Federation of Indian Chambers of Commerce and Industry

Conference on Fast Moving Consumer Goods

July 23, 2009

Federation House, Tansen Marg, New Delhi

Knowledge Partner
 Executive Summary

1. Background
In order to recognize the contribution of the FMCG sector to the socio-economic growth of India, to analyze
opportunities and challenges over the coming years, and to develop recommendations to its stake holders
(including FMCG companies, retailers and the Government), FICCI’s FMCG Committee and Technopak
joined hands to produce this first of its kind research report on the FMCG sector.

This report has been created through research and analysis over the last 12 months. We interviewed over
30 senior executives from FMCG companies, and various industry experts and stake holders. In addition
to primary research, we have extensively utilized Technopak’s internal Body of Knowledge, various media
reports, and other data sources. We provide recommendations to stake holders that we believe can fully
unlock the potential of this sector in the coming years.

2. Size, Growth and Significance of the FMCG Sector in India

i) Industry Size, Growth and Key Characteristics

• Industry Size - FMCG is the 4th largest sector in the Indian economy. It has grown consistently over the
last 3-4 years, including the last 12 months of economic slowdown. India’s FMCG sector is fragmented
and a substantial part of the market comprises of unbranded and unpackaged products. We estimate the
sector at US$ 25 billion (Rs. 120,000 crores1) at retail sales, in 2008.

• Growth Projections - Based on current trends, Exhibit 1 : FMCG Industry Category Breakup
we project growth at 10-12% for the next 10
Household Care Lighting
years; reaching an industry size of US$ 43 billion 2%
10%
(Rs. 206,000 crores) by 2013 and US$ 74 billion
(Rs. 355,000 crores) by 2018. Implementation of Tobacco
15% Food &
the Goods and Services Tax (GST) and opening
Beverage
up of Foreign Direct Investment (FDI) in retail can 53%
accelerate this growth, and we provide different Personal Care
scenarios later in this report. Exhibit 12 provides a 20%
product wise break-up of the sector.

• Key Characteristic (Price Elasticity)- A large number of FMCG products, especially those for mid and
mass markets, are highly price elastic (for a given price reduction, consumption increases by more than
the percentage of price reduction). This was seen in the 1990s, when reduction in excise duty on soaps
and toiletries reduced product prices, and resulted in high sales growth.

• From 70% levels in 1993-94, excise duty came down to 30% in 1997-98. Over this period, prices of
toiletries reduced by 25%, but excise collection increased from Rs. 130 crores to Rs. 396 crores (average
51% CAGR)3. With no excise duty driven price reduction from 1997-98 to 1999-2000, average excise
revenue growth was average 18% CAGR. This shows us that excise duty collection growth (driven by
sales volume growth) was much faster than the price reduction. Also, in absolute terms, excise collection
grew much faster, though excise was reduced in percentage terms. We apply a similar analysis later in
this report to project potential benefits of GST implementation.

1. US$ 1.0 = Rs. 48.0, some rounding off has been done
2. Source: Technopak Primary Research
3. Source: Indian Soap and Toiletries Manufacture Association

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ii) Significance and Socio-Economic Contribution

• Employment - It is amongst the largest employers in India. With about 9 million “kirana” stores selling
FMCG products, it supports livelihood of 13 million people. Another 25 million people are employed at
wholesalers, distributors, stockists, etc.

• Intake of Agricultural Output - US$ 2 billion (Rs. 9,600 crores) of agricultural produce is purchased by
the FMCG sector, processed and converted into value added products.

• Consumption of Media and Advertising - 40% of media industry earnings from advertising come from
the FMCG sector, a contribution of US$ 2 billion (Rs. 9,600 crores)

• Contribution to Contract Manufacturing - About 10% of FMCG production is outsourced to contract

manufacturing units, with ancillary industry contribution at about US$ 1.5 billion (Rs. 7,200 crores).

