FMCG Roadmap To 2020 - The Game Changers

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 Indian Industry (CII)
© Confederation of Indian Industry (CII), 2010
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CONTENTS Message from Conference Chairman 3

Executive Summary 4
Abbreviations and Acronyms 6
1. Industry Context 7
1.1. The FMCG Industry: Growth in the Last Decade 7
1.2. Growth across FMCG Categories 7
1.3. Growth across FMCG Players 7
2. Determinants of Industry Growth and Outlook for the Future 10
2.1. Industry Growth Drivers 10
2.2. FMCG Roadmap to 2020 12
3. Megatrends Shaping the Indian FMCG Industry 13
3.1. Accelerating Premiumization 14
3.2. Evolving Categories 16
3.3. Goldmine at the Bottom of the Pyramid 22
3.4. Rapid Globalization 28
3.5. Many-Indias 31
3.6. Growing Modern Trade 34
3.7. Eco-consciousness 39
3.8. Game-changing Technologies 42
3.9. Enabling Policies 46
4. Implications for the FMCG Industry 48
4.1. Industry Paradigms in 2020 48
4.2. Imperatives for the FMCG Industry 48
4.3. Implications for Other Stakeholders 54
Endnotes 55
About the Authors 55
2 FMCG Roadmap to 2020

The Indian FMCG industry is over INR 1300 billion in size. It touches the life
MESSAGE FROM of every Indian and therefore has perhaps the widest reach among all industries
CONFERENCE in India! The industry has tripled in size over the last 10 years, growing much
faster than in past decades. This has been facilitated by the many changes in
CHAIRMAN the Indian economic and industrial landscape—reduced levels of taxation,
easier import of materials and technology, reduced barriers to entry of
foreign players, growing organizational maturity of Indian players, growth
of media, and, of course, the growing affluence and appetite for consumption
of the Indian consumer. The industry’s 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 government policy, channel customers,
technological advances, leaders of social change such as NGOs, consumer
behaviour and, of course, the players themselves. Change will therefore occur
along many dimensions simultaneously, in a more compressed time scale
at the intersection of these change vectors. This will produce significant,
if unpredictable, outcomes for the industry. Over the last 20 years, almost
all FMCG companies have been riding the rising tide and almost all have
prospered. That may, however, not hold true over the next 10 years. While the
industry is set to grow at an even faster rate, in this round there could be as
many losers as winners!
Winners will discard archaic models which prioritize urban markets over rural
and innovate more complex but vastly more insightful segmentation models.
They will alter the dialogue with modern retailers and the emerging specialized
trade channel customers in meaningful ways, to grow the market and earn
profitable market share. They will use technology to not just pare costs, but
to create flexible supply chains which can access more consumer segments and
satisfy more consumer requirements. They will also use technology to both
win more consumers 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 find this report
by Booz & Company valuable. Booz has developed an excellent model to
understand the forces shaping the FMCG industry and this model is supported
by a strong analytical foundation. Several interesting conclusions flow
from the application of this model which should inform many board room
discussions as companies in India and elsewhere grapple with issues of the
future. Industry associations and the CII FMCG committee will no doubt
see value in this report, as they seek to influence different stakeholders; and,
of course, investors will vote with their money as they identify companies
that reflect a stronger understanding of these dynamics in their strategy and
execution.
Kannan Sitaram
Chairman
CII FMCG Forum 2010
FMCG Roadmap to 2020 3

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

(across products, branding and be seen both in terms of efficiencies changing operating model will have
operating structures). in the back-end processes (for significant implications for the
example, supply chain and industry and its stakeholders. To excel
6. Growing Modern Trade: The share distribution) as well as in the in this new model one will need to
of modern trade will increase and front-end (for example, consumer enhance current capabilities and build
may be expected to account for marketing). new ones to bridge gaps. In this new
nearly 30 per cent of the total trade setup, FMCG companies will have six
by 2020. This channel will compete 9. Enabling Policies: Many imperatives from a business strategy
with existing traditional trade government policies under perspective:
(approximately 8 million stores consideration, if executed, can help
which will continue to grow) and create a more suitable operating 1. Disaggregating the operating model
offer both a distribution channel environment. This will help 2. Winning the talent wars
through its cash & carry model as boost both demand and supply. 3. Bringing sustainability into the
well as other avenues to interact Demand will go up because of strategic agenda
with the consumer. increase in income levels and 4. Re-inventing marketing for
spread of education and supply ‘i-consumers’
7. Eco-consciousness: Global climatic will be augmented by removal of 5. Re-engineering supply chains
changes, dwindling natural resources, process bottlenecks and boost in 6. Partnering with modern trade
and growing ecological awareness of infrastructure investments.
consumers are increasing emphasis Stakeholders including government,
on environmental concerns. The While some of the above trends can retailers, NGOs, and investors
pressure on companies to go green already be observed today, many are will also need to play a key role in
is growing due to the involvement yet to break the existing paradigms. supporting the growth of the industry,
of various stakeholders—the In addition, the confluence of many while continuing to deliver on their
government (through policy), the of these change drivers—consumers, core business and social mandates.
consumers (through brand choice) technology, government policy,
and NGOs (through awareness and channel partners—will have a In conclusion, the FMCG sector in
advocacy). multiplier effect and magnify both India is poised for rapid growth in the
the magnitude as well as the pace next 10 years. Companies will need
8. Game-changing Technologies: of change. As with any change that to evolve to better meet the rapidly
Increased relevant functionality is disruptive in nature, there will be changing consumer needs within
coupled with lower costs will winners and losers. an increasingly complex operating
enable technology deployment to environment. The FMCG industry in
drive significant benefits and allow This transition from a stable and 2020 will be larger, more responsible,
companies to deal with complex homogenous operating model to a and more tuned to its evolved
business environments. This will dynamic, unpredictable and rapidly customers.

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

The sector witnessed a robust year- Within the category of food products,
1 on-year growth of approximately 11 which accounts for nearly 45 per
per cent in the last decade, almost cent of the industry size, staple
tripling from INR 470 billion in products like edible oils have grown
INDUSTRY FY2001 to the current size. The last at single digits given a high degree
CONTEXT five years have augured well for the of penetration as well as established
industry with an annual growth rate usage patterns. Fruit juices on the
of approximately 17 per cent since other hand have reported exponential
FY2005. Even in the meltdown years growth, moving from near-zero
of FY2008 and FY2009, the FMCG levels in FY2000 to INR 9 billion
industry witnessed sustained growth at present. Similar trends are visible
1.1. The FMCG Industry: Growth rates of 14 per cent and 11 per cent, in the personal products category
in the Last Decade respectively, demonstrating that with skin-care creams outpacing the
The fast moving consumer goods unlike other sectors, this sector was growth of more mundane product
(FMCG) industry1, which accounts relatively recession-proof lines such as toothpaste. Increased
for 2.2 per cent of India’s GDP, is (see Exhibit 1). incomes, changing social habits and
expected to attain a size of INR 1300 growing awareness of healthier and
billion by FY2010. Over the last 1.2. Growth across FMCG packaged beverages have contributed
few years the industry has witnessed Categories to these patterns (see Exhibit 2, p. 8).
a high rate of growth boosted The FMCG industry in India has
by favourable macroeconomic grown rapidly and the growth rates 1.3. Growth across FMCG Players
conditions, increased rural incomes, across different product categories Three well-identified sets of players
a rising consumption-culture in India are good indicators of how the Indian operate within a highly developed
and a proliferation of consumer consumer has evolved. and intensely competitive landscape
awareness campaigns.

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

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

2.1 Industry Growth Drivers by Rostow’s Stages on Economic
2 Having matured in a decade of Growth.2
tremendous economic growth, the
Indian FMCG industry is now ready The tipping point for exponential
DETERMINANTS to sustain that growth and forge growth, however, varies across
OF INDUSTRY ahead. There are three key forces at categories. At per capita GDP of
work within and outside the industry US$ 7000, the basic consumption
GROWTH AND which drive this development. of staples as a proportion of total
OUTLOOK FOR food consumption (measured by
2.1.1. Developmental Cycle of calories of intake), initially, tends to
THE FUTURE the Industry grow faster. For example, per capita
Booz & Company analysis of consumption of wheat grows fast
consumption patterns across when GDP is US$ 2000-5000 per
countries has revealed that most capita. However, the snacks category
categories of consumer products tend displays growth when GDP is in the
to follow an S-curve of growth with range of US$ 4000-7000 per capita,
the initial consumption driven by rich though this rise occurs comparatively
consumers and early adopters. At the late. Socio-cultural norms and
trigger point though, the consumption behaviours considerably impact
becomes more wide-spread and then both timing and growth patterns of
increases exponentially. Subsequently, various food categories. For example,
the categories of consumer products Mexico reports high rates of snacking
mature as consumers move from a due to local food habits, while Latin
‘need-driven’ to a more ‘want-driven’ America displays strong inclination
consumption pattern as explained for shampoos, which is driven not
Exhibit 4: Key Drivers of the FMCG Industry in India
CONTRIBUTION TO FMCG
GROWTH DRIVER PAST GROWTH (2001-2010) FUTURE GROWTH (2011-2020)
TRANSFORMATION
GDP Growth ~7% 8-9%
Population Growth 1.5% 1.2%
• ~14% annual growth • >15% annual growth

Per Capita (disposable income) (disposable income)
Income Growth
• Women’s participation 34% • Women’s participation closer
in 2010 to levels in developed nations
(70%)
• 2.3% urbanization • 2.5% urbanization

Lifestyle Changes • ~60% people in 15-59 age- • Similar age profile
group in 2010 • More up-trading in urban
and rural areas
• NREGA • GST
Government Policy • Farmer loan-waiver • FDI
• Right to Education
• Food Security

only by the availability of water but Exhibit 4, p. 10). These are elaborated can be expected to substantially
also social norms related to personal upon below: decrease supply chain costs.
hygiene. Increased FDI in multi-brand retail
• The Indian economy is expected to may open up a large channel for
While the Indian GDP per capita overtake UK in the coming decade, sales. Other policy measures such
is low, many Indian consumer with GDP growth ranging between as lower income taxes, the Food
segments which constitute rather 8-10 per cent.3 Security Act, Right to Education,
large absolute numbers are either infrastructure schemes etc have
close to or have already reached the • India is expected to reach China’s also acted as enablers of higher
tipping point of rapid growth. This current population figure of 1.4 consumption.
is true for many categories of billion by 2020.
consumer durables, beauty and 2.1.3 Evolving Consumer Profile
wellness goods, such as, skin-care • Per capita incomes supported Lifestyle changes, a comparatively
products and even edibles such as by various government schemes young population and greater
packaged beverages, all of which and policies are expected to rise willingness to spend more on better
have reported significantly faster in both rural and urban areas. quality products are expected to boost
growth rates. Participation of women in the the consumption-driven economy.
Indian workforce is also likely to Rural markets, given the current low
2.1.2 Macroeconomic Factors rise. Estimates suggest that if it penetration and high potential for
Favourable macroeconomic drivers increases to approximately 70 per up-trading are expected to bring about
such as the growth in GDP, coupled cent (as in the developed nations), super-normal growth for FMCG
with rising incomes, increased it will further boost GDP growth companies.
participation of women in the by 2-3 per cent.
workforce and the tapping of the All these factors will combine to
rural markets, are seen to be enabling • Favourable government policies catapult consumer demand for FMCGs
growth in the FMCG sector (see such as the introduction of GST to newer heights (see Exhibit 5).
Exhibit 5: FMCG Growth Ladder
Demand INCREASING UNFORESEEN

