Jan, 28

2009
FMCG SECTOR

Mahesh Babaria Executive Summary

maheshb@ghallabhansali.com
Products which have a quick turnover, and relatively low cost are
Mittal Dharod known as Fast Moving Consumer Goods (FMCG). FMCG products are those
mittald@ghallabhansali.com
that get replaced within a year. Examples of FMCG generally include a wide
range of frequently purchased consumer products such as toiletries, soap,
cosmetics, tooth cleaning products, shaving products and detergents, as well
as other non-durables such as glassware, bulbs, batteries, paper products, and
plastic goods. FMCG may also include pharmaceuticals, consumer electronics,
packaged food products, soft drinks, tissue paper, and chocolate bars.

85,000 Crores Indian Indiaʹs FMCG sector is the fourth largest sector in the economy and
FMCG market is one creates employment for more than three million people in downstream
of the important activities. Its principal constituents are Household Care, Personal Care and
sector and has
registered a robust
Food & Beverages. The total FMCG market is in excess of Rs. 85,000 Crores. It
growth rate. is currently growing at double digit growth rate and is expected to maintain a
high growth rate. FMCG Industry is characterized by a well established
distribution network, low penetration levels, low operating cost, lower per
capita consumption and intense competition between the organized and
unorganized segments.

The Rs 85,000-crore Indian FMCG industry is expected to register a

healthy growth in the third quarter of 2008-09 despite the economic downturn.
The industry is expected to register a 15% growth in Q3 2008-09 as compared
to the corresponding period last year. Unlike other sectors, the FMCG
industry did not slow down since Q2 2008. the industry is doing pretty well,
bucking the trend. As it is meeting the every-day demands of consumers, it
will continue to grow. In the last two months, input costs have come down
and this will reflect in Q3 and Q4 results.
Ag-gregate sale
FMCG industry is Market share movements indicate that companies such as Marico Ltd
expected to increase and Nestle India Ltd, with domination in their key categories, have improved
by 19.2 per cent their market shares and outperformed peers in the FMCG sector. This has
during the December
been also aided by the lack of competition in the respective categories. Single-
2008 quarter.
product leaders such as Colgate Palmolive India Ltd and Britannia Industries
Ltd have also witnessed strength in their respective categories, aided by
innovations and strong distribution. Strong players in the economy segment
like Godrej Consumer Products Ltd in soaps and Dabur in toothpastes have
also posted market share improvement, with revived growth in semi-urban
and rural markets.

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FMCG SECTOR

Swot Analysis
Strengths:
• Low operational costs
• Presence of established distribution networks in both urban and rural
areas
• Presence of well-known brands in FMCG sector
Weaknesses:
• Lower scope of investing in technology and achieving economies of
scale, especially in small sectors
• Low exports levels
• "Me-tooʺ products, which illegally mimic the labels of the established
brands. These products narrow the scope of FMCG products in rural
and semi-urban market.
Opportunities:
• Untapped rural market
• Rising income levels, i.e. increase in purchasing power of consumers
• Large domestic market- a population of over one billion.
• Export potential
• High consumer goods spending
Threats:
• Removal of import restrictions resulting in replacing of domestic
brands
• Slowdown in rural demand
• Tax and regulatory structure

Industry Category and Products

Household Care
Personal Wash:-
The market size of personal wash is estimated to be around Rs. 8,300 Cr. The
personal wash can be segregated into three segments: Premium, Economy
Hindustan Unilever and Popular. The penetration level of soaps is ~92 per cent. It is available in 5
Lim-ited is the biggest million retail stores, out of which, 75 per cent are in the rural areas. HUL is the
pro-ducer of Personal
leader with market share of ~53 per cent; Godrej occupies second position
wash and detergents.
The seg-ment is with market share of ~10 per cent. With increase in disposable incomes,
expected to grow by growth in rural demand is expected to increase because consumers are
double digit. moving up towards premium products. However, in the recent past there has
not been much change in the volume of premium soaps in proportion to
economy soaps, because increase in prices has led some consumers to look for
cheaper substitutes.

