and inter-state sales tax with a single GST rate. Moreover, FMCG companies will be able to optimize logistics and distribution costs in the GST era. The resulting cost savings by the companies can be passed on to the final consumer thereby boosting demand. However the implementation of GST has currently been put on the backburner by the government. Page 13



FMCG

Industry Analysis Report FMCG 2014
 Food Security Bill: The food security Bill has been passed recently by the Union Cabinet. As per the Bill, 5Kg of food grains per person per month will be provided at subsidized prices from State Governments under the targeted public distribution system. With additional demand, the agriculture sector would receive a boost and this could lead to more investments in improving agriculture productivity and making it more competitive. Investment approval: Investment up to 100% foreign equity for NRI & overseas corporate bodies has been approved by the government. FDI in Organized retail: The decision to allow 51% FDI in multi brand retail and 100% FDI in single brand retail argues well for the outlook for the FMCG sector. The move is expected to bolster employment, and supply chains, apart from providing high visibility for FMCG brands in organized retail markets, bolstering consumer spending, and encouraging more product launches. FDI of 100% under the automatic route is allowed in the food processing sector, which is considered as a priority sector. FMCG sector accounted for 1.9% of the nation‘s total FDI inflows in April 2000- September 2012. Cumulative FDI inflows into India from April 2000 to April 2013 in the food processing sector stood at `9,000.33 crore, accounting for 0.96% of overall FDI inflows while that in the soaps, cosmetics and toiletries was `3,115.54 crore in, accounting for 0.32%. The food processing sector attracted FDI inflows of `6,198 crore during April 2009 to December 2012. Relaxation of license rules: Industrial licenses are not required for almost all food and agro-processing industries, barring certain items such as beer, potable alcohol and wines, cane sugar, and hydrogenated animal fats and oils as well as items reserved for exclusive manufacturing in the small-scale sector. Economical Inflation rate is increasing across the world and India is also no exception. The government and Reserve Bank of India both are trying to control the inflation rate with the help of different measures. Economic slowdown in India, together with high inflation, is expected to further drag down consumer demand. Depreciating rupee has escalated raw materials prices. If these cost increases are transferred to shoppers, consumer confidence will erode further. According to Moody's, the Economic Growth Rate of India would be 5.5% in 2014-15. Fiscal Deficit: The challenge of overspending is expected to be curbed. Firm growth with minimal risk of large fiscal deficit to GDP ratio is anticipated. Fiscal deficit seen at 4.6 percent of GDP in 2013/14, below target of 4.8 With limited space for rate cut, RBI is unlikely to ease its policy rates in every meet this year due to persistent inflation and volatile industrial output and manufacturing prices threatening the inflation prospect. RBI is giving full attention to the inflation problem, which is undermining the fragile economic growth. India‘s per capita income, a measure of living standards, is projected to have increased 11.7 per cent to `5,729 per month in 2012-13 at current prices, up from `5,130 in the previous fiscal. The per capital income at current prices during 2012-13 is estimated to have stood at `68,747, up from `61,564 in FY 2011-12. Rising per capital incomes are likely to bolster discretionary spending, driving growth in the Indian FMCG sector. Social The Indian culture, social & life styles are changing drastically. The total population is nearly 1.27 billion and population includes rich, poor, middle class, male, female, located in rural, urban and sub urban areas, different level of education etc. Page 14







1.8.2     





1.8.3 

FMCG

Industry Analysis Report FMCG 2014
 According to International Labour Organisation, India will have the highest working age population in the world by 2020. The National Council of Applied Economic Research projects the proportion of middle class population to swell from 13.1% at present to 37.2% by 2025-26. Increase in working-age population and rising middle class will translate into higher purchasing power & boost consumerism. Premiumisation, despite the slowdown, consumers are willing to buy premium goods, unlike previous slowdowns that saw consumers down trade or buy cheaper products. Researches indicate consumers are willing to adopt a new premium category, even at a higher price, in the space of convenience, health and wellness. One area that we see global and local FMCG brands investing in is health and wellness. Health and wellness is a mega trend shaping consumer preferences and shopping habits and FMCG brands are listening. Leading global and Indian food and beverage brands have embraced this trend and are focused on creating new emerging brands in health and wellness. According to the PwC-FICCI report Winds of change: the wellness consumer, nutrition foods, beverages and supplements comprise a INR 145 billion to 150 billion market in India, growing at a CAGR of 10 to 12%. Technological Technology has been simplified and available in the industry. Where technology is not available then it is brought from foreign countries to meet FMCG sector requirements. Foreign players help in high technological development. With research and development facilities the new technologies are developed alone or with the help of foreign players. Environmental Increase in focus on environment preservation and reduction of impact on environment. Increased consciousness among the consumers. Company's Environmental Awareness being used as a selling point. Legal In a recent regulatory change by Telecom Regulatory Authority of India (TRAI), the advertisement time on television will be regulated to twelve minutes per hour and has come into effect on 1st October 2013. While this has cheer television viewers, channel broadcasters will have to face the brunt. Thus channel broadcasters are likely to raise ad-rates to compensate for lost revenues. This is likely to push up costs of FMCG companies as they feature among the top ten advertisers