• Fiscal Contribution - The FMCG sector contributes US$ 6.5 billion (Rs. 31,000 crores) through direct
and indirect taxes to the exchequer. Indirect taxes are about 30% of MRP, while direct taxes include
corporate income tax.

iii) Impact of the Current Economic Slowdown in India

• Our research finds that consumption expenditure of a household has declined more than decline
/ slowdown in their income. This suggests a decline in the share of consumption in income and a
greater weight given by consumers to the precautionary motive of saving. Also, Indian consumers have
reduced their expenditure shares on Durables and Semi-durables, and have allocated these savings to
consumption of Non-durable goods (which function as necessities).

• The economic uncertainty has resulted in simultaneous movements of consumers to uptrade and increase
consumption, even as others cut back consumption or indeed downtrade.

In many parts of rural India, we found consumption increasing due to growing incomes led by rising
food price realizations and Government schemes like the National Rural Employment Guarantee
Scheme (NREGS).

Simultaneously, we found some signs of downtrading in urban homes with fixed incomes given the
more direct impact that such consumers have experienced due to the downturn.

• Most FMCG products (non-durables) are necessities, and therefore, their volume consumption has been
largely unaffected in the current economic slowdown. The sector has coped well with recent challenges
and grew by 15% over the last year.

3. Growth Drivers, Opportunities & Challenges for FMCG sector

i) Growth Drivers and Opportunities

• Income Growth and Under-penetration of FMCG products - Penetration of many product categories
is very low, and with income growth, the market is set to grow over the coming years. Exhibit 2 presents
the penetration levels for some product categories

• Growth of Modern Retail - From US$ 410 billion in 2008 (Rs. 2,000,000 crores), Indian retail is expected
to grow to US$ 535 Billion by 2013 (Rs. 2,600,000 crores) and US$ 755 billion by 2018 (Rs. 3,600,000
crores).

Modern Retail - At current size of US$ 18 billion (Rs. 86,000 crores), modern retail is 5% of overall
retail. However, with anticipated US$ 30 billion (Rs. 144,000 crores) in fresh investments over the
next 5-7 years, modern retail will show impressive CAGR of more than 40%. We project it to grow to
US$ 73 billion (Rs. 350,000 crores) by 2013 and US$ 170 billion (Rs. 816,000 crores) by 2018. From

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 being apparel and lifestyle led, Modern Retail will be a greater reflection of the actual share of wallet
of the average consumer. We believe this growth will be a key growth key driver for the FMCG sector
in India.

Traditional Retail – In absolute terms, Traditional Retail will grow more than Modern Retail, in the next 5
years. This is contrary to most projections on this topic. From current US$ 392 billion (Rs. 1,900,000
crores), we project Traditional Retail to add US$ 70 billion (Rs. 336,000 crores) and grow to US$
462 billion (Rs. 2,200,000 crores). As per Technopak’s Retail Evolution Model (TREM), from current
9 million, the numbers of outlets selling FMCG is expected to increase to 11 million by 2013 and 16
million by 2018. In summary, Traditional Retail will grow slower in percentage terms, but will continue
to occupy a very dominant share of FMCG sales over the next 10-20 years.

Exhibit 2: Category Penetration in India4

Category Penetration All India % Urban % Rural %
Toilet Soap 91.5 97.4 88.9
Detergent Bar 88.6 91.4 87.4
Washing Powder 86.1 90.7 84.1
Toothpaste 48.6 74.9 37.6
Shampoo 38 52.1 31.9
Utensil Cleaner 28 59.9 14.6
Skin Cream 22 31.5 17.8
Instant Coffee 6.6 15.5 2.8
Deodrants 2.1 5.5 0.6

• Implementation of GST - The proposed rate of 20% GST (12% at central and 8% at state level) can mean
10-12% reduction in retail prices of FMCG products. We demonstrated the impact such a price reduction
in soaps and toiletries had on consumption and tax collection in the 1990s earlier. GST implementation
can give a very significant growth fillip to the FMCG sector.

• Growth Projections, with implementation of GST and opening up of retail FDI - We projected
growth of the FMCG sector on page 1. However, GST and retail FDI can speed up this growth (Exhibit 3)
to US$ 50 billion (Rs. 2,40,000 crores) by 2013 and US $ 100 billion (Rs. 4,80,000 crores) by 2018.