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Detergents:-
The size of the detergent market is estimated to be Rs. 12,000 Cr. Household
care segment is characterized by high degree of competition and high level of
penetration. With rapid urbanization, emergence of small pack size and
sachets, the demand for the household care products is flourishing. The
demand for detergents has been growing but the regional and small
unorganized players account for a major share of the total volume of the
detergent market. In washing powder HUL is the leader with ~38 per cent of
mar-ket share. Other major players are Nirma, Henkel and Proctor & Gamble.

Personal Care
Skin Care:-
The total skin care market is estimated to be around Rs. 3,400 Cr. The skin care
The Skin Care market is at a primary stage in India. The penetration level of this segment in
segment is expected to India is around 20 per cent. With changing life styles, increase in disposable
register a growth rate incomes, greater product choice and availability, people are becoming aware
of mare that 16
about personal grooming. The major players in this segment are Hindustan
percent.
Unilever with a market share of ~54 per cent, fol-lowed by CavinKare with a
market share of ~12 per cent and Godrej with a market share of ~3 per cent.

Hair Care:-
The hair care market in India is estimated at around Rs. 3,800 Cr. The hair care
market can be segmented into hair oils, shampoos, hair colorants &
conditioners, and hair gels. Marico is the leader in Hair Oil segment with
market share of ~ 33 per cent; Dabur occu-pies second position at ~17 per cent.

Shampoos:-
The Indian shampoo market is estimated to be around Rs. 2,700 Cr. It has the
penetration level of only 13 per cent in India. Sachet makes up to 40 per cent of
the total shampoo sale. It has low penetration level even in metros. Again the
market is dominated by HUL with around ~47 per cent market share; P&G
occupies second position with market share of around ~23 per cent. Anti-
dandruff segment constitutes around 15 per cent of the total shampoo market.
The market is further expected to increase due to increased marketing by
players and availability of shampoos in affordable sachets.

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FMCG SECTOR

Oral Care:-
The oral care market can be segmented into toothpaste - 60 per cent;
toothpowder - 23 per cent; toothbrushes - 17 per cent. The total toothpaste
market is estimated to be around Rs. 3,500 Cr. The penetration level of
toothpowder/toothpaste in urban areas is three times that of rural areas. This
segment is dominated by Colgate-Palmolive with market share of ~49 per cent,
while HUL occupies second position with market share of ~30 per cent. In
toothpowders market, Colgate and Dabur are the major players. The oral care
market, es-pecially toothpastes, remains under penetrated in India with
penetration level ~50 per cent.

Food & Beverages

Food Segment :-
The foods category in FMCG is gaining popularity with a swing of launches
by HUL, ITC, Godrej, and others. This category has 18 major brands
aggregating Rs. 4,600 Cr. Nestle and Amul slug it out in the powders segment.
The food category has also seen innovations like softies in ice creams, ready to
eat rice by HUL and pizzas by both GCMMF and Godrej Pillsbury.

Tea :-
The major share of tea market is dominated by unorganized players. More
than 50 per cent of the market share is capture by unorganized players.
According to Tea
Board of India, the Leading branded tea players are HUL and Tata Tea.
export of tea is
expected to be more Coffee :-
that 210 million kg for
The Indian beverage industry faces over supply in segments like coffee and
the year 2008 against
about 179 million kg tea. However, more than 50 per cent of the market share is in unpacked or
last year. loose form. The major players in this segment are Nestlé, HUL and Tata Tea.

Growth Prospect
Large Market
India has a population of more than 1.150 Billions which is just behind China.
According to the estimates, by 2030 India population will be around 1.450
Billion and will surpass China to become the World largest in terms of
population. FMCG Industry which is directly related to the population is
expected to maintain a robust growth rate.

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India is second largest

Country in terms of
Popula-tion growth
and increase in
population has a
direct rela-tion to
FMCG Products.

Source: UN Population Division: Medium variant

Spending Pattern
An increase is spending pattern has been witnessed in Indian FMCG market.
There is an upward trend in urban as well as rural market and also an increase
in spending in organ-ized retail sector. An increase in disposable income, of
household mainly because of in-crease in nuclear family where both the
husband and wife are earning, has leads to growth rate in FMCG goods.

