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FMCG New Opportunities

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White paper prepared by YFactor for CII Conference on 8th August 2012

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FMCG New Opportunities

  1. 1. CONCEPT & DESIGN BY NOSHE OCEANIC
  2. 2. Foreword ContentsThe Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess ofUS$ 24 Bn. It has a strong MNC presence and is characterized by well established distribution networks, intensecompetition between the organized and unorganized segments and low operational cost.All businesses face the twin issues of how to survive and grow in spite of the challenging external environmentand intensifying competition. In view of this, successful companies continuously look for new operational FMCG Market – Historical Trends and Growth Drivers;paradigms. Coupled with this are rapidly evolving consumer tastes and preferences and regulatory, trade and North Zone Developments 01logistics development. Given the changing scenario, FMCG companies need to look beyond their normalstrategic frameworks and evaluate opportunities in areas where they may not have ventured earlier using Modern Trade 04innovation and new technologies as part of their arsenal for surmounting emerging challenges.CII has undertaken various initiatives in the FMCG sector. Amongst them, some of the key activities have focused FMCG Market – Urban vs Rural 08on GST, Environment Protection Act notification on use of plastics; Sugar Representation; Cross Border Taxationand the Competition Act. Todays conference will discuss New Opportunities, Wider Markets and Sustainable Information Technology and FMCG Companies 12Business in the FMCG Sector. Innovation: A Framework for FMCG Companies 16The sub topics of this Conference would weave in the interrelated aspects of the Modern Trade; Market trendsUrban Vs Rural; Integrated Role of Information Technology; Innovation and its critical impact on the FMCG Sustainability Branding 19business and the emerging role of Branding with Sustainability.The Conference Programme and the White Paper prepared by our Knowledge Partner, YFactor would discusshow FMCG Companies can grow and prosper in times to come.Wishing you all success for the event.Mr. Vikram Bakshi Mr. Divyaroop BhatnagarConference Chairman Managing DirectorJoint Venture Partner and YFactor Marketing Private LtdManaging DirectorMcDonalds India (North & East)
  3. 3. FMCG NEW OPPORTUNITIES The FMCG landscape in North India is also very o Mrs Bectors has given a run for their FMCG Market – Historical Trends and Growth Drivers vibrant due to the following reasons: money to the large MNCs with innovative and well-presented food products. • Tax concessions provided by the hill states of FMCG Market Size and Growth J&K, HP and Uttarakhand have resulted in most o Bagrrys has come up with a range of FMCG companies moving their manufacturing healthy breakfast cereals, oats and muesli The FMCG Market in India is estimated at FMCG Market Growth is correlated with GDP growth to these locations. This has resulted in significant for the health c o n s c i o u s m o d e r n I n d i a n around Rs 130,000 Crores (US$ 24Bn)1 in 2010. and we have seen acceleration from close to 6% to employment generation and growth in GDP. consumer. Indias robust consumption patterns ensure relatively over 15% in FMCG Market Growth from the middle of Locations like Samba and Kathua (near Jammu), steady growth even in times of economic slowdown. the decade when Indias GDP started growing faster.2 o Ghari Detergents based in Kanpur have Baddi, Nalagarh and Parwanoo (in Himachal Future projections indicate a projected growth rate of become a major force in the Detergents Per Capita Consumption for key FMCG Categories is Pradesh) and Haridwar, Pantnagar and 12 – 15% over the next few years leading to a market by initially keeping a strong focus very much lower than for other developing countries Dehradun in Uttarakhand have become m a j o r projected market size of Rs 230,000 – Rs 260,000 on their home market of UP before indicating substantial headroom for growth3 centres for FMCG manufacturers. This has also Crores (US$ 42Bn – US 47 Bn) by 2015. Historically, expanding to other parts of the country. resulted in many packaging and raw material suppliers setting up their factories nearby. From FMCG Sectors and Categories US$ Per Capita China Indonesia India the supply chain point of view, the region has Packaged Foods including Beverages account for Skin Care 7.9 4.3 0.8 seen steady growth. Many FMCG companies close to 45% of the total FMCG Market. Personal Shampoo 2.3 2.1 0.6 have established Mother Godowns in locations Care contributes 26% and Home Care 15%. like Zirakpur, Punjab to cater to all India logistics. Ice Cream 3.3 1.7 0.4 The balance comprises of Tobacco