Confederation of Indian Industry Since 1895 FMCG Roadmap to 2020 The Game Changers Abhishek Malhotra Vikash Agarwalla

Srishti Chaudhry Prepared by

This Report has been prepared by Booz & Company Inc for the Confederation of Ind ian Industry (CII) Confederation of Indian Industry (CII), 2010 Disclaimer and C onfidentialities All rights reserved. No part of this publication may be reprodu ced, stored in a retrieval system, or transmitted, in any form or by any means e lectronic, mechanical, photocopying, recording or otherwise, without the prior w ritten permission from Confederation of Indian Industry (CII). While every care has been taken in data collection, analyses and compilation of this Report, CII doesnt accept any claim for compensation if any entry is wrong, abbreviated, canc elled, omitted or inserted incorrectly either as to the wording, space or positi on in the Report. Published by Confederation of Indian Industry, Northern Region Sector 31-A, Dakshin Marg, Chandigarh 160030 Tel: 0172-2602365/2605868, Fax: 01 72-2606259 Email: ciinr@cii.in; Web: www.cii.in CONTENTS Message from Conference Chairman Executive Summary 1. Industry Context 1.1. 1.2. 1.3. 2.1. 2.2. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 3.9. 4.1. 4.2. 4.3. 7 4 6 Abbreviations and Acronyms 3 The FMCG Industry: Growth in the Last Decade Growth across FMCG Categories Growt h across FMCG Players Industry Growth Drivers FMCG Roadmap to 2020 Accelerating Premiumization Evolving Categories Rapid Globalization Many-Indias 31 34 39 42 4 8 48 48 54 46 Growing Modern Trade Eco-consciousness Enabling Policies 16 22 28 10 12 13 14 7 7 7 2. Determinants of Industry Growth and Outlook for the Future 10 3. Megatrends Shaping the Indian FMCG Industry Goldmine at the Bottom of the Pyramid Game-changing Technologies 4. Implications for the FMCG Industry Industry Paradigms in 2020 Imperatives for the FMCG Industry Implications for Other Stakeholders 55 55 Endnotes About the Authors 2 FMCG Roadmap to 2020

MESSAGE FROM CONFERENCE CHAIRMAN The Indian FMCG industry is over INR 1300 billion in size. It touches the life o f every Indian and therefore has perhaps the widest reach among all industries i n India! The industry has tripled in size over the last 10 years, growing much f aster than in past decades. This has been facilitated by the many changes in the Indian economic and industrial landscapereduced levels of taxation, easier impor t of materials and technology, reduced barriers to entry of foreign players, gro wing organizational maturity of Indian players, growth of media, and, of course, the growing af uence and appetite for consumption of the Indian consumer. The ind ustrys potential to grow further and faster is awesome, given the low penetration of most categories and rising consumer incomes. Though many changes have taken place over the last 20 years, I believe the rate of change in the FMCG operating environment is set to accelerate. The waves of change will be propelled by gove rnment policy, channel customers, technological advances, leaders of social chan ge such as NGOs, consumer behaviour and, of course, the players themselves. Chan ge will therefore occur along many dimensions simultaneously, in a more compress ed time scale at the intersection of these change vectors. This will produce sig ni cant, if unpredictable, outcomes for the industry. Over the last 20 years, almo st all FMCG companies have been riding the rising tide and almost all have prosp ered. That may, however, not hold true over the next 10 years. While the industr y is set to grow at an even faster rate, in this round there could be as many lo sers as winners! Winners will discard archaic models which prioritize urban mark ets over rural and innovate more complex but vastly more insightful segmentation models. They will alter the dialogue with modern retailers and the emerging spe cialized trade channel customers in meaningful ways, to grow the market and earn pro table market share. They will use technology to not just pare costs, but to c reate exible supply chains which can access more consumer segments and satisfy mo re consumer requirements. They will also use technology to both win more consume rs and collaborate more intensely with consumers to create innovative products. Issues of sustainability will become far more central to their agendas. In this context, all stakeholders in the FMCG industry will nd this report by Booz & Comp any valuable. Booz has developed an excellent model to understand the forces sha ping the FMCG industry and this model is supported by a strong analytical founda tion. Several interesting conclusions ow from the application of this model which should inform many board room discussions as companies in India and elsewhere g rapple with issues of the future. Industry associations and the CII FMCG committ ee will no doubt see value in this report, as they seek to in uence different stak eholders; and, of course, investors will vote with their money as they identify companies that re ect a stronger understanding of these dynamics in their strategy and execution. Kannan Sitaram Chairman CII FMCG Forum 2010 FMCG Roadmap to 2020 3

EXECUTIVE SUMMARY The Indian FMCG industry at INR 1300 billion (in FY2010) accounts for 2.2 per ce nt of the GDP of the country. Given the inherently essential nature of the produ cts, the sector is more or less immune to recessionary pressures. The last decad e has seen the sector grow by 11 per cent annually. Robust GDP growth, opening u p of rural markets, increased income in rural areas, growing urbanization along with evolving consumer lifestyles and buying behaviours have all been drivers of this growth. Over the next decade, all the above drivers are expected to contin ue to impact the industry favourably. Based on discussions with industry experts as well as Booz & Company analysis, we believe that the FMCG industry will grow at a base rate of at least 12 per cent annually to become an INR 4000 billion i ndustry by 2020. Additionally, if some of the factors play out favourably within an environment of enabling policy and easing of supply constraints, 17 per cent growth may be expected over the next decade, leading to an overall industry siz e of INR 6200 billion by 2020. FMCG consumption is becoming more and more broadbased, and has reached an in exion point where the growth can be expected to take off, following the traditional S-shaped curve witnessed across many markets. While on an average, the growth of the industry will be strong, it will not be unifor m. Variations are likely across product categories, companies and locations. Bas ed on our research and extensive interviews, we have identi ed nine mega trends ac ross consumers, markets, and environments which will shape the industry by 2020. 1. Accelerating Premiumization: Continuous income growth coupled with an increas ed willingness to spend will push consumer up-trading and demand for higher pric ed, better quality (real or perceived) products. 2. Evolving Categories: Many co nsumers with rising economic status will shift from basic need to want based product s. In addition, evolving lifestyle behaviour and emphasis on beauty, health, and wellness will see increased requirements for customized and more relevant produ cts. 3. Goldmine at BOP: A signi cant majority of the population in the country, e specially in the rural markets, will become an important source of consumption b y moving beyond the survival mode. This bottom-of-the-pyramid (BOP) segment will r equire tailored products at highly affordable prices with the potential of very large volume supplies. 4. Rapid Globalization: While many leading foreign multin ational companies (MNCs) have operated in the country for years, given liberal p olicies, the next decade will witness increased competition from Tier 2 and 3 gl obal players. In addition, larger Indian companies will continue to seek opportu nities internationally and also gain access to more global brands, products, and operating practices. 5. Many Indias: Despite the complexities of our language, culture, and distances, the Indian market has largely been seen as a homogenous market. Increased scale and spending power will demand more fragmented and custo mized business models 4 FMCG Roadmap to 2020

(across products, branding and operating structures). 6. Growing Modern Trade: T he share of modern trade will increase and may be expected to account for nearly 30 per cent of the total trade by 2020. This channel will compete with existing traditional trade (approximately 8 million stores which will continue to grow) and offer both a distribution channel through its cash & carry model as well as other avenues to interact with the consumer. 7. Eco-consciousness: Global climat ic changes, dwindling natural resources, and growing ecological awareness of con sumers are increasing emphasis on environmental concerns. The pressure on compan ies to go green is growing due to the involvement of various stakeholdersthe gove rnment (through policy), the consumers (through brand choice) and NGOs (through awareness and advocacy). 8. Game-changing Technologies: Increased relevant funct ionality coupled with lower costs will enable technology deployment to drive sig ni cant bene ts and allow companies to deal with complex business environments. This will be seen both in terms of ef ciencies in the back-end processes (for example, suppl y chain and distribution) as well as in the front-end (for example, consumer mar keting). 9. Enabling Policies: Many government policies under consideration, if executed, can help create a more suitable operating environment. This will help boost both demand and supply. Demand will go up because of increase in income le vels and spread of education and supply will be augmented by removal of process bottlenecks and boost in infrastructure investments. While some of the above tre nds can already be observed today, many are yet to break the existing paradigms. In addition, the con uence of many of these change driversconsumers, technology, g overnment policy, channel partnerswill have a multiplier effect and magnify both the magnitude as well as the pace of change. As with any change that is disrupti ve in nature, there will be winners and losers. This transition from a stable an d homogenous operating model to a dynamic, unpredictable and rapidly changing operating model will have signi cant implications for the industry and it s stakeholders. To excel in this new model one will need to enhance current capa bilities and build new ones to bridge gaps. In this new setup, FMCG companies wi ll have six imperatives from a business strategy perspective: 1. Disaggregating the operating model 2. Winning the talent wars 3. Bringing sustainability into t he strategic agenda 4. Re-inventing marketing for i-consumers 5. Re-engineering su pply chains 6. Partnering with modern trade Stakeholders including government, r etailers, NGOs, and investors will also need to play a key role in supporting th e growth of the industry, while continuing to deliver on their core business and social mandates. In conclusion, the FMCG sector in India is poised for rapid gr owth in the next 10 years. Companies will need to evolve to better meet the rapi dly changing consumer needs within an increasingly complex operating environment . The FMCG industry in 2020 will be larger, more responsible, and more tuned to its evolved customers. FMCG Roadmap to 2020 5

ABBREVIATIONS AND ACRONYMS FMCG GDP FY INR US$ NREGS APMA NFSA FDI MVNO TRAI OCB SSI NGO CSR MNC OTC SMS VA S MRP GST Fast Moving Consumer Goods Gross Domestic Product Financial Year Indian Rupees U S (American) Dollars National Rural Employment Guarantee Scheme Agriculture Prod ucts Marketing (Regulation) Act National Food Security Act Foreign Direct Invest ment Mobile Virtual Network Operators Telecom Regulatory Authority of India Over seas Corporate Body Small-scale Industry Non-governmental Organization Corporate Social Responsibility Multi-national Company Over the Counter Short Message Ser vice Value-added Service Maximum Retail Price Goods and Service Tax 6 FMCG Roadmap to 2020

1 INDUSTRY CONTEXT 1.1. The FMCG Industry: Growth in the Last Decade The fast moving consumer goods (FMCG) industry1, which accounts for 2.2 per cent of Indias GDP, is expected to attain a size of INR 1300 billion by FY2010. Over the last few years the industr y has witnessed a high rate of growth boosted by favourable macroeconomic condit ions, increased rural incomes, a rising consumption-culture in India and a proli feration of consumer awareness campaigns. The sector witnessed a robust yearon-year growth of approximately 11 per cent in the last decade, almost tripling from INR 470 billion in FY2001 to the current size. The last ve years have augured well for the industry with an annual growth rate of approximately 17 per cent since FY2005. Even in the meltdown years of FY 2008 and FY2009, the FMCG industry witnessed sustained growth rates of 14 per ce nt and 11 per cent, respectively, demonstrating that unlike other sectors, this sector was relatively recession-proof (see Exhibit 1). 1.2. Growth across FMCG C ategories The FMCG industry in India has grown rapidly and the growth rates acro ss different product categories are good indicators of how the Indian consumer h as evolved. Within the category of food products, which accounts for nearly 45 per cent of t he industry size, staple products like edible oils have grown at single digits g iven a high degree of penetration as well as established usage patterns. Fruit j uices on the other hand have reported exponential growth, moving from near-zero levels in FY2000 to INR 9 billion at present. Similar trends are visible in the personal products category with skin-care creams outpacing the growth of more mu ndane product lines such as toothpaste. Increased incomes, changing social habit s and growing awareness of healthier and packaged beverages have contributed to these patterns (see Exhibit 2, p. 8). 1.3. Growth across FMCG Players Three well -identi ed sets of players operate within a highly developed and intensely competi tive landscape FMCG Roadmap to 2020 7

of the Indian FMCG market (see Exhibit 3, p. 9): 1. Foreign players who are pres ent through their subsidiaries such as Unilever, P&G, Nestle and PepsiCo. 2. Str ong Indian players with established national presence such as Marico, Dabur and Godrej Consumer Products. 3. Regional or small domestic players, such as Ajanta, Anchor, CavinKare etc., who are present in a few regions of the country. Most o f the foreign players such as such as HUL, P&G etc., have either established the ir presence or are actively looking towards entering India through organic and/ or inorganic routes. Kraft Foods for example , has entered India by buying Cadbury; and Danone, the French dairy major is reestablishing its presence in the food processing market through its tie-up with Yakult Honsha, a Japanese probiotics major. There are also numerous Indian playe rs who have established themselves in niche segments by developing differentiate d products and positions and have thus become industry leaders. Dabur and Marico are entities which have established their brand of health supplements (Chyawanp rash) and coconut hair oils (Parachute) through products intrinsically linked to the traditional Indian psyche. These categories are therefore dif cult to break into. Little wonde r then that foreign MNCs have largely stayed away from these product segments. A part from these, there are regional and small-scale FMCG players such as small t ea producers and organic food producers, who mainly compete by offering low-pric ed products with similar looks or packaging compared to the bigger brands, to th e right consumers typically based in rural areas or in small towns. These players with lower corporate overheads and clear focus on speci c consumer requirements ha ve a competitive edge over larger FMCG players. Exhibit 2: Selected Category Growth (FY2008-FY2010) 35% 24% 16% 8% Oils Biscuits 11% 26% 21% Fruit Drinks Skin Care Toothpaste Shampoo Hair Oil Source: IDFC Institutional Research, Euromonitor, Booz & Company analysis 8 FMCG Roadmap to 2020

