Unfortunately the so-called Fast Moving Consumer Good industry, no more seems to be moving fast. In the 1990s, the industry witnessed an unprecedented boom due to liberalisation, urbanisation, increase in disposable income and altered lifestyles. The boom was also fuelled by other factors like onslaught of satellite television, reduction of excise duties and de-reservation from the small-scale sector.

The boom however started fizzling in the second half of 2000. As can be seen from Exhibit 1, the quarterly retail sales growth for the industry has been in the negative territory since the third quarter of 2001. In the current year after showing signs of recovery in the month of June and July, the retail sales again slipped to –1.6% in Aug 02. Out of top 20 categories, 14 have recorded negative volume growth ranging from –2% to –15% in Aug 02. Volume sales growth in large categories like soaps, tea, detergents and toothpaste remained negative. However, some other categories like chocolate, biscuit and shampoos showed good growth.

India has a huge population of over 1 bn. However, it would be misleading to judge the size of the Indian market for FMCG products by just looking at the population size. A closer look at the age, geographical, occupational and income profile will help us get a better picture of the Indian consumer market.

Indian Consumer Market

India’s age distribution of population is skewed towards younger age group, which augurs well for the country’s burgeoning consumer market. Around 54% of India’s population are below 24 years. Though this percentage is expected to reduce in future, it is still estimated to remain at a high of 47% by 2013.

Though the age group is skewed in favour of the consumer good market, the purchasing power of the average Indian population is quite low. India’s per capita income is around US$ 460, which compares very poorly not only with developed countries but also with other developing countries. China has a per capita income of US$ 840, while countries like Thailand and Malaysia have even better per capita income of US$ 2,010 and US$ 3,380 respectively.

With around 65% of the country’s total workforce dependent on agriculture, the occupational profile of the country is skewed. This explains the high dependence of the FMCG sector on rural sales. Around 40% sales of the FMCG sector comes from the rural area. As the agriculture sector in India is highly dependent on monsoon, the FMCG sector also gets indirectly exposed to the vagaries of nature. The high dependence of the FMCG sector on agriculture also exposes it to the other structural problems facing the latter, like poor rural infrastructure, small landholdings, long chain of intermediaries etc.

Though the country has been witnessing increasing urbanisation, with the percentage of urban to total population going up to 33.4% in 2001 from 25.7% in 1991. The percentage of rural population is still very high. Moreover, even in the rural area, around 81% of the rural population are concentrated in villages having population below 5000. Hence one can say that the geographical profile of the country poses distribution challenge for the consumer good industry.

Characteristics of the Industry

Few FMCG categories have reached saturation level

The 1990s boom in FMCG industry was mainly led by rapid growth in rural penetration of low priced products. The spread of satellite television coupled by companies like Nirma and HLL’s rural penetration drive led to a marked improvement in rural penetration of the FMCG products. However, the rural penetration seems to have stagnated in the past couple of years, especially in the case of necessity product categories. In fact, categories such as toilet soaps, detergents, tea have reached high penetration levels in both rural as well as urban areas and it would be difficult to increase the penetration further (Exhibit 2).

Exhibit 2

Dealer Penetration (%)

Urban

Rural

Segments

1997

1999

2001e

1997

1999

2001e

Necessity

90

95

97

97

97

97

Emerging

88

95

97

79

88

92

Lifestyle

66

74

80

25

32

40

Source: ORG-MARG; Industry Estimates

Another point that emerges from the penetration numbers is that while the FMCG companies have successfully tapped the high-income group, they now need to target the lower income group (Exhibit 3). For a category like shampoo, in urban India the penetration level is at a high of 88% for the top 4% of the income group, while it is 23% for the lowest 10% of the Income group. Similar penetration level gap is witnessed in the rural areas also.

Exhibit 3

Penetration Levels by Income Groups

Urban India

Shampoo

Toothpaste

Top 4%

88

86

Next 4%

82

86

Next 13%

76

93

Next 22%

63

86

Next 22%

50

74

Next 25%

37

54

Lowest 10%

23

32

All Income Groups

54

72

Rural India

Shampoo

Toothpaste

Top 1%

71

86

Next 3%

60

80

Next 9%

48

67

Next 15%

34

50

Next 38%

22

31

Lowest 34%

14

17

All Income Groups

25

34

Source: ORG-MARG

Whatever the penetration level, the Indian consumers still offer tremendous growth potential because of their low per capita consumption (Exhibit 4). For a category like toothpaste, the per capita consumption in India is 40 ml as against 299 ml in USA and 358 ml in Brazil.