products. • Per capita income and GDP growth has been Underpenetrated categories such as Fruit Juices, North Zone – FMCG Development extremely high in the states of Punjab, Skin Care and Hair Care exhibit faster growth rates Chandigarh, Haryana, Delhi and West UP. This than categories such as Cooking Oil, Toothpaste, 2011 Population4 2011 GDP (RsCrores)5 Per capita GDP has resulted in the development of sophisticated Laundry and Toilet Soaps where usership is nearing Chandigarh 10,54,686 20,704 1,96,305 FMCG categories like Personal Care faster than saturation.6 Haryana 2,53,53,081 2,57,793 1,01,681 the rest of the country. FMCG Players Himachal Pradesh 68,56,509 52,426 76,462 • Innovative companies from the North Zone have The FMCG Sector comprises of five types of driven growth in a variety of categories, Some Jammu & Kashmir 1,25,48,926 47,709 38,018 players: examples are given below: Delhi 1,67,53,235 2,58,808 1,54,482 o Dabur needs no introduction. They have Punjab 2,77,04,236 2,21,332 79,891 leveraged the power of traditional Indian Rajasthan 6,86,21,012 3,03,358 44,208 Ayurveda to create a w h o l e r a n g e o f • Entrenched, well established MNCs such as Uttar Pradesh 19,95,81,477 5,88,467 29,485 products that touch the hearts of Indian HUL, Reckitt Benckiser, ITC or Nestle who have consumers. developed a deep understanding of the Indian Uttarakhand 1,01,16,752 77,580 76,685 o Kashmir Apiaries based in Punjab are the Consumer over the years. They are good North Zone 36,85,89,914 18,28,177 49,599 largest exporters of honey in India. They examples of think global and act local Pepsi All India 1,21,01,93,422 73,06,990 60,379 have also pioneered a large range of and Coke also fall into this category though they North Zone % 30.5% 25.0% honey varieties and blended products for are later entrants. the Indian market including Organic Honey • Relatively new MNC entrants. Examples such as Per Capita GDP is co-related with FMCG Market Size. States like UP, Rajasthan and J&K are below the that has become very popular in the LÓreal, Amway, Kellogg or P&G. In general these As GDP increases, consumers tend to use more national average while Chandigarh, Haryana and Modern Trade. companies tend to be more global in outlook sophisticated products especially in categories like Delhi are well above. This variation means that North o Bharat Box headquartered in Ludhiana, and treat the Indian market as an integral part of Personal Care. The North Zone has 31% of Indias Zone has a varied landscape for FMCG products and have leveraged their product their Regional/Global Strategy. population but contributes only 25% of National GDP. all segments of the market have a presence here. development, supply chain and • Large Indian companies such as Dabur, Godrej, 1 manufacturing capabilities to enter the Marico, Emami and CavinKare. Over the years US$ to INR assumed at 55 2 Source Technopak and Booz Analysis market with a range of FMCG products. 3 Source Euromonitor 2010 and HUL Presentation 2011 4 Census of India 601 5 VMW Analytics Services Source AC Nielsen and Technopak 02
  4. 4. FMCG NEW OPPORTUNITIES these companies have grown rapidly in scale Herbals, Crax, Forest Essentials and others who and sophistication and the quality of their are currently regional or limited players but are k e e n management is rapidly levelling the playing field. to scale up rapidly.7 • Single category large Indian companies such as It would be fair to say that the MNCs are facing keen Nirma, Ghari, Power Detergents and Ruchi competition from local players in India. Access to Soya. technology, sophisticated design and packaging and high quality advertising has narrowed the capability • Emerging Indian companies, better known for gap between local players and the MNCs. their brands such as Vasmol, Himgange, Lotus FMCG Growth Drivers The factors influencing growth of the FMCG Sector may be classified as Extrinsic or Intrinsic to the sector. Modern Trade Extrinsic Factors Intrinsic Factors Growth in GDP and Disposable Income Competition leading to: “Modern/Organised retailing is growing at an base and expanding their business with newer Increasing Urbanisation • Cost effectiveness and keeping pricing in check aggressive pace in urban India, fuelled by organized retail formats and intense competition Media Explosion • Intense market activity (new launches, relaunches, bourgeoning economic activity. Organized retail driving innovation in formats.”8 Rural Prosperity advertising and sales promotion) revenues are expected to increase from an estimated Between 2005 and 2009, Organised Retail in India Innovation in product development, marketing and US$ 12.9 billion per annum in 2005-06 to more than Government Policy (NREGA, Tax Reform) has grown at 24% CAGR.9 distribution strategies US$ 43 billion by 2009-10. A large number of Growth of Modern Trade Increasing