Booz & Company analysed the sales and pro tability of approximately 100 listed FMC G companies across foreign MNCs and large and small Indian players. The high gro wth rate of the FMCG industry was re ected in the growth rate of these players. Al so, the last decade saw a golden run for the Indian players who grew at a CAGR of 12 per cent in 2001-05 and 19 per cent in 2006-10. This compares handsomely with repor ted gures of 2 per cent and 16 per cent in the respective periods for the foreign MNCs. While this has widened choices for consumers, markets are, on the downside, more fragmented. Players are offering multiple products within common categories res ulting in brand erosion and decline in dominance. Exhibit 3: Sales Growth FMCG Players 19% (CAGR) 17% 16% 12% 11% 9% 8% 2% 2001-2005 Player Average Foreign MNCs Large Indian Regional / Small Domestic 2006-2010 Source: CMIE, Booz & Company analysis of ~100 FMCG players FMCG Roadmap to 2020 9

2 DETERMINANTS OF INDUSTRY GROWTH AND OUTLOOK FOR THE FUTURE 2.1 Industry Growth Drivers Having matured in a decade of tremendous economic gr owth, the Indian FMCG industry is now ready to sustain that growth and forge ahe ad. There are three key forces at work within and outside the industry which dri ve this development. 2.1.1. Developmental Cycle of the Industry Booz & Company a nalysis of consumption patterns across countries has revealed that most categori es of consumer products tend to follow an S-curve of growth with the initial con sumption driven by rich consumers and early adopters. At the trigger point thoug h, the consumption becomes more wide-spread and then increases exponentially. Su bsequently, the categories of consumer products mature as consumers move from a n eed-driven to a more want-driven consumption pattern as explained by Rostows Stages on Economic Growth.2 The tipping point for exponential growth, however, varies across categories. At per capita GDP of US$ 7000, the basic cons umption of staples as a proportion of total food consumption (measured by calori es of intake), initially, tends to grow faster. For example, per capita consumpt ion of wheat grows fast when GDP is US$ 2000-5000 per capita. However, the snack s category displays growth when GDP is in the range of US$ 4000-7000 per capita, though this rise occurs comparatively late. Socio-cultural norms and behaviours considerably impact both timing and growth patterns of various food categories. For example, Mexico reports high rates of snacking due to local food habits, wh ile Latin America displays strong inclination for shampoos, which is driven not Exhibit 4: Key Drivers of the FMCG Industry in India GROWTH DRIVER PAST GROWTH (2001-2010) FUTURE GROWTH (2011-2020) CONTRIBUTION TO FMCG TRANSFORMATION GDP Growth ~7% 8-9% Population Growth 1.5% 1.2% ~14% annual growth Per Capita Income Growth (disposable income) Womens participat ion 34% in 2010 >15% annual growth (disposable income) Womens participation closer to levels in d eveloped nations (70%) 2.5% urbanization Similar age profile More up-trading in urban and rural areas GST FDI Right to Education Food Security 2.3% urbanization Lifestyle Changes ~60% people in 15-59 agegroup in 2010 NREGA Government Policy Farmer loan-waiver 10 FMCG Roadmap to 2020

only by the availability of water but also social norms related to personal hygi ene. While the Indian GDP per capita is low, many Indian consumer segments which constitute rather large absolute numbers are either close to or have already re ached the tipping point of rapid growth. This is true for many categories of con sumer durables, beauty and wellness goods, such as, skin-care products and even edibles such as packaged beverages, all of which have reported signi cantly faster growth rates. 2.1.2 Macroeconomic Factors Favourable macroeconomic drivers such as the growth in GDP, coupled with rising incomes, increased participation of w omen in the workforce and the tapping of the rural markets, are seen to be enabl ing growth in the FMCG sector (see Exhibit 4, p. 10). These are elaborated upon below: The Indian economy is expect ed to overtake UK in the coming decade, with GDP growth ranging between 8-10 per cent.3 India is expected to reach Chinas current population gure of 1.4 billion b y 2020. Per capita incomes supported by various government schemes and policies are expected to rise in both rural and urban areas. Participation of women in th e Indian workforce is also likely to rise. Estimates suggest that if it increase s to approximately 70 per cent (as in the developed nations), it will further bo ost GDP growth by 2-3 per cent. Favourable government policies such as the intro duction of GST can be expected to substantially decrease supply chain costs. Increased FDI in m ulti-brand retail may open up a large channel for sales. Other policy measures s uch as lower income taxes, the Food Security Act, Right to Education, infrastruc ture schemes etc have also acted as enablers of higher consumption. 2.1.3 Evolvi ng Consumer Pro le Lifestyle changes, a comparatively young population and greater willingness to spend more on better quality products are expected to boost the consumption-driven economy. Rural markets, given the current low penetration and high potential for up-trading are expected to bring about super-normal growth f or FMCG companies. All these factors will combine to catapult consumer demand fo r FMCGs to newer heights (see Exhibit 5). Exhibit 5: FMCG Growth Ladder Demand Drivers NEW CONSUMERS INCREASING CONSUMPTION UP-TRADING UNFORESEEN FUTURE DRIVERS Population growth Increasing penetration (access to rural areas, more coverage) Increasing consumption in every occasion Increasing occasions of consumption GDP increased , incomes, younger population driving the above Using premium, sophisticated products Increasing income, womens participation in workforce, lifestyle changes powering above Supply Drivers Modern Trade + Technology Investments + Regulations FMCG Roadmap to 2020 11

Young population (below age of 30 years) comprise 59 per cent population current ly, and the composition is likely to remain similar over the next decade. This a ugurs well for the industry as the young have greater willingness to spend more. 2.2 FMCG Roadmap to 2020 Booz & Company analysis and discussions with industry experts indicate that the FMCG industry may grow at a base rate of at least 12 p er cent annually to become INR 4000 billion industry in 2020. Additionally, if s ome of the positive factors play out favourably, it could even record a 17 per c ent growth over the next decade, leading to an overall industry size of INR 6200 billion by 2020. These growth rates, however, depend on varying economic scenar ios (see Exhibit 6). Base Case models an As-Is scenario where the key assumptions are that GDP growth w ill continue at the same pace (of about 7 per cent) in the next decade and there will be no major change in regulations. Optimistic Case models a Transformation s cenario where key assumptions are that GDP growth will touch 9 per cent in the n ext decade, and favourable changes in regulations (such as FDI in multi-brand re tailing or rolling-out of the GST) will unlock industry potential. While the ove rall growth rates may be anticipated to lie in the 12-17 per cent range, many pr oduct categories are likely to grow much faster as consumer incomes increase, be haviours evolve and requirements change. In some areas one would expect Indian FMCGs to follow well-established growth-evolution paths. However, in many product categories growth may be accelerated by the explosive economic r ise, young consumer base and the in uence of the ubiquitous media. Some of that im pact is already evident in a category like liquid hand-wash which has shown very strong growth driven by increased consumer awareness around personal hygiene sp eci cally for children. Given the nascent stage of development across many categor ies even supply-led actions can help trigger rapid growth. For example, many pac kaged food categories (such as soups, breakfast cereals, and fruit juices) have seen rapid growth rates driven by increased presence of modern trade. Exhibit 6: Growth Scenarios of FMCG Sector 6250 (IN INR BILLION) Optimistic Case 17% Base Case 2850 12% 17% 12% 1300 2300 4000 FY10E FY15P FY20P Source: News articles, Booz & Company analysis 12 FMCG Roadmap to 2020

3 MEGATRENDS SHAPING THE INDIAN FMCG INDUSTRY CIIBooz research on industry evolutions in other markets and discussions with ind ustry experts and practitioners helped identify nine key forces that will change the face of the industry over the next ten years. These trends may be categoriz ed into three broad groups, based on their origins or sources (see Exhibit 7). H owever, their impact will be freely felt across multiple stages of the industry value chain. Consumer-related Trends: Changing demographic pro les and evolving be haviour signi cantly impact the way consumers consume and interact with products a nd services. Numerous and diverse consumers in India throw up an equally mind bo ggling diversity of consumption trends and patterns. At the same time, three pro minent trends merit some discussion. The rst one is increasing premiumization which will see consumers trading up the price ladder in search of additional function ality or brand promise. Second, at the middle of the pyramid, the evolution of consumption behaviour will be seen to lead to s igni cant changes within and across product categories. And nally, many companies w ill nd increasing value at the Bottom of the Pyramid (BOP) by serving products cu stomized to speci cally meet the requirements of this large market. It may be said that there will be signi cant scaling up at each step of the consumer incomepyrami d to be able to justify independent commercialization of the business potential. Market-related Trends: These pertain to evolving geographical markets or channe ls for the FMCG players. The key trends within this segment will be the viabilit y of sub-markets in India, growing organized retail and the increasing globaliza tion of FMCG players. These players need to be conscious of such trends and adap t their products as well as go-to-market strategies as per their target markets. Exhibit 7: Key Trends Shaping the FMCG Market in India 1 2 3 Accelerating Premiumization Evolving Categories 4 5 Rapid Globalization Many Indias Growing Modern Trade ers Goldmine at BOP 6 Ma um rke ns ts Co Environment 7 8 9 Source: Booz & Company analysis Eco-consciousness Game-changing Technologies Enabling Policies

FMCG Roadmap to 2020 13

 Environment-related Trends: These are in uenced by sociopolitical, legal, environm ental and technological reprioritizing that is inevitable in a dynamic environme nt. Changing government policies, growing importance of sustainability, evolving media platforms and technology will compel FMCG players to adopt business strat egies which keep the interests of communities and the environment in mind for in clusive development. 3.1. Accelerating Premiumization 3.1.1. Trend Description T he motivation for buying premium products varies with consumer income. The rich are willing to buy premium products for their emotional value and exclusive feel, an d their behaviour is very close to consumers in developed economies. They are we ll-informed about various product options, and want to buy products which suit their style. The upper midd le class wants to emulate the rich and trade up towards higherpriced products wh ich offer greater functional bene ts and experience compared to products for mass consumption. Such products are often referred to as masstige products. The rising income of Indian consumers has accelerated this trend towards premiumization or co nsumer up-trading. The improved purchasing power of Indian consumers is supporte d by greater workforce participation among women and an increasingly younger ear ning population with higher consumer willingness to spend on lifestyle products. These factors will gradually combine to give considerable push to premiumizatio n in the future, making it more pronounced as compared to the last decade. The premiumization trend can be obser ved prominently in the top two income groups mentioned already, the rich with an annual income exceeding INR 1 million, and the upper middle class with an annua l income ranging between INR 500 thousand and INR 1 million (see Exhibit 8). Whi le these two income groups account for only three per cent of the population cur rently, it is expected that by 2020 their numbers will double to constitute seve n per cent of the total population. By 2020 these groups will constitute large e nough numbers to merit a dedicated business strategy that FMCG companies will do well to adopt and follow. As per estimates, the Rich will grow to approximately 3 0 million people in 2020, which Exhibit 8: Household Distribution by Income and Profiles of Affluent Consumers i n India HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME AFFLUENT CONSUMERS IN INDIA > INR 1 million (Rich) Rich: Spend high proportion o n personal care, entertainment, etc.; want luxury and exclusivity 1% 2% 11% 2% 5% INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles) 29% Upper Middles: Have similar needs as the rich and purchase inexpensive brands of known companies 86% 64% < INR 0.2 million (Bottom of the Pyramid) 2010 2020 Source: McKinsey Global Institute, NCAER, Booz & Company analysis

14 FMCG Roadmap to 2020

is more than the current total population of Sweden, Norway and Finland put toge ther! Similarly, the Upper Middles will be a population of about 70 million in 202 0, which is more than the current population of the UK. The Indian population is also quite young compared to those in developed economies. People in the age gr oup of 15-44 comprise approximately 60 per cent of the population (see Exhibit 9 , p. 16). There are multiple ways in which the burgeoning younger population is supporting premiumization. First, the pro le of the young population reveals more actively employed people. This means, increased incomes available in households to spend on expendables. Second, young people tend to spend more compared to the ir parents and grandparents, and are easily attracted towards high-end products. T hird, they are more exposed to the media and its in uences, speci cally new platform s such as the internet, mobile phones etc. Their awareness levels are higher, an d they are better informed about developments around them. Continued favourable age distribution is a driver for premiumization in the futu re as well. There are several examples of consumers up-trading to more premium p roducts, as well as FMCG companies launching various products to capture the pre mium market: Dove, the premium personal and hair care brand from HUL, increased its market share from 0.1 per cent in 2005 to approximately 5 per cent in 2010 i n the hair care products category. LOreal, with premium brands in cosmetics, hair care and skin care, has been growing rapidly in India with 7.5 per cent market share in cosmetics climbing up to the third position in this category. Similarly for hair colour, LOreal has occupied 20 per cent share of the INR 12 billion hai r colour market with premium brands such as LOreal Excellence Crme and Garnier (a m asstige brand).4 As a result, LOreals overall sales have doubled in the last ve year s, and the growth trend is expected to continue. P&Gs Olay (premium anti-ageing skin-care brand) captured 20 per cent market share within one year of launch in a category which grew ve times between 2007 and 200 8. We expect that in the future, FMCG players will need to increase their effort s to cater to the ever-growing needs of consumers demanding premium products. 3. 1.2. Possible Strategies for FMCG Players Going forward, those FMCG players who decide to tap into the premiumization trend will nd the need to align their busin ess strategy to the pulse of the relevant consumer classes. Product Strategy: Pr emium products are intended to convey prestige or super-premium position that has asp irational value. People increasingly want products which are different, safe, and ethical with ingredients and/or features that have special and measurable bene ts . Indian FMCG players are likely to gain from investment in technology to develo p and manufacture Many consumers are likely to indulge in choice-driven consumption, which will inc rease demand for premium and super premium products in urban India. The middle a nd upper middle classes will be the chief contributors to this Mint, Dec 2009 FMCG Roadmap to 2020 15

such products in order to ride the crest. Marketing: For advertising prestige prod ucts, one may use special catalogues or niche print media, while for affordable p remium products, the mass media may be harnessed for marketing campaigns. Dependi ng on the positioning, the campaign may either emphasize and demonstrate effecti veness and bene ts of the product, or create an emotional bond with the consumers by highlighting relevant messages, say, by estab lishing exclusivity for a top-end brand. Sales and Distribution: For selling premi um products a high-touch or experiential and differentiated sales process may nd bett er alignment with the product strategy and overall business objective. For examp le, product demonstrations by salespersons or a trial run to educate consumers about high ef ciency and other bene ts of the products may be devised. The quality of human capital deployed for sales and distribution will need to be en hanced signi cantly through specialized training programmes if such a sales proces s is to be enabled. 3.2. Evolving Categories 3.2.1. Trend Description There are three ways in which a category can evolve. Exhibit 9: Estimated Age Distribution of Indian Population, 2010 7% 14% 31% 0-14 Yrs 15-29 Yrs 30-44 Yrs 45-59 Yrs 20% >60 Yrs 28% Source: United Nations; Booz & Company analysis 16 FMCG Roadmap to 2020