Drivers NEW CONSUMERS CONSUMPTION UP-TRADING FUTURE DRIVERS
• Population growth • Increasing • Using premium,

• Increasing penetration consumption in sophisticated
(access to rural areas, every occasion products
more coverage) • Increasing occasions • Increasing income,
of consumption women’s participation
• GDP, increased in workforce, lifestyle
incomes, younger changes powering
population driving above
the above
Supply Modern Trade + Technology Investments + Regulations

Drivers

Young population (below age of 30 • Base Case models an ‘As-Is’ scenario expect Indian FMCGs to follow
years) comprise 59 per cent population where the key assumptions are that well-established growth-evolution
currently, and the composition is likely GDP growth will continue at the paths. However, in many product
to remain similar over the next decade. same pace (of about 7 per cent) in categories growth may be accelerated
This augurs well for the industry as the next decade and there will be no by the explosive economic rise, young
the young have greater willingness to major change in regulations. consumer base and the influence
spend more. of the ubiquitous media. Some of
• Optimistic Case models a that impact is already evident in a
2.2 FMCG Roadmap to 2020 ‘Transformation’ scenario where category like liquid hand-wash which
Booz & Company analysis and key assumptions are that GDP has shown very strong growth driven
discussions with industry experts growth will touch 9 per cent in by increased consumer awareness
indicate that the FMCG industry may the next decade, and favourable around personal hygiene specifically
grow at a base rate of at least 12 per changes in regulations (such as for children.
cent annually to become INR 4000 FDI in multi-brand retailing or
billion industry in 2020. Additionally, rolling-out of the GST) will unlock Given the nascent stage of
if some of the positive factors play industry potential. development across many categories
out favourably, it could even record even supply-led actions can help
a 17 per cent growth over the next While the overall growth rates may trigger rapid growth. For example,
decade, leading to an overall industry be anticipated to lie in the 12-17 many packaged food categories
size of INR 6200 billion by 2020. per cent range, many product (such as soups, breakfast cereals, and
These growth rates, however, depend categories are likely to grow much fruit juices) have seen rapid growth
on varying economic scenarios faster as consumer incomes increase, rates driven by increased presence of
(see Exhibit 6). behaviours evolve and requirements modern trade.
change. In some areas one would
Exhibit 6: Growth Scenarios of FMCG Sector

6250
(IN INR BILLION) Optimistic Case
17%
Base Case
12%
2850
17%
4000
12%
1300
2300
FY10E FY15P FY20P
Source: News articles, Booz & Company analysis

CII–Booz research on industry of the pyramid, the evolution
3 evolutions in other markets and of consumption behaviour will
discussions with industry experts and be seen to lead to significant
practitioners helped identify nine key changes within and across product
MEGATRENDS forces that will change the face of categories. And finally, many
SHAPING THE the industry over the next ten years. companies will find increasing
These trends may be categorized into value at the Bottom of the Pyramid
INDIAN FMCG three broad groups, based on their (BOP) by serving products
INDUSTRY origins or sources (see Exhibit 7). customized to specifically meet the
However, their impact will be freely requirements of this large market.
felt across multiple stages of the It may be said that there will be
industry value chain. significant scaling up at each step
of the consumer income–pyramid
• Consumer-related Trends: to be able to justify independent
Changing demographic profiles and commercialization of the business
evolving behaviour significantly potential.
impact the way consumers
consume and interact with • Market-related Trends: These
products and services. Numerous pertain to evolving geographical
and diverse consumers in India markets or channels for the FMCG
throw up an equally mind boggling players. The key trends within
diversity of consumption trends this segment will be the viability
and patterns. At the same time, of sub-markets in India, growing
three prominent trends merit organized retail and the increasing
some discussion. The first one globalization of FMCG players.
is increasing ‘premiumization’ These players need to be conscious
which will see consumers trading of such trends and adapt their
up the price ladder in search of products as well as go-to-market
additional functionality or brand strategies as per their target
promise. Second, at the middle markets.
Exhibit 7: Key Trends Shaping the FMCG Market in India
1 Accelerating Premiumization 4 Rapid Globalization

2 Evolving Categories 5 Many Indias
3 Goldmine at BOP 6 Growing Modern Trade
ers
Ma
um
rke
ns
ts
Co
Environment
7 Eco-consciousness
8 Game-changing Technologies
9 Enabling Policies
Source: Booz & Company analysis

• Environment-related Trends: product options, and want to buy pronounced as compared to the last
These are influenced by socio- products which suit their style. The decade.
political, legal, environmental upper middle class wants to emulate
and technological reprioritizing the rich and trade up towards higher- The premiumization trend can be
that is inevitable in a dynamic priced products which offer greater observed prominently in the top two
environment. Changing functional benefits and experience income groups mentioned already, the
government policies, growing compared to products for mass rich with an annual income exceeding
importance of sustainability, consumption. Such products are INR 1 million, and the upper middle
evolving media platforms and often referred to as ‘masstige’ class with an annual income ranging
technology will compel FMCG products. between INR 500 thousand and
players to adopt business strategies INR 1 million (see Exhibit 8). While
which keep the interests of The rising income of Indian these two income groups account for
communities and the environment consumers has accelerated this only three per cent of the population
in mind for inclusive development. trend towards ‘premiumization’ currently, it is expected that by
or consumer up-trading. The 2020 their numbers will double to
3.1. Accelerating Premiumization improved purchasing power of constitute seven per cent of the total
3.1.1. Trend Description Indian consumers is supported by population.
The motivation for buying premium greater workforce participation
products varies with consumer among women and an increasingly By 2020 these groups will constitute
income. The rich are willing to younger earning population with large enough numbers to merit a
buy premium products for their higher consumer willingness to dedicated business strategy that
‘emotional value’ and ‘exclusive feel’, spend on lifestyle products. These FMCG companies will do well to
and their behaviour is very close to factors will gradually combine to give adopt and follow. As per estimates,
consumers in developed economies. considerable push to premiumization the ‘Rich’ will grow to approximately
They are well-informed about various in the future, making it more 30 million people in 2020, which
Exhibit 8: Household Distribution by Income and Profiles of Affluent Consumers in India
HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME AFFLUENT CONSUMERS

IN INDIA
• Rich: Spend high

1% 2% > INR 1 million (Rich)
5% proportion on personal
2% INR 0.5-1.0 million
11% (Upper Middles) care, entertainment, etc.;
want luxury and exclusivity
(Lower Middles) • 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

is more than the current total Continued favourable age distribution • P&G’s Olay (premium anti-ageing
population of Sweden, Norway and is a driver for premiumization in the skin-care brand) captured 20 per
Finland put together! Similarly, the future as well. cent market share within one year
‘Upper Middles’ will be a population of launch in a category which grew
of about 70 million in 2020, which is There are several examples of five times between 2007 and 2008.
more than the current population of consumers up-trading to more
the UK. premium products, as well as FMCG We expect that in the future, FMCG
companies launching various products players will need to increase their
The Indian population is also to capture the premium market: efforts to cater to the ever-growing
quite young compared to those in needs of consumers demanding
developed economies. People in • Dove, the premium personal premium products.
the age group of 15-44 comprise and hair care brand from HUL,
approximately 60 per cent of the increased its market share from 0.1 3.1.2. Possible Strategies for FMCG
population (see Exhibit 9, p. 16). per cent in 2005 to approximately Players
There are multiple ways in which 5 per cent in 2010 in the hair care Going forward, those FMCG
the burgeoning younger population products category. players who decide to tap into the
is supporting premiumization. First, premiumization trend will find the
the profile of the young population • L’Oreal, with premium brands in need to align their business strategy
reveals more actively employed cosmetics, hair care and skin care, to the pulse of the relevant consumer
people. This means, increased has been growing rapidly in India classes.
incomes available in households to with 7.5 per cent market share in
spend on expendables. Second, young cosmetics climbing up to the third Product Strategy: Premium
people tend to spend more compared position in this category. Similarly products are intended to convey
to their parents and grandparents, for hair colour, L’Oreal has occupied ‘prestige’ or ‘super-premium’
and are easily attracted towards 20 per cent share of the INR 12 position that has ‘aspirational’ value.
‘high-end’ products. Third, they are billion hair colour market with People increasingly want products
more exposed to the media and its premium brands such as L’Oreal which are different, safe, and ethical
influences, specifically new platforms Excellence Crème and Garnier with ingredients and/or features that
such as the internet, mobile phones (a ‘masstige’ brand).4 As a result, have special and measurable benefits.
etc. Their awareness levels are L’Oreal’s overall sales have doubled Indian FMCG players are likely to
higher, and they are better informed in the last five years, and the growth gain from investment in technology
about developments around them. trend is expected to continue. to develop and manufacture
‘Many consumers are likely to indulge

in choice-driven consumption, which
will increase demand for premium
and super premium products in urban
India. The middle and upper middle
classes will be the chief contributors to
this …’
—Mint, Dec 2009

such products in order to ride the ‘emotional bond’ with the consumers consumers about high efficiency and
crest. by highlighting relevant messages, other benefits of the products may be
say, by establishing ‘exclusivity’ for a devised. The quality of human capital
Marketing: For advertising ‘prestige’ top-end brand. deployed for sales and distribution
products, one may use special will need to be enhanced significantly
catalogues or niche print media, Sales and Distribution: For selling through specialized training
while for ‘affordable premium’ premium products a ‘high-touch programmes if such a sales process is
products, the mass media may be or experiential’ and ‘differentiated’ to be enabled.
harnessed for marketing campaigns. sales process may find better
Depending on the positioning, the alignment with the product strategy 3.2. Evolving Categories
campaign may either emphasize and overall business objective. For 3.2.1. Trend Description
and demonstrate effectiveness and example, product demonstrations by There are three ways in which a
benefits of the product, or create an salespersons or a trial run to educate 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

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

and increased sophistication in as pre-mixes and processed foods) per product development and mass-
emerging consumer choices. capita wheat consumption starts to customization for identifying different
fall. Finally, it levels-off as consumers product variants is already underway.
An analysis of consumption start demanding more product variety For instance, a decade ago, only a
patterns across economies shows suited to their preferences. India is limited variety of products such as
that consumers’ tastes change as an expected to follow a similar pattern shampoos was available within a
economy matures. For instance, as per of consumption across staple food particular brand. Now most large
capita GDP rises, in the initial years, products (see Exhibit 11, p. 20). players have launched many variants
wheat consumption per capita rises in accordance with hair types (oily /
as well. Larger number of consumers Increased Product Variety dry / normal), the seasons in which
emerge from relative poverty to Consumers are increasingly these can be used (winters / summers)
choose wheat over coarse grains. demanding customized products as well as consumer categories,
Then, as consumers start moving which are suited to their individual targeted separately at men, women,
towards convenience products (such needs. Micro-segmentation for and children. P&G’s Head and
Exhibit 10: Evolving Needs of Middle Class Consumers in India
HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME MIDDLE CLASS CONSUMERS

IN INDIA
Evolving Needs: Increasingly

5% want sophisticated products in
11% (Upper Middles) categories; desire products which
improve their appearance and
29% INR 0.2-0.5 million are good for their health; want
(Lower Middles) products meeting their specific
needs
86%

