Fmcg

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Fmcg

  1. 1. Markets all over the world have been on a roll in 2003 and the Indian bourses are noexception having gained almost 60% in 2003. During this period, while there aresectors that have outperformed this benchmark index, there are also sectors that haveunder performed. FMCG registered gains of just 33% on the BSE FMCG Index last year.At the macro level, Indian economy is poised to remained buoyant and grow at morethan 7%. The economic growth would impact large proportions of the population thusleading to more money in the hands of the consumer. Changes in demographiccomposition of the population and thus the market would also continue to impact theFMCG industry.Recent survey conducted by a leading business weekly, approximately 47 per cent ofIndias 1 + billion people were under the age of 20, and teenagers among themnumbered about 160 million. Together, they wielded INR 14000 Cr worth ofdiscretionary income, and their families spent an additional INR 18500 Cr on themevery year. By 2015, Indians under 20 are estimated to make up 55% of the population- and wield proportionately higher spending power. Means, companies that are able toinfluence and excite such consumers would be those that win in the market place.The Indian FMCG market has been divided for a long time between the organized sectorand the unorganized sector. While the latter has been crowded by a large number oflocal players, competing on margins, the former has varied between a two-player-scenario to a multi-player one.Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated bya handful of global players, Indias Rs.460 billion FMCG market remains highlyfragmented with roughly half the market going to unbranded, unpackaged home madeproducts. This presents a tremendous opportunity for makers of branded products whocan convert consumers to branded products. However, successfully launching andgrowing market share around a branded product in India presents tremendouschallenges. Take distribution as an example. India is home to six million retail outletsand super markets virtually do not exist. This makes logistics particularly for newplayers extremely difficult. Other challenges of similar magnitude exist across the FMCGsupply chain. The fact is that FMCG is a structurally unattractive industry in which toparticipate. Even so, the opportunity keeps FMCG makers trying.At the macro-level, over the long term, the efforts on the infrastructure front (roads,rails, power, river linking) are likely to enhance the living standards across India. Tilldate, Indias per capita consumption of most FMCG products is much below worldaverages. This is the latent potential that most FMCG companies are looking at. Even inthe much-penetrated categories like soaps/detergents companies are focusing on
  2. 2. getting the consumer up the value chain. Going forward, much of the battle will befought on sophisticated distribution strengths.Structural Analysis Of FMCG IndustryTypically, a consumer buys these goods at least once a month. The sector covers awide gamut of products such as detergents, toilet soaps, toothpaste, shampoos,creams, powders, food products, confectioneries, beverages, and cigarettes. Typicalcharacteristics of FMCG products are: -1.The products often cater to 3 very distinct but usually wanted for aspects - necessity,comfort, luxury. They meet the demands of the entire cross section of population. Priceand income elasticity of demand varies across products and consumers.2.Individual items are of small value (small SKUs) although all FMCG products puttogether account for a significant part of the consumers budget.3.The consumer spends little time on the purchase decision. He seldom ever looks atthe technical specifications. Brand loyalties or recommendations of reliable retailer/dealer drive purchase decisions.4.Limited inventory of these products (many of which are perishable) are kept byconsumer and prefers to purchase them frequently, as and when required.5.Brand switching is often induced by heavy advertisement, recommendation of theretailer or word of mouth.Distinguishing features of Indian FMCG BusinessFMCG companies sell their products directly to consumers. Major features thatdistinguish this sector from the others include the following: -1. Design and Manufacturing1. Low Capital Intensity - Most product categories in FMCG require relatively minorinvestment in plan and machinery and other fixed assets. Also, the business has lowworking capital intensity as bulk of sales from manufacturing take place on a cashbasis.2.Technology - Basic technology for manufacturing is easily available. Also,technology for most products has been fairly stable. Modifications and improvementsrarely change the basic process.3.Third-party Manufacturing - Manufacturing of products by third party vendors isquite common. Benefits associated with third party manufacturing include (1) flexibilityin production and inventory planning; (2) flexibility in controlling labor costs; and (3)