First, as consumers needs change, they start purchasing more evolved and sophisti cated products within a category, hence, the product offering must also transfor m to keep pace with demand trends. For instance, consumers have moved from tooth powders to toothpastes and are now also demanding mouth-wash within the same pro duct category. Second, consumers start demanding customized products, speci cally tailored to their individual tastes and needs. Nowhere is this more apparent tha t in the differentiated demand for toothpaste depending on individual oral care needs. Third, driven by growing concerns about beauty, health, and wellness supported by hygienic and healthier lifestyles, consumers shift towards personal grooming products which purportedly further these goals. Such, category evoluti on is primarily observed among the upper middle and lower middle income classes. While these consumer groups in India account for approximately 150 million peop le currently, their size is expected to increase to about 500 million people in 2020, which is approximately 1.5 times the current population of the US (see Exh ibit 10, p. 18). Shift towards Evolved Products In the oral care category, consu mer preferences have shifted over time. While neem datun for brushing teeth was a co mmon tradition earlier, it was replaced by the tooth powder in 1970s and 80s. Th e toothpaste emerged in late 1980s and 90s. Toothpaste penetration has increased from 50 per cent in 2005 to 55 per cent in 2010. Lately, in the oral hygiene ca tegory, supplementary products like mouthwash and sugar-free chewing gum have al so seen increased acceptance amongst consumers.. The current penetration of mout hwash is 6 per cent and is growing at a rate of 35 per cent. Toothpowder has see n a decrease in penetration from 35 per cent to 30 per cent in the last 5 years. This trend is likely to pick up in the coming decade with a maturing economy Lately, in the oral hygiene category, supplementary products like mouthwash and sugar-free chewing gum have also seen increased acceptance amongst consumers. FMCG Roadmap to 2020 17

and increased sophistication in emerging consumer choices. An analysis of consum ption patterns across economies shows that consumers tastes change as an economy matures. For instance, as per capita GDP rises, in the initial years, wheat cons umption per capita rises as well. Larger number of consumers emerge from relativ e poverty to choose wheat over coarse grains. Then, as consumers start moving to wards convenience products (such as pre-mixes and processed foods) per capita wheat consumption starts to fall. F inally, it levels-off as consumers start demanding more product variety suited t o their preferences. India is expected to follow a similar pattern of consumptio n across staple food products (see Exhibit 11, p. 20). Increased Product Variety Consumers are increasingly demanding customized products which are suited to th eir individual needs. Micro-segmentation for product development and masscustomization for identifying different product vari ants is already underway. For instance, a decade ago, only a limited variety of products such as shampoos was available within a particular brand. Now most larg e players have launched many variants in accordance with hair types (oily / dry / normal), the seasons in which these can be used (winters / summers) as well as consumer categories, targeted separately at men, women, and children. P&Gs Head and Exhibit 10: Evolving Needs of Middle Class Consumers in India HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME MIDDLE CLASS CONSUMERS IN INDIA > INR 1 million (Rich) Evolving Needs: Increasin gly want sophisticated products in categories; desire products which improve the ir appearance and are good for their health; want products meeting their specifi c needs 1% 2% 11% 2% 5% INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million (Lower Middles) 29% 86% 64% < INR 0.2 million (Bottom of the Pyramid) 2010 2020 Source: McKinsey Global Institute, NCAER, Booz & Company analysis 18 FMCG Roadmap to 2020

Shoulders brand which started with two variants in 1997 now boasts 11 variants t o choose from. Mass-customization in India will intensify in the future with FMC G players pro ling the potential buyer by age, region, personal attributes, skin t ype, ethnic background, and professional choices. Microsegmentation will amplify the need for highly customized market research so as to capture the speci c needs of the consumer segment targeted, before the actual product design phase gets u nderway. Increasing Beauty, Health and Wellness Concerns The beauty products mar ket is expected to grow by 15-20 per cent in the future, which is the direct result of the changing socio-economic status of the Indian consumers, especially the women. Better paying jobs and exposure to f ashion and beauty trends prevailing in the developed world through the televisio n and other media have resulted in changing tastes and choices. Middle class wom en are now more conscious of their appearance and are willing to spend more on e nhancing it. Products such as colour cosmetics (growing by 46 per cent), sun car e products (growing at 13 per cent) have latched on to this trends rapidly.5 Ind ian men are also becoming more conscious of their appearance, and several compan ies have been launching beauty and grooming products speci cally targeted at men. HUL has launched Vaseline for Men, Emami came out with Fair and Handsome, and LOreal has launched Garnier Men Power Light products. As per estimates, the demand for in-salon skin care treatments by men is increasing by 40 per cent annually.6 Along with beaut y products, there is an increased awareness about good health practices among co nsumers today. Sedentary lifestyles and unhealthy habits have led to the rise of lifestyle-related diseases such as diabetes and heart problems. Increased aware ness of healthrelated issues has led to the demand for healthier products with l ower calories, less sugar, more nutritional content, and with a greater In the skin category, there have been over 1200 brands and variants launched in t he last ve years alone. Even in a more developed category like soaps there have b een over 800 brands and variants launched in the last ve years. Gopal Vittal, ED, H ome and Personal Care, Hindustan Unilever Limited FMCG Roadmap to 2020 19

proportion of natural ingredients. This trend has impacted the food and beverage s category to a large extent, along with some other categories such as personal care, and fabric care. The market size of health drinks and health foods is abou t INR 50 billion currently and is expected to grow at approximately 10 per cent annually in future (see Exhibit 12, p. 21). We have already witnessed heightened activity around health product launches by FMCG players, and this is only expected to increase in the future. Sugar Free Go ld has been targeting health-conscious and diabetic people, and claims that it r esults in reducing intake by approximately 500 calories per day. Marico launched Saffola Gold with LoSorb technology, which results in less oil a bsorption while frying. Nestle recently launched Maggi Dal Atta noodles, expecte d to provide dietary bres and protein, thus lending to a healthy meal. Recently m ulti-grain Maggi has also been launched. Exhibit 11: Wheat Consumption Patterns High Wheat Consumption per Capita Pre-mixes Bulk-flour Branded Flour/ Bakeries Segmented Food Processed Food Fast Food India China Brazil Specialized Bakeries Drivers COST QUALITY CONVENIENCE CUSTOMIZATION Source: United Nations; Booz & Company analysis 20 FMCG Roadmap to 2020

3.2.2. Possible Strategies for FMCG Players Innovations towards more evolved and s ophisticated product forms, healthier variants of existing products, and enhance d product portfolios to introduce a much larger variety suited to different consumer group s may provide critical tools for grappling with the dynamic Indian consumer land scape. Evolved product forms of developed markets adapted to Indian requirements along with new product development leveraging the health platform will demand focused R& D and market research efforts. Exhibit 12: Market Size and Growth in the Health and Wellness Space GROWTH RATE (%) 2009 - 2012 24 22 20 18 16 14 12 10 8 6 4 2 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 APPROXIMATE MARKET SIZE (IN INR BILLION), 2009 Source: Businessworld publication, Marketing Whitebook 2010 Ayurvedic Medicines & Products Alternative Medicines FMCG Products Health & Food Drinks Skin & Health Care Dietary Supplements FMCG Roadmap to 2020 21

During market research, greater consumer segmentation may be required to identif y consumer needs and market potential. Manufacturing processes will need to be a dapted to serve mass customization objectives. The supply chain, marketing and s ales and distribution process may have to be redesigned to best reach the target consumer segment. For example, using gymnasiums for selling health drinks or sto cking of a product for a speci c ethnic group near their residential area may be s trategic targeting moves. Complex business models have to support ever widening product portfolios, variants, and products types straddling categories. 3.3. Goldmine at the Bottom of the Pyramid 3.3.1. Trend Description We have de ned the bottom-ofthe-pyramid or BOP consumers as those who earn less than INR 200 t housand per annum per household. This group currently constitutes about 900-950 million people in India (see Exhibit 13). Unlike the middle class segment, which is rather urban, Exhibit 13: Profile of BOP Consumers in India. HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME 1% 2% 11% 2% 5% > INR 1 million (Rich) INR 0.5-1.0 million (Upper Middles) INR 0.2-0.5 million ( Lower Middles) 29% BOP CONSUMERS IN INDIA Spend mostly on essentials, no / very limited demand for expensive lifestyle products 86% 64% < INR 0.2 million (Bottom of the Pyramid) 2010 2020 Source: McKinsey Global Institute, NCAER, Booz & Company analysis 22 FMCG Roadmap to 2020

already well-served and competitive, the BOP markets are largely rural, poorly-s erved and uncompetitive. The second characteristic of BOP markets is that a lot of their basic needs are yet unmet: nancial services, mobiles phones and communic ation, housing, water, electricity and basic healthcare are lacking. Rural BOP p opulation is estimated to be about 78 per cent of the total BOP population in th e country (see Exhibit 14). The growth trends, issues and challenges in rural ma rkets are somewhat different from those in urban areas. Income is largely agricultural, which is dependent on monsoons. Supply chain is constrained by poo r infrastructural development. However, government initiatives such as the Natio nal Rural Employment Guarantee Act (NREGA), increasing minimum support prices of crops, Sampoorna Grameen Rozgar Yojna, Pradhan Mantri Gram Sadak Yojana and Swa rnjayanti Gram Swarozgar Yojana (with a total allocation of INR 535 billion in F Y2010) are changing the rural landscape of India. Between FY2007 and FY2010 disb ursement under NREGA has increased from INR 125 billion to INR 390 billion. Minimum support price (MSP) o f key crops such as paddy and wheat rose at a CAGR only 2 per cent and 3 per cen t in the period FY2003-FY2007 but between FY2007 and FY2010, these prices have r isen at attractive CAGRs of 18 per cent and 20 per cent respectively. These init iatives along with government-sponsorship of selfhelp groups have resulted in hi gher disposable incomes, greater womens empowerment and improvement of social ind icators in the rural economy (see Exhibit 15, p. 24). Exhibit 14: Rural and Urban BOP Population Distribution Urban 22% 78% Rural Source: IFC and World Resources Institute FMCG Roadmap to 2020 23

It is heartening to note that by 2025, percentage rural population in the INR 20 0 thousand to INR 500 thousand category is projected to increase to 22 per cent from the present level of 3 per cent. Rural Growth Outpacing Urban Markets As a result of rising incomes, the FMCG market growth in rural areas at 18 per cent p er annum has recently exceeded that of the urban markets at 12 per cent. Products such as fru it juices and sanitary pads which had no demand in the rural markets earlier hav e suddenly started establishing presence. While the rural market comprises only 34 per cent of the total FMCG market currently, given the current growth rates, its contribution is expected to increase to 45-50 per cent by 2020 (see Exhibit 16, p. 25). While most FMCG players have succeeded in establishing suf cient access to their p roducts in rural areas, the next wave of growth is expected to come from increas ing category penetration, development of customized products for these markets a nd up-trading rural consumers towards higher-priced and better products. Exhibit 15: Promising Annual Income Levels and Social Indicators in Rural India RURAL HOUSEHOLD INCOME DISTRIBUTION 145 3% 1% 0% 161 7% 1% 1% 167 2% 2% 22% 48% 100% > INR 1 million INR 0.5-1.0 million INR 0.2-0.5 million 59% 46% 36% 22% 27% 59% 35% 50% 61% INR 90-200 thousand 1981 2007 41% 2015 26% 2025 < INR 90 thousand 2005 Number of Pucca Houses Below Poverty Line Rural Literacy Source: CII Rural Report, Consumer Lifestyles-India, Euromoniter, Indian Institu te of Foreign Trade 24 FMCG Roadmap to 2020

While category penetration has increased in rural areas in the last decade, ther e is further scope to raise the levels to match urban penetration in the future (see Exhibit 17, p. 26). Blurring Urban-Rural Divide Rural women are now more br and-conscious and are shifting towards brands used by their urban counterparts. They want quality products in t heir homes. The demand for branded healthcare products, branded processed food a nd beverages and toiletries is expected to grow in the future. Many local brands have been nding it dif cult to grow in rural areas because of this shift, thereby providing increased opportunities to the organized FMCG players t o target this market with their products. This trend may eventually erase differ entiation between the urban and rural brands, with the rural consumers increasin gly demanding the same Exhibit 16: Retail Growth in Rural and Urban India 20% 15% 10% 5% 0% 2003 -5% -10% Source: Edelweiss, IDFC Securities, Booz & Company analysis Rural Urban 2004 2005 2006 2007 2008 2009 FMCG Roadmap to 2020 25

products as urban consumers in the next decade. Cheaper brands will however co-e xist for products with wide price differentials between local brands and well-es tablished brands. For products with narrower price variations, some amount of up -trading can be expected. However, the affordability of branded products will re main a challenge for BOP consumers. For higher-end brands, consumers in this segment will want price points which are affordable and within their budget and hence demand smaller SKUs. 3.3.2. Possible Strategies for FMCG Players FMCG play ers with an eye on rural volumes could gear their innovation, manufacturing and rural supply chain processes towards small-volume units of products which the ru ral consumer can afford. Shampoos in sachets are a good example of the success of such innovation. Given the large number of BOP co nsumers, the top line will need to be volume-based rather than valuebased. Hence , a different business model will need to be devised by the FMCG companies. Some de ning features of such a business model are outlined below. This is, however, n ot an exhaustive list. The corporate sector has realized that the next growth in its business will come from the rural sector. Rural is a much discussed topic in boardrooms Pradeep Kashy ap, Founder and CEO, MART Exhibit 17: Rural and Urban Penetrations - A Comparison RURAL PENETRATION (%) CATEGORY 2001 2009 Headroom for growth URBAN PENETRATION, 2009 (%) Toothpaste Skin Cream Dish Wash Shampoo 32 20 12 16 45 33 16 46 75% 32% 60% 62% Source: IDFC Securities, Edelweiss, A.C. Nielsen, Booz & Company analysis 26 FMCG Roadmap to 2020

