Fast Moving Consumer Goods Sector Analysis Report

 Fast moving consumer goods (FMCG) is the 4th largest sector in the Indian economy. There
are three main segments in the sector – household and personal care which accounts for
50%, healthcare which accounts for 31%, and food and beverages which accounts for 19% of
the sector.

 The urban segment accounts for 55% of the overall revenue generated by the FMCG sector.
On the other hand, the rural segment contributes 45% and is growing at a faster pace
compared to the urban segment. Demand for quality goods and services have been going up
in rural areas, on the back of improved distribution channels of FMCG companies.

 The Government of India has approved 100% Foreign Direct Investment (FDI) in the cash and
carry segment of the sector along with 51% FDI in multi-brand retail. Global retailers, who are
keen to increase their footprint in India can now cash in on the consumption growth story of
the country.

 The Goods and Services Tax (GST), launched in 2017, has been beneficial for the FMCG sector.
Many of the FMCG products such as soap, toothpaste and hair oil now come under the 18%
tax bracket against the previous 23-24% rate. Moreover, rates on food and hygiene products
have been reduced to 0-5% and 12-18%, respectively.

 Despite being one of the fastest growing markets globally for FMCG products, the per
capita FMCG consumption in India is still amongst the lowest in the world, giving the
industry a long runway for growth.

 Supply
Abundant supply through a distribution network of over 8 m stores across the country.
Distribution networks are being strengthened in rural areas.

 Demand
Not being an essential commodity, the demand for consumer products is elastic. Several brands
are positioned with narrow product differentiation. However, rising contribution of women to
 the working force and growing nuclear families have led to higher demand for convenience
foods, especially in urban areas.

 Barriers to entry
Huge investments in establishing brand identity and setting up distribution networks.

 Bargaining power of suppliers

Small and fragmented suppliers have limited bargaining power. Larger FMCG companies can
negotiate better rates during times of high input cost inflation. Most companies have integrated
backwards and have their own supply chains.

 Bargaining power of buyers

Rising competition and the onslaught of the e-commerce boom does provide good bargain
opportunities for customers. However, on account of a large number of buyers and limited
number of suppliers, the bargaining power of consumers is low in the FMCG sector.

 Competition
Competitiveness among Indian FMCG players is high. With more MNCs entering the country, the
industry has become highly fragmented. Domestic players feel the competitive pressure from
large well established MNCs. Spending on advertisements continues to grow and marketing
budgets, as well as strategies, are becoming more aggressive

Long Term Profitability /Level of

Competition & its impact /Entry Barriers
/Regulations /Life Cycle /Current position of
FMCG industry
FMCG Sector – Present
Being the second most populated country in the world, there is no doubt that India should be one of the
countries with a pioneering and growing FMCG market. Apparently, that is indeed what is happening right
now and what is more interesting are the products that have a greater market share.

In the past few years, there are increasing number of initiatives like farm loan waivers, Direct Benefit
Transfer (DBT) and development of infrastructure in rural areas. Under the Union budget 2019-2020, the
focus has been shifting towards education, agriculture, healthcare, infrastructure, tax rebate and micro, small
and medium enterprises (Ministry of Micro, Small and Medium Enterprises).These initiatives are projected to
have an impact by increasing the minimum wages of common people, especially in rural areas. Thus, any
increment in income will be directly proportional to demand in FMCG products.

Change in lifestyle and traditional culture is also having a positive impact on the FMCG industry. The
population in urban areas is diverging towards premium products as opposed to essential goods because of
the rise in income of the middle-class people. This has also lead to FMCG companies to rethink strategies as
people are willing to pay high prices for premium products.

India’s demographic profile plays a major role in the growth of this sector. Not only is India’s demographic
young, but this segment is also characterized by increased urbanization and higher expenditure. Urban
development initiatives by the government, as well as the increasing middle class of India, has led to an
increase in the number of attractive markets in the country. Ernst & Young’s research on the cities of India
highlights the emergence of 30 ‘new wave’ cities such as Jaipur and Surat. Consumption in these cities is
growing at a faster rate than that of many of India’s metros. India’s young population is also characterized by
a high degree of technological awareness. Growing penetration of smartphones and better internet
connectivity in India has led to a burgeoning E-Commerce sector, which has, in turn, helped formalize large
sections of the unorganized retail sector.