usage of IT in FMCG companies domestic and international players are setting up Mega Trends in Health/Wellness and Environment Protection Integration of the product and service experience (Lakme, Streak, Kaya) 85% Encouraging Up Trading – HUL in Skin Care 81% 55% 40% 30% 20% 4.80% It has often been said that India offers a bewildering affecting growth. The following issues that are of diversity in terms of languages, religions, castes, paramount importance will be taken up for discussion a na ia a an S nd di si es U income stratification and education. This vibrant in this paper and in the conference today: iw hi ay In la n C Ta ai al do marketplace has found a fitting resonance with Th M In • Impact of the Modern Trade FMCG Marketers. As the consumer market deepens and matures marketers have hastened to widen their • Urban vs Rural Market Figure : Organized Retail Penetration in Select Economies10 offerings to cater to all shades of this diversity. There is • Role of IT and Innovation inFMCG companies a place for every kind of consumer product – at all Retail is an extremely significant part of the Indian Economy estimated at 39% of GDP.11 Yet organised retail price points, with every consumer benefit possible • Sustainability Branding contribution is only at 4.8% of the total market (2009) especially when compared to other developing catering to myriad geographies. countries. (Figure 1) Conference Themes Several important themes emerge from the foregoing 8 IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in) analysis of the FMCG Sector and the key drivers 9 IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis 10 IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis 11 7 Confederation of Indian Industry & AT Kearney Report (2006)03 Source YFactor Presentation 04
  5. 5. FMCG NEW OPPORTUNITIES Retail spending habits in India 2. Current Shopping Habits of Urban Indians: The b. Larger product range for an increasingly urban Indian is very used to convenience demanding urban consumer of the catered to by traditional retailing with primary “many Indias”. 16 Home, 3% Pharma, 2% Entertainment, 1% presence of neighbourhood kirana stores, Health & Beauty, 1% But replacing current shopping habits is not easy. And Books, Music & push-cart vendors, melas and mandis 15 .They with high costs there is an increasing need to make Gifts, 3% offer home delivery, easy access and a personal modern trade profitable faster. For FMCG products, touch. Indians also tend to buy frequently, opportunities could be in: Durables, 10% especially food and in the case of the lower income strata small volume, low unit price packs. The weekly or fortnightly shopping habit Clothing & does not work in India, where fresh food items Textile, 36% are bought virtually on a daily basis. Footwear, 13% FMCG and Modern Trade Can Modern Trade compete with current traditional sales distribution networks? Watch & 1. De-intermediation: By directly supplying Jewellery, 17% products to stores, companies are effectively cutting out the wholesaler margins and can offer a. Home Delivery: The highest level of Food & better rates to Modern Trade which could result convenience – no traffic, no parking. You Grocery, 14% in increased profitability. could guarantee ticket sizes by having minimum orders and reduce costs by 2. Economies of Scale: Directly supplying stores servicing orders directly from warehouses. Figure : Retail Categories12 results in lower transportation costs, savings on time and increased efficiency. b. Smaller convenience stores that have easy There is clearly a huge opportunity for growth in all these categories in the Organised Retail Sector. access to consumers. Prime locations are 3. Intensity of Interaction and Measurement: unlikely to be in malls which attract footfalls Factors contributing to low penetration of store this could have an impact on yield per Modern Trade offers an opportunity for bent more on entertainment than grocery organised retail in India square foot o r p ro f i t a b i l i t y. T h i s f a c t o r companies to directly i n t e r a c t w i t h t h e shopping, but more in residential a r e a s effectively rules out setting up mega stores consumer. Observe trends, run promotions, 1. Modern Trade is an Urban Business: which can then cater to an everyday need. 30-40 Km from the city centre as in m o s t assess the effectiveness of promotional Urbanization is an integral part of the process of The target would be for repeat consumers, developed markets. Also such stores would activities and promote general awareness of economic growth. As in most countries, Indias constant footfalls and high conversion rates. exclude the bulk of Indian consumers who do their brands. Companies should also view their towns and cities make a major contribution to Such stores would need to differentiate not have the means of transport