HUL Brand-Building Initiative Khushiyon Ki Doli s HUL has initiated a rural campa ign called Khushiyon Ki Doli. The objective of the campaign is to create awarene ss and engage with the masses through technology. Vehicles equipped with LCD TVs , DVD players, small generators etc roam rural habitations, mainly targeting hou sewives. A range of HULs product commercials are played ranging from Surf Excel t o Huggies Diapers. HUL organizes games at the end of the campaign distributing s achets of various products as prizes. HUL is also engaging with local retailers in rural areas on purchase of merchandize or new sale of stocks. Innovative products customized to local tastes available at affordable price poi nts. Effective and attractive product packaging that enables convenient use and storage. Effective mix of multimedia marketing strategies to create a buzz; unconv entional partnering with NGOs and local governments to in uence the in uencers, educ ating consumers around attributes and functionality of products. Ensuring access to typically rural or remote consumers through new and low-cost ways of distrib ution given the inadequate supply chain / logistics infrastructure in these area s. An entrepreneur driven model would be an appropriate example. Increasingly, the rural consumer will demand the same product as the urban consum er and there will be convergence. Sunil Duggal, CEO, Dabur India FMCG Roadmap to 2020 27

3.4. Rapid Globalization 3.4.1. Trend Description The Indian FMCG industry has very competitive landscape, with three sets of players: the global players or oreign MNCs, the large Indian players, and regional or small domestic players. ncreasing globalization has important rami cations for foreign MNCs as well as ge Indian companies with pan-India presence and

a f I lar

sometimes, small international footprints as well. Many foreign FMCG multination als have established themselves on a rm footing in India. Examples include Unilev er which has been present in India since the 1930s, P&G, which established its p resence through its Vicks brand in the 1950s, and Nestle, which commenced operat ions in the late 1950s. In the recent past, India as one of the fastest growing economies in the world h as attracted foreign MNCs who see it as a key market. With a spurt in reverse inn ovation foreign MNCs are leveraging India as an innovation hub; consumer research h appens rst in India, and then, products are taken to other markets. Several forei gn FMCG majors have headed for India with the purpose With a spurt in reverse innovation foreign MNCs are leveraging India as an innovati on hub; consumer research happens rst in India, and then, products are taken to ot her markets. 28 FMCG Roadmap to 2020

Popularly Positioned Products Nestle plans to build a dedicated R&D centre in In dia, which is expected to commence operations by mid 2012. The centre will focus on developing Popularly Positioned Products, which can meet specific needs of con sumers belonging to lower income groups, and provide high-quality and nutritiona l foods at affordable prices. These products are also expected to be sold in oth er countries. Second, Nestle plans to broaden its product portfolio in India, an d has been evaluating the option of entering the breakfast cereals market, a nas cent but fast-growing category by leveraging its strong cereal brands such as Ne squik, Cheerios etc. of acquiring experienced talent, and deploying them in similar markets elsewhere . Companies are seeking senior management experience in handling a diverse and c omplex market such as India, to crack other markets by sharing ideas which have worked before. Unilever for example, has deployed senior resources from India to East Europe, Africa, and South-east Asia, where it expects to see the next wave of growth. Companies are seeking senior management experience in handling a diverse and com plex market such as India, to crack other markets by sharing ideas which have wo rked before. FMCG Roadmap to 2020 29

There are numerous instances of foreign FMCG attention to India: Kraft Foods acq uired Cadburys in 2009 to establish a foothold in developing countries such as In dia. Ferrero Rocher is planning to expand presence in India in the confectionary segment. Many foreign MNCs are contending to acquire Paras Pharmaceuticals, a d omestic player with strong brands in OTC and personal care categories. French co smetics major LOreal is planning to enter the deodorant segment which is growing at 30 per cent annually. GSK Consumer has recently expanded into the noodles and biscuits market in India through its agship brand Horlicks. We can expect the fo reign FMCG MNCs already operating in India to focus on the Indian business even more strongly and develop their Indian subsidi aries as a signi cant contributor to global business by increasing penetration of existing products, while introducing greater variety, broadening category portfo lios and developing new brands and innovations. The multinationals not present i n India can be expected to look for entry opportunities in terms of organic or i norganic expansion in the future. Apart from foreign MNCs in India, there are nu merous large Indian players which have started establishing global footprints to diversify their business risks and tap the growth potential in other countries. Initially, Indian FMCG players expanded outside India to either target the Indi an diaspora in speci c countries or to hedge against increasing competition within India. Traditionally, the same product portfolio was taken to other countries. However, increasingly FMCG companies have been acquiring international FMCG comp anies with strong brands to widen their product portfolio, thereby sharing brands between I ndia and the global markets of the acquired company. In the future, many Indian domestic players are expected to evolve into mini-MNCs and therefore will need t o develop customized products to target the local populations in international m arkets (see Exhibit 18). Examples of Hedging against Domestic Competition Godrej Consumer Products Ltd. took its hair colours and Fairglow soap to the UK target ing the Indian population residing there. Dabur International exports products t o over 60 countries, targeting the Indian diaspora in those countries. Examples of Brand Sharing Godrej acquired Keyline Brands (a UK-based FMCG player) in 2006 , which enabled it to enter the skin care segment using Keylines brands. It intro duced the latters Exhibit 18: International Growth of Indian FMCG Players STAGE 1 Hedging against Domestic Competition STAGE 2 Brand Sharing STAGE 3 Targe ting Local Populations of Other Countries Organic growth Target Indian diaspora of other markets with existing product por tfolio Exports / limited channel reach Inorganic growth by acquiring international companies with strong FMCG brands Br oadening brand / product portfolio for all target markets Increased sales and di stribution as distribution channels are augmented through acquisition Organic growth after establishing presence in other markets Behaving as a multin ational and developing customized products for local populations of global marke ts 30 FMCG Roadmap to 2020

brands such as Erasmic (shaving products) and Cuticura (talcum powder) in India. Dabur acquired the Turkish FMCG company Hobi Kozmetik Group this year to streng then its presence in the Middle East and North Africa. Hobi Kozmetik is present in the personal care market and sells a wide variety of hair care and skin care products under the brands Hobby and New Era in 35 countries. Its brands also enjoy s igni cant market shares in their respective categories. As Hobis brands complement Daburs portfolio, they give Dabur a strong platform in new product categories in India (by introducing Hobis brands) and new markets (leveraging Hobis established presence). Marico acquired the skin care company Sundari LLC, and two aromatic s oap brands in Bangladesh. Wipro acquired the marketing rights for Chandrika soap in India and other SAARC countries. As Chandrika is the second largest selling brand in south India, this was seen as aligning with Wipros strengths in markets like Andhra Pradesh, where its soap brand Santoor was already the market leader. Examples of Targeting Local Populations of Other Countries Emami bought a manuf acturing facility in Egypt this year. This acquisition was seen to be consolidat ing its presence in Africa, a fast growing market which contributed about one-th ird to the companys international business. The plant is expected to serve as a r egional manufacturing base for the Middle East, Europe, and African markets. Als o, international business accounted for 20 per cent of Emamis turnover in FY2010 and this is expec ted to grow further. Godrej has introduced sandalwood and ayurvedic variants of Godrej No. 1 in British super-markets which has helped it attract the British Af ro-Asian population which has a high demand for ethnic-Indian products. Maricos s kin care services brand, Kaya, recently acquired aesthetic skin care business of Derma Rx, a company providing skin care services. Derma Rx operates three centr es in Singapore and one in Kuala Lumpur, with consumer base of approximately 37, 000. This is expected to help Marico establish its presence in the market for sk in care products in Singapore. It may also open Kaya clinics in the country. 3.4 .2. Possible Strategies for FMCG Players Going forward, we expect the larger pla yers in India to marry the best of global practices with the Indian operational nuances (regulations, channel mix, consumer preferences etc) in their business m odels. Foreign MNCs will bring in global business models and products to India, adapt them to Indian tastes, develop products in India and market them to simila r geographies internationally as well. Large, Indian FMCG players will learn nua nces of operating in other countries in managing new retail channels and differe nt regulations and bring back these best practices to India. Also, Indian MNCs w ill now have to develop organization designs that are geared towards a geographi cally-diversi ed model. Indian players integrating with acquired companies success fully would need to retain the human capital to ensure continuity and understanding of the characteristics of the local market. They would need to ensure that while a cquiring a company, there is either an absence of or very limited overlap with t he acquired brands. This helps avoid the elimination of one brands share by anoth er. Companies would need to institutionalize best practices between various mark ets. In fact, expansion into new geographies may help companies to identify new trends which could occur in other markets. For example, changing consumer prefer ences in one country may be replicated in another market with a time-lag, which can be captured by a geographicallydiversi ed business. Companies with presence in developed nations with a high share of organized retail may also be able to app ly their learning in India. Indian players developing into international organiz ations will have to follow global standards in terms of governance, people proce sses, etc. 3.5. Many-Indias 3.5.1. Trend Description Spanning an area of 3.3 mil lion square kilometres, India is a vast country with 29 states. Language, eating habits and sartorial styles vary by region, or state, and ethnic group. Increas ingly, FMCG players are realizing that India is not a homogenous market but cons umer preferences vary signi cantly. Second, certain states present higher growth p otential in certain categories necessitating a focussed business strategy to dri ve growth. Recently, the BIMARU states of Bihar, Madhya Pradesh, Rajasthan and U

ttar Pradesh FMCG Roadmap to 2020 31

have been responsible for tremendous growth in FMCG compelling players to look a t these states more closely. It has become imperative for FMCG players to grow re gional in their thinking and move towards an increasingly decentralized operating model in India. Given the large Indian population, consumers within a state prov ide FMCG companies suf cient scale to form dedicated organizations for individual regions or states. By 2020, Maharashtras GDP will exceed that of Greece, Belgium, and Switzerland, and Uttar Pradeshs economic size will exceed that of Singapore and Denmark (see Exhibit 19) . So, having a dedicated rm for Maharashtra or Gujarat can prove to be a realisti c and pro table proposition. Exhibit 19: Some Indian State GDPs Compared to Select Country GDPs GDP PPP IN 2020 (IN INR BILLION) 25,000 20,000 15,000 10,000 5,000 0 Maharashtra UP Andhra Pradesh WB Gujarat Greece Belgium Switzerland Singapore Denmark Note: Extrapolation of 2001-2009 Growth Rates Source: IMF, CIA World Factbook, B ooz & Company analysis 32 FMCG Roadmap to 2020

Buzz Around the BIMARUs BIMARU contributes 35-45 per cent of our sales. These sta tes are not BIMARU for us; we would be BIMARU without them. Aditya Agarwal, Direct or, Emami Group of Companies Godrej is planning to increase marketing spends and distribution network in these states. These states consume 17-18 per cent of God rejs products. We expect it to go up to 25 per cent in a years time. A Mahendran, MD , Godrej Consumer Products Ltd Apart from the youth factor, what makes BIMARU imp ortant is that the consumers here are brand-loyal. The diaper category has seen 43 per cent growth in UP in FY2010 over the previous year. Anil Chugh, Senior VP W ipro Consumer Care and Lighting , Varying Consumer Preferences As consumer prefe rences differ across regions and states, companies may be well-advised to follow a regional strategy in terms of product ingredients, positioning, marketing cam paign, and channels. Historically, we have seen some examples of regional adaptat ion of business strategies by companies: HUL launched Brooke Bond Sehatmand for l ow-income consumers to compete against regional tea companies such as Wagh Bakri , Girnar and Sapat. Sehatmand was speci cally meant for down-trading consumers in Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Chhattisgarh. HUL also launc hed brand Ruby, speci cally for the Karnataka market. HUL launched a regional dete rgent brand in Punjab called Chokra which is present in two or three districts o f the state. Several players adapted beverage avours to local tastes, while tobacco players customized blends to regional preferences Dabur registered strong double digit growth in BIMARU states in FY2010 and expects that to continue. Dabur rol led out special rural focussed sales initiatives in BIMARU states. Rural distrib ution reach was stepped up in many high potential districts, penetrating to vill ages of lower population strata. George Angelo, EVP Sales, Dabur India FMCG Roadmap to 2020 33

