INDUSTRY - FMCG

Submitted by: (GROUP 10) Himani Kothari (23) Kanupriya Verma (27) Mohit Kumar (34) Pradhan Rachit (39) Prasad Kamath (41)

Executive Summary
The Fast Moving Consumer Goods (FMCG) sector in India has been growing at a healthy CAGR of 11% over the last decade. Riding on the back of increasing demand and changing consumer preferences, thanks to higher disposable incomes and the retail revolution, the sector has been posting double-digit growth over the past couple of years. The industry is volume driven and is characterized by low margins. The products are branded and backed by skilled marketing, heavy advertising, slick packaging and strong distribution networks. Also, raw material prices play an important role in determining the pricing of the final product. Modern retail formats too have contributed in a major way in pushing the growth in the FMCG sector. With rising income levels and the spread of modern retail, the FMCG industrys future prospects look bright which is expected to further boost sales. Growth in the sector is led by higher urban and rural demand. Going forward, the governments growing support to agriculture will drive long-term growth in consumption from the rural sector. In our view, amongst all the FMCG segments, the food segment will outperform over the coming years. The Indian food industry is a significant part of the Indian economy, (food constitutes about 36% of the consumer wallet). The Indian food industry is poised to grow by a whopping 63.5% from USD 126 billion now to USD 206 billion in next 5 years and by 137.8% to USD 300 billion in the next 10 years, throwing up huge opportunities for investments across the entire value chain. India faces contrasting problems of having one of the highest malnutrition cases and also being the diabetes capital of the world. In our view, both of these are an opportunities for Food companies. The health foods segment is likely to see one of the highest growth in the Food segment. To exploit this trend many companies have launched health based products like Britannia launched Nutrichoice biscuits, Danone launching probiotic yogurt, Dabur introduced a juice with fiber and HUL introduced Soya and multigrain atta, iodized salt, energy drinks. We believe that the demand for these products is going to outpace the overall Food Category growth for the years to come.

PESTEL Analysis of Indian FMCG Sector

Political Tax Structure: Complicated tax structure, high indirect tax, lack of uniformity, high octroi & entry tax and changing tax policies. Infrastructure Issues: Performance of FMCG is very much depended on government spending on Agricultural Infrastructure, Power, and Transportation Infrastructure. Regulatory Constraints: Requirement for multiplicity of permits and licenses for various states, prevailing outdated labor laws, Cumbersome and lengthy export procedures, confusing and time consuming subsidy availing procedures Policy framework: Approval related to investment of FDI into Retail sector (single-brand retail &multi-brand retail, License rules in setting up of Industry, Changes in Statutory Minimum Price (SMP) of commodities and Priority sector classification of Industries. Economical GDP Growth: Growth of the industry is consistent with the Indian economy Inflation: Inflationary pressures alter the purchasing power of money. This has a direct impact on consumer spending and business investment Consumer Income: Increase in incomes is largely an outcome of economic growth across sectors. Over the past few years, India has seen increased economic growth, with a continuing and substantial impact on consumer disposable incomes enabling good growth for the FMCG sector. Private Consumption: The Indian economy, unlike other economies, has a very high rate of private consumption (61%) Urbanization: India has 70% of its population living in rural areas. With rising urbanization, more people will have exposure to modern products and brands and thus shift to branded and packaged goods and products. Social Change in consumer Profile: Rapid urbanization, increased literacy and rising per capita income, have all caused rapid growth and change in demand patterns, leading to an explosion of new opportunities. Around 45 per cent of the population in India is below 20 years of age and the young population is set to rise further. Change in Lifestyle: Changing Lifestyle of Indian consumers has led to focus on premium products among Indian FMCG players.

 Rural focus: As market is getting saturated, companies are focusing on rural area for penetration, by providing consumers with bite-sized or single-use packs Technology Adoption of ERP, Supply Chain Optimization tools and Business Intelligence Tools will help FMCG companies to integrate business processes across the enterprise, suppliers and customers. With the level of competition and sluggish growth. Most FMCG corporate are looking at IT to reduce costs in the supply chain, and flatten the bottom line marketing and advertising through mobile and social media platforms Environmental The ecological and environment aspects such as weather, climate, & climate changes like global warming have shown increased impact on FMCG sector. As a result a lot of FMCG companies have now shifted towards green and recyclable products to curb down the disposable waste and make the environment more clean and hence help them earn carbon credits. Legal Employment law: Employment law provides equal opportunities to every citizen to work & earn his livelihood. It provides equal opportunities to every citizen. Consumer protection: This law helps to protect the rights of consumers & he/she can file a case against seller if cheated.