FMCG – who are the big boys?

In the Indian FMCG landscape, the biggest FMCG players are HUL, Nestle, ITC, Britannia Industries,
Marico, Godrej Consumer, Tata Consumer.

Some terms used in FMCG and what they mean (Click on Hyperlink)

Brand Advertising Volume Consumption SSSG

Value Growth
Jugaad Pricing Supply Chain Logistics Warehous
Types e
Product Discretiona Non- Vendors/Suppli Consumer
Placement ry spending Discretionary ers
Spending
Producer Shelf Contract Wholesalers Equilibriu
Planning Manufacturi m price
ng
Elasticity Inelastic Elastic dema Category Retailers
of demand demand nd management
Key Stockists & Product Market Share Market
Performan Super Flanking leadership
ce Stockists
Indicators
Mass Law of Complement Niche Market Demand
production Demand & ary and Forecastin
Supply Substitute g
Goods
RoCE Organic Inorganic FIFO Push
Marketin
g
Pull  Surrogate LIFO Promotions 7 P‘s of
Marketing Marketing Marketin
g
BCG  Rural  Co-Branding
Matrix Marketing

How does the FMCG Sector work? Everything you need to know!
You know how they say that everything begins with an Idea? Well, for a FMCG company everything starts
with a product!
Src – Marketing Weekly

Rural and Urban – The 2 sides of a coin called FMCG!

 Rural consumption has increased, led by a combination of increasing income and

higher aspiration levels. There is an increased demand for branded products in
rural India. 
 The rural FMCG market reached US$ 23.63 billion in FY18. The rural FMCG
market is expected to grow to US$ 220 billion by 2025.
 Accounting for a revenue share of around 55 percent, the urban segment is the
largest contributor to the overall revenue generated by the FMCG sector in India.
 The rural segment is growing at a rapid pace and accounted for a revenue share
of 45 percent in the overall revenues recorded by the FMCG sector in India.
FMCG products account for 50 percent of total rural spending.
 Rural India is witnessing increased demand for quality goods and services driven
by upgraded distribution channels of FMCG companies. Low penetration levels
in the rural market offer room for growth
Key Deals in recent times in the FMCG Sector

Why do FMCG companies have very low margins on their products?

Fast-moving consumer goods have generally very low profit margins. Products and therefore sold in large
quantities.

Suppose you have an IT company that executes Rs 10000 Cr of contacts each year and earns a 35% operating
profit margin. In FMCG, what happens is the company produces and sells Rs 500 Cr of products with a 5-
10% operating profit margin but it does so 40 times. FMCG is all about the churn!

Intermediaries and their earnings in the FMCG Value Chain (Subject to change
on the company and the type of products)
Src – Marketing Weekly

What are the stages of a FMCG product?

The four stages of a typical fast moving consumer good are:

Introduction into the market: When the product enters the market for the first time. The demand for
the product needs to be increased; this is usually done, by giving the customer some samples so that they can
try before they purchase the product. This stage helps the company to identify potential issues the product
might have, from the consumer’s point of view.

Growth Stage: After the product is introduced into the marker the sales increase, people start to buy the
product when required, the public is aware of the features and benefits of the product at this stage.

Maturation stage: Production costs usually reduce at this point as the product would have sold several
times during the growth stage. The price of the product usually drops down and the sales peek at this time.
During this stage, competitors introduce their own products, which have, are of similar characteristics.

Decline Stage:  Sales would have dropped down significantly, the price of the product increases, and
consumers tend to buy other products. Getting profits becomes very hard at this stage. The product is then
stopped when it reaches this stage.

E-Commerce – The prodigal son of the FMCG Sector?

E-commerce is not something that is taken lightly by any of the FMCG companies. Just read any annual
report and the word is featured a lot of times. But why is that so?

 India’s increasing internet penetration and rising digital maturity along with
developing infrastructure has helped boost online transactions
 The online FMCG market is forecast to reach US$ 45 billion in 2020 from US$
20 billion in 2017, backed by growth in online users from 90 million in 2017 to
200 million in 2020E.
  Around 72 percent of Indian consumers are most likely to shop online locally for
premium products.
 The Indian online grocery market is estimated to exceed sales of about Rs 22,500
crore (US$ 3.19 billion) in 2020, a significant jump of 76 percent over the
previous year.
 It is estimated that 40 percent of all FMCG purchases in India will be online by
2020, thereby making it a US$ 5-6 billion business opportunity.