We expect this trend of launching different product variants in different region s / states to continue in the future. 3.5.2. Possible Strategies for FMCG Player s Strategizing for Growth Centres Bihar, MP, Rajasthan and UP together comprise 36 per cent of Indias population, and 40 per cent of Indias youth. However, their cummulative contribution to FMCG consumption is only 24 per cent, which shows su f cient room for growth. Further, per capita income in the four states has started growing at 13 per cent, exceeding the national average growth rate. Hence, goin g forward, the Indian FMCG sector can expect to see signi cant growth from BIMARU. For players to take full advantage of this potential, a separate strategy will have to be devised for such regions with greater resource deployment and more fo cused product and sales initiatives. Other Strategic Tools Overall, decentraliza tion or regionalization will become an increasingly important theme for FMCG players. They will need to identify and achieve clarity on their strategy i n each state targeted. Product Strategy: FMCG players need to ensure that brands which do well in speci c regional markets do not lose out due to their focus on n ational brands. For example, for HUL, Hamam leads in Tamil Nadu, Rexona leads in Andhra Pradesh and Sunlight detergent leads in West Bengal and Kerala. However, lack of focus on these individual brands has led to loss of market share in the se speci c markets. Marketing Strategy: Marketing strategy and expenditure may var y with states, their position in the market, and growth trajectories. Also, the positioning will have to be better adapted to consumer preferences. Supply Chain Strategy: Sales and distribution structures, investment in logistics and wareho using among other facilities cannot remain in exible across states. Competitive St rategy: Competitive strategy of national players will also need to watch out for regional players which have better customized products for a particular region. Organization Design: Going forward, FMCG players may need to decentralize their organizational design, with separate R&D and strategic planning operations for different states. 3.6. Growi ng Modern Trade 3.6.1. Trend Description Historical Growth of Organized Retail N o strategic exercise is complete without a business strategy for the retail sect or, as the FMCG industry depends on retail for consumer sales. While Indias retai l sector has been growing at over 7 per cent annually, a large proportion of it is unorganized retail in the form of scattered momand-pop stores which require a very resource-intensive distribution process in terms of manpower and logistics . Also, volume per retail store is very low. However, modern trade or organized retail has created a concentrated (high volume) channel for distribution by FMCG players. Second, the share of some consumer product categories such as processe d food and beverages is also expected to grow rapidly within organized retail, w hich makes the latter a very crucial contributor to the industry. Modern trade i s still at a nascent stage in India; the share of modern 34 FMCG Roadmap to 2020

trade in retail last year was only about ve per cent. However, it has been growin g very rapidly displaying approximately 25 per cent annual growth (see Exhibit 2 0). Several formats exist within modern trade and organized retail, such as, hyp er marts, supermarkets, and cash-and-carry (which is essentially organized wholesaling). While supermarkets have the highest share in terms of the number of stores (approximately 85 per ce nt of total modern trade stores in 2009), hyper marts account for the highest ar ea (approximately 70 per cent of the total area under modern trade). Cash-and-ca rry is still nascent with only about eight stores in 2009. In a large and growing market such as Indi a, we expect existing formats to evolve and new formats to come up in the future , driving the growth of various FMCG categories. Local Indian players have been experimenting with different Exhibit 20: Organized Retail Penetration in Select Economies (% OF TOTAL RETAIL) 81.0% 85.0% 55.0% 40.0% Organized retail has grown at 24% CAGR over the last 4 years but significa nt headroom exists 4.8% 30.0% 20.0% 3.1% India 2005 India 2009 China Indonesia Thailand Malaysia Taiwan US Source: IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis FMCG Roadmap to 2020 35

business models with mixed success. The Future Group is one of the prominent pla yers in this space and operates more than 1000 stores with different formats suc h as Big Bazaar (hypermarket), Food Bazaar (supermarket), Central (urban mall), futurebazaar.com (online shopping portal), home town (home furnishings), and Aad har (rural retailing). The economic slowdown dented the growth of organized reta il during 2008 and 2009. Lower footfalls resulted in lower sales growth and margins contracted as retail expansion had been nanced through debt and the i nterest rates were now rising. There were also increasing funding constraints. H owever, growth has picked up again and expansion plans are now being announced. Future Growth Modern trade is expected to grow very rapidly in the future with i ts share in total retail projected to reach 11 per cent by 2014 and 30 per cent by 2020 (see Exhibit 21). This growth will be supported by: High economic growth: GDP is expected to grow at 8-10 per osting growth in all sectors. Increasing incomes: Incomes ue to rise which should further drive convenience shopping. ion: Organized retail will continue to increase presence in ties, which are growing faster than metros. Exhibit 21: Modern Trade Penetration (% OF TOTAL RETAIL) 30.0% 11.0% 4.8% 2009 2014E 2020E Source: IBEF, Booz & Company analysis 36 FMCG Roadmap to 2020 cent in the future, bo are expected to contin Increasing urbanizat Tier 1 and Tier 2 ci

 Improving infrastructure: The government is increasing its thrust on improving i nfrastructure. A recent example is the construction of the Golden Quadrilateral, a dedicated freight corridor which will result in improved supply chain ef cienci es. Future Trends in Modern Trade This analysis has tried to capture the ongoing and future trends within modern trade which are expected to impact the FMCG ind ustry. Among these are a focus on supply chain management for improved pro tability, emergence of private labels, expansion of modern trade beyond metros and the rise of cashand-carry business in India (see Exhibit 22). Focus on Supp ly Chain Management: Organized retailers are going to be increasingly interested in reducing time-to-market. To achieve this, it will be important to invest in inventory management and related technology for capturing sales data, forecastin g demand and generating automatic replenishment. Decreasing inventory levels will also require strong backward integration with d istributors or manufacturers. Retailers will also need to optimize logistics fur ther in terms of warehousing and transportation etc. For this it will be imperat ive to increase supplier collaborations. Emergence of Private Labels: Private la bels or products manufactured and marketed by retailers, have been growing in In dia as they are very attractive to retailers for three reasons: Exhibit 22: Organized Retail Industry Trends Focus on Supply Chain Management Emergence of Private Labels Expansion beyond Metros Source: Booz & Company analysis Rise of Cash-and-Carry FMCG Roadmap to 2020 37

First, they help retailers to improve pro tability as the margins for private labe ls are higher (30-35 per cent on average) compared to the manufacturers brands. S econd, they help retailers to create differentiation between competitors as they are unique to their stores. Third, the emergence of retailing as a specialist f unction and the growth of multiple retailing have helped retailers push manufact urers towards greater margins. Experience has shown that the retailers who most consistently exceed expectations are rewarded with higher average sales, more re peat business, and invaluable goodwill. All these are critical stepping stones o n the journey to sustainable loyalty. Further, penetration by private labels in India is quite low compared to other d eveloped countries (see Exhibit 23). Due to all these factors, it is expected th at private labels will become a major threat to FMCG players in the future. Expa nsion beyond Metros: Organized retailers have started expanding their presence f rom metros to smaller cities. For example, Big Bazaar had 44 per cent of its sto res outside the top 19 cities in 2009. There are plans to open stores in Tier 1 and Tier 2 cities in Tamil Nadu as well. Similarly, Lifestyle is planning to exp and its base across 22 cities by FY2013. This further implies that modern trade will become increasingly important for FMCG players as a major channel not just in metros, but in other cities as well (see Exhibit 24, p. 39). Rise of Cas h-and-Carry: Several foreign, organized retailers have been increasing their pre sence in the cashand-carry business in India. Metro was one of the rst to enter I ndia in 2003. It targeted kirana owners, hotels, restaurants and catering servic es through ve outlets across Bangalore, Mumbai, Hyderabad and Kolkata. Wal-Mart e ntered the cash-and-carry business through a joint venture with Bharti Enterpris es under the brand name Best Price. It has three stores in Punjab currently and pl ans to expand to 10-15 stores over the next few years. Similarly, Carrefour is e xpected to set up its rst cash-and-carry store in Delhi. Cashand-carry is expecte d to provide an alternative channel to FMCG players Exhibit 23: Private Label Share in Overall Organized Retail Sales 46% 40% 35% 29% 27% 21% 20% 11% 20% Switzerland UK Germany Spain France Australia USA India World Average Source: Technopak, Booz & Company analysis 38 FMCG Roadmap to 2020

in the future. However, whether cashand-carry would form a signi cant chunk of tot al sales is a question given that all foreign retailers are eyeing the retail op portunity and waiting for multi-brand FDI in retail to open up. 3.6.2. Possible Strategies for FMCG Players With increasing importance of modern trade, channel segmentation is expected to become crucial for FMCG players, along with the adop tion of a greater collaborative approach with the most important channel partner s. With the emergence of private labels, the retailer-manufacturer relationship will come under greater pressure. FMCG players will need to become primary suppl iers to top retailer-partners by leveraging their position as market leaders. Th ey may also have to provide special discounts. Second, to prepare a better value proposition to retailers, they will also need to shift their role f rom transaction to advisory and help in category development, joint promotions e tc. The need for FMCG players to improve execution in terms of merchandising in the top organized retail accounts and invest in technology to gain insights into consumer behaviour and purchasing patterns will signi cantly increase in the futu re. 3.7. Eco-consciousness 3.7.1 Trend Description What makes sustainable busine ss practices essential? Increased ecosustainability of business will be extremel y important for FMCG companies in the future. Global climatic changes and the gr owing scarcity of natural resources have already led to increased concerns about the environment. The pressure on companies from key stakeholders to be environmentally responsible is gradually on the rise. Various stakeholder responses to ecoconcerns are showcased below. Government: India is committed to reducing carbon emissions by 25 per cent by 2020 and the government has been imp osing stringent environmental norms on companies. Also, many states have enacted legislations such as the ban on plastic bags to further the cause. Consumers: C oncern for the environment has changed the purchasing behaviour of consumers. An Edelman survey of 6000 global consumers conducted between August and October, 2 008 found that 87 per cent believed it was their duty to contribute to a better en vironment. Media and NGOs: Environmental activists and journalists are Exhibit 24: Percentage Share of Retail Presence Across Different Cities, 2009 Number of Stores 113 27 18 45 100% 26% 67% 30% Top 4 61% 49% Planning to open Stores in T1/T2 cities in Tamil Nadu 9% 35% 33% 39% 31% 9% 11% Pantaloons 22 5 to 15 16 to 35 Others Big Bazaar Number of Cities 58 Shoppers Stop 9 Lifestyle 8 Planning to open 45 stores across 22 cities by FY13 Source: Technopak, news articles, Booz & Company analysis FMCG Roadmap to 2020

39

becoming increasingly vocal in their protests against companies which have been polluting the environment or not engaging in judicious use of resources. Some NG Os routinely monitor and track the CSR efforts of FMCG companies in India, drivi ng awareness and importance of such initiatives (see Exhibit 25). Competitors: S ome FMCG companies have started pioneering sustainability efforts. For example ITC has been publishing an annual report on sustainability and has also conducted s ustainability audit of businesses and subsidiaries. HUL has been focusing on ens uring sustainable practices in business. Nestle has initiated pollution-free was te disposal at manufacturing plants, while Dabur has been focusing on reducing e nergy consumption, increasing renewable energy and plans to become carbon positive in the next few years. Such measures are forcing other players to also involve themselves considerably in driving gre en practices. Channels: Some of the global modern trade players have mandated su stainability requirements from their suppliers. Wal-Mart has been at the forefro nt of such initiatives. Such practices will soon be implemented in emerging mark ets like India. Investors: Foreign investors have also been driving the sustaina bility agenda in the companies they invest in by benchmarking with global practi ces. Some of the top sustainability issues worldwide have also been identi ed for the FMCG industry in India. The most important of these are packaging, water-use, harmful emissions and the impa ct of products on health. These have been detailed below: Packaging: Primary and secondary packaging costs typically constitute approximately 8-10 per cent of t he total cost base for most FMCG players. A signi cant proportion of packaging is polymer-based and non-biodegradable. It has been observed that for essential com modities such as milk, the packaging issue is not given much importance by the c onsumers or regulators; while for products such as snacks, packaging sustainabil ity has attracted more attention. Hence, FMCG players should take a closer look at their packaging cost-base and try to eliminate or reduce the quantity of pack aging material used and upgrade to biodegradable packaging materials. Exhibit 25: Karmayog CSR Rating of FMCG Companies Across India DISTRIBUTION OF FMCG COMPANIES ACROSS CSR RATINGS 25 0% 20% 7% 27% 28% 4% 20% 23 % 26% 5 4 3 41 2% 43 2% 5% 48% 2 44% 44% 1 0 2007 2008 2009 Performance of FMCG companies is improving but many are still in the lowest brac ket Note: 5 is the best rating and 0 is the worst rating on CSR performance Source:

Secondary research, Booz & Company analysis 40 FMCG Roadmap to 2020

 Harmful emissions: This is a problem area for FMCGs given these are logistics-in tensive businesses that also release greenhouse gases during their manufacturing processes. Since fuel scarcity in the future is likely and transportation is a major GHG culprit, companies should strive to make transportation more ef cient an d encourage usage of renewable energy through use of hybrid vehicles for transpo rtation. Water utilization: With depleting groundwater and scarcity of fresh wat er, FMCG companies should resort to water-ef cient technologies during manufacturi ng, and recycle used water. Health impact of products: This is a big concern for both consumers and the government. It has been observed that increasingly, cons umers are reading through the nutritional information on products, and becoming more conscious of the harmful impact of categories such as snacks and fast foods . The FMCG industry needs to lead by example in this case and shift towards heal thier products. Others: FMCG players should partner with suppliers which provide green (organic) raw materials, drive the usage of renewable energy sources and more energy ef cient technologies such as CFL for lighting up of ces and factories. Business Sense in Driving Sustainability Adopting green technology and processes has also started making economic sense for companies. The following points enab le better understanding of how this has worked: Rising costs of resources: Costs of doing business will increase, especially in areas dependent on natural resources. Many commodities have seen a high degree o f price volatility and long-term forecasts indicate sky rocketing costs of natur al resources. Affordable Green Technology: Cost-effective green technologies are emerging, as is the supporting ecosystem comprising of researchers, regulators and other such personnel facilitating and supporting their development. Commerci alization further ensures the pro tability, or at least the economic feasibility, of green initiatives. For example, the widespread adoption of solar energy syste ms had long been hampered by the high cost of photovoltaic (PV) cells per kilowa tt-hour compared with other energy sources. But as the price of traditional ener gy skyrocketed, low-cost thin- lm technology became increasingly commercialized an d this has begun replacing rst-generation crystalline silicon PV installations to day. As solar energys cost per kilowatthour continues to drop, it is estimated th at a larger proportion of the population will adopt this. Impact on top-line and bottomline: More and more business leaders are recognizing the fact that going green can have a dramatic effect on their companies nancial results. To capture th is value, they use green programmes to eliminate waste and drive ef ciency through out the enterprise and, in more advanced cases, to create top-line growth by bri nging new product offerings to market. An example lies in organic foods. Also, Wal-Mart has decided to sell only concentrated laundry detergents, which require less packaging and space for transport and storage, saving fuel and transportat ion costs while driving a green initiative. Increasing Commitment Levels for Sus tainability Since the forces driving sustainability are compelling and enduring, every company should incorporate sustainable business practices. This is not a business choice but a prerequisite, particularly for major FMCG companies. More and more companies realize that if they dont address the green challenge in a rig orous way, their costs will increase over time, their reputations in the market will suffer, and they will miss some of tomorrows most valuable market opportunit ies. The three levels of sustainability based on the commitment levels of compan ies are described below (see Exhibit 26, p. 42). Responsible Green: This is the leastevolved level of green business, and is characterized by a limited and lega listic approach to sustainability. Companies that pursue green at this level are focused on projects and initiatives designed to ensure compliance with environm ental laws and regulations in the locales in which they operate. They also respo nd to the green demands of value chain partners (suppliers or retailers) they ca nnot afford to lose. At this level, companies dont develop capabilities which sup port green, and may not even have a dedicated environmental function. However, s ome managerial attention is required for awareness of ever-changing regulations and market conditions. Also, some investments may be required to prove complianc e in terms of tracking and reporting. Most of the Indian companies are at this l