Value Chain Analysis - Procter & Gamble (Company Specific)

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best outsourced. It suggests that the activities of a business could be grouped under two headings: primary activities and supporting activities

Sourcing and Procurement (sourcing, supply planning, materials procurement)

P&Gs raw materials are sourced and/or procured from all over the world, wherever it would be cost-effective. It is thus no surprise that for a number of years it had focused on ways to improve supply chain efficiency and costs. It now has a powerful industrial network linking electronically to major suppliers and customers. This is to the extent that it changed companies when efforts to reduce inventory levels only produced marginal improvements. This led to the introduction of agent-based modeling.

Operations (assembly, branch operations)

P&Gs operations had four business units: health and beauty, babies, snacks and beverages, and fabric and home care. It offered more than 300 products including major brands like Tide. It has been aggressively using product lifecycle management software since 2000 for new product development. The company uses MatrixOne software for mechanizing and automating the knowledge components, and flow components, within the bringing-a-product-to market phases. In addition, the company is planning to expand its use of agent-based modeling to actually run important aspects of its operations so that end-to-end replenishment cycle for products could be shortened drastically. Outbound Logistics (warehousing, shipping, fulfillment)

P&Gs largest customer Wal-Mart that has a reputation for requiring suppliers to coordinate their supply chain processes with its powerful just-in-time continuous inventory replenishment system. A database is used to hold information about work processes vital for creating, reviewing, approving, and distributing products. This enabled the company to lower its costs on item such as pigments and chemicals, and to reduce development time. Sales and Customer Service (sales, order processing, customer support)

Wal-Mart is still P&Gs largest customer, accounting for nearly 20 percent of its sales and could be responsible for one-third of P&G global sales by 2013. Wal-Mart capitalized on this position to force P&G to sell wares to them at the cheapest prices possible. With the coming of a new CEO in 2000, the company began to find new ways of selling its major brands in more flexible, innovative and cost-conscious ways. This was apparently because they were not meeting sales targets, and had to rely on price increase to do so. Support Activities, which whilst they are not directly involved in production, may increase Efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Financial Management (financing, planning, investor relations)

The companys introduction of agent-based modeling saved them $300 million annually on an Investment less than 1 percent of that amount. This is because it was able to perform what-if Analysis on inventory levels, in-store stockouts, and transportation costs to find out alternate rules to existing ones being analyzed, such as ordering and shipping frequencies or product allocation in Distribution centers. It was discovered that trucks should be often dispatched before fully loaded. Although transportation costs would be higher using partially loaded trucks because of both driver time and fuel to deliver fewer goods, the simulation showed that retail store stockouts would occur less often, thus reducing the amount of lost sales which would make up for the higher distribution costs. Research and Development (product design, testing, process design, material research)

P&G came to be seen as unimaginative, even stodgy. It seemed weak in developing new products, and had developed just one product in 15 years. This gave the chance for traditional competitors and makers of generic versions of their branded products to grab market share. It established an

Intranet called InnovationNet, which was used to bring people together who are working on similar problems in order to generate synergy for new product ideas and product development. Using the same intranet, P&G allows outsiders like research scientists and entrepreneurs to search for new, innovative products worldwide. Further, it uses a very small information technology group called Virtual Learning @ Procter and Gamble to develop the concepts, designs, and packaging for potential new products. Facilities Management (physical plant, IT services, office equipment)

Introduction of several information technology services and systems for the various departments of the company has helped in efficient facilities management. 1. MatrixOne; used to manage and integrate other IT systems and work processes. 2. InnovationNet, and intranet which is used to provide access to published information such as Documents, reports, charts and videos. 3. zTelligence; to conduct market research and online surveys 4. Marketing resource management software to enable marketers focus on creative results -oriented marketing.

Human Resource Management (recruiting, training, compensation)

P&G began to use information systems to support how learning occurred within the company. It created an intranet through which new employees could network with experts, learn from projects and receive answers to pertinent questions. This system encouraged experts to share their knowledge with newbies through an implicit compensation or reward system. Further, human resource was provided with tools they needed to enhance their trade. For example, marketing personnel were given a platform where they could access data, marketing principles and tools in order to make sound judgment about a situation.