to travel shelf space as a platform for this kind of the countrys economy. With less than 1/3 of themselves from traditional m o m a n d p o p and shop at such distances. interaction and take advantage of it. Indias people, its urban areas generate over 2/3 shops by offering better hygiene, consistent of the countrys GDP and account for 90% of b. Increasing Property prices in Urban India: Challenges to Modern Trade in current Market products availability, longer working hours government revenues.13 Based on the above, city centric stores seem situation and attractive pricing based on a to be the way forward. However, such city consolidated supply chain. a. Congestion in Urban India: Lack of good 1. Convenience of Access: Challenges of Urban centric locations hugely increase the cost of public transportation, traffic and parking Living in India are those of space and time. 2. Supply Chain: Organized retailers are going to real estate. Property prices in U r b a n I n d i a woes makes store access a factor. If stores Congestion, traffic and parking woes are a be increasingly interested in reducing time-to- have doubled in the last few years are destinations then convenience of reality. Kirana stores and other traditional mom market. To achieve this, it will be important to encouraging retailers to rent not buy. Rental access is an issue and they could be limited and pop outfits are more convenient with their invest in inventory management and related clauses come with a 15% every three years to their catchment area only. For a very large easy access (walking distance) and home technology for capturing sales data, forecasting escalation.14 delivery systems. Modern Trade could have demand and generating automatic some distinct advantages: replenishment. Decreasing inventory levels will 12 ZENITH International Journal of Multidisciplinary Research Vol.2 Issue 1, January 2012, ISSN 2231 5780 also require strong backward integration with 13 http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21207992~pagePK:141137~piPK: a. Hygienic, clean shopping environment distributors or manufacturers. Retailers will also 14 1127~theSitePK:295584,00.html 14 International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 24 (2009)© EuroJournals Publishing, Inc. 2009 1505 IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in) 16FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 31 06
  6. 6. FMCG NEW OPPORTUNITIES need to optimize logistics further in terms of penetration in India is quite low as compared to other warehousing and transportation etc. For this it countries indicating a potential for future growth. (See 17 will be imperative to increase supplier collaborations. Figure 3) This could pose a major challenge to FMCG companies in the future. 3. In Store Brands: They give a retailer the highest profitability as margins on these brands are 30- 35%. They also help distinguish between retailers as they are unique to the store. Current Retail spending habits in India 46% FMCG Market – Urban Vs Rural 40% 35% Overview 29% Heres a simple statistic. Over 300 million Urban capital income is 4X that of rural income, you start 27% Indians live in 5,000 metros, cities and towns with an understanding the concentration of purchasing 21% average population density of 5,000 people per sq. power in urban areas – why marketing to urban 20% 20% km. But 800 million Rural Indians live in 627,000 consumers has been the low hanging fruit, while villages with an average population density of only rural marketing has faced huge economic challenges. 11% 150 people per sq. km. When you factor in Urban per Number of Villages and UAS / Towns by size class and their population Ranges No. of Villages Population Ranges No. of UAs/Towns Population Switzerland UK Germany Spain France Australia USA India World Less than 100 45,276 2,274,375 Less than 5000 192 667,772 Average 18 Figure : Private Label Share in overall Organised Retail Sales 100-199 46,276 6,912,023 5,000-9,999 879 6,658,356 200-499 127,511 43,960,187 10,000-19,999 1,346 19,458,295 To face this challenge, FMCG players will need to estate in India and customers shopping habits. 