evel of sustainability. FMCG Roadmap to 2020 41

 Ef cient Green: These companies approach sustainability with an internal focus, an d strive to simultaneously reduce environmental impact, lower costs, and enhance operating ef ciencies. They can take the form of a simple e-mail message asking o f ce workers to voluntarily turn off their computers before leaving work or entail a rigorous effort to reduce waste by redesigning products. They can feature ded icated efforts and signi cant investments, but typically they deliver relatively s hort-term payback. The key is to balance the investmentsin resources, systems, an d assetswith the likely payoff. Continued focus of senior leadership on costs and ef ciency savings provides signi cant support for sustainability initiatives. Diffe rentiated Green: Differentiated green companies pursue green in a strategic way throughout the value chain of the business and in a variety of new businesses and business oppo rtunities. Going for green at the differentiated green level requires signi cant i nvestments of time, effort, and capital. The company can expect to obtain long-t erm paybacks in terms of more ef cient operations, and increased market share vis-vis competitors. 3.7.2. Possible Strategies for FMCG Players Going forward, FMCG players will need to make a choice in terms of their sustainability effortseithe r they choose a defensive or a proactive approach. They can either wait for the regu lations to evolve and compel them towards adherence to sustainability norms, or grab the opportunity and start building a sustainable business model to drive bu siness advantage in the future. Including sustainability as a core business stra tegy and driving sustainable elements throughout product lifecycle through product innovation, investment decisions, or marketing can go a long way towards creating a sustainable FMCG business. 3.8. Game-chang ing Technologies 3.8.1. Trend Description Technology, an all-pervasive factor, i s signi cantly impacting all facets of business. In the FMCG sector, technology fa cilitates front-end processes of business by creating consumer awareness, enable s ef cient sales and distribution and runs backend processes like market research, generating shopper insights, gathering business intelligence, supply chain mana gement etc. It is believed that in the future, FMCG players will need to signi can tly increase their investments in technology and use it to derive competitive ad vantage. Technology at the Front-End Technology options for creating consumer aw areness and promoting sales have proliferated in the last Exhibit 26: Levels of Commitment to the Environment Differentiated Green (Usage of sustainability to drive Efficient Green (Selectiv e investment to drive Efficiencies) Responsible Green (Compliance) Pursue green sustainability initiatives which focus on regulatory compliance Cou ld be either government driven ...or value chain partner driven (supplier / reta iler) Leverage green to identify cost reduction / efficiencies Companies can lev erage lean principles to attain this level This should be the base minimum for a ll companies as there is significant money on the table (both cost and revenue) which can be achieved Elevate Green Strategy to a core strategy, and not just a CSR initiative Use the green lens over the product life cycle, considering the env ironmental impact through the entire value chain Integrate Green Messaging into brand positioning and messages Manage trade-offs explicitly across growth, cost, sustainability, risk and service competitive advantage) Source: Booz & Company Going for Green: A Capabilities Approach to Environmental Opportunity, Dec 2009 42 FMCG Roadmap to 2020

decade, with increased adoption of broadband the evolution of social networking sites as major media platforms, and the growth of value-added services on mobile s. An increasingly young population coupled with increased participation of wome n in workforce have lent support to the adoption of new consumer favouring techn ologies. While print and television account for 86 per cent share in advertising at present, internet advertising has grown at approximately 30 per cent annuall y. The Indian youth is spending most of their time at the television and on the Internet. As per estimates, Google products account for 30 per cent of online ti me spent by Indian consumers (see Exhibit 27). Four platforms or technologies wh ich could play a major role in consumer awareness in future have been detailed below: Social Marketing: Social marketing sites such as Facebook, Orkut, Twitter, Linkedin etc are becoming increasingly popular, especially among the youth. Facebook for instance has approximately 14 million Indian users at present. Similarly Linkedin, aimed at creating a network of professionals, has about 3 million users and India is one of its fastest gro wing subscriber bases. Several FMCG players have started targeting social networ king sites for creating brand awareness. Capital Foods has reported 30 per cent growth in revenue over the past six months attributing its growth to the adverti sing campaign it launched on Facebook. Amul has 52,000 fans on Facebook and heav y traf c of discussions on its community page. Perfetti Van Melle has appointed Isobar to manage its digital image on Facebook and Twitter. Bene ts: Social networ king sites provide a low-cost alternative to traditional channels or of ine busine ss networking events which involve signi cant marketing expenses. The sites are in teractive and create a viral effect reaching out to a community of users who are interacting with each other. Leveraging social marketing sites for co-creation and sales: FMCG players can also leverage these sites for engaging with consumer s on product design and sales imperatives. Apparel brands such as Benetton, Will s Lifestyle, Pantaloons and Van Heusen are tapping social networking sites as de sign centres driving efforts of co-creation with end-users. The Exhibit 27: Media Channels Consumption by Youth (AGE-GROUP OF 13-35 YEAR OLDS, 2009) MINUTES / DAY 100 90 80 70 60 50 40 32 30 2 0 10 0 Newspaper Magazine TV Radio Internet 0 100 44 60 70 200 250 98 MILLION YO UTH 300 150 50 Average Time Spent # Youth Utilizing Channel Source: National Book Trust-NCAER Survey 2009 across ~400 villages and ~200 citi es, secondary research, Booz & Company analysis FMCG Roadmap to 2020 43

contributions from users on various features ranging from colour, textures to de signs are welcomed. Also, some players such as ITC are seen pushing their online sales for Wills Lifestyle through their member community on Facebook. However, given the nascent nature and untested ef cacy of social marketing, it will be prud ent to use it complementarily with other of ine channels for a holistic engagement . Mobiles as a Major Platform for Consumer Engagement: Mobile phone penetration in India has been increasing at approximately 75 per cent annually for the last v e years. Mobiles can be a very powerful platform for consumer engagement given t heir extremely wide reach. The number of mobile users is expected to reach 900 m illion by 2014. Given the advent of 3G, value-added services will get increasing ly enhanced. Increasing Popularity of Mobile Advertising: Given the advantages s uch as direct and personalized communication, and a high access to rural consume rs who accounted for more than 100 million subscribers in 2009, mobile advertisi ng is seen to be gaining popularity. Marketing Campaigns on Mobiles: Several FMC G players have started creating marketing campaigns for mobile phones. Cadbury c ame up with an interactive campaign which allowed students to check their exam r esults using Reliance India mobile service. If the student passed, he got an SMS congratulating him saying Pappu Pass Ho Gaya along with the exam result and this encouraged him to celebrate the moment with a Cadbury Dairy Milk Chocolate. Simi larly, Coca-Cola started a contest titled Sprite Kholega to Bolega in which all Sprite bottles would have a c ode number printed under the crown. When this code was sent as an SMS to a desig nated phone number, the buyer could win free talk-time ranging between INR 50 an d INR 5,000, and other mobile freebies. Advent of 3G: Historically, the mobile h as attracted low advertising expenditure because of its format of advertisingsimp le text SMS or basic pictures. However, 3G will enable rich media content and vi deo transmission over the phone. About 100 million users are expected to have 3G handsets in 2012-13 up from the current 20 million users. With 3G, advertisers would be able to subsidize the cost of downloading rich media content by subscri bers. For instance, a song from a new Bollywood lm could be put up for download w ith an advertisement of a soft drink company as a pre-roll or a mid-roll. Consum ers could download this song for free while the soft-drink company would pay for the download. Approval for Mobile Virtual Network Operators (MVNO): Recently, t he Telecom Regulatory Authority of India (TRAI) has created the pathway for MVNO s to operate in India. Their entry can be expected to accelerate the growth of m obile advertising in future, as they are dependent on VAS and advertising to dif ferentiate themselves from other service providers. MVNOs provide mobile phone s ervices by buying airtime from existing telecom operators, which they then marke t by leveraging their brand and distribution network. MVNOs can even offer the e ntire mobile service for free if the subscriber opts to receive a certain number of ads per week. Blyk for instance is an MVNO i n the UK which sells mobile network for free by giving customers free airtime in exchange for accepting up to six advertising messages per day. Blyk generates a ll of its revenue from advertisers and ensures that it has a user base that adve rtisers will pay a premium to reach. Online Advertising: FMCG players have been increasing their focus on online advertising with expenditure on the medium grow ing approximately 57 per cent annually between 2006 and 2009, with further 30 pe r cent annual growth expected in the future. This is also in line with the expec ted increase in broadband penetration in India from approximately 3 per cent at present.7 Leading FMCG companies such as HUL, P&G, Cadbury and Tata Tea have bee n ramping up their online advertisement budget for speci c brands. For instance, H UL created an online campaign with its Sunsilk Gang of Girls, while Tata Tea cam e up with Jaago Re and Lipton launched Stay Sharp. At present, FMCG players spen d only 1-2 per cent of their marketing budget on online advertising. This is exp ected to increase to 10 per cent in line with global trends in the next few year s. Globally, as companies use the online medium for enhancing brand awareness, t he advertisements become more interactive. For example, in the US Pepsi runs onl ine contests for Pepsi Max and Doritos wherein consumers can upload 30-second co

mmercials about Max/Doritos. There is online voting on these advertisements and awards of up to US$ 5 million are given to winners. The internet can be a very p owerful medium to target speci c consumer 44 FMCG Roadmap to 2020

segments such as students who comprise of approximately 30 per cent of total int ernet users and urban professionals. Growing penetration of credit cards in the economy will also boost online purchase. At present, credit card penetration in India is just 2-3 per cent, while in the developed markets it is 10-12 per cent. Advertisements in Gaming: The gaming industry in India, though nascent, is INR 18 billion in size, and is growing at approximately 40 per cent annually. A grow ing young population, increasing affordability of goods due to higher disposable incomes and low price of hardware and content (with game download prices coming down), proliferation of developers and publishers and growing awareness through internet and social media are some of the factors leading to growth of this ind ustry. Some FMCG players have already started testing waters in the gaming adver tisement world. Cadbury has a Tetris-like game where bars of chocolate are the b uilding blocks, while AXE, HULs deodorant for men, has partnered with Zapak for creation of Axe Inxtinct for the brand to stay o n top of its consumers minds. The size of gaming advertisement in India was INR 9 billion in 2009. It is expected to grow three times in the next three-four year s. Though the penetration of gaming is low compared to mass media such as televi sion and print, it is a powerful tool for the marketers as the engagement level with the consumers is quite high. Technology at the Back-End FMCG players can le verage technology for driving greater ef ciency in various back-end processes. By deploying datacapturing technologies at pointsof-sales, players can understand c onsumer purchase behaviour. Similarly, for gathering business intelligence on co mpetitors leveraging technology at the retail end is becoming common practice. S upply chain management also has tremendous potential for driving ef ciencies throu gh tools of demandforecasting, production scheduling, inventory optimization, lo gistics planning etc. Several FMCG players have been investing in technologies for back-end processes. Coca-Cola has invest ed in customized wireless hand-held devices for its sales persons. The devices h ave wireless receipts of the list of customers to be visited and other customer details. They also allow transmission of activity reports back to the of ce. Sales people can now spend two more hours of quality time with retailers due to this technology. HUL has an internet-based supply chain management system which conne cts it to the redistribution stockists. This focuses on primary sales (HUL to st ockists) and secondary sales (stockists to retailers) along with enhanced commun ication and has enabled release of inventory reduced eld force time by 50 per cen t, and ensured full time availability at retail outlet (see Exhibit 28). Wal-Mar t globally has radiofrequency identi cation tags incorporated into products in sto res which perform the same functions as bar-codes thus enabling access to histor ical and geo-spatial details of the product. These are widely used in supply cha in management Exhibit 28: IT-enabled Supply Chain Management at HUL Planning Hub Product Flow Supplier Manufacturing Plant C&FA Distributor Kirana IT Systems