Marketing and Advertising (market research, promotion, advertising)

The company employed the use of knowledge systems to manage marketing. It also uses a very small information technology group called Virtual Learning @ Procter and Gamble to develop the marketing for potential new products. Further, it works with marketing company called Cre8 to put together virtual presentations that demonstrate new concepts to rapidly prototype new features for current products, and even test how consumers react to alternative shelf-space designs. Using information technology in marketing had been ignored in the past because they saw it as complex. P&Gs various brands, product lines, customers, and even different marketing groups each used their own independent software for some functions, including email and marketing campaign management. Currently, using zTelligence, P&G does much of its market research and surveying online.

KSF Analysis of Indian FMCG Sector

Rising Incomes driving purchase: Owing to Indias strong economic prospects, the per capita income has recorded a CAGR of 11.2 percent over 2000-12. Due to this, the want to buy premium products has increased especially in the urban areas, driving the growth of the Indian FMCG sector significantly in the past one decade itself. Government Initiatives for rural development: Government has introduced schemes like increasing the minimum support price, providing loan waivers and disbursements through the NREGA programme. The poverty in the rural sector has reduced due to this and hence the purchasing power has shown an increasing trend. Increasing awareness and easier accessibility: Growing awareness, easier access and changing lifestyles has led to a growing consumer spending in modern retail stores like Big Bazaar, Reliance retail etc. Spending in modern retail stores in India shot up by 31 percent in 2011 compared to the previous year. Modern retail spending is expected to shoot up to USD 5 billion from USD 1.8 billion in 2011. Rising Low Income Value Explorers (LIVE): Around 10 million LIVE explorers earning an income of less than USD 1,325.7 per year living in urban India spent one-fifth of their household expenditures (USD 2.4 billion) on FMCG in 2012. It is estimated that this figure will rise to USD 3.6 billion by 2015. Rising First time modern trade shoppers (FTMTS): FTMTS spending on FMCG products is estimated to triple to USD 1 billion by 2015 from USD 280 million in 2012. FTMTS spends 35 percent on FMCG at modern trade and is growing by 15 percent each year. This segment is expected to significantly drive the growth of the FMCG sector. FDI Inflows rise over the years: FMCG sector has been witnessing healthy FDI inflows over the years; during FY 01-13, FMCG accounted for 20 percent of the total inflows. Within FMCG, food processing was the largest recipient with a share of 46.6 percent. Other KSFs include: New product launches. Growth of modern trade Availability of online channel to shop

Business level Strategies Procter & Gamble

Procter &Gamble has the reputation of being the innovation star that invests US$ 2 Billion in R&D annually which is 50% annually more than its largest peer. It also spends US$ 400 million each year on foundational consumer research to uncover opportunities for innovation across 100 countries. Its Connect and Develop program is aimed at engaging with the partners outside the boundaries of the company to source new product ideas. In 2012, its head of technology declared that P&G has tripled its innovation success rate. Innovation has long been at the heart of P&Gs success. As former CEO Bob Mc Donald said We know from our history that while promotions may win quarters, innovation wins decades. P&G innovated the now widely imitated brand manager role, a focal point of accountability for bringing together its R&D, sourcing, IT, HR and other functions in service of a particular brand. Though there have been good amount of innovations, as A. G. Lafley returns to his former job of running the company, he is faced with stagnant growth, lagging productivity and restless shareholders. Its progress in emerging markets is not what the company expects. Merely innovating is an unlikely solution to the challenge Lafley faces in reviving P&G. The firm requires innovation in its business system- upstream, downstream, internal or all three. The fourth quarter (2012) results depict clearly that the revenue of P&G increased by 2% year-overyear to $20.7 billion, exceeding consensus expectations. Core earnings per share fell 4% year-overyear to $0.79, which was still better than consensus estimates. Though fourth quarter results were decent, performance was not the most relevant story for P&G. Lafley is largely known for his focus on product innovation and growing the top line, Lafley stressed the importance of accelerating costsavings and productivity improvements. It certainly represents a change in strategy from the trajectory of McDonald's reign. Over the past few years, we've seen P&G raise prices on some of its core products, and surprisingly, brand power didn't seem nearly as strong as many assumed. Detergent price increases mostly backfired, and P&G had to roll back the price increases to recapture market share. P&G has gone back to the drawing board with respect to its global supply chain, and it won't rule out any changes that can boost the firm's operating margin. Majority of the sales of P&G now come from promotional events, pull systems of efficient distributers of consumer and industrial products. The core strengths of P&G are: Consumer understanding: Uncovers the unarticulated needs of consumers Innovation: Translates consumer desires into new products Brand building: Shapes purpose inspired, benefit driven brands Go-to market capabilities: Reaches consumers n retailers at the right place and time Scale: Drives efficiency and consumer value VRIO Framework for Distribution: Value: Supplier Diversity is one important way P&G achieves the goal of touching lives and improving life. In 1972, P&G established a program to identify and work with minority-owned businesses in the United States. In 2000, P&G pioneered a new kind of partnership with its retail customers and suppliers moving from transactional negotiations to win-win partnerships.