500-999 145,402 105,274,341 20,000-49,999 1,163 35,154,857 exploit their brand power, develop relationships with FMCG companies have faced challenges too due to their retail partners, provide better rates and invest the increasing power of the modern retailer. As the 1,000-1,999 129,977 183,294,133 50,000-99,999 404 27,832,412 more in developing and expanding their categories. presence of Modern Trade deepens and intensifies, 2,000-9,999 80,413 239,184,866 1,00,000-4,99,999 320 60,554,358 FMCG companies need to understand how to Summary and Key Takeaways 5,000-9,999 14,799 98,112,136 5,00,000-9,99,999 39 27,503,626 partner with them to maximise mutual benefits. Modern Trade has been growing rapidly in India. It has 10,000 & above 3,961 63,478,578 10,00,000-& above 35 108,290,013 faced challenges too based on the high costs of real Total 593,615 742,490,639 Total 4,378 286,119,689 Source: Primary Census Abstract, India, Census of India 2001. The Urban and Rural segments of the Indian FMCG • explosion in cable TV, newspapers, mobiles and Market have always had different growth paths. internet => higher media penetration Urban India, although much smaller, in absolute • easier distribution access =>lower distribution household numbers, had much higher per capita costs and better controls incomes and so traditionally accounted for the largest segment (if not majority) by value for most FMCG FMCG consumers were rapidly getting penetrated companies. Key drivers of urban markets were and simultaneously trading up to better (and higher margin) products. This was a ready market with • increasing urbanization => more absolute visible drivers, and everyone wanted their share. households Classical marketing strategies were trickle down – • industry & services grew faster than agriculture focused on penetrating Metros, then working down 17FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 37 18 FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 38,Technopak, Booz & Company analysis => faster growth of urban incomes Tier I and II towns to smaller markets over time.07 08
  7. 7. FMCG NEW OPPORTUNITIES Unfortunately, the entry of new MNC companies, and and larger P&Ls, they could invest in small distributor FMCG Distribution System Large and Emerging Indian companies, turned or rural wholesaler coverage programs, coupled with marketing in Urban “India” into an expensive slugging rural consumer activation programs such as match with your competitors. sampling. In many cases they were the first and only Factory By contrast, the lure of tapping large numbers of rural brands. Subsequently, strategic thinking like under penetrated consumers in Rural “Bharat” has “Goldmine at the Bottom of the Pyramid” has always fascinated marketers. Traditionally, the become mainstream. Considering that only 38% of C&FA Entrenched MNCs were active in rural markets, keen Indias population will be Urban by 2020, rural to fuel growth by seeding their brands amongst new marketing is an essential part of every FMCG consumers and building competitive advantage companys plans. Key Accounts Super through consumer loyalty. With their higher volumes Stockist Stockist Penetration and per capita consumption (Rural - urban penetration 2002) Category Market Size Urban Rural Total Urban Urban Van Modern Project Sub (US$ million) Penetration (%) Penetration (%) Penetration (%) Wholesaler Retailer Sales Trade Shakti Stockist High Penetration categories >50% Drive upgradation and consumption Fabric Wash 1210 89.6 82.9 84.9 Urban Rural Rural Rural Rural Retailer Wholesaler Retailer Consumer Retailer Personal Wash 938 97.9 90.7 92.8 Packet Tea 635 91.2 82.2 84.9 Rural Low Penetration categories: Drive Penetration Retailer Toothpaste 409 69.8 32.3 43.5 Bulk of Rural Skin 312 36.6 19.8 24.7 Sales Hair Wash 230 40.1 16.3 23.3 Over the years FMCG companies have tried various • Van operations that are partially or fully Talcum Powder 148 66 36.8 45.1 methods to directly reach the rural areas. On the subsidised by the company Branded Atta 107 44 30.2 34.3 Marketing side since the reach of traditional media • HUL has started Operation Shakti that is aimed Dish Wash 102 54.6 11.5 24.4 used to be poor they went in for: at directly reaching rural consumers Instant Coffee 55 - - - • Wall and shop paintings • Rural oriented supermarkets like Hariyali and R&G Coffee 30 - - - • Cinema and demonstration vans Khushali Ketchups 25 12.5 0.7 4.2 • Participation in rural fairs and festivals • E Choupal Deodorants 19 - - - With increasing penetration of TV and other It is fair to say that direct reach to the rural areas is still Jams 13 - - - conventional media, reliance on these activities has limited. The key challenge is that any one companys Source: HLL, Indian Readership Survey. come down to some extent but has not been turnover is not sufficient to pay for the higher costs eliminated altogether. that rural distribution entails. As explained above, Exploiting the under penetrated potential of Bharat run rural distribution systems have a natural verses India represents an obvious opportunity for economic reach, beyond which the stockist loses direct economic reach to the rural areas is limited to On the distribution side, FMCG companies have brands; however the marketing and distribution methods money. Any distribution activity beyond this natural the largest villages while the large extent of rural India experimented with several techniques: to reach those remote customers are not so clear. economic reach has to be supported by the is still fed through wholesale