Central Unify Distributor Mgmt System Hand-held Device Dispatch Daily Production Plan-weekly Dispatch Daily Sales Stocks Prices Invoicing Availability Stocks Sales Source: HUL CLAS Conference Investor Presentation 2008, Booz & Company analysis FMCG Roadmap to 2020 45

for improving ef ciency of inventory tracking, cutting cost of documentation, and enhancing ef ciency of scheduling through geopositional tracking. 3.8.2. Possible Strategies for FMCG Players Leveraging technology across the value chain of prod uct innovation, manufacturing, sales and distribution, and marketing can help FM CG players derive various bene ts in terms of designing better products and becomi ng cost-ef cient on the one hand, and expanding the market through better engageme nt with consumers on the other. FMCG companies can capture better consumer insig hts by deploying various technologies at point-ofsales and involving consumers i n co-creation processes through online channels. Inventory management systems, h andhelds for capturing data, production planning tools and vendor management too ls could be used by FMCG players to derive supply chain ef ciencies. Various new p latforms such as internet, mobile, and media such as gaming have widened choices for marketers. However, marketing efforts will need to account for the speci c co nsumer segment being targeted. For ef cient marketing, companies need to focus on the concept of return from marketing investments or the top line growth achieved p er marketing rupee spent. 3.9. Enabling Policies The FMCG industry is regulated comparatively lightly and in spite of tremendous competition, the government act ing as the watch dog, limits its role to prescribing product norms to protect co nsumers interests (regulation on MRP, Prevention of Food Adulteration Guidelines and other such), and to providing speci c incentives to priority industries. The Indian Government has enacted several policies and A cts aimed at fostering the development of the FMCG industry. The government has also been enacting several measures to drive inclusive growth of the economy by targeting the economically and socially weaker sections and creating a platform to bridge the gap between the poor and the rich. 3.9.1. Facilitating Growth of FMCG Players: Supply Side Factors Historically, the government has introduced policie s aimed at attaining international competitiveness through reduced duties, autom atic foreign investments and food laws. Some positive regulatory triggers for th e industry are mentioned below: Food Processing and Agro Industry Recognized by the government as priority sector, industrial licensing exemption is extended to almost all products in this category. Automatic investment approval and up to 1 00 per cent foreign equity is allowed in the industry. For organized players, ex cise duty bene t for 10 years from commencement of a unit is offered. Pricing bene t for unorganized players has been reduced with favourable tax scheme for organiz ed players, especially for biscuits, noodles, cigarettes. Exports 100 per cent e xport-oriented units can be set up after government approval. Foreign Direct Inv estment Automatic investment approval (including foreign technology agreements w ithin speci ed norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) inve stment, is allowed for most of the food processing sector except malted food, al coholic beverages and those reserved for small scale industries (SSI). Within re tailing, FDI is allowed in single-branded retailing (up to 51 per cent), and in cash-andcarry / wholesale business (up to 100 per cent). 3.9.2. Facilitating Con sumer Demand The government has been playing a signi cant role in driving inclusiv e growth of Indian consumers through direct measures such as decreased tax rate and raised salaries (the Sixth Pay Commission was lauded for its recommendations in this direction) which enable greater disposable incomes to be available to t he consumers, as well as indirect welfare measures through employment generation , provision of education, providing food security etc. Increase in Disposable In comes Income-Tax rates have been decreasing. The tax rate for income of INR 0.6 million is down from 27 per cent in FY2003 to 9 per cent in FY2011. Rise in sala ries of government employees through the Sixth Pay Commission. There have been p ayouts of INR 400 billion since 2008. Rise in Rural Incomes Rural expenditure by the government has increased from INR 230 billion in 2006 to INR 830 billion in 2010. The farmer loan waiver scheme and the National Rural Employment Guarantee Scheme (NREGS) have driven increasing incomes in rural areas (NREGS provided em ployment to

46 FMCG Roadmap to 2020

approximately 50 million homes in FY2010). Increasing Awareness Right to Educati on is expected to result in increased awareness among consumers which will drive quality-consciousness among them. As per The Right of Children to Free and Comp ulsory Education Act 2010, every child in the agegroup 6-14 will be provided eig ht years of elementary education, and any cost which prevents a child from acces sing school will be borne by the State, which will have the responsibility of en rolling the child, and ensuring attendance and completion of eight years of scho oling. 3.9.3. Areas for Regulatory Intervention However, there are some areas in which the government needs to come out with appropriate regulations, such as in troduction of GST, opening of FDI in multi-brand retail, and stricter norms to c urb counterfeit products. These are expected to have a signi cant impact on how th e FMCG sector performs in the coming years GST: The government is expected to im plement GST in the near future. This would help to replace the multiple indirect taxes levied on consumer products (by central and state tax authorities). There will be several bene ts of implementing GST. A uniform and simple tax would help in reducing prices of consumer products due to a more ef cient supply chain. Curre ntly, FMCG players have warehouses in every state to avoid certain taxes, which results in a higher cost of operation. Also, logistical delays can be avoided with the elimination o f multiple levels of taxes, and mitigation of differences in tax structures acro ss states. Consumption would grow with reduced prices. Tax collections from the FMCG industry will also increase with increased tax compliance and broad-basing of products and services for which the tax is levied. FDI in Multi-Brand Retail: At present, no FDI is allowed in multibrand retail, which is preventing global retailers such as Wal-Mart and Carrefour from establishing their retail operatio ns in India. It has been seen that in developed markets, large organized retaile rs have brought huge bene ts to consumers by lowering the total cost of supply cha in operations. Going forward, the government is expected to change the FDI polic y for multi-brand retail in India, to allow more competition in the sector. Coun terfeit Products: Counterfeit products pose a serious threat to the growth of FM CG industry. As per estimates, counterfeit goods account for 10-15 per cent of t he total size of the FMCG industry. To the exchequer, these result in a loss of INR 45 billion. The government is expected to come out with more stringent polic ies to enforce Trade Mark and Copyright Laws to protect the rights of consumers and FMCG companies. Revamping Agriculture Products Marketing (Regulation) Act (A PMA): As per APMA, food processors are not allowed to buy directly from farmers. As a result, many intermediaries are involved in the supply chain. This creates, rst, a monopolistic environment in which the f armer does not have any say in determining the price. Second, the intermediaries , who are fragmented, do not invest in modernizing the supply chain and the ware housing infrastructure remains poor. Logistics, speci cally for perishable raw mat erials such as fruits and vegetables are ignored which results in huge wastage o f produce, or sub-standard products which do not meet international standards. T hird, food processors have to pay a higher price for procurement, as the raw mat erials go through several layers of intermediaries. To avoid this, all the state governments are expected to come out with a policy to allow FMCG players to dir ectly source agricultural raw materials from farmers. National Food Security Act (NFSA): This is expected to ensure that the basic needs of the rural poor are s atis ed, and they can have a better lifestyle by spending on discretionary product s. The NFSA will require the government to provide 35 kg of foodgrain at INR 3 p er kg to almost everyone (barring the rich) in one-fourth of the poorest blocks of the country, and will cover 40-50 per cent of the people in the rest of the c ountry. Ramping Labour Laws: India has archaic and inef cient labour laws, with st rictly de ned norms for work hours, over-time, contract employees etc. These resul t in inef cient operations for manufacturers. The government needs to modernize th e labour laws to enable FMCG manufacturers to improve their ef ciency and lower co sts of production.

FMCG Roadmap to 2020 47

4 IMPLICATIONS FOR THE FMCG INDUSTRY 4.1. Industry Paradigms in 2020 The FMCG industry in 2020 will be characterized by: Large Size: The Indian FMCG industry in 2020 is expected to reach a size of INR 3700 billion INR 5200 billion. As a major contributor to economic growth in t he next decade it will contribute close to 3 per cent of the GDP. Increased Prod uct Complexity: The market for FMCG products is becoming increasingly heterogene ous with evolution of different consumer segments which have very different need s. One product will not be able to successfully target all consumer segments and companies will have to make very dif cult choices. They will either focus on one / a few niche segment(s) or straddle various consumer segments with a basket of product variants. Evolving Consumers: Consumers are becoming more aware about pr oducts and associated functions / bene ts. They are taking out time to learn more about the products they should choose. This trend therefore can be expected to c hange buying behaviour and consumption patterns signi cantly and rapidly. Increase d Competitive Intensity: Competition in the industry is expected to further inte nsify with regional players targeting national expansion, and more global player s targeting the Indian market. Channel Evolution: The channel choices in the ind ustry are expected to widen with increasing penetration of organized retail and internet / B2C commerce. While FMCG companies will need to develop a detailed sa les and marketing strategy for these channels, they will have to renew focus on traditional trade which will continue to retain its position as the dominant channel. Environmental Concerns: With in creasing pressure from government, NGOs, and consumers for ef cient and prudent us e of environment and natural resources, the FMCG industry will need to signi cantl y increase its efforts to drive sustainability as a core business strategy. Sign i cant among these factors are those that can force a complete break from existing paradigms. In addition, the con uence of these change driversconsumers, technology , government policy, and channel partnerswill have a multiplier impact and magnif y both the magnitude as well as the pace of change. As with any transformational change here too there will be winners and losers. Many product categories will grow rapidly (30-40 per cent annually) given fast adoption rates across large ma rket. Other categories may mature and slow down to single digit growth rates. Si milarly, the competitive intensity will increase signi cantly. There will be an ur gency to grab a share of what will, in ten years, be amongst the largest consume r markets of the world leading to a proliferation of products and services. New leaders will emerge by leveraging tailored business models, relevant products, n imble marketing, fast time-to-market, and ef cient supply chains. 4.2. Imperatives for the FMCG Industry The transition from a stable and homogenous operating mod el to a more dynamic, unpredictable and rapidly changing operating 48 FMCG Roadmap to 2020

environment will have signi cant implications across stakeholders. The movement of consumers in and out of categories, the changes to the structure of consumption across segments and the co-existence of seemingly con icting attitudes to consump tion will create a level of complexity and challenge never seen before. Winning in this new world will require enhancing current capabilities and building new o nes to bridge gaps. In our view, in this new world, FMCG companies will have six imperatives from the perspective of business strategy. 4.2.1. Disaggregating th e Operating Models FMCG players are facing divergent choices at each link of the value chain depending on their business offering and the target market. Very different business models are required for targeting the premium segment, the middle clas s, and bottom-of-the-pyramid consumers. Business operations too differ when cons umers of different age-group / regions / genders are targeted. FMCG companies wi ll need to build capabilities across the value chain for the speci c consumer segm ent which they target. Strategies of targeting consumers belonging to different income classes are illustrated below (see Exhibit 29). Hence, going forward, FMC G companies will need to manage an increasingly complex operating model dependin g on the set of choices they make in terms of target market, product offering, e xtent of decentralization (region / state) and extent of globalization. In the operati ng model design, companies will also need to drive ef ciencies in time-to-market a nd ensure that decision rights are properly de ned to ensure quick decision making in reaction to changing consumer trends. For those who operate across a spectru m of markets and segments, it will be crucial to evaluate where they should disa ggregate their business models in order to deal effectively with both new as wel l as mature segments. They will also need to gure out areas where scale and integ ration can give them more advantage. This will have implications on the way all aspects of the business, from distribution to marketing to the supply chain are con gured (see Exhibit 30, p. 50). Exhibit 29: Divergent Choices in FMCG Business FMCG VALUE CHAIN Offering/Market R&D Supply Chain Manufacturing Marketing Sales & Distribution High investment in R&D Managing imported ingredients/products Out-bound logistics customized as per cus tomer preferences Premium Product for the Affluent Product with high efficacy, using breakthrough technology Large variety, customized solutions Low production Targeted media - niche magazines, brochures, etc. Branding to create differentiat ion

 High-touch model company-owned outlets High service dedicated sales force Low-to uch model with focus on expanding reach Discounts/promotions to drive penetratio n Low investment in R&D Standard Product for Mass Consumption No customization Ensure availability of products at point-ofsales through efficient inventory man agement Few unit sizes Mass production Use of mass media TV, national newspaper High investment in R&D Customized Product for BOP Market Low-cost no-frills adapted to local preferences Achieve low cost through partnerships/alliances Customized to produce smaller SKUs Low-cost driven by shared facility/low rentals/ high utilization Use of local media outdoor advertising (banners), NGO volunteers Shared Channel Local people used for sales Source: Booz & Company analysis FMCG Roadmap to 2020 49

4.2.2. Winning the Talent Wars With accelerating growth in the sector in terms o f more products, brands, categories, geographies of operation etc, the demand fo r human capital is going to increase signi cantly. Also, higher quality of talent will be required to deal with the increasingly complex Indian market. Two key ar eas of emphasis will be attraction of the best available talent and ensuring dev elopment and retention of the acquired talent. With increasing employment choice s available to students, the FMCG industry is likely to face a talent crunch in both acquisition and retention. In colleges, students prefer high-paying jobs wh ich require deskwork rather than physically strenuous sales jobs in FMCG compani es. As a result most of the bright students do not even apply to FMCG companies. For instance, in one of the Indian Institutes of Management, while 30 per cent students took up marketing jobs from campus in 2003, the number decreased to 15 per cent in 2010. With new industrie s scaling up and offering more attractive value propositions, this percentage wi ll continue to reduce. Talent scarcity is expected to intensify in the future, a nd the industry will need to devise an attractive employee value proposition for bright graduates to acquire quality talent. Retention is equally important as t raditionally, the industry has continuously lost key talent to other growing / h igh-paying industries such as telecom and the nancial sector in the absence of su itable rewards and recognition. A key challenge will be to maintain employee loy alty, hence companies will need to focus on employee segmentation to disproporti onately reward the topperforming employees (with monetary and non-monetary incentives) along with quic k career progression. 4.2.3. Bringing Sustainability into the Strategic Agenda W hile the other stakeholders, consumers, government, and channels, will need more time to prepare for driving the sustainability agenda, FMCG players will need t o proactively start building a sustainable business model to drive competitive a dvantage in the future, instead of simply complying with stipulations and regula tions. The principles which can help FMCG companies achieve this are: 1. Sustain ability as a Core Business Strategy: Sustainability should be an integrated elem ent at the core of the overall strategy of a rm. The products should be green, th ey should be marketed as green, Exhibit 30: Key Challenges in the Future Operating Model One company vs. multiple Increasing complexity in frontend and back-end technolo gy Avoiding duplicity across businesses Technology Structure separate companies for different target markets Very different levels of control and decision right s Ensuring knowledge sharing / transfer across portfolios Knowledge People Buildin g workforces (value, mass, premium) with very different capabilities Managing di fferent business processes Leveraging synergies across businesses / portfolios P rocesses Different human capital management processes Source: Booz & Company analysis 50 FMCG Roadmap to 2020