2010 2020

Shoulders brand which started with the future, which is the direct result Vaseline for Men, Emami came out
two variants in 1997 now boasts 11 of the changing socio-economic status with Fair and Handsome, and L’Oreal
variants to choose from. of the Indian consumers, especially has launched Garnier Men Power
the women. Better paying jobs and Light products. As per estimates,
Mass-customization in India will exposure to fashion and beauty trends the demand for in-salon skin care
intensify in the future with FMCG prevailing in the developed world treatments by men is increasing by 40
players profiling the potential buyer through the television and other per cent annually.6
by age, region, personal attributes, media have resulted in changing tastes
skin type, ethnic background, and choices. Middle class women Along with beauty products, there is
and professional choices. Micro- are now more conscious of their an increased awareness about good
segmentation will amplify the need appearance and are willing to spend health practices among consumers
for highly customized market research more on enhancing it. Products such today. Sedentary lifestyles and
so as to capture the specific needs as colour cosmetics (growing by 46 unhealthy habits have led to the
of the consumer segment targeted, per cent), sun care products (growing rise of lifestyle-related diseases such
before the actual product design at 13 per cent) have latched on to this as diabetes and heart problems.
phase gets underway. trends rapidly.5 Indian men are also Increased awareness of health-
becoming more conscious of their related issues has led to the demand
Increasing Beauty, Health and appearance, and several companies for healthier products with lower
Wellness Concerns have been launching beauty and calories, less sugar, more nutritional
The beauty products market is grooming products specifically content, and with a greater
expected to grow by 15-20 per cent in targeted at men. HUL has launched
‘In the skin category, there have

been over 1200 brands and variants
launched in the last five years alone.
Even in a more developed category like
soaps there have been over 800 brands
and variants launched in the last five
years.’
—Gopal Vittal, ED,
Home and Personal Care,
Hindustan Unilever Limited

proportion of natural ingredients. We have already witnessed heightened • Marico launched Saffola Gold
This trend has impacted the food and activity around health product with LoSorb technology, which
beverages category to a large extent, launches by FMCG players, and this results in less oil absorption while
along with some other categories such is only expected to increase in the frying.
as personal care, and fabric care. future.
• Nestle recently launched Maggi Dal
The market size of health drinks and • Sugar Free Gold has been targeting Atta noodles, expected to provide
health foods is about INR 50 billion health-conscious and diabetic dietary fibres and protein, thus
currently and is expected to grow at people, and claims that it results in lending to a healthy meal. Recently
approximately 10 per cent annually in reducing intake by approximately multi-grain Maggi has also been
future (see Exhibit 12, p. 21). 500 calories per day. launched.
Exhibit 11: Wheat Consumption Patterns
High Wheat Consumption

per Capita
Pre-mixes
Bulk-flour Branded Flour/ Segmented Food

Bakeries
Processed Food Specialized
Bakeries
Fast Food
India China Brazil

Drivers
COST QUALITY CONVENIENCE CUSTOMIZATION
Source: United Nations; Booz & Company analysis

3.2.2. Possible Strategies for FMCG portfolios to introduce a much larger Evolved product forms of developed
Players variety suited to different consumer markets adapted to Indian
Innovations towards more ‘evolved’ groups may provide critical tools for requirements along with new product
and sophisticated product forms, grappling with the dynamic Indian development leveraging the ‘health
healthier variants of existing consumer landscape. platform’ will demand focused R&D
products, and enhanced product and market research efforts.
Exhibit 12: Market Size and Growth in the Health and Wellness Space
GROWTH RATE (%)

2009 - 2012
24
Ayurvedic
22 Medicines &
Products
20
18 Alternative
Medicines
16
14
FMCG Products
12
Health &
10 Food Drinks
8 Skin &
Health Care
6 Dietary
Supplements
4
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

During market research, greater consumer segment. For example, 3.3. Goldmine at the Bottom of the
consumer segmentation may be using gymnasiums for selling health Pyramid
required to identify consumer drinks or stocking of a product for 3.3.1. Trend Description
needs and market potential. a specific ethnic group near their We have defined the bottom-of-
Manufacturing processes will residential area may be strategic the-pyramid or BOP consumers as
need to be adapted to serve mass targeting moves. those who earn less than INR 200
customization objectives. thousand per annum per household.
Complex business models have This group currently constitutes
The supply chain, marketing and sales to support ever widening product about 900-950 million people in India
and distribution process may have to portfolios, variants, and products (see Exhibit 13). Unlike the middle
be redesigned to best reach the target types straddling categories. class segment, which is rather urban,
Exhibit 13: Profile of BOP Consumers in India.
HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME

2%
11% (Upper Middles)

(Lower Middles) BOP CONSUMERS IN INDIA
Spend mostly on essentials, no / very

limited demand for expensive lifestyle
products
86%

2010 2020

already well-served and competitive, agricultural, which is dependent increased from INR 125 billion to
the BOP markets are largely rural, on monsoons. Supply chain is INR 390 billion. Minimum support
poorly-served and uncompetitive. The constrained by poor infrastructural price (MSP) of key crops such as
second characteristic of BOP markets development. paddy and wheat rose at a CAGR
is that a lot of their basic needs are only 2 per cent and 3 per cent in the
yet unmet: financial services, mobiles However, government initiatives such period FY2003-FY2007 but between
phones and communication, housing, as the National Rural Employment FY2007 and FY2010, these prices
water, electricity and basic healthcare Guarantee Act (NREGA), increasing have risen at attractive CAGRs of 18
are lacking. minimum support prices of crops, per cent and 20 per cent respectively.
Sampoorna Grameen Rozgar Yojna,
Rural BOP population is estimated to Pradhan Mantri Gram Sadak These initiatives along with
be about 78 per cent of the total BOP Yojana and Swarnjayanti Gram government-sponsorship of self-
population in the country Swarozgar Yojana (with a total help groups have resulted in higher
(see Exhibit 14). allocation of INR 535 billion in disposable incomes, greater women’s
FY2010) are changing the rural empowerment and improvement of
The growth trends, issues and landscape of India. social indicators in the rural economy
challenges in rural markets are (see Exhibit 15, p. 24).
somewhat different from those Between FY2007 and FY2010
in urban areas. Income is largely disbursement under NREGA has
Exhibit 14: Rural and Urban BOP Population Distribution
Urban
22%
78%
Rural
Source: IFC and World Resources Institute

It is heartening to note that by recently exceeded that of the urban While most FMCG players have
2025, percentage rural population markets at 12 per cent. Products succeeded in establishing sufficient
in the INR 200 thousand to INR such as fruit juices and sanitary pads access to their products in rural
500 thousand category is projected which had no demand in the rural areas, the next wave of growth is
to increase to 22 per cent from the markets earlier have suddenly started expected to come from increasing
present level of 3 per cent. establishing presence. While the rural category penetration, development
market comprises only 34 per cent of customized products for these
Rural Growth Outpacing Urban of the total FMCG market currently, markets and up-trading rural
Markets given the current growth rates, its consumers towards higher-priced
As a result of rising incomes, the contribution is expected to increase to and better products.
FMCG market growth in rural 45-50 per cent by 2020 (see Exhibit
areas at 18 per cent per annum has 16, p. 25).
Exhibit 15: Promising Annual Income Levels and Social Indicators in Rural India
RURAL HOUSEHOLD INCOME DISTRIBUTION
145 161 167 59% 59%

> INR 1 million
3% 1% 0% 7% 1% 1% 2% 2%
100%
46%
35% 36%
50% INR 0.2-0.5 million 27%
48% 22%
INR 90-200 thousand 1981
61%
41%
26% < INR 90 thousand 2007
2005 2015 2025 Number of Below Rural Literacy

Pucca Houses Poverty Line
Source: CII Rural Report, Consumer Lifestyles-India, Euromoniter, Indian Institute of Foreign Trade

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

products as urban consumers in the segment will want price points which good example of the success of such
next decade. Cheaper brands will are affordable and within their innovation.
however co-exist for products with budget and hence demand smaller
wide price differentials between local SKUs. Given the large number of BOP
brands and well-established brands. consumers, the top line will need to
For products with narrower price 3.3.2. Possible Strategies for FMCG be volume-based rather than value-
variations, some amount of up-trading Players based. Hence, a different business
can be expected. FMCG players with an eye on rural model will need to be devised by the
volumes could gear their innovation, FMCG companies. Some defining
However, the affordability of manufacturing and rural supply chain features of such a business model are
branded products will remain a processes towards small-volume units outlined below. This is, however, not
challenge for BOP consumers. For of products which the rural consumer an exhaustive list.
higher-end brands, consumers in this can afford. Shampoos in sachets are a
‘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 Kashyap,
Founder and CEO, MART
Exhibit 17: Rural and Urban Penetrations - A Comparison
RURAL PENETRATION (%) URBAN PENETRATION, 2009 (%)

Headroom
CATEGORY 2001 2009
for
growth
Toothpaste 32 45 75%
Skin Cream 20 33 32%
Dish Wash 12 16 60%
Shampoo 16 46 62%
Source: IDFC Securities, Edelweiss, A.C. Nielsen, Booz & Company analysis

HUL’s Brand-Building Initiative Khushiyon Ki Doli
HUL has initiated a rural campaign called Khushiyon Ki Doli. The objective of
the campaign is to create awareness and engage with the masses through
technology. Vehicles equipped with LCD TVs, DVD players, small generators
etc roam rural habitations, mainly targeting housewives. A range of HUL’s
product commercials are played ranging from Surf Excel to Huggies Diapers.
HUL organizes games at the end of the campaign distributing sachets 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 points.
• Effective and attractive product

packaging that enables convenient
use and storage.
• Effective mix of multimedia

marketing strategies to create a
‘buzz’; unconventional partnering
with NGOs and local governments
to influence the influencers,
educating consumers around
attributes and functionality of
products.
• Ensuring access to typically rural

or remote consumers through new
and low-cost ways of distribution
given the inadequate supply chain /
logistics infrastructure in these
areas. An entrepreneur driven
model would be an appropriate
example.
‘Increasingly, the rural consumer
will demand the same product as the
urban consumer and there will be
convergence.’
—Sunil Duggal, CEO,
Dabur India

3.4. Rapid Globalization sometimes, small international In the recent past, India as one of
3.4.1. Trend Description footprints as well. the fastest growing economies in the
The Indian FMCG industry has a world has attracted foreign MNCs
very competitive landscape, with Many foreign FMCG multinationals who see it as a key market. With a
three sets of players: the global have established themselves on a firm spurt in ‘reverse innovation’ foreign
players or foreign MNCs, the large footing in India. Examples include MNCs are leveraging India as an
Indian players, and regional or Unilever which has been present in ‘innovation hub’; consumer research
small domestic players. Increasing India since the 1930s, P&G, which happens first in India, and then,
globalization has important established its presence through its products are taken to other markets.
ramifications for foreign MNCs as Vicks brand in the 1950s, and Nestle,
well as large Indian companies which commenced operations in the Several foreign FMCG majors have
with pan-India presence and late 1950s. headed for India with the purpose
With a spurt in ‘reverse innovation’

foreign MNCs are leveraging India
as an ‘innovation hub’; consumer
research happens first in India, and
then, products are taken to other
markets.

Popularly Positioned Products
Nestle plans to build a dedicated R&D centre in India, which is expected

to commence operations by mid 2012. The centre will focus on developing
‘Popularly Positioned Products’, which can meet specific needs of consumers
belonging to lower income groups, and provide high-quality and nutritional
foods at affordable prices. These products are also expected to be sold in
other countries. Second, Nestle plans to broaden its product portfolio in India,
and has been evaluating the option of entering the breakfast cereals market,
a nascent but fast-growing category by leveraging its strong cereal brands
such as Nesquik, Cheerios etc.
of acquiring experienced talent, and

deploying them in similar markets
elsewhere. Companies are seeking
senior management experience in
handling a diverse and complex
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 complex market such
as India, to crack other markets by
sharing ideas which have worked
before.