Rarity: The business relationship necessary for such a wide demanding distribution network are rare to acquire. Imitability: Even though many brands have tried to imitate P&Gs success with brand management by hiring brand managers away from P&G, they have often failed to duplicate the success. The competitors failed to identify less visible coordination mechanisms or to realize that P&Gs brand management style conflicted with the competitors own corporate culture. Organization: P&G exploits its distribution network by building partnerships that create value for both parties, then ensuring the long term health of its most important partners to P&Gs own advantage. VRIO Framework for Differentiation: Value: The value of product differentiation lies in the innovations by P&G. Rarity: It is difficult to establish differentiation in the products. There are substitutes available for P&G product offerings, creating intense competitive environment. Imitability: Imitating products to a great level is possible. Organization: Focus on providing branded products of superior quality and value and better customer experience.

Hindustan Unilever Limited

HUL was earlier known as Hindustan Lever Limited. In June 2007, the company was renamed Hindustan Unilever Limited. It adopted Total Product maintenance to meet zero error zero loss.HUL prioritized opportunities which build upon the existing assets and capabilities. It avoided spreading their management thinly. For example: HUL first made its sales and distribution channel &supply chain management in manufacturing and selling wheat flour and utilized it into the selling breads produced by wheat flour. According to brand equity, Soap & Detergent and Tea are cash cow for the company. They high relative market share and low growth rate. Personal Products and Coffee are stars for the company as they have high relative market share as well as high market growth rate. Only food is a segment which is a question mark. HUL is taking several steps to capture more market share so that food segment can also be a part of Star for the company. The company has a low relative market share where as it is under high market growth rate. HULs has the largest number of brands in most trusted brands list. 16 of HULs brands featured in AC- Neilson brand equity list of 100 most trusted brands in 2008.It has one of the widest portfolio of products sold via a strong distribution channel. It owns and markets some of the most popular brands in the country across various categories including soaps, detergents, shampoos tea and face creams. After stagnating from1999 to 2004, the company is back on the growth track. It always believes ion customer friendly products with major emphasis on low cost overall without compromising on the quality of the product they are leveraging the scale and capabilities of the parent company and focusing on the value of execution. The entire product portfolio is also being tweaked to include premium offering such as Ponds age miracle and dove shampoo in skin and hair care. It introduced Project Shakti to penetrate the rural market. HUL has been launching new products and brand extensions with investments being made towards brand building and increasing its market share.HUL is also streamlining its business operations in line with the One Unilever philosophy adopted by the Unilever group worldwide

.Introduction of premium products and addition of new consumers via market expansion will be HULs growth drivers. Being an MNC operating in India, HUL is more conservative in its strategies than its Indian counterparts. Moreover, given increasing competition, it faces the risk of being overtaken by domestic players in various categories. Prolonged inflation may lead to margin contraction, in case HUL is not able to pass on this burden to consumers. The company's large size also poses a problem, since it does not give HUL the agility to address the competition it faces from national and regional players. In the past 10 years, HUL has made four shifts in its business strategy, targeted at boosting growth and reach: POWER BRANDS: (Strategy in2000) Focusing on fewer brands, 30 of them, and showering marketing attention on them. MASSTIGE: (Strategy in 2005-06) Making premium brands (prestige) attainable for a larger section of consumers (mass). ONE UNILEVER: (Strategy in2007) Building leadership position in fast-growing markets. PUMP UP THE VOLUMES: (Strategy in 2010) Global CEO Paul Polman is pushing the Indian operations chasing value growth to deliver on the volumes as well. VRIO Framework for Distribution: Value: Presence of established distribution networks in both urban and rural areas. Focuses on short supply change for distribution. Rarity: HUL is the king of distribution channel in India but now it is getting full competition from the P&G and others like ITC, AMUL, DABUR, NESTLE. Imitability: It is not easy to imitate the kind of distribution channel HUL has. Organization: Each category has a different set of supply chain, production and consumer decision making processing associated with it. Their distribution network is changing from being one driven by entrepreneurs to becoming large professional distribution houses with service orientation. VRIO Framework for Differentiation: Value: Focus on product customization and categorization. HUL initiated a number of social cause activities (CSR). Rarity: Substitutes are available easily. Imitability: Me-too products which illegally imitate the brand name and packaging.