Exhibit 3 : FMCG Industry Category Breakup5

Scenario 1: With no change in industry Scenario 2: FDI opened in Multi-brand retail +
status, almost 12% YOY growth rate GST implemented, 15% YOY growth rate
100 100

80 80
Growth Rate of 12% Growth Rate of 15%
US$ Billion

US$ Billion

60 60
100
40 74 40

20 43 20 50
25 25
0 0
2008 2013 2018 2008 2013 2018

ii) Challenges

• Tax Structure - At almost 30%, taxation levels in India are much higher when benchmarked internationally.
Also, the tax structure creates logistical delays because of its multi-level system at central and state
levels, with each state itself having different tax structures.

• Counterfeit Products - These account for almost 5% of the industry and pose serious challenges in its
growth and also impact government’s tax collections significantly.

4. Source: Hindustan Unilever Limited, 2007

5. Source: Technopak Primary Research and Analysis

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4. Recommendations to Stakeholders
i) Recommendations to FMCG Companies

• Strengthen Consumer Understanding – Deep consumer understanding will always be at the heart of
FMCG. Especially during the current downturn, it is critical to know and respond to changing consumer
and shopping behaviour. More sophisticated and rigourous tools need to be applied. For example,
our research finds that in some metros, there is a rising demand for higher end home consumption
food products, as consumers eat out less and compensate by eating better at home. This presents an
opportunity for the FMCG firm with its finger on the consumer’s pulse.

• Improve Engagement with Modern Retail – There are large synergies for FMCG companies and
Modern Retail if they work closely together. Some areas include:

Key Account Management – Appoint account managers to work with retail partners. Together, create
plans on everything from stocking practices to display, pricing and in-store promotions. Improve fill
rates with Modern Retail, which are currently very low at ~60%.

Category Captainship – FMCG companies can manage a product category for the retailer. The retailer
benefits from the manufacturer’s expertise in their categories, and the manufacturer through increased
sales volumes.

• Make the most of zero CST – CST has come down from 4% two years ago to 2% at present. Reduction
to 0% by next year is expected to be on track. Currently, most companies have a warehouse and C&FA in
every state to avoid paying CST. With zero CST, companies can set up large distribution warehouses and
hubs, as there will be no inter-state tax levied.

We estimate cost savings of Rs. 7-12 crores per annum for a company with revenues of Rs. 2,000 crores.
Further, planning and warehouse management are simplified, and service levels to customers improved.
The time to act on this opportunity is now!

ii) Recommendations to Retailers

• Traditional Retailers – Invest in better customer service, product display and store ambience. Invest in
infrastructure, especially for products that require controlled temperature environment.

• Modern Retailers – Work with FMCG brands to improve fill rates, better capture consumer and shopper
needs, and explore co-branding and co-promotion opportunities.

iii) Recommendations to the Government

• Implement GST as per current timelines – Rapid implementation of GST to replace the multiple indirect
taxes currently levied on FMCG products and will have several benefits including uniform, simplified and
single point taxation and reduced prices to the end consumer. Consumption growth and improved tax
compliance will result in an increase in tax collections.

• Enforce Trade Mark and Copyright Laws – This is essential to drastically reduce counterfeits, and
protect the rights of the consumers and FMCG companies.

• Modernize Labour Laws – This will enable Indian manufacturers to improve efficiencies, serve Indian
consumers better and also grow exports from India.

Albert Einstein once famously said, “In the middle of every difficulty lies opportunity.” As happens in a
crisis, new truths are revealed, sometimes not always pleasant. The current economic downturn has
proved challenging for a number of industries. However, the FMCG sector does have significant growth
opportunities in the coming years. Companies that make the right choices are the ones that will win in such
times!

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 About Technopak

We are a management consulting firm with a difference. Founded in 1991 on the principle of “concept” to
“commissioning”, we are in the top 5 consulting firms in India by revenues. We are strategic advisors to our
clients during the ideation phase, implementation guides through start-up phase, and trusted advisors overall.
The industries we serve include Retail, Consumer Products, Fashion (Textiles & Apparel), Healthcare,
Hospitality & Tourism, Leisure & Entertainment, Food & Agriculture and Education.