markets. Challenges of Rural Markets - Reach company, otherwise it wont happen. As an example, only 3% of Indias villages, with a population above ‘Wholesale on Wheels – The United Villages retailers had to visit the nearest town to procure 81% The biggest single challenge of Bharat is the ability of 5,000, were found to be viable for rural distribution by Experience19 of the goods that they were selling. These visits were marketers to profitably reach and sell to these leading FMCG companies. Thus, most of the FMCG typically made twice a month leading to a large consumers and retailers. Typically, revenue per day As discussed above only 3% of Indias villages are products reaching rural retailers and consumers amount of cost and disruption in their operations. per rural sales route may be only 25% that of urban accessible through conventional single company run move still move through the wholesale markets. This routes – and van distribution costs like fuel and direct distribution systems. UV found that rural United Villages has set up a pilot project in Jaipur leads to a lack of control and focus that is of concern salaries may be 50% higher. The combination of to FMCG companies.09 lower revenue and higher costs means that, company 19 YFactor Client 10
  8. 8. FMCG NEW OPPORTUNITIES (Rajasthan) catering to 5000 rural retailers near also carried by the UV system. Jaipur. The pilot has now been extended to Kota and • Orders are taken on a mobile phone application will extend other parts of the state by the year end. specially developed for UV. These orders are The salient features are: sent to the central computer and serviced within • UV Sales Executives operating on motorcycles 2 days. The mobile based application provides procure orders from rural retailers operating on a rich information for the companys operations. weekly or fortnightly contact cycle. • Since goods are aggregated across companies • Goods are procured from Cash & Carry stores the combined sales volume is sufficient to pay (Carrefour, Metro and Walmart) on a daily basis. for distribution costs. No inventory is maintained by UV. The product • UV is leveraging its rural reach to extend other range is carefully selected and includes FMCG products from major companies as well as services for its rural customers as well as Information Technology and FMCG Companies extending marketing support for its distribution smaller ones. Durables and store brands are partners. IT has become an essential part of operations in IT • How to choose the right one for my business? companies. Broadly, the role of IT encompasses the Summary and Key Takeaways • Implementation is difficult following aspects: As competition in the urban areas intensifies, the rural various systems for reaching the rural areas with • Failure rates are high • Financial accounting, MIS, planning and control market represents a major opportunity for FMCG varying degrees of success. With an underpenetrated Experience21 suggests that an FMCG company in companies. However, the high cost of distribution has rural population and growing rural incomes this • Sales force automation and analytics India with a turnover of over Rs 200 Crores may be been a barrier for direct distribution. Most of rural segment will continue to be of high interest to FMCG • Communication – Since this aspect pervades ready for an ERP installation. Such a company will in demand is still being met through the wholesale marketers in future. through all companies, not only FMCG, it will not all probability have: trade. FMCG companies have experimented with be discussed here. • Multiple manufacturing plants Not so long ago, financial accounting and MIS were • Distribution in more than one region. There will handled manually in most FMCG companies. be a HO and Regional Offices Thereafter accounting packages like Tally started making their appearance. Many companies went in • Distributed purchasing – there may be a HO for computerization of their accounting systems but purchase function but there is likely to be local failed to integrate the supply chain and sales. Later purchasing at the plant level on, this led to a plethora of software fixes most of • 200+ employees them developed in house. As companies grew, it has led to a number of spread sheet based systems that In our view, one of the most critical issues facing have become very cumbersome and complex to FMCG companies is that over the years they have handle. 20 developed work around solutions for many accounting and other matters. Similarly, they may The earliest ERP systems started out as MRP have a multiplicity of distribution systems. As an (Manufacturing Resource Planning) systems. They example Company X22 has the following distribution have now evolved into fully integrated ERPs systems in place: encompassing all aspects of a companys working. All the larger FMCG companies have adopted ERP • Delhi/NCR – C&FA systems already. Smaller companies have been • Rest of North India – CSA slower to move in this direction. There are many apprehensions about ERP systems that have been • Mumbai – 3rd party outsourced system expressed by smaller FMCG companies: • South India – Super Stockists • ERP systems are very expensive The field force is a blend of in house Territory Sales 20 YFactor Analysis 21 YFactor experience spread over several FMCG companies 2211 YFactor Client 12