Exhibit 4

Per Capita Consumption

India

Brazil

USA

Personal Wash (kg)

0.5

1.1

2

Fabric Wash (Kg)

2.6

7.2

13

Toothpaste (ml)

40

358

299

Shampoo (ml)

16

444

1018

Source: Industry

Rise of lifestyle and convenience products

While the necessity product categories have matured and are facing challenges on the growth front, lifestyle and convenience products offer tremendous growth potential to the Indian consumer goods industry. The food segment, which is still at a very nascent stage in India, is a good example of rising consumer demand for convenience products because of changing life style. Industry data shows that categories like noodles, jam, ketchup, fruit juice and other packaged ready to eat food are growing with leaps and bounds.

Cosmetics, women-healthcare, mosquito repellent, scourers are some of the other categories in the FMCG industry, which are showing good growth potential.

Freebies have become a constant feature

Increasing competition in the industry has restricted the ability of the players to raise price frequently. For instance, late last year, HLL had increased the prices of shampoos significantly higher than competition. As a result, by the second half of the current year, the company had lost 450 basis point of market share in this segment.

In fact with increasing competition, many categories like detergents and toilet soaps have started to follow commodity economies. As a result the industry players are resorting to freebies and discounts to garner larger market share.

Another method being adopted by players to increase sales is the introduction of smaller size units at lower price points. Following the tremendous success of shampoos in sachet packs, now we have many other products like chocolates, hair oil, and detergent in smaller packs.

Imports not a major threat for the industry

India removed the quantitative restriction on 714 items in 2000 and the remaining 715 items in 2001. With the removal of quantitative restrictions, imported consumer good products are now easily available in cities like Mumbai, Delhi and Bangalore. However, the percentage of imports is still very low and does not pose an immediate threat to the industry.

Reduction in Indirect Taxes

In the past 10 years, the excise duty rates in India have declined from the level of 40-50% to 16% for most categories. The decrease in consumer good prices as a result of reduction in excise duties was one of the factors responsible for the rapid growth witnessed by the industry in 1990s. The total indirect rates on FMCG goods in India now range between 25-35%, which is similar to or higher than most countries in Europe and the US. Though, reduction in indirect taxes will help raise growth rates, the chances of further dramatic reduction in excise duties are low.

Problems facing the industry

Economic Slowdown

The FMCG industry has been hit by the slowdown in the economy in the recent past. Slowdown in the economy not only dents the purchasing power of the consumers, it also influences the consumer sentiments leading to lower spending. The consumer sentiments have also been affected by the current global slowdown. The economic numbers released in the current fiscal, be it GDP, exports, IIP, credit offtake, are definitely showing signs of revival in the Indian economy. However, the extent of recovery cannot be ascertained completely as the impact of drought is still to be reflected in the economic numbers being released.

Downtrading

Another problem facing the FMCG industry is downtrading by consumers. Premium brands are losing out to the mass-market brands as consumers are showing preference for ‘value for money’ products. For example, in 2001, HLL’s premium soap brand Lux showed a yoy dip of 12.3%, while its mass-market brand Breeze showed a healthy growth of 12.4%. Downtrading is most evident in categories like soaps, detergents and toothpaste.

Spurious Products

Counterfeit products masquerading as some of the country’s top selling products is significantly eating into the revenues of the industry. Popular brands across product categories are losing between 10% to 30% of their business to fakes. An AC Neilson survey estimated the annual loss to the FMCG industry from spurious products, at Rs 26 bn and to the Government (in the form of unpaid taxes) at Rs 9 bn. An ORG survey of 12,500 retail stores completed in Jan 02 found the counterfeit market to be 5-15% of the annual sales of Rs 600 bn for the FMCG industry. That’s between Rs 30 bn and Rs 90 bn a year.

Change in urban consumption pattern

The FMCG industry has also been affected by changing urban consumption pattern in favour of consumer-durables vis-à-vis non-durables. The increasing expenditure on consumer-durables could be attributed to the easy financing facilities available. Moreover, with changing lifestyle and increasing aspirations, the proportion of spending on healthcare, education, transportation and communication is increasing, which is also eating into the share of consumer non-durables.

High Advertising Budget

The competitive pressure in the industry has hiked the advertising budget. However, with the increase in the number of television channels, the money spent on advertising by the FMCG companies does not go as far as it used to earlier. Brand loyalty has been wavering with increasing options being available to the consumers.