1.8.4  

1.8.5    1.8.6

FMCG

Page 15

Industry Analysis Report FMCG 2014
2. MARKET TREND AND OUTLOOK
With a population of over one billion, India is one of the largest economies in the world in terms of purchasing power and increasing consumer spending, next to China. The Indian FMCG industry, with an estimated market size of ~`2 trillion, accounts for the fourth largest sector in India. In the last decade, the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated at compounded rate of ~17.3%. The sector is characterized by strong presence of global businesses, intense competition between organized and unorganized players, well established distribution network and low operational cost. Availability of key raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage. During 2012, the country witnessed high inflation, muted salary hikes and slowing economic growth, which affected the FMCG sector with companies posting deceleration in volume growth in their quarterly results. However, the trend seen in 2012 is likely to accelerate in 2013 as growth will come from rural dwellers that are expected to see a rise in their disposable incomes.

2.1 Indian FMCG Industry & Economic Indicators
   The Indian FMCG industry represents nearly 2.5% of the country‘s GDP. The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the last 5 years driven by rising income levels, increasing urbanisation, and strong rural demand and favourable demographic trends. The sector accounted for 1.9% of the nation‘s total FDI inflows in April 2000- September 2012. Cumulative FDI inflows into India from April 2000 to April 2013 in the food processing sector stood at `9,000.3 crore, accounting for 0.96% of overall FDI inflows while the soaps, cosmetics and toiletries, accounting for 0.32% of overall FDI at `3,115.5 crore. Food products and personal care together make up two-third of the sector‘s revenues. Rural India accounts for more than 700 mn consumers or 70% of the Indian population and accounts for 50% of the total FMCG market. With changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $80 bn by 2026 in towns with population of up to 10 lakh. India's labor cost is amongst the lowest in the world, after China & Indonesia, giving it a competitive advantage over other countries. Unilever Plc's $5.4 billion bid for a 23% stake in Hindustan Unilever is the largest Asia Pacific cross border inbound merger and acquisition (M&A) deal so far in FY‘14 and is the fifth largest India Inbound M&A transaction on record till date. Excise duty on cigarette has been increased in the Union Budget for 2013-14, which would hit major industrial conglomerates like ITC, VST Industries in the short term.

    



2.2 Rising per capita income and changing lifestyle
India‘s per capita income, a measure of living standards, is projected to have increased 11.7 per cent to `5,729 per month in 2012-13 at current prices, up from `5,130 in the previous fiscal. The per capital income at current prices during 2012-13 is estimated to have stood at `68,747, up from `61,564 in FY 2011-12. Rising per capital incomes are likely to bolster discretionary spending, driving growth in the Indian FMCG sector. The per capita income in real terms (at 2004-05 constant prices) during 2012-13 is likely to attain a level of `39,143 as compared to the First Revised Estimate for the year 2011-12 of `38,037. According to the IMF, India‘s per capital income is tipped to grow at a CAGR of 8.8 per cent to USD 2,228.5 over a period of 2012-17. In 2012-13, India‘s per capita income stood at USD 1,535.6. Also, rising number of working women and the reducing popularity of the joint family system has increased the demand for processed and packaged food products. Further, rising awareness has also boosted demand for personal care and healthcare products. People in the rural areas have become more open to consuming modern packages food products and personal grooming products as satellite TV and internet powers awareness. FMCG Page 16

Industry Analysis Report FMCG 2014
Also, the fast growing economy provides scope for growth in FMCG space. Despite the current slowdown, India remains one of the fastest growing global economies, giving huge opportunities for leading FMCG players to expand their brand presence, introduce new products and foray into untapped markets. Being a consumer-driven economy, India is one of the leading FMCG markets in the world.

2.3 Early monsoon
This year, the early arrival of monsoon has brought liveliness to the Indian FMCG companies, as it has increased the expectations of growth in uptake in the rural market, which accounts for upto 50% of sales of the FMCG companies. The dependence of FMCG sector on agriculture is high, so good monsoon is a positive add-on for the rural economy. As the monsoon arrives, disposable income in rural India increases, as a consequence, there would be increased consumption of FMCG products. The early arrival and prospects of a good monsoon are making FMCG firms such as Emami, Dabur, Marico and GSK Consumer Healthcare quite optimistic as 50% of their sales come from rural demand. It was reported that Emami which gets about 40-45% of total sales from rural India, expects increased consumption of FMCG products due to a good monsoon. Moreover, nearly 50% of Dabur's domestic sales are from rural India and the company has registered a total sale of `6,146 crore from the region. For Marico, the proportion of income from the rural area has increased over time and is currently around 30%. So, with a good monsoon, it is expected that there will be an improvement in rural consumption sentiment.