  9. 9. FMCG NEW OPPORTUNITIES Incharges and outsourced Sales Personnel. Objective decision process Benefits of ERP Implementation • Facilitate day to day management Purchase has a multiplicity of vendors with varying The criteria and the scoring system must be agreed in There are 3 key areas in which ERP implementation o Real time information access trading terms for the same material at different advance prior to viewing any potential systems. The will help the company25 locations. Materials are not coded and there is no o Reporting criteria must be wide-ranging and decided upon by standardization. In such an environment, it becomes • Help reduce operating cost as many objective people as possible within and o Data integrity and commonality across all difficult to proceed with implementation of an ERP o Reduce inventory parts of the company external to the enterprise. system immediately. Our experience suggests that it is better to undertake a comprehensive Business Full involvement by all personnel o Lower production costs o Activity based costing Process Review (BPR) before embarking on an ERP The decision on the system must be made by all o Manpower savings in finance and planning • Support strategic planning implementation. In general, the less the stakeholders within the enterprise. "It requires top areas customization required for an ERP the better would o Mid-term forecasting management leadership and participation… it involves be the implementation. virtually every department within the company". Sales Force Automation retailer and are hence not the sales that are recorded If an in principle decision to evaluate the benefits of Implementation24 in the companys books. an ERP implementation has been taken in the FMCG companies are strongly driven by Secondary company, the following steps may be required for There are several pitfalls to avoid during Sales. These refer to sales made by the stockist to the taking it forward: implementation. While there is no one size fits all solution, the following issues are very important: • Discussion on whether to go with a BPR. In Factory many cases, the companies who undertake • Reference to the Business Case – keep what Primary BPRs are also ERP implementers and the you had agreed earlier with respect to the cost Sales discussion will help to clarify the way forward. benefits always in mind while implementing. C&FA • Preliminary discussions with a few ERP vendors. • Choose your implementation partner with great This will help to obtain a ball park idea of cost and care. a first cut feel of the various ERP solutions. Site • Have a core in-house team dedicated full time to visits to reference clients will also be helpful. Stockist Secondary the implementation. This must be a cross Sales • Formation of a core in-house team headed by functional team drawn from all departments the CEO/CFO/CIO to evaluate ERP solutions. involved with the ERP. There must be an internal The same team should be enhanced later for champion – preferably the CIO. Retailer implementation. • Have frequent reviews with top management. • Structured evaluation of ERP options. Many • Dont be wedded to your own processes even if Sales force targets, retail schemes and product The advent of hand held devices and improved methodologies are available for this purpose and you have gone through a BPR. There is a high promotions are usually based on Secondary Sales. communication technology has changed the it is outside the scope of this article to present risk and cost attached to customization. This is done in order to prevent dumping at the scenario in the last few years. The front line sales them. However, some of key principles to be • Avoid the big bang approach. Most smaller stockist level. Primary Sales which actually generate person now carries a hand held device on which he followed are:23 companies dont have the resources to handle revenue for the company are on a replenishment books retail orders (Secondary Sales). These are Structured approach all the implementation in one go. basis for the stockist. Hitherto most companies used downloaded into the Stockists computer at the end to follow a manual system of recording and of the day and serviced the next day. Compilation is A detailed document outlining all the steps that will be monitoring secondary sales. The company Territory done automatically