Changing Profile and Mind Set of Consumer

People are becoming conscious about health and hygienic. There is a change in
Survey by A. C. the mind set of the Consumer and now looking at “Money for Value” rather
Nielsen shows about than “Value for Money”. We have seen willingness in consumers to move to
71 per cent of Indian evolved products/ brands, because of changing lifestyles, rising disposable
take notice of pack-
income etc. Consumers are switching from economy to premium product even
aged goods' labels
contain-ing nutritional
we have witnessed a sharp increase in the sales of packaged water and water
information compared purifier.
to two years ago which Findings according to a recent survey by A. C. Nielsen shows about 71 per
was only 59 per cent. cent of Indian take notice of packaged goodsʹ labels containing nutritional
information compared to two years ago which was only 59 per cent.

Advantages To The Sector

Governmental Policy
Indian Government has enacted policies aimed at attaining international
competitiveness through lifting of the quantitative restrictions, reducing excise
duties, automatic foreign in-vestment and food laws resulting in an
environment that fosters growth. 100 per cent ex-port oriented units can be set
up by government approval and use of foreign brand names is now freely
permitted.

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Central & State Initiatives

Recently Government has announced a cut of 4 per cent in excise duty to fight
with the slowdown of the Economy. This announcement has a positive impact
on the industry.
But the benefit from the 4 per cent reduction in excise duty is not likely to be
uniform across FMCG categories or players. The changes in excise duty do not
impact cigarettes (ITC, Godfrey Phillips), biscuits (Britannia Industries, ITC) or
ready-to-eat foods, as these prod-ucts are either subject to specific duty or are
exempt from excise. Even players with manu-facturing facilities located
mainly in tax-free zones will also not see material excise duty savings. Only
large FMCG-makers may be the key ones to bet and gain on excise cut.

Foreign Direct Investment (FDI)

Automatic investment approval (including foreign technology agreements
within specified norms), up to 100 per cent foreign equity or 100 per cent for
NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of
the food processing sector except malted food, alcoholic beverages and those
reserved for small scale industries (SSI).
There is a continuous growth in net FDI Inflow. There is an increase of about
150 per cent in Net Inflow for Vegetable Oils & Vanaspati for the year 2008.

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Market Opportunities
Vast Rural Market
Rural India accounts for more than 700 Million consumers, or ~70 per cent of
the Indian population and accounts for ~50 per cent of the total FMCG market.
The working rural population is approximately 400 Millions. And an average
citizen in rural India has less then half of the purchasing power as compare to
his urban counterpart. Still there is an untapped market and most of the
FMCG Companies are taking different steps to capture rural market share.
The market for FMCG products in rural India is esti-mated ~ 52 per cent and is
projected to touch ~ 60 per cent within a year. Hindustan Unilever Ltd is the
largest player in the industry and has the widest market coverage.
Export - “Leveraging the Cost Advantage”
Cheap labor and quality product & services have helped India to represent as
a cost ad-vantage over other Countries. Even the Government has offered zero
import duty on capital goods and raw material for 100% export oriented units.
Multi National Companies out-source its product requirements from its
Indian company to have a cost advantage.
India is the largest producer of livestock, milk, sugarcane, coconut, spices and
cashew apart from being the second largest producer of rice, wheat, fruits &
vegetables. It adds a cost advantage as well as easily available raw materials.
Sectoral Opportunities
Major Key Sectoral opportunities for Indian FMCG Sector are mentioned
below:
Dairy Based Products
India is the largest milk producer in the world, yet only around 15 per cent of
the milk is processed. The organized liquid milk business is in its infancy and
also has large long-term growth potential. Even investment opportunities exist
in value-added products like desserts, puddings etc.
Packaged Food
Only about 10-12 per cent of output is processed and consumed in packaged
form, thus highlighting the huge potential for expansion of this industry.
Oral Care
The oral care industry, especially toothpastes, remains under penetrated in
India with penetration rates around 50 per cent. With rise in per capita
incomes and awareness of oral hygiene, the growth potential is huge. Lower
price and smaller packs are also likely to drive potential up trading.
Beverages
Indian tea market is dominated by unorganized players. More than 50% of the
market share is capture by unorganized players highlighting high potential for
organized players.