2.4 Export potential
India is one of the world's largest producers for a number of FMCG products but its exports are a very small proportion of the overall production. Total exports of food processing industry were US$ 2.9 billion in 2001-02 and marine products accounted for 40% of the total exports. In order enhance the global presence, Indian companies have started eying overseas markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries because of the similar lifestyle and consumption habits between these countries and India. India's exports of processed food were `413.1 billion in 2012-13, accounting nearly 13% of the country‘s total exports. India‘s exports of cosmetics/ toiletries stood at `15.5 billion in April-May 2013, accounting for 0.59% of total exports. HUL, Godrej Consumer, Marico, Dabur and Vicco laboratories are amongst the top exporting companies.

2.5 Rupee depreciation and fluctuation in commodity prices
Despite higher interest rates and elevated inflation, the Indian FMCG sector grew at a healthy 15-20 per cent rate last year driven by robust rural and urban demand. The sector is generally considered resilient to harsh economic conditions as need for some FMCG goods such as home cleaning equipment‘s, soaps, etc. will always be there. But the recent volatility in commodity prices and weakness in Indian rupee makes it difficult for companies to finalize raw material prices, which affect the final price of the product. With the Indian consumer known to be value conscious, FMCG players face a tough decision whether to pass on the price hike to consumers. At the same time, higher input costs may force a reduction in advertising and promotional budgets. Further, the record depreciation of the Indian rupee in recent weeks as negative for companies who import raw materials such as Marico, Godrej Consumer Products, Colgate, Dabur, as it may crimp margins unless they raise prices. The power shortage in the economy, coupled with adequate transportation and agricultural infrastructure remain the major obstacles for the growth of the Indian FMCG industry as many untapped regions remain inaccessible.

2.6 Rural India Demography
The rural middle-class constitutes a potential market lying to be tapped by the corporates in the business of fastmoving consumer goods (FMCG). It has been observed that rural India accounts for more than 700 mn consumers or 70% of the Indian population and 50% of the total FMCG market. The working rural population is approximately 400 mn. Average citizens in rural India have less than half the purchasing power of their urban counterparts. Still, this market has immense potential, enticing FMCG companies to take different steps to capture it. FMCG Page 17

Industry Analysis Report FMCG 2014
2.7 Middle-Class household, the underlying factor for FMCG growth
The Indian middle class population is the most promising market for FMCG and give brand makers the opportunity to convert them to branded products. As per McKinsey Global Institute (MGI), middle class population in India is going to increase by about 12 times during 2005-2025; as a result, spending is expected to increase by about 2025, fuelling consumption demand.

2.8 Disposable income
Per capita disposable income determines an individual's ability to purchase goods or services. As per the BRICs report, India is likely to witness a rise in disposable income to USD 1,150 by 2015, from the current USD 556 per annum, on account of growth in industrial and services sector. As a result, spending will increase which will consequently boost the FMCG sector growth.

2.9 Budget (2013-14) Highlights and Impact on FMCG sector
The overall impact of budget 2013-14 has been neutral on FMCG sector. The budget turned out to be dampener for the cigarette industry particularly for ITC with 18% rise in excise duty this year following last year‘s 21% rise. However, rise in allocation for Ministry of Rural Development augers well for FMCG companies. Besides, there was no major announcement for the sector.

2.10

Increased outlays on rural development/ changes in lowest income slab

The finance minister's decision to increase allocation for Ministry of Rural Development announced in the latest budget by 46% bodes well for FMCG companies, as rural region contributes one-third of FMCG sales. However, a large part of the increase shall involve capital stock building, while expenditures on flagship MNREGA has been raised modestly (12% growth under the head of rural employment). Further, the exemption limit has been raised modestly for the lowest income slab to `220,000. Also, the government has made promising statements over the GST implementation, which may be implemented by the end of FY‘14. Further, the budget has made an extra provision of `100 bn on account of the Food Subsidy Bill, which is also a positive trigger for the FMCG sector.

2.11

Changes in excise duties for cigarettes

Excise duty on cigarette has been increased in the Union Budget for 2013-14, which would hit major industrial conglomerates like ITC, VST Industries in the short term as volumes are likely to get impacted. The Union Budget has raised excise duties on cigarettes, roughly by 18%, across cigarette lengths except the new slab (