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Organization: Product mix coupled with product differentiation. VROI framework (Distribution): Resources and capabilities Procter & Gamble HUL Value Yes Yes Rarity Yes Yes Imitability No No Organization Yes Yes

VROI Framework (Differentiation): Resources and capabilities Procter & Gamble HUL Value Yes Yes Rarity No No Imitability Yes Yes Organization Yes Yes

Strategy Diamond for Hindustan Unilever (HUL)

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Strategy Diamond for Procter & Gamble (P&G)

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Worksheet on FMCG Industry Structure 1. Threat of new Entrants Yes 1. Do large firms have a cost or performance advantage in your segment or the industry? 2. Are there any proprietary product differences in your industry? 3. Are there are any established brand identities in your industry? 4. Do your customers incur any significant costs in switching suppliers? 5. Is there a lot of capital needed to enter your industry? 6. Is serviceable used equipment expensive? 7. Does the newcomer to your industry face difficulty in accessing distribution channels? 8. Does experience help you to continuously lower costs? 9. Does the newcomer have any problems in obtaining the necessary skilled people materials or suppliers? 10. Does your product or service have you proprietary features that give you lower costs? 11. Are there any licenses, insurances or qualifications that are difficult to obtain? 12. Can the newcomers expect strong retaliation on entering the market? X X X X X X X X X X X X May No be

2. Bargaining power of Buyers: To what extent are your customers locked into your? Yes May No be 1.Is there a large number of buyers relative to the number of X firms in the business? 2. Do you have a large number of customers, each with relatively X small purchases? 3. Does the customers face any significant costs in switching X suppliers? 4.Does the buyer need a lot of important information? X 5. Is the buyer aware of the need for additional information? X 6. Is there anything which prevents your customers from taking X your function in house? 7. Your customers are not highly sensitive to price? X 13

8. Your product is unique to some degree or has accepted branding? 9.Your customers businesses are profitable? 10.You provide incentives to the decision makers?

X X X

3. Threat of Substitutes: (Some other products or services which perform the same job as yours) Yes May No be 1. Substitutes have performance limitations which have X performance limitations which do not completely offset their lowest price or their performance advantage is not justified by their higher price? 2. The customer will incur costs in switching to a substitute? X 3. Your Customer has no real substitute? X 4. Your customer is not likely to substitute? X 4. Bargaining power of suppliers? Yes 1. My inputs (Materials, labor, suppliers, services, etc) are standard rather than unique or differentiated. 2. I can switch between suppliers quickly and cheaply? 3. My suppliers would find it difficult to enter my business or my customers would find it difficult to perform my function in house? 4. I can substitute inputs readily? 5. I have many potential suppliers. 6. My business is important to my suppliers. 7. My cost of purchases has no significant influence on my overall costs? 5. Determinants of Rivalry among existing competitors. Yes 1.The industry is growing rapidly. 2.The industry is not cyclical with intermittent overcapacity? 14 X X May No be X X X X X X X May No be

3. The fixed costs of the business are a relatively low portion of total costs? 4. There are significant product differences and brand identities between the competitors? 5. The competitors are diversified rather than specialized. 6.It would not be hard to get of this business because there are no specialized skills and facilities or long term contract commitments etc. 7. My customers would incur significant costs in switching to a competitor? 8. My product is complex and requires a detailed understanding on the part of my customer. 9. My competitors are all of approximately the same size as I am.

X X X X

X X X

Overall Rating of Industry Favorable Moderate Unfavorable Remarks 1. Threat of new Entrants. 7 5 Threat of new entrants looks comparatively high in FMCG as the barriers of entry are not strong. Buyers power is strong since consumer are highly price sensitive Substitute threat is relatively low as the top players build a significant brand equity. Suppliers do have a strong

2. Bargaining Power of Buyers.

3. Threat of Substitutes.

4. Bargaining power of Suppliers

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5. Intensity of rivalry among competitors.

bargaining power and hence may affect the profitability levels significantly Rivalry among competitors is strong attributing to less product differences, product characteristics and cost.

Bibliography: ibef.org
moneycontrol.com wikipedia.com

http://goo.gl/TCVCq5 http://goo.gl/3Lxw99

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