There are numerous instances of focus on the Indian business even strong brands to widen their product
foreign FMCG attention to India: more strongly and develop their portfolio, thereby sharing brands
Indian subsidiaries as a significant between India and the global markets
• Kraft Foods acquired Cadbury’s contributor to global business by of the acquired company. In the future,
in 2009 to establish a foothold in increasing penetration of existing many Indian domestic players are
developing countries such as India. products, while introducing greater expected to evolve into mini-MNCs
variety, broadening category and therefore will need to develop
• Ferrero Rocher is planning to portfolios and developing new brands customized products to target the local
expand presence in India in the and innovations. The multinationals populations in international markets
confectionary segment. not present in India can be expected (see Exhibit 18).
to look for entry opportunities
• Many foreign MNCs are in terms of organic or inorganic Examples of Hedging against
contending to acquire Paras expansion in the future. Domestic Competition
Pharmaceuticals, a domestic player • Godrej Consumer Products Ltd.
with strong brands in OTC and Apart from foreign MNCs in India, took its hair colours and Fairglow
personal care categories. there are numerous large Indian soap to the UK targeting the Indian
players which have started establishing population residing there.
• French cosmetics major L’Oreal is global footprints to diversify their
planning to enter the deodorant business risks and tap the growth • Dabur International exports
segment which is growing at 30 per potential in other countries. Initially, products to over 60 countries,
cent annually. Indian FMCG players expanded targeting the Indian diaspora in
outside India to either target the Indian those countries.
• GSK Consumer has recently diaspora in specific countries or to
expanded into the noodles and hedge against increasing competition Examples of Brand Sharing
biscuits market in India through its within India. Traditionally, the same • Godrej acquired Keyline Brands
flagship brand Horlicks. product portfolio was taken to other (a UK-based FMCG player) in
countries. However, increasingly 2006, which enabled it to enter the
We can expect the foreign FMCG FMCG companies have been acquiring skin care segment using Keyline’s
MNCs already operating in India to international FMCG companies with brands. It introduced the latter’s
Exhibit 18: International Growth of Indian FMCG Players
STAGE 1 STAGE 2 STAGE 3
Hedging against Targeting Local Populations

Brand Sharing
Domestic Competition of Other Countries
• Organic growth • Inorganic growth by acquiring • Organic growth after establishing

• Target Indian diaspora of other international companies with strong presence in other markets
markets with existing product FMCG brands • Behaving as a multinational and
portfolio • Broadening brand / product portfolio developing customized products for
• Exports / limited channel reach for all target markets local populations of global markets
• Increased sales and distribution as
distribution channels are augmented
through acquisition

brands such as Erasmic (shaving business accounted for 20 per cent would need to retain the human
products) and Cuticura (talcum of Emami’s turnover in FY2010 capital to ensure continuity and
powder) in India. and this is expected to grow understanding of the characteristics of
further. the local market.
• Dabur acquired the Turkish FMCG
company Hobi Kozmetik Group • Godrej has introduced sandalwood They would need to ensure that while
this year to strengthen its presence and ayurvedic variants of Godrej acquiring a company, there is either
in the Middle East and North No. 1 in British super-markets an absence of or very limited overlap
Africa. Hobi Kozmetik is present which has helped it attract the with the acquired brands. This helps
in the personal care market and British Afro-Asian population avoid the elimination of one brand’s
sells a wide variety of hair care which has a high demand for share by another.
and skin care products under the ethnic-Indian products.
brands ‘Hobby’ and ‘New Era’ Companies would need to
in 35 countries. Its brands also • Marico’s skin care services brand, institutionalize best practices between
enjoy significant market shares Kaya, recently acquired aesthetic various markets.
in their respective categories. skin care business of Derma Rx,
As Hobi’s brands complement a company providing skin care In fact, expansion into new
Dabur’s portfolio, they give Dabur services. Derma Rx operates three geographies may help companies
a strong platform in new product centres in Singapore and one in to identify new trends which could
categories in India (by introducing Kuala Lumpur, with consumer base occur in other markets. For example,
Hobi’s brands) and new markets of approximately 37,000. This is changing consumer preferences in one
(leveraging Hobi’s established expected to help Marico establish its country may be replicated in another
presence). presence in the market for skin care market with a time-lag, which can
products in Singapore. It may also be captured by a geographically-
• Marico acquired the skin care open Kaya clinics in the country. diversified business. Companies with
company Sundari LLC, and presence in developed nations with
two aromatic soap brands in 3.4.2. Possible Strategies for FMCG a high share of organized retail may
Bangladesh. Players also be able to apply their learning in
Going forward, we expect the larger India.
• Wipro acquired the marketing players in India to marry the best
rights for Chandrika soap in India of global practices with the Indian Indian players developing into
and other SAARC countries. As operational nuances (regulations, international organizations will have
Chandrika is the second largest channel mix, consumer preferences to follow global standards in terms of
selling brand in south India, this etc) in their business models. Foreign governance, people processes, etc.
was seen as aligning with Wipro’s MNCs will bring in global business
strengths in markets like Andhra models and products to India, adapt 3.5. Many-Indias
Pradesh, where its soap brand them to Indian tastes, develop 3.5.1. Trend Description
Santoor was already the market products in India and market them to Spanning an area of 3.3 million
leader. similar geographies internationally as square kilometres, India is a vast
well. country with 29 states. Language,
Examples of Targeting Local eating habits and sartorial styles vary
Populations of Other Countries Large, Indian FMCG players will by region, or state, and ethnic group.
• Emami bought a manufacturing learn nuances of operating in other Increasingly, FMCG players
facility in Egypt this year. This countries in managing new retail are realizing that India is not a
acquisition was seen to be channels and different regulations homogenous market but consumer
consolidating its presence in Africa, and bring back these best practices preferences vary significantly.
a fast growing market which to India. Also, Indian MNCs will
contributed about one-third to the now have to develop organization Second, certain states present higher
company’s international business. designs that are geared towards a growth potential in certain categories
The plant is expected to serve as a geographically-diversified model. necessitating a focussed business
regional manufacturing base for the strategy to drive growth. Recently,
Middle East, Europe, and African Indian players integrating with the BIMARU states of Bihar, Madhya
markets. Also, international acquired companies successfully Pradesh, Rajasthan and Uttar Pradesh

have been responsible for tremendous model in India. Given the large Pradesh’s economic size will exceed
growth in FMCG compelling players Indian population, consumers within that of Singapore and Denmark (see
to look at these states more closely. a state provide FMCG companies Exhibit 19). So, having a dedicated
sufficient scale to form dedicated firm for Maharashtra or Gujarat can
It has become imperative for FMCG organizations for individual regions prove to be a realistic and profitable
players to grow ‘regional’ in their or states. By 2020, Maharashtra’s proposition.
thinking and move towards an GDP will exceed that of Greece,
increasingly decentralized operating Belgium, and Switzerland, and Uttar
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 WB Gujarat Greece Belgium Switzerland Singapore Denmark
Pradesh
Note: Extrapolation of 2001-2009 Growth Rates

Source: IMF, CIA World Factbook, Booz & Company analysis

Buzz Around the BIMARUs
‘BIMARU contributes 35-45 per cent of our sales. These states are not
BIMARU for us; we would be BIMARU without them.’
—Aditya Agarwal, Director, 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 Godrej’s products. We
expect it to go up to 25 per cent in a year’s time.’
—A Mahendran, MD, Godrej Consumer Products Ltd
‘Apart from the youth factor, what makes BIMARU important 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, Wipro Consumer Care and Lighting
‘Dabur registered strong double digit growth in BIMARU states in FY2010

Varying Consumer Preferences and expects that to continue. Dabur rolled out special rural focussed sales
As consumer preferences differ initiatives in BIMARU states. Rural distribution reach was stepped up in many
across regions and states, companies high potential districts, penetrating to villages of lower population strata.’
may be well-advised to follow a —George Angelo, EVP Sales, Dabur India
regional strategy in terms of product
ingredients, positioning, marketing
campaign, and channels.
Historically, we have seen some

examples of ‘regional adaptation’ of
business strategies by companies:
• HUL launched Brooke Bond

Sehatmand for low-income
consumers to compete against
regional tea companies such as
Wagh Bakri, Girnar and Sapat.
Sehatmand was specifically meant
for down-trading consumers in
Uttar Pradesh, Madhya Pradesh,
Bihar, Jharkhand and Chhattisgarh.
HUL also launched brand Ruby,
specifically for the Karnataka
market.
• HUL launched a regional detergent

brand in Punjab called Chokra
which is present in two or three
districts of the state.
• Several players adapted ‘beverage

flavours’ to local tastes, while
tobacco players customized blends
to regional preferences

We expect this trend of launching FMCG players. They will need to forward, FMCG players may need
different product variants in different identify and achieve clarity on their to decentralize their organizational
regions / states to continue in the strategy in each state targeted. design, with separate R&D and
future. strategic planning operations for
Product Strategy: FMCG players need different states.
3.5.2. Possible Strategies for FMCG to ensure that brands which do well
Players in specific regional markets do not 3.6. Growing Modern Trade
Strategizing for Growth Centres lose out due to their focus on national 3.6.1. Trend Description
Bihar, MP, Rajasthan and UP together brands. For example, for HUL, Historical Growth of Organized
comprise 36 per cent of India’s Hamam leads in Tamil Nadu, Rexona Retail
population, and 40 per cent of India’s leads in Andhra Pradesh and Sunlight No strategic exercise is complete
youth. However, their cummulative detergent leads in West Bengal and without a business strategy for the
contribution to FMCG consumption Kerala. However, lack of focus on these retail sector, as the FMCG industry
is only 24 per cent, which shows individual brands has led to loss of depends on retail for consumer sales.
sufficient room for growth. market share in these specific markets. While India’s retail sector has been
growing at over 7 per cent annually, a
Further, per capita income in the four Marketing Strategy: Marketing large proportion of it is unorganized
states has started growing at 13 per strategy and expenditure may vary retail in the form of scattered mom-
cent, exceeding the national average with states, their position in the and-pop stores which require a
growth rate. market, and growth trajectories. Also, very resource-intensive distribution
the positioning will have to be better process in terms of manpower and
Hence, going forward, the Indian adapted to consumer preferences. logistics. Also, volume per retail store
FMCG sector can expect to see is very low. However, modern trade
significant growth from BIMARU. Supply Chain Strategy: Sales and or organized retail has created a
distribution structures, investment concentrated (high volume)
For players to take full advantage of in logistics and warehousing among channel for distribution by FMCG
this potential, a separate strategy will other facilities cannot remain players. Second, the share of some
have to be devised for such regions inflexible across states. consumer product categories such
with greater resource deployment as processed food and beverages is
and more focused product and sales Competitive Strategy: Competitive also expected to grow rapidly within
initiatives. strategy of national players will organized retail, which makes the
also need to watch out for regional latter a very crucial contributor to
Other Strategic Tools players which have better customized the industry.
Overall, decentralization or products for a particular region.
regionalization will become an Modern trade is still at a nascent
increasingly important theme for Organization Design: Going stage in India; the share of modern

trade in retail last year was only cash-and-carry (which is essentially with only about eight stores in 2009.
about five per cent. However, it has organized wholesaling). While super- In a large and growing market such
been growing very rapidly displaying markets have the highest share in terms as India, we expect existing formats
approximately 25 per cent annual of the number of stores (approximately to evolve and new formats to come
growth (see Exhibit 20). 85 per cent of total modern trade up in the future, driving the growth of
stores in 2009), hyper marts account various FMCG categories.
Several formats exist within modern for the highest area (approximately 70
trade and organized retail, such as, per cent of the total area under modern Local Indian players have been
hyper marts, supermarkets, and trade). Cash-and-carry is still nascent experimenting with different
Exhibit 20: Organized Retail Penetration in Select Economies
(% OF TOTAL RETAIL)
85.0%
81.0%
55.0%
40.0%
Organized retail
has grown at 24% 30.0%
CAGR over the
last 4 years but 20.0%
significant
headroom exists
3.1% 4.8%
India India China Indonesia Thailand Malaysia Taiwan US