FMCG – Growth Driver

 Favorable demographics. According to CRISIL, as many as 90% of the Indian

population will be below the age of 60 by the calendar year 2020 and 64% of
them form a part of the working population (in the age bracket of 15 and 59
years). In comparison, the U.S., China, and Brazil are expected to only have
77%, 83%, and 86% of their population below the age of 60.
 Urbanization. Urbanization is one of India’s most important economic growth
drivers as this leads to substantial investments in infrastructure development,
which, in turn, lead to job creation, development of modern consumer services,
and increased ability to mobilize savings. The share of the urban population in
the total population has been consistently rising over the years and stood at about
30.9% in 2010 and is expected to reach 37.4% by 2025 thereby increasing
demand.

FY20 Roundup of the whole FMCG Sector!

What does a good FMCG company look like?

If you had read the previous articles on Banking, NBFC, and Gold Financing, we
chose the best companies or the market leader. We chose Kotak and HDFC
Bank in Banking, Bajaj Finance in NBFC, and Manappuram in Gold Finance, we
will do the same here.

Hindustan Unilever is by far the best FMCG company in terms of business and
management.

Few Indians have heard of Hindustan Unilever Limited (HUL). But they are
intimate with the brands it sells. To name a few: Lifebuoy, Dove, Clinic Plus,
Ponds, Lakme, Closeup, Surf Excel, Vim, Brooke Bond, Bru, Kwality Wall’s,
Kissan, and, as of 2020, Horlicks. Nine out of ten Indian households use an HUL
product every month. Forget Google and Facebook, more Indians use HUL
products than those who own a television, those who vote, or even those who
have running water or electricity.

In 1958, HUL was already one of the biggest companies in India. It made a net
profit of Rs 1 Cr and in 2019 it made a net profit of Rs 6080 Cr, a CAGR of 15%.

In this period, the Indian Economy grew 1400 times but HUL grew 6000 times!

Fun Facts on HUL!

Fixing the Price – A twist

Fix the price and the profit you want to make; the cost is the target you have to
achieve.

It is a disruptive thought. Most companies assume the costs and then fix one of
the other two — price or profits. Multinationals tend to fix the profit they want
and price accordingly, and local competitors fix a price and take a reduction on
profits. HUL alone, in my knowledge, fixes profit and price and treats cost as a
variable.

Price and Volumes

Price is the biggest driver of volumes and volumes are the biggest driver of cost
reduction. By fixing Prices low, you drive volumes up and cost down. Why do
volumes drive costs down? All costs are either variable, like raw materials and
power, or fixed, like rent, advertising, salaries of office staff, etc. If the fixed
costs are 20 per cent of revenue and revenue doubles, the fixed costs come
down to 10 per cent of revenue. This is called leverage, where costs come down
not because you cut it, but because the business becomes bigger. More
interestingly, even those that are considered variable costs are not fully variable
and have large fixed components to them. Take raw material costs, clearly a
variable cost. But the more volume you produce, the less the wastage in
factories and the better your negotiation power. The more the volumes, the less
the chances of trucks going half full or energy being wasted in factory
shutdowns. So in reality you get leverage not just on fixed costs but even on
what are considered variable costs.

Supply Thoughts

Samir Jain, currently CEO of Bunge, was the chief packaging buyer at HUL
when he realized two things. Every factory was buying cardboard boxes (CLD,
in HUL jargon) from three or four suppliers. Supply security was the reason.
Samir realized that having several suppliers makes you less important to each
supplier thereby affecting supply security. It is the chicken-and-egg story. The
more you push for supply security by fragmenting the less likely you are to
achieve it. Instead, if you become crucial to the business of a single supplier,
you not only reduce costs but also ensure that it will do its best to ensure
supplier security. Each region was given one supplier to work with, with a
supplier from another region as the backup. Costs went down and supply
security did indeed go up.

Products

Most consumers want benefits from products at the cheapest cost. A vocal few,
usually higher income, demand specific ingredients. There is no value judgement
here and companies should service the needs of their consumers in the best
way. HUL being a predominantly mass marketing company, it usually designs
for output and not input.