Segment wise growth

Personal Wash

The personal wash segment valued at around Rs 40 bn has not been performing well. The segment witnessed a yoy dip of around 12% in Aug 02. The poor performance of the category can be attributed to high penetration level leading to lower scope of increasing growth through further increase in penetration. The category is also witnessing increasing downtrading, with the popular segment eating into the share of the premium segment. However, industry players are trying to capture the niche consumers by introducing value-added products like shower gels, etc. HLL, with brands like Lux, Lifebuoy, Breeze, and Rexona leads the market with a share of around 60%. Some of the other players in the market are Nirma, Godrej Consumers and Reckitt & Colman.

Fabric Wash

With increasing competition, the fabric was category valued at Rs 45 bn has started to behave like a commodity. The popular segment account for around 85% of the total detergent market. Nirma is the leader in the popular segment, while HLL (Surf, Wheel) is the leader in the premium segment. Some of the other players in the market are P&G (Ariel, Gain, Tide) and Henkel Spic (Henko).

Oral Care

The sales volume in the oral care category continued to fall, with Aug 02 recording a yoy dip of around 8%. However, the segment valued at Rs 20 bn has tremendous potential to grow because of the low per capita consumption of this category. In India the per capita consumption of toothpaste is 40 ml as against 299 ml in US and even higher 358 ml in Brazil. Colgate is the leader in the segment, with roughly 50% share of the market, followed by HLL with a share of around 36%. The players in the segment have very little pricing power because of limited scope of product differentiation

Skin Care

This category has products like cream, talcum powder, moisturisers and lotions under its umbrella. Fairness Cream valued at around Rs 9.3 bn is the largest product in this category. HLL dominates the segment with 53% share in fairness cream and 65.2% share in talcum powder. In contrast to some of the other FMCG categories like soaps, detergents and oral care, brand loyalty is quite strong in the skin care category.

Household Care

The category with products like mosquito repellent, scourers and floor cleaners is valued at around Rs 18 bn. Mosquito repellent valued at roughly Rs 6 bn is among the fastest growing product in this category. Godrej Sara Lee with brand Goodnight is the leader in the mosquito repellent segment, while HLL’s Vim in the major player in the dishwasher segment. In the floor cleaner segment, phenol with attractive pricing is much ahead of branded products like Lisol of Reckitt & Colman and Domex of HLL.

Food Products

The food products industry currently has low penetration. However, the industry promises very good growth potential because of the changing lifestyle in urban India. The category includes sub-categories like processed fruits and vegetables, dairy, branded staples, bakery, ready to eat packaged food etc.

India is among the world’s largest producers of many food items, however, only about 1.8-2% of the country’s fruits and vegetables are processed compared to 60-70% in countries like the US and UK. This is because of poor storage, refrigeration, and transportation facilities in the country.

As far as the branded staple market is concerned, it is currently dominated by the unorganized sector. However, it also has the presence of FMCG giant, HLL. The price sensitive nature of the Indian markets makes most of the mass market basic staples food category business a low margin business, however high volumes are expected to make up for the low margins.

The Indian Dairy industry is dominated by the co-operative sector, with National Dairy Development Board (NDDB), a clear market leader. NDDB’s major brand, Amul is the market leader in the branded cheese, butter and margarine segments. Some of the other players in the segment are Britannia and Nestle.

As the bakery industry was reserved for small-scale sector till last year, the unorganised sector contributes around 60% to the total sales. The biscuit segment has been showing good performance, with a yoy growth of around 17% in Aug 02 as against a dip of around 4% in Aug 01. Britannia and Parle are the two main players in the category.

Chocolate & Confectionery

The chocolate market is showing significant improvement in sales trend. The segment has grown by 18% (yoy) in Aug 02 as against a negative growth in Aug 01. The healthy performance of the category could be partially attributed to lower exposure to the rural slowdown. The strategy of the two main players, Cadbury and Nestle of introducing products in smaller packs to propel growth has been very successful. However, the confectionery market, which is around eight times the size of the chocolate market in terms of volume has not been doing well. This is because of the hike in excise duty from 8% to 16%, which has made it difficult for companies to promote their products economically as most of these are sold at fixed price points of Re 1 and 50 paise.

Tea

Indian tea industry is currently going through a phase of recession. The players in the category are facing margin squeeze as well as realisation lower than the marginal cost. The main factors responsible for the poor show are lower auction prices, increasing wage cost and consumer downtrading. Export is also being hit by lower focus on quality and increasing competition from countries like Sri Lanka and Kenya. Packaged tea contributes only around 35% to the total tea market, while the rest comes from loose tea. HLL is the leader in the packaged tea category with a share of 35.3% followed by Tata Tea that has a share of around 18.8%.