2005 2009
Source: IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis

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

• Improving infrastructure: The profitability, emergence of private Decreasing inventory levels will also
government is increasing its thrust labels, expansion of modern trade require strong backward integration
on improving infrastructure. A beyond metros and the rise of cash- with distributors or manufacturers.
recent example is the construction and-carry business in India (see Retailers will also need to optimize
of the Golden Quadrilateral, a Exhibit 22). logistics further in terms of
dedicated freight corridor which warehousing and transportation
will result in improved supply Focus on Supply Chain Management: etc. For this it will be imperative to
chain efficiencies. Organized retailers are going to be increase supplier collaborations.
increasingly interested in reducing
Future Trends in Modern Trade time-to-market. To achieve this, it will Emergence of Private Labels: Private
This analysis has tried to capture the be important to invest in inventory labels or products manufactured
ongoing and future trends within management and related technology and marketed by retailers, have
modern trade which are expected for capturing sales data, forecasting been growing in India as they are
to impact the FMCG industry. demand and generating automatic very attractive to retailers for three
Among these are a focus on supply replenishment. reasons:
chain management for improved
Exhibit 22: Organized Retail Industry Trends
Focus on Supply Chain Emergence of Private

Management Labels
Expansion beyond Rise of Cash-and-Carry

Metros

First, they help retailers to improve Further, penetration by private labels just in metros, but in other cities as
profitability as the margins for in India is quite low compared well (see Exhibit 24, p. 39).
private labels are higher (30-35 per to other developed countries
cent on average) compared to the (see Exhibit 23). Rise of Cash-and-Carry: Several
manufacturer’s brands. foreign, organized retailers have been
Due to all these factors, it is expected increasing their presence in the cash-
Second, they help retailers to create that private labels will become a and-carry business in India. Metro
differentiation between competitors major threat to FMCG players in the was one of the first to enter India
as they are unique to their stores. future. in 2003. It targeted kirana owners,
hotels, restaurants and catering
Third, the emergence of retailing as a Expansion beyond Metros: Organized services through five outlets across
specialist function and the growth of retailers have started expanding their Bangalore, Mumbai, Hyderabad
multiple retailing have helped retailers presence from metros to smaller and Kolkata. Wal-Mart entered the
push manufacturers towards greater cities. For example, Big Bazaar had cash-and-carry business through a
margins. 44 per cent of its stores outside the joint venture with Bharti Enterprises
top 19 cities in 2009. There are plans under the brand name ‘Best Price’. It
Experience has shown that the to open stores in Tier 1 and Tier 2 has three stores in Punjab currently
retailers who most consistently exceed cities in Tamil Nadu as well. Similarly, and plans to expand to 10-15 stores
expectations are rewarded with higher Lifestyle is planning to expand its over the next few years. Similarly,
average sales, more repeat business, base across 22 cities by FY2013. This Carrefour is expected to set up its first
and invaluable goodwill. All these are further implies that modern trade will cash-and-carry store in Delhi. Cash-
critical stepping stones on the journey become increasingly important for and-carry is expected to provide an
to sustainable loyalty. FMCG players as a major channel not alternative channel to FMCG players
Exhibit 23: Private Label Share in Overall Organized Retail Sales
46%
40%
35%
29%
27%
21% 20% 20%
11%
Switzerland UK Germany Spain France Australia USA India World

Average
Source: Technopak, Booz & Company analysis

in the future. However, whether cash- better value proposition to retailers, to be environmentally responsible is
and-carry would form a significant they will also need to shift their role gradually on the rise.
chunk of total sales is a question from transaction to advisory and
given that all foreign retailers are help in category development, joint Various stakeholder responses to eco-
eyeing the retail opportunity and promotions etc. concerns are showcased below.
waiting for multi-brand FDI in retail
to open up. The need for FMCG players to • Government: India is committed
improve execution in terms of to reducing carbon emissions
3.6.2. Possible Strategies for FMCG merchandising in the top organized by 25 per cent by 2020 and the
Players retail accounts and invest in government has been imposing
With increasing importance of technology to gain insights into stringent environmental norms on
modern trade, channel segmentation consumer behaviour and purchasing companies. Also, many states have
is expected to become crucial for patterns will significantly increase in enacted legislations such as the ban
FMCG players, along with the the future. on plastic bags to further the cause.
adoption of a greater collaborative
approach with the most important 3.7. Eco-consciousness • Consumers: Concern for the
channel partners. 3.7.1 Trend Description environment has changed
What makes sustainable business the purchasing behaviour of
With the emergence of private practices essential? Increased eco- consumers. An Edelman survey of
labels, the retailer-manufacturer sustainability of business will be 6000 global consumers conducted
relationship will come under greater extremely important for FMCG between August and October, 2008
pressure. FMCG players will need companies in the future. Global found that 87 per cent believed it
to become primary suppliers to top climatic changes and the growing was their ‘duty’ to contribute to a
retailer-partners by leveraging their scarcity of natural resources have better environment.
position as market leaders. They already led to increased concerns
may also have to provide special about the environment. The pressure • Media and NGOs: Environmental
discounts. Second, to prepare a on companies from key stakeholders activists and journalists are
Exhibit 24: Percentage Share of Retail Presence Across Different Cities, 2009
Number of Stores 113 27 18 45

100%
26%
49%
67% 61%
30%
Top 4
Planning to open 9% 5 to 15
31%
Stores in T1/T2 cities
in Tamil Nadu 39% 16 to 35
35% 33% 9%
11% Others
Big Bazaar Shoppers Lifestyle Pantaloons

Stop Planning to open
45 stores across
Number of Cities 58 9 8 22 22 cities by FY13
Source: Technopak, news articles, Booz & Company analysis

becoming increasingly vocal in energy and plans to become carbon most important of these are packaging,
their protests against companies positive in the next few years. water-use, harmful emissions and the
which have been polluting the Such measures are forcing other impact of products on health. These
environment or not engaging in players to also involve themselves have been detailed below:
judicious use of resources. Some considerably in driving green
NGOs routinely monitor and practices. • Packaging: Primary and secondary
track the CSR efforts of FMCG packaging costs typically constitute
companies in India, driving • Channels: Some of the global approximately 8-10 per cent of
awareness and importance of such modern trade players have the total cost base for most FMCG
initiatives (see Exhibit 25). mandated sustainability players. A significant proportion
requirements from their suppliers. of packaging is polymer-based
• Competitors: Some FMCG Wal-Mart has been at the forefront and non-biodegradable. It has
companies have started pioneering of such initiatives. Such practices been observed that for essential
‘sustainability’ efforts. For example will soon be implemented in commodities such as milk, the
ITC has been publishing an annual emerging markets like India. packaging issue is not given much
report on sustainability and has importance by the consumers or
also conducted sustainability audit • Investors: Foreign investors have regulators; while for products such
of businesses and subsidiaries. also been driving the sustainability as snacks, packaging sustainability
HUL has been focusing on ensuring agenda in the companies they has attracted more attention.
sustainable practices in business. invest in by benchmarking with Hence, FMCG players should take
Nestle has initiated pollution-free global practices. a closer look at their packaging
waste disposal at manufacturing cost-base and try to eliminate or
plants, while Dabur has been Some of the top sustainability issues reduce the quantity of packaging
focusing on reducing energy worldwide have also been identified material used and upgrade to bio-
consumption, increasing renewable for the FMCG industry in India. The degradable packaging materials.
Exhibit 25: Karmayog CSR Rating of FMCG Companies Across India
DISTRIBUTION OF FMCG COMPANIES

ACROSS CSR RATINGS
25 41 43
0% 2% 2%
7%
20% 5%
26%
27%
28% 5
20% 23%
4
4%
3
2
48% 44% 44%
1
2007 2008 2009
Performance of FMCG companies is improving but

many are still in the lowest bracket
Note: 5 is the best rating and 0 is the worst rating on CSR performance
Source: Secondary research, Booz & Company analysis

• Harmful emissions: This is a • Rising costs of resources: Costs Wal-Mart has decided to sell only
problem area for FMCGs given of doing business will increase, concentrated laundry detergents,
these are logistics-intensive especially in areas dependent which require less packaging and
businesses that also release on natural resources. Many space for transport and storage,
greenhouse gases during their commodities have seen a high saving fuel and transportation costs
manufacturing processes. Since fuel degree of price volatility and while driving a green initiative.
scarcity in the future is likely and long-term forecasts indicate
transportation is a major GHG sky rocketing costs of natural Increasing Commitment Levels for
culprit, companies should strive to resources. Sustainability
make transportation more efficient Since the forces driving sustainability
and encourage usage of renewable • Affordable Green Technology: are compelling and enduring,
energy through use of hybrid Cost-effective green tech- every company should incorporate
vehicles for transportation. nologies are emerging, as is the sustainable business practices. This is
supporting ecosystem comprising not a business choice but a prerequisite,
• Water utilization: With depleting of researchers, regulators and particularly for major FMCG
groundwater and scarcity of other such personnel facilitating companies. More and more companies
fresh water, FMCG companies and supporting their development. realize that if they don’t address the
should resort to water-efficient Commercialization further green challenge in a rigorous way,
technologies during manufacturing, ensures the profitability, or at their costs will increase over time, their
and recycle used water. least the economic feasibility, of reputations in the market will suffer,
green initiatives. For example, and they will miss some of tomorrow’s
• Health impact of products: This is the widespread adoption of most valuable market opportunities.
a big concern for both consumers solar energy systems had long The three levels of sustainability based
and the government. It has been hampered by the high cost on the commitment levels of companies
been observed that increasingly, of photovoltaic (PV) cells per are described below (see Exhibit 26,
consumers are reading through kilowatt-hour compared with p. 42).
the nutritional information on other energy sources. But as
products, and becoming more the price of traditional energy Responsible Green: This is the least-
conscious of the harmful impact of skyrocketed, low-cost thin-film evolved level of green business, and
categories such as snacks and fast technology became increasingly is characterized by a limited and
foods. The FMCG industry needs commercialized and this has begun legalistic approach to sustainability.
to lead by example in this case and replacing first-generation crystalline Companies that pursue green at
shift towards healthier products. silicon PV installations today. As this level are focused on projects
solar energy’s cost per kilowatt- and initiatives designed to ensure
• Others: FMCG players should hour continues to drop, it is compliance with environmental laws
partner with suppliers which estimated that a larger proportion and regulations in the locales in which
provide green (organic) raw of the population will adopt this. they operate. They also respond to
materials, drive the usage of the green demands of value chain
renewable energy sources and more • Impact on top-line and bottom- partners (suppliers or retailers) they
energy efficient technologies such line: More and more business cannot afford to lose. At this level,
as CFL for lighting up offices and leaders are recognizing the fact that companies don’t develop capabilities
factories. going green can have a dramatic which support green, and may not
effect on their companies’ financial even have a dedicated environmental
Business Sense in Driving results. To capture this value, function. However, some managerial
Sustainability they use green programmes to attention is required for awareness of
Adopting green technology and eliminate waste and drive efficiency ever-changing regulations and market
processes has also started making throughout the enterprise and, in conditions. Also, some investments
economic sense for companies. more advanced cases, to create may be required to prove compliance
The following points enable better top-line growth by bringing new in terms of tracking and reporting.
understanding of how this has product offerings to market. An Most of the Indian companies are at
worked: example lies in organic foods. Also, this level of sustainability.