and a substantial portion of the companys revenue should be come from the sale of green goods. To achieve this, sustainability must be on the agenda of the senio r leadership, established as a cultural trait within the company, driven across the organization. 2. Sustainability in Product Innovation: FMCG players should e mbed green in their innovation efforts. Because sustainable initiatives require new ways of looking at problems, companies could leverage innovation and new pro duct development best practices to support their green initiatives. 3. Using the Sustainability Lens throughout the Product Lifecycle: Companies should view the entire product lifecycle through a green lens. They should seek cradle-tocradle l ifecycles in which products or their content can be used again and again with ze ro waste. A good example is Nikes idealistic longterm vision of sustainabilityto de sign products that are fully closed loop: produced using the fewest possible mat erials, designed for easy disassembly while allowing them to be recycled into ne w products or safely returned to nature at the end of their life. 4. Sustainabili ty Driving Major Decisions: The implications of companies choices in terms of env ironmental impact should be assessed and the trade-offs involved in all major de cisions, including sustainable programmes (renewable energy sources and recycled materials, energy ef ciency and material yields) should be weighed against risk, cost, growth, and service/ quality. PepsiCo has incorporated sustainability as a criterion in its capital expenditure lter. All capital expenditure requests over INR 5 million must include a review of the sustainability issues and opportuniti es surrounding the request. 5. Integrating Sustainability into Marketing and Mes saging: Companies should develop consistent messaging about their sustainability efforts and incorporate them into their communications at all levels. In this w ay, they attract and inform stakeholders, including customers, employees, invest ors, and regulators. The sustainability index for consumer products that Wal-Mar t has announced is a good example of how sustainable initiatives can be structur ed and communicated in ways that bolster corporate credibility. Similarly, Pepsi Co India has annual reporting on sustainability as a part of its global initiati ve, with impetus on reducing water and electricity consumption, and improving pa ckaging. 4.2.4. Reinventing Marketing for i-Consumers Deep consumer understanding and interaction has always been at the heart of the FMCG sector. Going into the future, marketing will need to target individual consumers who want customized p roducts, as well as consumers who are spending more and more time online, hence the term i-consumers. Many companies periodically engage with consumers through su rveys, focus groups, test markets, product testing and other mechanisms. Similar ly FMCG companies have been signi cantly large users of advertising mediums (print , television and outdoor) to communicate with their consumers. In the rapidly ev olving environment it becomes more critical to know, respond to and communicate with the consumer. Across the globe, companies are migrating away from traditional paid advertising towards below the line media and marketing programmes that put them in direct con tact with consumers. In India, new platforms have emerged in the form of mobile phones; with planned investments in broadband there will be signi cant increase in online usage. This shift is giving rise to a new generation of customized marke ting platforms, transforming the way in which consumers experience advertising a nd establish relationships with brands. Digital marketing platforms will be a bi g part of this strategic shift. They will rede ne what it takes to succeed in buil ding brands and reaching customers. Companies will need to use emerging technolo gy in new assets such as databases, websites, and branded content. They will nee d to develop new analytical models to measure the effectiveness of media spendin g. They will also need to manage the integration of advertising planning, media buying, promotions management, and other tasks currently handled by multiple age ncies. Companies that build these capabilities will nd that their marketers can p lay a more strategic business role. Yesterdays marketing organizations used to st ick to tactical functions to support strategic decisions that had already been m ade. Tomorrows marketing leaders will help set the strategy for major advertising , promotions, and public relations campaigns, and serve as growth champions in t

he development of brands, products, and new businesses. Over the next few years, FMCG marketers will look to shift their creative and media strategies to fully capitalize on the online opportunity and make digital media a bigger FMCG Roadmap to 2020 51

priority in their brand strategies. In India, mass marketing through traditional print and television will continue to play a role in driving increased awarenes s, but marketers will need to develop their presence in interactive channels tha t not only drive greater brand awareness but also enable new insights into consu mers. 4.2.5. Re-engineering Supply Chains8 As consumer behaviour shifts across s egments, re-engineering the supply chain will be critical to stay abreast of the se changes and reach an increasingly fragmented customer base. Supply chains are already under pressure to deliver at lower costs and offset generally rising co sts for raw materials and energy. This pressure may intensify even further as go vernments (either nationally or at the state or city level) put a price on carbo n emissions and establish new regulations on waste. Changing tax laws with the i mplementation of GST would lead to simpli cation and more uniformity. Todays supply chains were built on yesterdays blueprints, in a world where low energy and tran sportation costs, cheap labour, relatively inexpensive raw materials, complex ta x laws and scarce environmental regulations were xed assumptions. The supply chai n of the future, by contrast, will have to be leaner, greener, and more tailored to manage increasing complexity. This will require three key actions: Rethink p roduct and packaging formulation: Companies will need to consider their choices in product design and process technologythe inherent drivers of cost, sustainabil ity, and risk. What ingredients are used, how much packaging is required for the nished product, and what changes in material c hoice or manufacturing process would reduce material and energy usage would be i mportant decision points. It is essential to understand the economics of product and process choices before considering supply chain changes. Small changes to s uch inherent factors can create large market and cost impacts. Restructure the s upply chain network and footprint: Once product and process choices have been re considered, the supply network needs to be realigned to balance cost, service, r isk, and sustainability in meeting market demand. Changing regulation, speci cally GST, as well as new areas of demand acceleration, such as eastern India, will n eed to be incorporated. The challenge for manufacturers is to make the right foo tprint trade-offs not only for today but also for an uncertain tomorrow. Success ful companies will build more exibility and adaptability into their networks with investments in technologies and assets that can react to changes in demand as w ell as variability in factors like labour costs and energy use. Realign the role of suppliers and third parties: In an environment of increased uncertainty, clo se collaboration between supply chain partners has become more important than ev er. Pressures felt by manufacturershigher material costs, sustainability requirem ents, supply and demand imbalances, product safety issues, resilience and enviro nmental concernsare shared by suppliers. Today, the role played by suppliers has gone well beyond merely providing raw materials. Now suppliers routinely provide a broad set of materials and services . They also participate in product development efforts by sharing ideas as well as making investments in new processes and technologies. 4.2.6. Partnering with Modern Trade Modern trade is still at a nascent stage in India. The share of mod ern trade in retail last year was approximately ve per cent. However, it has been growing very rapidly since at approximately 25 per cent and is likely to contri bute nearly 25 per cent of the total retail sales in India, becoming a very crit ical partner. This will be more critical for many categories which even today de rive signi cant sales from this channel given the consumer base. FMCG companies an d retailers have started on a somewhat adversarial note. Uncertainty about the b usiness models (store formats) as well as consumer reactions coupled with tradit ional mistrust have been contributors to this uncomfortable partnership. Negotia tions over price, promotional support, and marketing budgets, among other persis tent areas of disagreement, often result in damaged relationships and minor gain sonly to have the ghts resume the following year. For more than a decade, retailer s and suppliers in many developed markets have tried to learn to collaborate mor e and move beyond the old zerosum games. Their initiatives have included assigni ng captains to work with each other on ways to drive category growth and forming i

ndustry groups (such as Ef cient Consumer Response and Collaborative Planning, For ecasting, and Replenishment) that pursue supply chain optimization. Yet despite all the hard work, only partial success has been achieved. 52 FMCG Roadmap to 2020

Retailersupplier partnerships have failed primarily because buyers tend to view t heir value in a limited way: purely as a means of extracting lower prices or ext ra-promotional dollars from FMCG suppliers in their yearly negotiations. Buyers often walk away from a negotiation feeling successful, unaware that their victor y may well have been compromised by the failure to address issues that could hav e much more impact on retailer and supplier pro ts, such as in-store availability. The shelves are still not fully stocked, and what seemed like a highly pro table days work is actually only a slightly larger share of a smaller pie. The nascent stage of modern trade in India provides FMCG players and also the retailers with a unique opportunity to learn from global models and get to a win-win position at a faster rate. The bene ts of collaboration include: Revenue-margin enhancement : Working jointly to harness complementary skills and apply the knowledge needed to grow a category can be a win-win proposition. This effort can be as simple a s linking the suppliers consumer insight to the retailers proper process improveme nt. A wide range of supplier-related processes can be improved by more collabora tive retailersupplier relationships, including promotion planning and execution, demand forecasting, and stock replenishment. One of the best sources of informat ion for improving these processes is the retailers pointof-sale data. Supply chai n improvements: More ef cient distribution, streamlined inventory, increased produ ct availability, and improved merchandising operations are all within the reach of collaborative retailersupplier relationships as well . Moving from a supplier to a partner will require FMCG companies to pay careful attenti on to how they structure their relationship. They may reap rich rewards if they were to: Generate a full basket of possibilities, but home-in on a few prioritiz ed opportunities that are critical to both businesses. Establish an open dialogu e, but ensure that the terms of all agreements are explicitly de ned upfront. Crea te transparency by sharing bene ts, costs, and information openly, but build in ap propriate con dentiality measures. Set both short- and long-term agendas with supp ly partners to capture value quickly but still pursue the big ideas. Gain top-le vel support, but stay focused on the execution. Be more open with all suppliers, but choose collaboration partners wisely. 4.3. Implications for Other Stakehold ers While FMCG companies will have to signi cantly change to meet the requirements of the evolving industry, this will also have an impact on the entire ecosystem and other stakeholders. We have broadly divided the stakeholders in the FMCG in dustry into these ve entities FMCG players, government, retailers, NGOs and invest ors. Each of these stakeholders will need to play a key role to support the growth of the industry towards a win-win situation for all (see Exhibit 31, p. 5 4). 4.3.1. Government The FMCG industry supports many social objectives and play s a key role in driving economic growth by providing signi cant direct and indirec t employment opportunities, making vast contributions to the exchequer, and supp orting growth of agriculture through backward linkages. The government has taken several steps towards inclusive growth of the FMCG industry by supporting the d emand growth, which should be continued in the future. However, on the supply si de, there are a few areas which need regulatory intervention to unlock the break through potential of the industry. These include implementation of GST which can save FMCG companies from multi-layered taxes and drive long-term ef ciencies in s upply chain; allowing FDI in multi-brand retail which will enable large global r etailers to bring best-practices to India; enforcing regulations to curb counter feit consumer products which will signi cantly reduce economic loss to the industr y; revamping the Agriculture Products Marketing Act to allow food processing pla yers to buy directly from the farmers; and revamping labour laws to drive ef cienc ies among FMCG manufacturers. 4.3.2. Retailers As discussed earlier, retailers a nd FMCG players have a symbiotic relationship and need to co-operate with each o ther for smooth operations and growth enhancement. Both traditional retailers an d organized retailers will need to collaborate with the FMCG players for driving breakthrough growth in the sector. They should focus on FMCG Roadmap to 2020

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co-investment in technology and improvement of infrastructure. For the tradition al retailers, better infrastructure is required at the pointof-sale which ensure s uninterrupted electricity, IT infrastructure for capturing sales and collectio n. For the organized retailers, while the focus has to be on increasing ef ciency and driving differentiation, investment in supply chain and greater partnership with suppliers for the overall category development will be required to derive l ong-term economic bene ts. Also, organized retailers and FMCG players can share ta lent and best practices, while driving overall FMCG growth. 4.3.3. NGOs NGOs which act as the guard rails of the FMCG industry can have a major role to play in driving sustai nability efforts. Going forward, NGOs would need to act aggressively as the sust ainability gatekeepers, and increasingly monitor and track the industry to ensur e that best-practices are highlighted and sustainability agenda is not ignored. Secondly, NGOs can indirectly continue to enable expansion FMCG offtake into rural markets, acting as nancial enablers by giving credit to small retailers / e ntrepreneurs and through other measures. 4.3.4. Investors Global as well as dome stic investors should seriously consider the Indian FMCG industry for future inv estments given the highly attractive market. Also, along with market expansion, investors will need to monitor FMCG companies, tracking their expenditures to en sure that the bottom-line growth matches / exceeds the top-line growth. Exhibit 31: FMCG Industry Stakeholder Map FMCG Players Government Retailers NGOs Investors Source: Booz & Company analysis 54 FMCG Roadmap to 2020

Endnotes 1 The FMCG industry has been defined to include these categories: food products, p ersonal care, oral care, fabric care, hair care, OTC products and baby care. The size of the industry has been estimated through retail sales, and the growth ra tes indicate nominal growth of the industry, and include both the organized and unorganized FMCG industry. Conversion of 1US$ = INR 45 has been used in the docu ment. 2 According to Rostow, it is possible to identify all societies, in their econom ic dimensions, as lying within one of five categories: the traditional society, the preconditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption. 3 Goldman Sachs projections LOreal Deutsche Report, MSN News. Source: Euromonitor h ttp://www.thehindubusinessline.com/2010/04/20/sories/2010042053960500.htm Booz & Company, Bring Mass Broadband to India: Roles for Government and Industry, 2010 . Booz & Company, Next Generation Supply Chains, 2009. 4 5 6 7 8 About the Authors Abhishek Malhotra is a Partner with Booz & Company and is base d in Mumbai. He leads the Consumer, Media & Retail work for the firm in India. A bhishek has 13 years of consulting experience with Booz and his main focus has b een business transformation and operations strategy with experience in consumer, media, retail and industrials products. He has participated in engagements in A sia, Australia, Europe, and North America. Abhishek received his MBA from the In dian Institute of Management, Ahmedabad, India and his BE in Electronic Engineer ing from Punjab Engineering College, Chandigarh, India. Vikash Agarwalla is a Se nior Associate with Booz & Company and is based in New Delhi. He works as a part of the Consumer, Media & Retail practice of the firm in India. He has over 7 ye ars of management consulting experience and his main focus has been business tra nsformation and operations strategy with experience in consumer, media, retail a nd industrials products. Vikash received his MBA from the Indian Institute of Ma nagement, Lucknow, India and his BE in Mechanical Engineering from Delhi College of Engineering, Delhi, India. Srishti Chaudhry is a senior consultant with Booz & Company and is based in Gurgaon. She has experience in growth, financial plan ning and business transformation aspects of consumer products, energy and health care industries. Srishti studied business management in the Indian Institute of Management, Ahmedabad. FMCG Roadmap to 2020 55