  3. 3. logistics - sometimes its essential to get certain products manufactured near themarketStrategy: Porters Five Forces Model: analysing industrystructureDefining an industryAn industry is a group of firms that market products which are close substitutes for each other (e.g. thecar industry, the travel industry).Some industries are more profitable than others. Why? The answer lies in understanding the dynamicsof competitive structure in an industry.The most influential analytical model for assessing the nature of competition in an industry is MichaelPorters Five Forces Model, which is described below:Porter explains that there are five forces that determine industry attractiveness and long-run industryprofitability. These five "competitive forces" are-The threat of entry of new competitors (new entrants)- The threat of substitutes- The bargaining power of buyers- The bargaining power of suppliers- The degree of rivalry between existing competitors
  4. 4. Threat of New EntrantsNew entrants to an industry can raise the level of competition, thereby reducing its attractiveness. Thethreat of new entrants largely depends on the barriers to entry. High entry barriers exist in someindustries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency,restaurants). Key barriers to entry include- Economies of scale- Capital / investment requirements- Customer switching costs- Access to industry distribution channels- The likelihood of retaliation from existing industry players.Threat of SubstitutesThe presence of substitute products can lower industry attractiveness and profitability because theylimit price levels. The threat of substitute products depends on:- Buyers willingness to substitute- The relative price and performance of substitutes- The costs of switching to substitutesBargaining Power of SuppliersSuppliers are the businesses that supply materials & other products into the industry.The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impacton a companys profitability. If suppliers have high bargaining power over a company, then in theorythe companys industry is less attractive. The bargaining power of suppliers will be high when:- There are many buyers and few dominant suppliers- There are undifferentiated, highly valued products- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to setup their own retail outlets)- Buyers do not threaten to integrate backwards into supply- The industry is not a key customer group to the suppliersBargaining Power of BuyersBuyers are the people / organisations who create demand in an industryThe bargaining power of buyers is greater when- There are few dominant buyers and many sellers in the industry- Products are standardised- Buyers threaten to integrate backward into the industry- Suppliers do not threaten to integrate forward into the buyers industry- The industry is not a key supplying group for buyers
  5. 5. Intensity of RivalryThe intensity of rivalry between competitors in an industry will depend on:- The structure of competition - for example, rivalry is more intense where there are many small orequally sized competitors; rivalry is less when an industry has a clear market leader- The structure of industry costs - for example, industries with high fixed costs encouragecompetitors to fill unused capacity by price cutting- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greaterrivalry; industries where competitors can differentiate their products have less rivalry- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significantcost associated with the decision to buy a product from an alternative supplier- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is moreintense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) -then competitors tend to exhibit greater rivalry.Fast moving consumer goods (FMCG) – or Consumer Packaged Goods (CPG) – are products thatare sold quickly and at relatively low cost. Examples include non-durable goods such as soft [1][2]drinks, toiletries, and grocery items. Though the absolute profit made on FMCG products is relativelysmall, they generally sell in large quantities, so the cumulative profit on such products can be substantial. Contents [hide]1 Scope2 References3 See also4 External links[edit]ScopeThe term FMCG refers to those retail goods that are generally replaced or fully used up over a shortperiod of days, weeks, or months, and within one year. This contrasts with durable goods or majorappliances such as kitchen appliances, which are generally replaced over a period of several years.
  6. 6. FMCGs have a short shelf life, either as a result of high consumer demand or because the productdeteriorates rapidly. Some FMCGs – such as meat, fruits and vegetables, dairy products and bakedgoods – are highly perishable. Other goods such as alcohol, toiletries, pre-packaged foods, soft drinksand cleaning products have high turnover rates. [1]The following are the main characteristics of FMCGs: From the consumers perspective:  Frequent purchase  Low involvement (little or no effort to choose the item -- products with strong brand loyalty are exceptions to this rule)  Low price From the marketers angle:  High volumes  Low contribution margins  Extensive distribution networks  High stock turnover

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