Supply Chain

A Lean supply chain is needed that does three things – it extracts more from
fixed capital, creatively reduces operating costs, and sells close to the factory.

HUL is a master of extracting more from fixed capital. Every manufacturing

process is thoroughly studied and de-bottlenecked to increase the rated
capacity. Pradeep Banerjee, executive director supply chain and a company
veteran of forty years, has a 50:25:25 rule when it comes to capital expenses:
50 percent of new capacity must come from de-bottlenecking, 25 percent from
efficiencies like factory worker productivity, and only 25 percent from new
capital.

Obsessions with low costs! The results are ROCEs of 93%+!

This obsession with low capital spends is why HUL’s ROCE at 93% is the
highest in the industry. Arun Adhikari, a former managing director at HUL,
believes that ‘respect for money’ is a key-value system in HUL and it is best
evinced by its attitude to capital expenditure. He recalls a story of when his
friend Durgesh Mehta was the branch accountant at the Calcutta branch.
Durgesh wanted a Godrej Store well cupboard in his room and made a capital
expenditure proposal citing the security of crucial financial documents as the
reason. The reply from the CAPEX approval authority was that the proposal had
been partly approved. The request for the cupboard was disallowed but an
upgrade of the existing lock to the door to his room was approved. A more
secure lock to the room would surely solve the problem of theft of important
documents!

Cost Controls while keeping the end product same!

Categories can often get locked into high-priced raw materials if their
formulations are input- and not output-focused. Imagine a master chef who has
a recipe for his secret masala: it contains turmeric from Meghalaya, chilies fresh
from Mexico, coarse sea salt, and saffron from Spain. Tastes wonderful but
costs the earth, especially when the rupee depreciates versus the euro.

There is another approach to deconstructing this masala:a certain shade of

yellow that is measurable, aromas that can be measured on an olfactometer, a
certain combination of the five basic tastes of salt, sweet, sour, umami, and
bitter, a certain average particle size and a certain nutrition profile. Once you
know these parameters you can formulate for these output variables. Turmeric
from Greece can be replaced by Salem turmeric and you could add deflavoured
mango powder to get the same shade of yellow. The possibilities are endless,
creative, and cheap. To hell with the food snobs.

Price per gram debate

Logically the price per kilo of a small pack should be more than the price per kilo
of a large pack. But the truth is that the consumers of small packs are generally
much poorer than those of medium-size or large packs. So from a consumer
point of view, it is better to discount the small packs, but ideally not by more
than 15 to 20% from the core pack.

Working Capital Obsession

HUL’s obsession with working capital is legendary. Working capital includes

credit and stocks in hands and it is famously (though not accurately) said in
corporate circles that HUL operates with negative working capital. When Rohit
Jawa was training in Shahjahanpur, near Bareilly, he recalls, he got information
that a distributor’s cheque had bounced meant unpaid company working capital
was lying with the distributor. Jawa finished his dinner and rode his bike
through dacoit-infested areas to the distributor’s house. Knocking on the door
at 10 p.m., he demanded and got the cashback.

Investments/ Developments & Government Initiatives

The Government has allowed 100 percent Foreign Direct Investment (FDI) in
food processing and single-brand retail and 51 percent in multi-brand retail.
This would bolster employment, supply chain, and high visibility for FMCG
brands across organized retail markets thereby bolstering consumer spending
and encouraging more product launches. The sector witnessed a healthy FDI
inflow of US$ 16.28 billion during April 2000-March 2020.

Some of the major initiatives taken by the Government to promote the FMCG
sector in India are as follows:

 The Government of India has approved 100 percent FDI in the cash and carry
segment and in single-brand retail along with 51 percent FDI in multi-brand
retail.
 The Government has drafted a new Consumer Protection Bill with special
emphasis on setting up an extensive mechanism to ensure simple, speedy,
accessible, affordable, and timely delivery of justice to consumers.
 The Goods and Services Tax (GST) is beneficial for the FMCG industry as many
of the FMCG products such as soap, toothpaste, and hair oil now come under the
18 percent tax bracket against the previous rate of 23-24 percent. Also, GST on
food products and hygiene products has been reduced to 0-5 percent and 12-18
percent respectively.
  GST is expected to transform logistics in the FMCG sector into a modern and
efficient model as all major corporations are remodelling their operations into
larger logistics and warehousing.