and a wealth of information is followed for the evaluation should be prepared by the Sales in Charge would fill up a daily sales report which available for analysis including details of sales core team prior to starting the evaluation process. would record all sales made to retailers on that day. personnel working, productivity, schemes and target Focused demonstrations Subsequently a Stockist Sales and Stock Control achievement. One example of a hand held system There is no point in demonstrations by vendors that Statement would be prepared every month. Figures implemented by Hemas, Sri Lanka26 is shown below. do not pertain to the FMCG Business. Similarly, site would be manually compiled upto the national level. Many modifications are possible to suit a particular visits to reference FMCG clients is a good idea. These systems have remained virtually unchanged for companys requirements. the last 40 – 50 years. 23 25 Adapted from Wikipedia R.A. Anthony 24 2613 Adapted from Michael Burns – 180 Systems YFactor Client 14
  10. 10. FMCG NEW OPPORTUNITIES Hand Held System Operation Innovation: A Framework for FMCG Companies “Innovation is the specific act of entrepreneurship. It is • Amul who introduced the concept of milk co- the act that endows resources with a new capacity to operatives and helped reduce milk shortages. create wealth” Peter F. Drucker • HUL who innovated the worlds first fairness All of us are aware of the tremendous power of cream (Fair & Lovely) that tapped into a deep innovation. It is a well-known fact that a powerful new seated need of Asian and African consumers. concept gains high market shares while followers Now all FMCG companies have fairness have to make do with much smaller figures. One of products as a major part of their portfolio. the most striking examples of innovation in the recent • Reckitt Benckiser who successfully extended past has been the success of Apple. Products such the germ-kill property of Dettol into toilet soap. as I Phone and I Pad were world firsts and have resulted in the company achieving a valuation of $600 • Hygienic Research Institute who introduced hair Bn27. Companies like Reckitt Benckiser and J&J have dye in a hair oil form liked by Indians. Their a strong focus on innovation. One of the key metrics28 product, Super Vasmol is a block buster. Advantages • Data is transferred at the end of the day to the company from all parts of the country. It can also used is the percentage of turnover coming from new • Low cost manufacturing: • Order booking at the retail level is fast and products launched in the last 36 months. For most be real time if the hand held device talks directly accurate. The sales person is well aware of successful companies this should be at least 15%29. o The Nano to the central computer. product availability, schemes and his daily Some of the most successful examples of FMCG o Pharmaceuticals target. Pricing is also controlled as it is built in Summary and Key Takeaways innovation in India have been: into the system. o Product development of low cost FMCG Information technology is rapidly changing the way • Nirma who pioneered the concept of an products by an Indian company for a US MNC • The hand held device records all control that FMCG companies operate. ERP systems are economical and effective detergent powder as information like time of first and last call, time becoming more affordable and even mid-size an alternative to laundry soap and built a How do we identify an innovative company or what spent in the market and productivity of the companies can take advantage of the increased revolutionary demand pull model based on are the factors required for fostering an innovation sales person. efficiency that they provide. Similarly, Sales Force intensive advertising. culture within an organization? This paper examines Automation using hand held devices can two aspects: • Replenishment for the Stockist is automatic and • HUL who realized that Indian housewives prefer revolutionize the way that companies manage their works on a re-order level mechanism. The washing their clothes without soaking them in a • How do we evaluate where our company stands secondary sales systems. stockists c o m p u t e r t h r o w s a n o r d e r bucket while still wanting better performance on innovation? Are we good at it or not and in automatically to the C&FA and goods are than laundry soap. This resulted in the launch of what directions to we need to improve. dispatched accordingly. The hand held Rin detergent bar. Later, similar thinking led to • How to create an innovation oriented culture and system links seamlessly with the companys the introduction of Vim as a dish wash bar. process within the company? ERP. 27 CNN Money 10.04.12 28 YFactor Analysis 29 YFactor Analysis 3015 YFactor Client 16

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