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Company Prospects
Hindustan Unilever Limited
• Unilever is lowering its expenditure on packaging across its portfolio
of food brands as part of a wider cost-cutting drive. HUL has pared
down the colour palette used for print-ing across many products. The
system has been used to reduce printed packaging costs for Unileverʹs
products. It is also eco-friendly because it reduces waste in the printing
process. HUL is taking different steps to reduce the cost and increase
the margin.
• Hindustan Unilever’s product - Pureit (a water purifier) has received
the UNESCO Water Digest Water Award 2008-2009 in the category of
best domestic non-electric water puri-fier. Pureit received the award
for outstanding contribution in the field of water in India. The product
is available across 21 Indian states and has reached more than 1 million
homes in India giving them access to microbiologically safe drinking
water. Pureit’s performance has been tested by leading international &
national medical, scien-tific & public health institutions and meets the
germ-kill criteria of the Environmental Pro-tection Agency, the
drinking water regulatory agency in the USA.
Procter & Gamble Hygiene & Health Care Limited (P&G)
• The Company has 21 product categories out of which only 8 product
have presence in India. The company is planning to launch the rest 13
product in India. The company expects to see a growth in other
categories.
• The company has an aggressive plan to set up 20 new factories across
the World out of which 19 is expected to come in emerging markets
and most of them would be seen in Brazil, Russia, India, and China
(BRIC) nations.
• Whisper which is one of the company’s power brands has recorded 50
per cent market share in urban India.
Godrej Consumer Products Limited (Godrej)
• The Board of Directors of Godrej Consumer Products Limited (GCPL)
has approved the acquisition of 50 per cent stake of its joint venture
partner SCA Hygiene Products’ stake in Godrej SCA Hygiene Limited.
After the transaction, the Joint Venture which owns the ‘Snuggy’ brand
of baby diapers will become a 100 per cent subsidiary of GCPL.
• Godrej Consumer Products Limited has acquired 100 per cent stake in
the Kinky Group Limited, South Africa. Kinky is among one of the
largest brand into hair segment with product portfolio.

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Dabur India Limited (Dabur)

• Dabur has entered into the malted food drink market with the launch
of a new health drink “Dabur Chyawan Junior”. According to the
company, they expect to capture a market share of 10 per cent of the
Rs. 1,900 Crores malted food drink market over the next two years.
• Dabur has acquired 72.15 per cent of Fem Care Pharma Ltd (FCPL), a
leading player in the women’s skin care products market, for Rs 203.7
Crores in an all-cash deal. The Company is expected to create synergy
by this deal.
• Dabur got approval from Government of Himachal Pradesh to set up
another medicine manufacturing unit. The project has an expected
investment of Rs. 130 Crores.
Colgate-Palmolive (India) Limited
• Colgate Palmolive (India) Ltd, which is currently holding 75 per cent of
the share capital of SS Oral Hygiene Products Private Ltd, Hyderabad,
has acquired the remaining 25 per cent share capital from the local
shareholders at an aggregate price of Rs 77.70 lakh. Consequently, SS
Oral Hygiene Products has become a wholly owned subsidiary of the
company.
Nestle India Limited

• Nestle is planning to invest Rs 6 billion in India in 2009 for expansion

of its business in the country.The company which has allotted an
investment of Rs 3 billion in the Indian market in 2008, would be
doubling the investment in 2009 as part of its business strategy. Nestle
International is reinvesting and expanding in India and Nestle India
will have all the financial resources to expand and grow from the
parent company.
• Nestle India reported a good increase in its standalone net profit for the
second quarter.During the quarter, the profit of the company rose
26.54% to Rs 1,210.90 million from Rs 956.90 million in the same
quarter, last year. The company posted earnings of Rs 12.56 a share
during the quarter, registering 26.61% growth over prior year period.
Net sales for the quarter rose 23.45% to Rs 10,356.30 million, while total
income for the quarter rose 23.78% to Rs 10,423.40 million, when
compared with the prior year period.

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