India

Sector Review FMCG

Rahul Kumar
(91)9975470920 rahulkumar@siib.ac.in 24 April 2012

Sector Overview

The FMCG industry is volume driven and is characterized by low margin.

Indias FMCG sector is the fourth largest sector in the economy and creates employment for more than three million people in downstream activities.

The total FMCG market is in excess of US $ 25 billion including tobacco. It is currently growing at double digit growth rate and is expected to maintain a high growth rate in near future.

There is a huge growth potential for all FMCG companies as the per capita consumption of almost all products in country is amongst lowest in the world.

Its currently growing at double digit growth rate and is expected to maintain a high growth rate. Market share movement indicate that companies such as Marico Ltd. And Nestle India Ltd, with domination in key

Per capita consumption of

almost all products in the country is very low compared to world standards, thus huge untapped opportunities.

category, have improved their market shares and outperformed peers in the FMCG sector At present, urban India accounts for more than 65% of total FMCG consumption, with rural India accounting for remaining 35%.However rural India accounts for more than 44% consumption in major FMCG categories such as personal care, fabric care and hot beverages. Because of the diverse agro-climatic condition in India, there is large raw material base suitable for food industry. Labour cost in India is amongst the lowest in emerging countries resulting in low cost of production. FMCG will witness robust hiring and salary hikes in the range of 10-15%, Attrition levels too may come down, with companies going out of their way to retain employees. Demand-side driver Supply-side Driver

FMCG sector is one of the largest employment sectors in the country, it directly contributes to livelihood of almost 13 million people.

Two sides of equation that is Demand and Supply must come together along with other systemic factors.

Consistent GDP Growth Increase Consumer Income High Private Income Rising Urbanization Increasing discretionary Income

Growth of Modern Retail Low Labor cost Newer Products

Systemic Driver

Favorable Changes in Government Policies Infrastructure Development

Please see important notice on last page

Page 1 of 6

India

Sector Review

09 May 2011

Growth Projection 20 18
Within food segment it is estimated that processed foods, bakery, and dairy are long term growth categories in both rural and urban areas.

GDP GROWTH

FMCG SECTOR GROWTH 17 16 15 15 12 16

18

16

Growth in Percentage

14 12 10 8 6 4 2 0 2 4 8.4 8.3 10 9.3

9.3

9.8

9.1

8.8 7.8 7.3

4.9

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: RBI, WORLD BANK, FICCI

House-Hold Income Distribution

Percent

Demand for FMCG product is set to boom over 100 per cent by 2020.This will be driven by the rise in share of middle class. (defined as climbers and consuming class)

2003 60 50 41 40 30 20 10 0 Very Rich

Source: NCAER

2015

54

34 26 18 13 2 5 4 consuming class Climbers Aspirants 3 Destitutes

Please see important notice on last page

Page 2 of 6

India

Sector Review

09 May 2011

FMCG sector is relatively less discretionary demand and therefore tends to be relatively stable in long run, though consumer do up or down trade with economic fluctuations.
Within FMCG sector, the Indian food processing industry represents more than 6 per cent of GDP accounts for more than 15% of total countrys export.

Major Segment of FMCG Industry

House hold care 10% Lighting 2%

Food and beverages 53%

Tobacco 15%

Personal care 20%

Indian Consumer spending patterns

Books and musics 8%

Indias share in world consumer spending is set to enlarge from 1.9 per cent in 2005 to 3.1% in 2020.
Source: Techno peak

Accessories 1%

Entertainment 2% Music and theatre 5% Footwear 2%

Eating out 10% vacation 4% Consumer durable 7% Clothing 7%

Grocery 40%

Savings and investment 4% Personal care Home textiles 2% 8%

Source: FICCI

Please see important notice on last page

Page 3 of 6

India

Sector Review

09 May 2011

Huge untapped opportunities: Low per capita in India compared to worlds other countries.

Rapid urbanization, increasing literacy and rising per capita income, have all caused rapid growth and change in demand pattern, leading to an explosion of new opportunity.

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 UK 1.31

1.46

Personal wash(in kg)

0.87

UK Brazil 0.5 Thailand India

Brazil

Thailand

India

Toothpaste(in kg)
0.7 0.6
Rural market is vital for survival of FMCG companies as urban market is getting saturated.

0.61

0.5 0.4 0.3 0.2 0.1 0 UK Brazil 0.23

0.4

UK Brazil Thailand India 0.07

Thailand

India

Penetration level in most product categories like toothpaste, skin care, detergent etc. in India is low. Low penetration indicates existence of unsaturated market, which is likely to expand as the income level rise.

Detergent(in kg)
20 15 10 5 0 West Europe
Source: IBEF

West Europe 20 10 3.7 USA Phillippines 2.7 India USA Phillippines India

Please see important notice on last page

Page 4 of 6

India

Sector Review

09 May 2011

Consumer expenditure on food(US $ billiom)

Total consumer expenditure on food in India at US $ 140 billion is amongst the largest in the emerging markets, next to china

172 140

72 54 28 Thailand 32 S Korea Taiwan Brazil Russia UK India china 58 60

Source: Euro monitor

Labor Cost Comparision

Labor cost per worker(in US $)
Labor cost in India is amongst the lowest in emerging Asian countries.

12000 10000 8000 6000 4000 2000 0

10743

korea

Labor Cost per worker(US $)

5824 2705 2450 2250

Malaysis indonesia philipins

1889

1619

1052

943

China Nepal Srilanka Pakistan

Emerging market
Source:IBEF

Most FMCG companies focus on urban markets for value and rural markets foe volumes.

Revenue(mar' 11)
25000 20000 15000

HUL faces tough competition from ITC.

10000 5000 0

Please see important notice on last page

Page 5 of 6

India

Sector Review

09 May 2011

SWOT ANALYSIS
Strengths Low cost labor gives India a competitive advantage of low cost of production. Many MNCs have established their plants in India to outsource for domestic and export market. Low operational cost Presence of established distribution network in both urban and rural India. Favourable policies Foreign allowed. direct investment government Weaknesses Lower scope of investing in technology Low export level Unable to reach economies of scale, sectors. especially in small

Development of rural infrastructure is in focus of government, which will be beneficial for FMCG companies. Government has created various Tax holiday zones in the country. For example: Himachal Pradesh, Uttaranchal and Sikkim

Opportunities Rising income level. Increase in purchasing power of consumer. Only about 10-12 per cent of output thus High is processed and huge goods consumed in packaged form, highlighting consumer potential. spending. Export potential.

Threats Removal of import restriction resulting in replacing of domestic brands. Tax and regulatory structure Rural demand is cyclical in nature and also depends upon monsoon

Key to EDUCORPORATEBRIDGE investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends). 2011 EDUCORPORATEBRIDGE, India. Note: In the interests of timeliness, this document has not been edited. Other disclosures will come xXXXXXXXXXXXXXXXXXXXXXXXXX

Page 6 of 6