Road Ahead

Rural consumption has increased, led by a combination of increasing income

and higher aspiration levels. There is an increased demand for branded products
in rural India. The rural FMCG market in India is expected to grow to US$ 220
billion by 2025 from US$ 23.6 billion in FY18.

On the other hand, with the share of unorganised market in the FMCG sector
falling, the organised sector growth is expected to rise with increased level of
brand consciousness, augmented by the growth in modern retail.

Another major factor propelling the demand for food services in India is the
growing youth population, primarily in urban regions. India has a large base of
young consumers who form majority of the workforce, and due to time
constraints, barely get time for cooking.

Online portals are expected to play a key role for companies trying to enter the
hinterlands. Internet has contributed in a big way, facilitating a cheaper and
more convenient mode to increase a company’s reach. It is estimated that 40
per cent of all FMCG consumption in India will be made online by 2020. The
online FMCG market is forecast to reach US$ 45 billion in 2020 from US$ 20
billion in 2017.

It is estimated that India will gain US$ 15 billion a year by implementing GST.
GST and demonetisation are expected to drive demand, both in the rural and
urban areas, and economic growth in a structured manner in the long term and
improved performance of companies within the sector.
 SWOT Analysis of FMCG industry

Strengths-

Good corporate culture

Stable cash flows

Successful international expansion

Sophisticated marketing-mix models

Manufacturing expertise

Highly automated systems

Efficient logistics system

Effective use of marketplace data

Good identifier of market insights

Ability to leap-frog competitor’s technology

Strong retailer relationships

Strong brand equity

Consumer “love” for the brand

Lots of key locations

Highly effective sales team

Successful product line extensions

Broad product range

High share of target markets

Clear value proposition

Clear segments targeted effectively

Weaknesses-

Strong existing competitors

Many substitute competitive products

Broad competitive set

Significant channel conflict

Seen as being disinterested in corporate social responsibility

Targeting price elastic markets

Reducing customer lifetime values

Limited number of new customers

A high-cost logistics system

Opportunities-

Extend our brand into new areas (brand extension)

Develop new products for international markets

Broaden  our product range to target new segments

Add more product line extensions

Target more price inelastic markets

Attract new customers through special offers

Use automation to improve performance

Leverage our superior logistics system

Improve our analytical marketing capabilities

Data mining of our customer  database

Demand for home delivery services

Aggressively challenge substitute offerings

Leverage bargaining power with retailers

Expand number of retailers

Acquire a competitor’s successful brand

Conduct more marketing experiments

Supply private label brands for key retailers

Reposition weaker products

Introduce low-cost products under a new brand name

Identify and pursue relevant market gaps

Threats-

Key competitors gaining market share

Inability to grow the customer base long-term

Products becoming outdated

New products cannibalizing our existing sales

Lost of unique product features

Failed brand extensions

Decline stage of the product life cycle

Reaching market saturation

Declining share-of-customer

A disconnected, and less loyal, customer base

Health concerns

Increase in commodity prices

Home delivery competitors

Industry price-war

Growing competitive set

Competitors targeting our product gaps

Retailers not accepting our product line extensions

Loss of a key retailer/channel

Organized consumer lobby groups

Adverse media attention

Summary SWOT Analysis-

MICHAEL PORTER’S 5 FORCES MODEL AND
FUTURE TRENDS OF FMCG INDUSTRY
1. Barriers to Entry : -

Entry of new players in an industry raises the level of competition, thereby reducing its attractiveness.
The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some
industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency,
restaurants, FMCG ).