• Efficient Green: These companies value chain of the business and in product lifecycle through product
approach sustainability with a variety of new businesses and innovation, investment decisions, or
an internal focus, and strive business opportunities. Going marketing can go a long way towards
to simultaneously reduce for green at the differentiated creating a sustainable FMCG business.
environmental impact, lower green level requires significant
costs, and enhance operating investments of time, effort, and 3.8. Game-changing Technologies
efficiencies. They can take the form capital. The company can expect to 3.8.1. Trend Description
of a simple e-mail message asking obtain long-term paybacks in terms Technology, an all-pervasive factor,
office workers to voluntarily turn of more efficient operations, and is significantly impacting all facets
off their computers before leaving increased market share vis-à-vis of business. In the FMCG sector,
work or entail a rigorous effort competitors. technology facilitates front-end
to reduce waste by redesigning processes of business by creating
products. They can feature 3.7.2. Possible Strategies for FMCG consumer awareness, enables efficient
dedicated efforts and significant Players sales and distribution and runs back-
investments, but typically they Going forward, FMCG players will end processes like market research,
deliver relatively short-term need to make a choice in terms of generating shopper insights, gathering
payback. The key is to balance their sustainability efforts—either they business intelligence, supply chain
the investments—in resources, choose a ‘defensive’ or a ‘proactive’ management etc. It is believed that in
systems, and assets—with the likely approach. They can either wait for the the future, FMCG players will need to
payoff. Continued focus of senior regulations to evolve and compel them significantly increase their investments
leadership on costs and efficiency towards adherence to sustainability in technology and use it to derive
savings provides significant support norms, or grab the opportunity and competitive advantage.
for sustainability initiatives. start building a sustainable business
model to drive business advantage in Technology at the Front-End
• Differentiated Green: Differentiated the future. Including sustainability as Technology options for creating
green companies pursue green in a core business strategy and driving consumer awareness and promoting
a strategic way throughout the sustainable elements throughout sales have proliferated in the last
Exhibit 26: Levels of Commitment to the Environment
Differentiated Green
(Usage of sustainability to drive
Efficient Green
competitive advantage)
(Selective investment to drive
Efficiencies) • Elevate Green Strategy to a core strategy,
and not just a CSR initiative
Responsible Green • Leverage green to identify cost reduction / • Use the ‘green lens’ over the product life
(Compliance) efficiencies cycle, considering the environmental impact
• Companies can leverage lean principles to through the entire value chain
• Pursue green sustainability initiatives which attain this level • Integrate Green Messaging into brand
focus on regulatory compliance • This should be the base minimum for all positioning and messages
• Could be either government driven companies as there is significant money on • Manage trade-offs explicitly across growth,
• ...or value chain partner driven (supplier / the table (both cost and revenue) which can cost, sustainability, risk and service
retailer) be achieved
Source: Booz & Company Going for Green: A Capabilities Approach to Environmental Opportunity, Dec 2009

decade, with increased adoption awareness in future have been Isobar to manage its digital image on
of broadband the evolution of detailed below: Facebook and Twitter.
social networking sites as major
media platforms, and the growth Social Marketing: Social marketing • Benefits: Social networking sites
of value-added services on mobiles. sites such as Facebook, Orkut, provide a low-cost alternative
An increasingly young population Twitter, Linkedin etc are becoming to traditional channels or offline
coupled with increased participation increasingly popular, especially among business networking events which
of women in workforce have lent the youth. Facebook for instance has involve significant marketing
support to the adoption of new approximately 14 million Indian users expenses. The sites are interactive
consumer favouring technologies. at present. Similarly Linkedin, aimed and create a viral effect reaching
While print and television account at creating a network of professionals, out to a community of users who
for 86 per cent share in advertising has about 3 million users and India is are interacting with each other.
at present, internet advertising has one of its fastest growing subscriber
grown at approximately 30 per bases. Several FMCG players have • Leveraging social marketing
cent annually. The Indian youth is started targeting social networking sites for co-creation and sales:
spending most of their time at the sites for creating brand awareness. FMCG players can also leverage
television and on the Internet. Capital Foods has reported 30 per these sites for engaging with
As per estimates, Google products cent growth in revenue over the past consumers on product design and
account for 30 per cent of online time six months attributing its growth to sales imperatives. Apparel brands
spent by Indian consumers the advertising campaign it launched such as Benetton, Wills Lifestyle,
(see Exhibit 27). on Facebook. Amul has 52,000 fans Pantaloons and Van Heusen are
on Facebook and heavy traffic of tapping social networking sites as
Four platforms or technologies which discussions on its community page. design centres driving efforts of
could play a major role in consumer Perfetti Van Melle has appointed co-creation with end-users. The
Exhibit 27: Media Channels Consumption by Youth
(AGE-GROUP OF 13-35 YEAR OLDS, 2009)
MINUTES / DAY MILLION YOUTH
100 98 300
90
250
80
70
70
200
60
60
50 150
44
40
32
100
30
20
50
10
0 0
Newspaper Magazine TV Radio Internet
Average Time Spent # Youth Utilizing Channel
Source: National Book Trust-NCAER Survey 2009 across ~400 villages and ~200 cities, secondary research, Booz & Company analysis

contributions from users on various contest titled ‘Sprite Kholega to opts to receive a certain number of
features ranging from colour, Bolega’ in which all Sprite bottles ads per week. Blyk for instance is
textures to designs are welcomed. would have a code number printed an MVNO in the UK which sells
Also, some players such as ITC under the crown. When this code mobile network for free by giving
are seen pushing their online sales was sent as an SMS to a designated customers free airtime in exchange
for Wills Lifestyle through their phone number, the buyer could for accepting up to six advertising
member community on Facebook. win free talk-time ranging between messages per day. Blyk generates all
INR 50 and INR 5,000, and other of its revenue from advertisers and
However, given the nascent nature mobile freebies. ensures that it has a user base that
and untested efficacy of social advertisers will pay a premium to
marketing, it will be prudent to use • Advent of 3G: Historically, reach.
it complementarily with other offline the mobile has attracted low
channels for a holistic engagement. advertising expenditure because of Online Advertising: FMCG
its format of advertising—simple players have been increasing their
Mobiles as a Major Platform for text SMS or basic pictures. focus on online advertising with
Consumer Engagement: Mobile However, 3G will enable rich media expenditure on the medium growing
phone penetration in India has been content and video transmission approximately 57 per cent annually
increasing at approximately 75 per over the phone. About 100 million between 2006 and 2009, with
cent annually for the last five years. users are expected to have 3G further 30 per cent annual growth
Mobiles can be a very powerful handsets in 2012-13 up from the expected in the future. This is also
platform for consumer engagement current 20 million users. With in line with the expected increase
given their extremely wide reach. The 3G, advertisers would be able to in broadband penetration in India
number of mobile users is expected to subsidize the cost of downloading from approximately 3 per cent at
reach 900 million by 2014. Given the rich media content by subscribers. present.7 Leading FMCG companies
advent of 3G, value-added services For instance, a song from a new such as HUL, P&G, Cadbury and
will get increasingly enhanced. Bollywood film could be put up for Tata Tea have been ramping up their
download with an advertisement of online advertisement budget for
• Increasing Popularity of Mobile a soft drink company as a pre-roll specific brands. For instance, HUL
Advertising: Given the advantages or a mid-roll. Consumers could created an online campaign with its
such as direct and personalized download this song for free while Sunsilk Gang of Girls, while Tata Tea
communication, and a high the soft-drink company would pay came up with Jaago Re and Lipton
access to rural consumers who for the download. launched Stay Sharp. At present,
accounted for more than 100 FMCG players spend only 1-2 per
million subscribers in 2009, mobile • Approval for Mobile Virtual cent of their marketing budget on
advertising is seen to be gaining Network Operators (MVNO): online advertising. This is expected
popularity. Recently, the Telecom Regulatory to increase to 10 per cent in line with
Authority of India (TRAI) has global trends in the next few years.
• Marketing Campaigns on Mobiles: created the pathway for MVNOs
Several FMCG players have started to operate in India. Their entry Globally, as companies use the
creating marketing campaigns for can be expected to accelerate the online medium for enhancing brand
mobile phones. Cadbury came growth of mobile advertising in awareness, the advertisements become
up with an interactive campaign future, as they are dependent on more interactive. For example, in
which allowed students to check VAS and advertising to differentiate the US Pepsi runs online contests
their exam results using Reliance themselves from other service for Pepsi Max and Doritos wherein
India mobile service. If the providers. MVNOs provide consumers can upload 30-second
student passed, he got an SMS mobile phone services by buying commercials about Max/Doritos.
congratulating him saying ‘Pappu airtime from existing telecom There is online voting on these
Pass Ho Gaya’ along with the operators, which they then market advertisements and awards of up to
exam result and this encouraged by leveraging their brand and US$ 5 million are given to winners.
him to celebrate the moment with distribution network. MVNOs
a Cadbury Dairy Milk Chocolate. can even offer the entire mobile The internet can be a very powerful
Similarly, Coca-Cola started a service for free if the subscriber medium to target specific consumer

segments such as students who men, has partnered with Zapak for have been investing in technologies
comprise of approximately 30 per creation of ‘Axe Inxtinct’ for the for back-end processes.
cent of total internet users and urban brand to stay on top of its consumers’
professionals. minds. Coca-Cola has invested in customized
wireless hand-held devices for its sales
Growing penetration of credit cards The size of gaming advertisement in persons. The devices have wireless
in the economy will also boost online India was INR 9 billion in 2009. It receipts of the list of customers to be
purchase. At present, credit card is expected to grow three times in visited and other customer details.
penetration in India is just 2-3 per the next three-four years. Though They also allow transmission of
cent, while in the developed markets the penetration of gaming is low activity reports back to the office.
it is 10-12 per cent. compared to mass media such as Sales people can now spend two more
television and print, it is a powerful hours of quality time with retailers
Advertisements in Gaming: The tool for the marketers as the due to this technology.
gaming industry in India, though engagement level with the consumers
nascent, is INR 18 billion in size, is quite high. HUL has an internet-based supply
and is growing at approximately 40 chain management system which
per cent annually. A growing young Technology at the Back-End connects it to the redistribution
population, increasing affordability FMCG players can leverage stockists. This focuses on primary
of goods due to higher disposable technology for driving greater sales (HUL to stockists) and
incomes and low price of hardware efficiency in various back-end secondary sales (stockists to retailers)
and content (with game download processes. By deploying data- along with enhanced communication
prices coming down), proliferation capturing technologies at points- and has enabled release of inventory
of developers and publishers and of-sales, players can understand reduced field force time by 50 per
growing awareness through internet consumer purchase behaviour. cent, and ensured full time availability
and social media are some of the Similarly, for gathering business at retail outlet (see Exhibit 28).
factors leading to growth of this intelligence on competitors
industry. leveraging technology at the retail Wal-Mart globally has radio-
end is becoming common practice. frequency identification tags
Some FMCG players have already Supply chain management also has incorporated into products in stores
started testing waters in the gaming tremendous potential for driving which perform the same functions
advertisement world. Cadbury has efficiencies through tools of demand- as bar-codes thus enabling access
a Tetris-like game where bars of forecasting, production scheduling, to historical and geo-spatial details
chocolate are the building blocks, inventory optimization, logistics of the product. These are widely
while AXE, HUL’s deodorant for planning etc. Several FMCG players used in supply chain management
Exhibit 28: IT-enabled Supply Chain Management at HUL
Planning Hub
Manufacturing
Product Flow Supplier C&FA Distributor Kirana
Plant
IT Systems Central Unify Distributor Mgmt Hand-held Device

