• The sector is divided into two segments - the premium segment • With the economy on a high growth path, robust consumerism,
catering mostly to the urban upper middle class and the popular greater rural penetration and rapidly growing organised retail,
segment with prices as low as 40% of the premium segment, we remain bullish on the growth prospects of the FMCG space.
catering to the mass in urban and rural markets. The premium While rural regions would drive consumption due to higher
segment is less price-sensitive and more brand conscious. penetration, organised retailing in urban markets would help
• Since penetration levels are pretty high in most urban areas, increase value growth led by demand of premium products.
future growth can come only from deeper rural penetration The shift from unorganised to organised and from unbranded
and higher consumption. As rural income increases and to branded will add further impetus to growth in this segment.
distribution network improves (in line with road development However, concerns remain with respect to the increasing
projects), the penetration levels are set to increase. At present, competitive environment, input cost pressures and
urban India accounts for 66% of total FMCG consumption, with infrastructure bottlenecks. Companies, which have the ability
rural India accounting for the balance 34%. However, rural to maintain or increase the market share, offset cost pressures
India accounts for more than 40% of the consumption in major without sacrificing volumes would stand to benefit.
FMCG categories such as personal care and fabric care.
• The industry is volume driven and is characterised by low
margins. Products are branded and backed by marketing, Supply: Abundant supply in metros. Distribution networks
heavy advertising, slick packaging and strong distribution are being beefed up to penetrate the rural areas.
networks. Also, raw material prices play an important role in
determining the pricing of the final product. Demand: FMCG sector poised to grow 4-fold to $95 billion
in 10 years, says Federation of Indian Chamber of Commerce
• Despite the strong presence of MNC players, the unorganised and Industry-Technopak report.
sector has a significant presence in this industry. In most
categories, the unorganised sector is almost as big if not bigger Barriers to entry: Huge investments in promoting brands,
as the organised sector. Unorganised players offer higher setting up distribution networks and intense competition, but
margins to stockists in order to gain marketshare. the sector is not capital intensive.
Bargaining power of suppliers: Some of the companies
FY09 are integrated backwards, which reduces the supplier's
clout. Manufacturing is largely outsourced.
• The Rs 1016 bn FMCG sector grew by 18% YoY in 2008. Bargaining power of customer: In case of branded
Higher penetration, per capita consumption, increasing products, there is little that the consumer can influence as the
population base, and household income continued to drive intense competition within the FMCG space results in value
growth. The willingness to spend was also instrumental in for money deals. (e.g. buy one, get one free concept).
bolstering growth. The sector got further impetus by several
tax sops, greater focus on infrastructure development as well Competition: Competition is faced from both domestic, MNCs
as a boost to rural income. and also from cheaper imports, which are increasingly visible
in urban markets. Price wars are a common phenomenon.
RURAL AREAS: DRIVING GROWTH
CURRENT SCENARIO AND PROSPECTS
Value growth % Volume growth %
Rural Urban Rural Urban • Rising per capita income, increased literacy and rapid
urbanisation have caused rapid growth and change in demand
Hair oil 20.4 14.3 19.8 13.3 patterns. Apart from the demand for basic goods, convenience
Coconut oil 22 13.5 21.2 13.5 and luxury goods are also growing at a fast pace. The urban
population between the ages of 15 to 34 years is expected to
Shampoo 10.3 14.6 7.4 7.8 increase from 107 m in 2001 to 138 m in 2011. This would
Toothpaste 17.4 12.2 14.6 8.0 unleash a latent demand with more money and a new mindset.
Source : AC Nielsen. • While the homegrown companies are looking to expand beyond
the Indian shores, the MNC subsidiaries are likely to look for
• The number of households in rural areas using FMCG products leveraging their respective parent's strength. Since India is a
went up from 136 m in 2004 to 143 m in 2007 implying a CAGR big potential market, none of the big MNCs can afford to ignore
of 1.7% on the back of higher penetration. In 2008, the rural the region for long. The decade ahead is likely to see more
economy grew at a robust rate of 25% as compared to 10% MNCs looking to enter India, as organised retailing picks up.
growth in urban retail market According to a McKinsey report, • Due to the large size of the market, penetration level in most
rural India, would become bigger than the total consumer product categories like jams, skin care, toothpaste, hair wash
market in countries such as South Korea or Canada in another etc. in India is low. This is more pronounced when comparing
20 years. While the per capita income in rural areas is lower rural and the urban areas. Existence of unsaturated markets
than that in urban areas, the customer base is thrice that of provides an excellent opportunity for the industry players in
urban areas. the form of a vastly untapped market as the income rises.
• Most of the companies had faced pressure on their input prices • FMCG products are witnessing a retailing revolution in recent
during 2008. The companies had to take judicious price times. While some retail chains have large retail formats
increases and also reduced the packet sizes and stock- enabling huge volumes, some are focused on affordability
keeping units (SKUs). While this improved the realisations, which has resulted in margins getting squeezed. The Indian
some pressure on volumes was witnessed. During the first market is dominated by more than 12 m small 'mom and pop'
half of the year, the raw material prices saw a fall. Hence in retail outlets. However only 4% is in the organised sector,
order to maintain the market share and volume growth the thereby reducing the reach. With FDI expected to be allowed,
FMCG companies passed on the benefit of lower raw material the share from the retail formats is expected to increase.
prices to the consumers.