Key barriers to entry include:-

 Economies of scale
 Product differentiation
 Brand Identity
 Customer switching costs
 Access to industry distribution channels
 Capital requirement
 Access to technology
 Government Protection
Barriers to Entry
6
5

1 Barriers to Entry

 Economies of Scale are the key determinants of market structure and entry for any organization. In
FMCG Sector Economics of scale is highly attractive because units produced of goods is very larger
scale and the costs incurred on those is very less

 Differentiation looks to make a product more attractive by contrasting its unique qualities with
other competing products, in FMCG sector differentiation has been done via color, size, shape,
quantity etc. Product differentiation in FMCG sector is highly attractive

 The most visible elements of a brand are colors, design, logotype, name, symbol, etc. A well-built
brand identity will effectively communicate a company’s personality and its product value to
potential customers, helping build brand recognition, association and loyalty. So the brand identity
is very high in FMCG Industry and the customer switching cost is very low because there are ample
no. players in the market

 There are huge availability of distribution channels in FMCG like manufacture, retail outlets,
wholesaler etc and

custmers
Retail
outlets
Wholesaler

Manufacture

 The Indian FMCG Industry is characterized with modest entry and exit barriers.
 2.Rivalry Among competitors:-

Competitiveness among the Indian FMCG players is high. With more MNCs entering the country, the
industry has become highly fragmented.

Spending on advertisements continues to grow and marketing budgets as well as strategies are
becoming more aggressive.

Rivalry among competitors is includes:-

 Number of competitors
 Industry growth
 Differentiation
 Switching cost
 Openness of terms of sale
 Excess capacity
 Strategic stakes
Rivalry among competitors

6
5
4
3
2
1
0 Rivalry among
competitors

 The availability of market players in FMCG is really high which increase competition in market The
Top 5 market leaders in FMCG Industry, in terms of revenue and profits
 FY15 Revenue(Cr.) FY15
45000 12000 Profit(Cr.)
40000
10000
35000
30000 8000
25000
6000
20000
15000 4000

10000 2000
5000
0
0

 FMCG has been a safe sector for investors looking for predictable margins and stable returns during
the economic crisis. So we can say that the industry growth in the FMCG sector is high.

 The product differentiation is moderate in FMCG Sector that’s by the differentiation in competitors
is also moderate and switching cost from one company to another is low in this sector

 The intensity of competitive rivalry increases when success in an industry is important to a large
number of firms. For example, the success of a diversified firm may be important to its effectiveness
in other industries, especially when the firm is in interdependent or related industries. The high
strategic stakes impact the long term profit potential for an organization in this sector there are
ample no. of competitors so that we can say that the excess capacity is high and contribution of
investor and stakeholders is also high.

3. Bargaining Power of Suppliers :-

Suppliers to the industry wish to capture as much of the profit in the value chain as possible prices are
generally governed by international commodity markets, making most of the FMCG companies a
price takers. Due to the long term relationships with suppliers etc., the FMCG companies negotiate
better rates during times of high input cost inflation. If an intermediary is earning excessive profits,
suppliers will raise prices in order to capture a greater share of the profit

The bargaining power of suppliers includes:-

 Number of suppliers
  Availability of substitute
 Supplier’s threat of forward integration
 Industry’s threat of backward integration
 Contribution to cost
 Industry’s importance to supplier

 In this sector the power of suppliers of raw materials and intermediate goods is not very high
because there is ample number of substitute suppliers available so the bargaining power of the
suppliers is low

 All firms must recognize that they compete against firms producing substitute products, those
products that are capable of satisfying similar customer needs but come from outside the industry
and thus have different characteristics. So the availability of substitute is really high in FMCG sector

 high-volume, low-margin fast-moving consumer goods industry contributed moderate rate of cost
due to the involvement of advertisement, manufacturing, packaging so that importance to supplier
is also moderate

Bargaining power of
6
suppliers
5

1
No. of suppliers Availability ofSupplier's Industry’s Contribution Industry’s
0 substitutesthreat of forward threat of to importance
integration backward cost to supplier
integratio
n of
Bargaining power
suppliers

4.Threat of Substitutes: -
The presence of substitute products in FMCG industry attractiveness and profitability because they limit
price levels. The threat of substitute products depends on:

 Availability of close substitute

  Switching cost
 The relative price and performance of substitutes
 Profitability of the producers of substitutes

 Being an essential commodity the demand for consumer products is elastic. Several brands are
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 FMCG industry.
E.g. Available substitutes of Colgate in market

 the cost of switching from one supplier’s product to another supplier’s product is easy if the
switching cost is lower but if it’s high then it’s difficult to buyers , the switching cost in FMCG sector
is low because of easy availability of products

 the relative price and performance of substitutes are closely related in this sector and profitability of
producers is depend on the performance of the substitute

Threat of substitutes

Availabiity of close substitute Switching Cost

The relative price and performance of substitutes
Profitability of the producers of substitute
 5. Bargaining Power of Consumers: -

Bargaining power of buyers or consumers depends on:-

 Number of buyers
 Availability of suppliers
 Switching cost
 Contribution to quality
 Contribution to cost

 While firms seek to maximize their return on invested capital, buyers are interested in purchasing
products at the lowest possible price. To reduce cost or maximize value, customers bargain for
higher quality or greater levels of service at the lowest possible price by encouraging competition
among firms in the industry. Into this sector the availability of buyers are high.