Our team currently comprises 300+ skilled professionals, from leading International and Indian engineering and
management institutes. Most of our consultants have hands-on industry experience in their fields of specialization
and represent a wide variety of functional backgrounds. This enormous knowledge and talent pool enables us
to create customized teams for each project based on client requirements.

Technopak continues to keep up the impressive track record of helping clients improve their performance in
tandem with their mission, values, objectives and market realities of their industries. Our 600+ clients are leaders
in their market sectors and include leading Indian and international businesses, entrepreneurs, investment
houses, multilateral development bodies and governments.

Services we offer in Management Consulting

At Technopak, we foster innovation and creativity which challenge conventional thinking and generate practical
and far reaching solutions for our clients. In 2008, we worked with over 130 clients across 180+ projects, in 20
countries besides India, across 5 continents.

Our key services are:

Business Strategy. Assistance in developing value creating strategies based on consumer insights, competition
mapping, international benchmarking and client capabilities.
Start-Up Assistance. Leveraging operations and industry expertise to ‘commission the concept’ on turnkey
basis.
Performance Enhancement. Operations, industry & management of change expertise to enhance the
performance and value of client operations and businesses.
Capital Advisory. Supporting business strategy and execution with comprehensive capital advisory in our
industries of focus.
Consumer Insights. Holistic consumer & shopper understanding applied to offer implementable business
solutions.

Services we offer through our Group Companies

Insights and innovation led product, packaging, space
and strategic design, including design research,
concepts, engineering and prototyping. A blend of
unique, contemporary and relevant concepts and
solutions.
www.foleydesigns.com
Holistic consumer understanding applied to offer
implementable business solutions revolving around
shopper insights, trend insights, design and innovation
insights, marketing communication and measuring
customer delight.
www.indiamindscape.com

Strategizing, planning and managing creation,
development and growth of brands through a scientific,
transparent and process-driven methodology.
www.vertebrand.com
Engineering
Planning, implementation and project management
of plants, warehouses and entertainment centers with
a focus on modernization, process improvement,
technical valuation, power & water audit and
environmental engineering.
www.technopak.com/engineering

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About FICCI

FICCI is the rallying point for free enterprises in India. It has empowered Indian businesses, in the changing
times, to shore up their competitiveness and enhance their global reach.

With a nationwide membership of over 1500 corporates and over 500 chambers of commerce and business
associations, FICCI espouses the shared vision of Indian businesses and speaks directly and indirectly
for over 2,50,000 business units. It has an expanding direct membership of enterprises drawn from large,
medium, small and tiny segments of manufacturing, distributive trade and services. FICCI maintains the
lead as the proactive business solution provider through research, interactions at the highest political level
and global networking.

FICCI FMCG committee

To represent the FMCG sector, with a tremendous growth opportunity, FICCI constituted a committee
which is actively involved in various trade & policy matters concerning FMCG Sector. Since its inception,
the committee has worked persistently on various issues concerning FMCG Sector, be it representations
on rationalization of VAT, issues on normative pricing and harmonization of labeling provisions etc. The
committee through its representation in various empowered committees and inter ministerial working
groups of the Government, has effectively served the cause of this sector at the highest level

Chairman - FICCI FMCG committee

Mr. Shantanu Khosla
Managing Director
Proctor & Gamble India

Co Chair - FICCI FMCG committee
Mr. Kurush Grant
Chief Executive (FMCG & Tobacco Business)
ITC Pvt Ltd

Mr. Saugata Gupta

CEO-Consumer Products
Marico Limited

FICCI Secretariat
Mr. Sameer Barde
Senior Director
FICCI
Phone: +91 11 23738760 (Extn 221 & 424)
email: sameer@ficci.com

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 About Authors

Raghav Gupta
President
raghav.gupta@technopak.com

Pratichee Kapoor
Principal Consultant
pratichee.kapoor@technopak.com

Inderpreet Kaur
Senior Consultant
inderpreet.kaur@technopak.com

Shray Chugh
Research Associate
shray.chugh@technopak.com

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Technopak Advisors Pvt. Ltd. Federation of Indian Chambers of Commerce and Industry

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