System
• Dispatch Daily • Production • Sales • Availability

Plan-weekly • Stocks • Stocks
• Dispatch Daily • Prices • Sales
• Invoicing
Source: HUL CLAS Conference Investor Presentation 2008, Booz & Company analysis

for improving efficiency of Food Adulteration Guidelines and foreign equity or 100 per cent
inventory tracking, cutting cost other such), and to providing specific for NRI and Overseas Corporate
of documentation, and enhancing incentives to priority industries. Bodies (OCBs) investment, is
efficiency of scheduling through geo- The Indian Government has enacted allowed for most of the food
positional tracking. several policies and Acts aimed at processing sector except malted
fostering the development of the food, alcoholic beverages and
3.8.2. Possible Strategies for FMCG FMCG industry. The government has those reserved for small scale
Players also been enacting several measures to industries (SSI).
Leveraging technology across the drive inclusive growth of the economy » Within retailing, FDI is allowed
value chain of product innovation, by targeting the economically and in single-branded retailing (up
manufacturing, sales and distribution, socially weaker sections and creating a to 51 per cent), and in cash-and-
and marketing can help FMCG platform to bridge the gap between the carry / wholesale business (up to
players derive various benefits in ‘poor’ and the ‘rich’. 100 per cent).
terms of designing better products
and becoming cost-efficient on the 3.9.1. Facilitating Growth of FMCG 3.9.2. Facilitating Consumer
one hand, and expanding the market Players: Supply Side Factors Demand
through better engagement with Historically, the government has The government has been playing a
consumers on the other. introduced policies aimed at attaining significant role in driving inclusive
international competitiveness through growth of Indian consumers through
FMCG companies can capture better reduced duties, automatic foreign direct measures such as decreased
consumer insights by deploying investments and food laws. Some tax rate and raised salaries (the Sixth
various technologies at point-of- positive regulatory triggers for the Pay Commission was lauded for its
sales and involving consumers in industry are mentioned below: recommendations in this direction)
co-creation processes through online which enable greater disposable
channels. • Food Processing and Agro Industry incomes to be available to the
» Recognized by the government consumers, as well as indirect welfare
Inventory management systems, as priority sector, industrial measures through employment
handhelds for capturing data, licensing exemption is extended generation, provision of education,
production planning tools and vendor to almost all products in this providing food security etc.
management tools could be used by category.
FMCG players to derive supply chain » Automatic investment approval • Increase in Disposable Incomes
efficiencies. and up to 100 per cent foreign » Income-Tax rates have been
equity is allowed in the industry. decreasing. The tax rate for
Various new platforms such as » For organized players, excise income of INR 0.6 million
internet, mobile, and media such duty benefit for 10 years from is down from 27 per cent in
as gaming have widened choices commencement of a unit is FY2003 to 9 per cent in FY2011.
for marketers. However, marketing offered. » Rise in salaries of government
efforts will need to account for the » Pricing benefit for unorganized employees through the Sixth Pay
specific consumer segment being players has been reduced with Commission. There have been
targeted. For efficient marketing, favourable tax scheme for payouts of INR 400 billion since
companies need to focus on the organized players, especially for 2008.
concept of ‘return from marketing biscuits, noodles, cigarettes.
investments’ or the top line growth • Rise in Rural Incomes
achieved per marketing rupee spent. • Exports » Rural expenditure by the
» 100 per cent export-oriented government has increased from
3.9. Enabling Policies units can be set up after INR 230 billion in 2006 to INR
The FMCG industry is regulated government approval. 830 billion in 2010.
comparatively lightly and in spite » The farmer loan waiver
of tremendous competition, the • Foreign Direct Investment scheme and the National Rural
government acting as the watch dog, » Automatic investment approval Employment Guarantee Scheme
limits its role to prescribing product (including foreign technology (NREGS) have driven increasing
norms to protect consumers’ interests agreements within specified incomes in rural areas (NREGS
(regulation on MRP, Prevention of norms), up to 100 per cent provided employment to

approximately 50 million homes cost of operation. Also, logistical in the supply chain. This creates,
in FY2010). delays can be avoided with the first, a monopolistic environment
elimination of multiple levels of in which the farmer does not have
• Increasing Awareness taxes, and mitigation of differences any say in determining the price.
» Right to Education is expected in tax structures across states. Second, the intermediaries, who
to result in increased awareness Consumption would grow with are fragmented, do not invest in
among consumers which will reduced prices. Tax collections modernizing the supply chain and
drive quality-consciousness from the FMCG industry will the warehousing infrastructure
among them. As per The also increase with increased tax remains poor. Logistics, specifically
Right of Children to Free and compliance and broad-basing of for perishable raw materials such
Compulsory Education Act products and services for which the as fruits and vegetables are ignored
2010, every child in the age- tax is levied. which results in huge wastage of
group 6-14 will be provided produce, or sub-standard products
eight years of elementary • FDI in Multi-Brand Retail: At which do not meet international
education, and any cost which present, no FDI is allowed in multi- standards. Third, food processors
prevents a child from accessing brand retail, which is preventing have to pay a higher price for
school will be borne by the global retailers such as Wal-Mart procurement, as the raw materials
State, which will have the and Carrefour from establishing go through several layers of
responsibility of enrolling the their retail operations in India. It intermediaries. To avoid this, all
child, and ensuring attendance has been seen that in developed the state governments are expected
and completion of eight years of markets, large organized retailers to come out with a policy to allow
schooling. have brought huge benefits to FMCG players to directly source
consumers by lowering the total agricultural raw materials from
3.9.3. Areas for Regulatory cost of supply chain operations. farmers.
Intervention Going forward, the government is
However, there are some areas in expected to change the FDI policy • National Food Security Act
which the government needs to come for multi-brand retail in India, (NFSA): This is expected to ensure
out with appropriate regulations, to allow more competition in the that the basic needs of the rural
such as introduction of GST, opening sector. poor are satisfied, and they can
of FDI in multi-brand retail, and have a better lifestyle by spending
stricter norms to curb counterfeit • Counterfeit Products: Counterfeit on discretionary products. The
products. These are expected to products pose a serious threat to NFSA will require the government
have a significant impact on how the the growth of FMCG industry. As to provide 35 kg of foodgrain at
FMCG sector performs in the coming per estimates, counterfeit goods INR 3 per kg to almost everyone
years account for 10-15 per cent of the (barring the rich) in one-fourth of
total size of the FMCG industry. To the poorest blocks of the country,
• GST: The government is expected the exchequer, these result in a loss and will cover 40-50 per cent of the
to implement GST in the near of INR 45 billion. The government people in the rest of the country.
future. This would help to replace is expected to come out with more
the multiple indirect taxes levied on stringent policies to enforce Trade • Ramping Labour Laws: India
consumer products (by central and Mark and Copyright Laws to has archaic and inefficient labour
state tax authorities). There will protect the rights of consumers and laws, with strictly defined norms
be several benefits of implementing FMCG companies. for work hours, over-time,
GST. A uniform and simple tax contract employees etc. These
would help in reducing prices of • Revamping Agriculture Products result in inefficient operations for
consumer products due to a more Marketing (Regulation) Act manufacturers. The government
efficient supply chain. Currently, (APMA): As per APMA, food needs to modernize the labour laws
FMCG players have warehouses processors are not allowed to buy to enable FMCG manufacturers to
in every state to avoid certain directly from farmers. As a result, improve their efficiency and lower
taxes, which results in a higher many intermediaries are involved costs of production.

4.1. Industry Paradigms in 2020 channels, they will have to renew
4 The FMCG industry in 2020 will be focus on traditional trade which
characterized by: will continue to retain its position
as the dominant channel.
IMPLICATIONS • Large Size: The Indian FMCG
FOR THE FMCG industry in 2020 is expected to • Environmental Concerns:
reach a size of INR 3700 billion– With increasing pressure from
INDUSTRY INR 5200 billion. As a major government, NGOs, and
contributor to economic growth in consumers for efficient and prudent
the next decade it will contribute use of environment and natural
close to 3 per cent of the GDP. resources, the FMCG industry will
need to significantly increase its
• Increased Product Complexity: efforts to drive sustainability as a
The market for FMCG products core business strategy.
is becoming increasingly
heterogeneous with evolution Significant among these factors are
of different consumer segments those that can force a complete
which have very different needs. break from existing paradigms.
One product will not be able to In addition, the confluence of
successfully target all consumer these change drivers—consumers,
segments and companies will have technology, government policy,
to make very difficult choices. and channel partners—will have a
They will either focus on one / a multiplier impact and magnify both
few niche segment(s) or straddle the magnitude as well as the pace of
various consumer segments with a change.
basket of product variants.
As with any transformational change
• Evolving Consumers: Consumers here too there will be winners and
are becoming more aware about losers. Many product categories
products and associated functions will grow rapidly (30-40 per cent
/ benefits. They are taking out time annually) given fast adoption rates
to learn more about the products across large market. Other categories
they should choose. This trend may mature and slow down to single
therefore can be expected to change digit growth rates. Similarly, the
buying behaviour and consumption competitive intensity will increase
patterns significantly and rapidly. significantly. There will be an urgency
to grab a share of what will, in
• Increased Competitive Intensity: ten years, be amongst the largest
Competition in the industry is consumer markets of the world
expected to further intensify with leading to a proliferation of products
regional players targeting national and services. New leaders will emerge
expansion, and more global players by leveraging tailored business
targeting the Indian market. models, relevant products, nimble
marketing, fast time-to-market, and
• Channel Evolution: The channel efficient supply chains.
choices in the industry are
expected to widen with increasing 4.2. Imperatives for the FMCG
penetration of organized retail Industry
and internet / B2C commerce. The transition from a stable and
While FMCG companies will homogenous operating model to
need to develop a detailed sales a more dynamic, unpredictable
and marketing strategy for these and rapidly changing operating

environment will have significant chain depending on their business of decentralization (region / state)
implications across stakeholders. offering and the target market. and extent of globalization. In the
The movement of consumers in and Very different business models are operating model design, companies
out of categories, the changes to required for targeting the premium will also need to drive efficiencies
the structure of consumption across segment, the middle class, and in time-to-market and ensure that
segments and the co-existence of bottom-of-the-pyramid consumers. decision rights are properly defined
seemingly conflicting attitudes to Business operations too differ when to ensure quick decision making in
consumption will create a level of consumers of different age-group reaction to changing consumer trends.
complexity and challenge never / regions / genders are targeted.
seen before. Winning in this new FMCG companies will need to build For those who operate across a
world will require enhancing current capabilities across the value chain for spectrum of markets and segments,
capabilities and building new ones to the specific consumer segment which it will be crucial to evaluate where
bridge gaps. they target. Strategies of targeting they should disaggregate their
consumers belonging to different business models in order to deal
In our view, in this new world, income classes are illustrated below effectively with both new as well
FMCG companies will have six (see Exhibit 29). as mature segments. They will also
imperatives from the perspective of need to figure out areas where scale
business strategy. Hence, going forward, FMCG and integration can give them more
companies will need to manage advantage. This will have implications
4.2.1. Disaggregating the Operating an increasingly complex operating on the way all aspects of the business,
Models model depending on the set of from distribution to marketing to the
FMCG players are facing divergent choices they make in terms of target supply chain are configured
choices at each link of the value market, product offering, extent (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 • Large variety, • Targeted media - niche • High-touch model -
Premium • Product with high ingredients/products customized solutions magazines, brochures, company-owned
Product for efficacy, using break- • Out-bound logistics • Low production etc. outlets
the Affluent through technology customized as per • Branding to create • High service -
customer preferences ‘differentiation’ dedicated sales force
• Low investment in R&D • Ensure availability of • Few unit sizes • Use of mass media - • Low-touch model
Standard • No customization products at point-of- • Mass production TV, national newspaper with focus on
Product for sales through efficient expanding reach
Mass inventory management • Discounts/promotions
Consumption
to drive penetration
• High investment in R&D • Achieve low cost through • Customized to produce • Use of local media - • Shared Channel
Customized • Low-cost no-frills partnerships/alliances ‘smaller’ SKUs outdoor advertising • Local people used for
Product for adapted to local • Low-cost driven by (banners), NGO sales
BOP Market preferences shared facility/low volunteers
rentals/high utilization