 High brand loyalty for a product discourages customers’ product shift. But low switching cost and
aggressive marketing strategies under intense competition between the FMCG companies, induce
consumers to switch between products, thereby driving value for money deals for consumers.

 Brand loyalty for a product contributed good quality and high cost.

Bargaining power of
4.5 buyers
4
3.5
3
2.5
2
1.5
1
0.5
0
No. of buyers Availability ofSwitching costContribution toContribution to
suppliersqualitycost

Bargaining power of buyers

Overall assessment:-
 FMCG Industry
6

0
Threat of new Rivalry amongPower of Power of Threat of Overall
entrants competitores buyers suppliers substitutes Attractiveness
FMCG Industry Overall
assessment

Future trends of FMCG industry:-

 Fast moving consumer goods will become a Rs 400,000-crore industry by 2020. the FMCG
sector witnessed robust year-on-year growth of approx. 11 per cent in the last decade, almost tripling
in size from Rs 47,000 crore in 2000-01 to Rs 130,000 crore now (it accounts for 2.2 per cent of the
country’s GDP). Growth was even faster in the past five years — almost 17 per cent annually since
2005. It identifies robust GDP growth, opening up of rural markets, increased income in rural areas,
growing urbanization along with evolving consumer lifestyles and buying behaviors as the key drivers
of this growth

 Goods and Service Tax(GST), which will replace the multiple indirect taxes levied on FMCG sector
with a uniform, simplified and single-pint taxation system, is likely to be implemented soon. A swift
move to the proposed GST may reduce prices, bolstering consumption for FMCG products.

 FDI in retail- The decision to allow 51% FDI in multi brand retail and 100% FDI in single brand retail
augers 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 growth will be driven by new segments such as urban India’s poorest households and low-
income value seekers visiting modern trade outlets for the first time
 Expanding Distribution Network- In order to tap the growing potential of rural
markets, the companies are now focused on improving their distribution networks to
expand their reach in rural India.

 Rising Importance of Smaller-sized packs- Companies are increasingly introducing

smaller stock keeping units (SKUs) at reduced prices. This helps them sustain margins,
maintain volumes from price conscious costumers and increase their consumer base.

 Lifestyle Products- Increasing urbanization and higher disposable incomes are

encouraging many consumers to move from unbranded to branded products,
bolstering growth in the FMCG market. Despite the current slowdown, the demand for
premium products (comprising of wheat cornflakes and muesli, baked and non-fried
potato chips and snacks, and diet beverages, 100% juices and organic or green tea) in
the health and wellness space, is rising, encouraging companies to launch more
premium products. Moreover, demand for sophisticated personal care products is also
on the rise as people become beauty and health conscious.

 The anti-ageing skincare category grew five times between 2007 and 2008. It’s today
the fastest- growing segment in the skincare market. Olay, Procter & Gamble’s
premium anti-ageing skincare brand, captured 20 per cent of the market within a year
of its launch in 2007 and today dominates it with 37 per cent share.

 Entry of New Brands (Brand/ Line Extension)- Innovation is a driving factor in Indian
FMCG. Several companies have started innovating or customizing their existing
product portfolios for new consumer segments. Brand extensions are 5 times more
successful than launching brands, increasing sales by 30% and contributing to 30% to
brand sales

Conclusion: -
FMCG Sector is a high volume and low margin industry, according to Michael Porter’s
5 forces model in FMCG industry, the number of the buyers and the number of
suppliers both are high, competition is also very high that’s by substitutes are easily
available in there. If customers are not so very brand loyal that means because of
substitute are easily available, the switching cost of buyers is also very low.

So overall we can say that the FMCG sector is highly admirable in India because the
contribution of this sector is almost 2.5% of the total GDP