4.2.2. Winning the Talent Wars Institutes of Management, while 30 performing employees (with monetary
With accelerating growth in the sector per cent students took up marketing and non-monetary incentives) along
in terms of more products, brands, jobs from campus in 2003, the with quick career progression.
categories, geographies of operation number decreased to 15 per cent in
etc, the demand for human capital 2010. With new industries scaling 4.2.3. Bringing Sustainability into
is going to increase significantly. up and offering more attractive the Strategic Agenda
Also, higher quality of talent will be value propositions, this percentage While the other stakeholders,
required to deal with the increasingly will continue to reduce. Talent consumers, government, and
complex Indian market. Two key scarcity is expected to intensify in the channels, will need more time to
areas of emphasis will be attraction of future, and the industry will need to prepare for driving the sustainability
the best available talent and ensuring devise an attractive employee value agenda, FMCG players will need
development and retention of the proposition for bright graduates to to proactively start building a
acquired talent. acquire quality talent. sustainable business model to drive
competitive advantage in the future,
With increasing employment choices Retention is equally important instead of simply complying with
available to students, the FMCG as traditionally, the industry has stipulations and regulations. The
industry is likely to face a talent continuously lost key talent to other principles which can help FMCG
crunch in both acquisition and growing / high-paying industries such companies achieve this are:
retention. In colleges, students prefer as telecom and the financial sector
high-paying jobs which require desk- in the absence of suitable rewards 1. Sustainability as a Core Business
work rather than physically strenuous and recognition. A key challenge Strategy: Sustainability should be
sales jobs in FMCG companies. As a will be to maintain employee loyalty, an integrated element at the core
result most of the bright students do hence companies will need to of the overall strategy of a firm.
not even apply to FMCG companies. focus on employee segmentation to The products should be green,
For instance, in one of the Indian disproportionately reward the top- they should be marketed as green,
Exhibit 30: Key Challenges in the Future Operating Model
• One company vs. multiple

• Increasing complexity in front- separate companies for
end and back-end technology different target markets
• Avoiding duplicity across • Very different levels of control
businesses and decision rights
Technology
Structure
• Ensuring knowledge sharing /

transfer across portfolios
Knowledge
People
• Building workforces (value,

mass, premium) with very
different capabilities
• Managing different business • Different human capital
processes Processes management processes
• Leveraging synergies across
businesses / portfolios

and a substantial portion of the INR 5 million must include a Across the globe, companies are
company’s revenue should be come review of the sustainability issues migrating away from traditional paid
from the sale of green goods. To and opportunities surrounding the advertising towards ‘below the line’
achieve this, sustainability must request. media and marketing programmes
be on the agenda of the senior that put them in direct contact with
leadership, established as a cultural 5. Integrating Sustainability into consumers. In India, new platforms
trait within the company, driven Marketing and Messaging: have emerged in the form of mobile
across the organization. Companies should develop phones; with planned investments in
consistent messaging about broadband there will be significant
2. Sustainability in Product their sustainability efforts and increase in online usage. This shift
Innovation: FMCG players should incorporate them into their is giving rise to a new generation of
embed green in their innovation communications at all levels. customized marketing platforms,
efforts. Because sustainable In this way, they attract and transforming the way in which
initiatives require new ways of inform stakeholders, including consumers experience advertising and
looking at problems, companies customers, employees, investors, establish relationships with brands.
could leverage innovation and new and regulators. The sustainability
product development best practices index for consumer products that Digital marketing platforms will
to support their green initiatives. Wal-Mart has announced is a be a big part of this strategic shift.
good example of how sustainable They will redefine what it takes
3. Using the Sustainability Lens initiatives can be structured and to succeed in building brands and
throughout the Product Lifecycle: communicated in ways that bolster reaching customers. Companies will
Companies should view the entire corporate credibility. Similarly, need to use emerging technology
product lifecycle through a green PepsiCo India has annual reporting in new assets such as databases,
lens. They should seek ‘cradle-to- on sustainability as a part of its websites, and branded content. They
cradle’ lifecycles in which products global initiative, with impetus will need to develop new analytical
or their content can be used again on reducing water and electricity models to measure the effectiveness
and again with zero waste. A good consumption, and improving of media spending. They will also
example is Nike’s idealistic long- packaging. need to manage the integration of
term vision of sustainability—‘to advertising planning, media buying,
design products that are fully 4.2.4. Reinventing Marketing for promotions management, and other
closed loop: produced using the ‘i-Consumers’ tasks currently handled by multiple
fewest possible materials, designed Deep consumer understanding and agencies.
for easy disassembly while allowing interaction has always been at the
them to be recycled into new heart of the FMCG sector. Going Companies that build these
products or safely returned to into the future, marketing will need capabilities will find that their
nature at the end of their life’. to target individual consumers who marketers can play a more strategic
want customized products, as well as business role. Yesterday’s marketing
4. Sustainability Driving Major consumers who are spending more organizations used to stick to
Decisions: The implications of and more time online, hence the tactical functions to support strategic
companies’ choices in terms of term ‘i-consumers’. Many companies decisions that had already been
environmental impact should periodically engage with consumers made. Tomorrow’s marketing leaders
be assessed and the trade-offs through surveys, focus groups, will help set the strategy for major
involved in all major decisions, test markets, product testing and advertising, promotions, and public
including sustainable programmes other mechanisms. Similarly FMCG relations campaigns, and serve as
(renewable energy sources companies have been significantly growth champions in the development
and recycled materials, energy large users of advertising mediums of brands, products, and new
efficiency and material yields) (print, television and outdoor) to businesses.
should be weighed against communicate with their consumers.
risk, cost, growth, and service/ In the rapidly evolving environment Over the next few years, FMCG
quality. PepsiCo has incorporated it becomes more critical to know, marketers will look to shift their
sustainability as a criterion in respond to and communicate with the creative and media strategies to fully
its capital expenditure filter. All consumer. capitalize on the online opportunity
capital expenditure requests over and make digital media a bigger

priority in their brand strategies. much packaging is required for materials. Now suppliers routinely
In India, mass marketing through the finished product, and what provide a broad set of materials
traditional print and television will changes in material choice or and services. They also participate
continue to play a role in driving manufacturing process would in product development efforts by
increased awareness, but marketers reduce material and energy usage sharing ideas as well as making
will need to develop their presence would be important decision investments in new processes and
in interactive channels that not points. It is essential to understand technologies.
only drive greater brand awareness the economics of product and
but also enable new insights into process choices before considering 4.2.6. Partnering with Modern Trade
consumers. supply chain changes. Small Modern trade is still at a nascent
changes to such inherent factors stage in India. The share of
4.2.5. Re-engineering Supply can create large market and cost modern trade in retail last year was
Chains8 impacts. approximately five per cent. However,
As consumer behaviour shifts across it has been growing very rapidly since
segments, re-engineering the supply • Restructure the supply chain at approximately 25 per cent and
chain will be critical to stay abreast network and footprint: Once is likely to contribute nearly 25 per
of these changes and reach an product and process choices have cent of the total retail sales in India,
increasingly fragmented customer been reconsidered, the supply becoming a very critical partner.
base. Supply chains are already network needs to be realigned to This will be more critical for many
under pressure to deliver at lower balance cost, service, risk, and categories which even today derive
costs and offset generally rising costs sustainability in meeting market significant sales from this channel
for raw materials and energy. This demand. Changing regulation, given the consumer base.
pressure may intensify even further as specifically GST, as well as new
governments (either nationally or at areas of demand acceleration, such FMCG companies and retailers have
the state or city level) put a price on as eastern India, will need to be started on a somewhat adversarial
carbon emissions and establish new incorporated. The challenge for note. Uncertainty about the business
regulations on waste. Changing tax manufacturers is to make the right models (store formats) as well as
laws with the implementation of GST footprint trade-offs not only for consumer reactions coupled with
would lead to simplification and more today but also for an uncertain traditional mistrust have been
uniformity. tomorrow. Successful companies contributors to this uncomfortable
will build more flexibility and partnership. Negotiations over price,
Today’s supply chains were built on adaptability into their networks promotional support, and marketing
yesterday’s blueprints, in a world with investments in technologies budgets, among other persistent
where low energy and transportation and assets that can react to changes areas of disagreement, often result
costs, cheap labour, relatively in demand as well as variability in in damaged relationships and minor
inexpensive raw materials, complex factors like labour costs and energy gains—only to have the fights resume
tax laws and scarce environmental use. the following year.
regulations were fixed assumptions.
The supply chain of the future, by • Realign the role of suppliers and For more than a decade, retailers and
contrast, will have to be leaner, third parties: In an environment suppliers in many developed markets
greener, and more tailored to manage of increased uncertainty, close have tried to learn to collaborate
increasing complexity. collaboration between supply more and move beyond the old zero-
chain partners has become more sum games. Their initiatives have
This will require three key actions: important than ever. Pressures felt included assigning ‘captains’ to work
by manufacturers—higher material with each other on ways to drive
• Rethink product and packaging costs, sustainability requirements, category growth and forming industry
formulation: Companies will supply and demand imbalances, groups (such as Efficient Consumer
need to consider their choices product safety issues, resilience Response and Collaborative Planning,
in product design and process and environmental concerns—are Forecasting, and Replenishment) that
technology—the inherent drivers shared by suppliers. Today, the pursue supply chain optimization. Yet
of cost, sustainability, and risk. role played by suppliers has gone despite all the hard work, only partial
What ingredients are used, how well beyond merely providing raw success has been achieved.

Retailer–supplier partnerships have within the reach of collaborative growth of the industry towards a
failed primarily because buyers tend retailer–supplier relationships as well win-win situation for all (see Exhibit
to view their value in a limited way: . 31, p. 54).
purely as a means of extracting lower Moving from a supplier to a partner
prices or extra-promotional dollars will require FMCG companies to 4.3.1. Government
from FMCG suppliers in their yearly pay careful attention to how they The FMCG industry supports many
negotiations. Buyers often walk away structure their relationship. They may social objectives and plays a key
from a negotiation feeling successful, reap rich rewards if they were to: role in driving economic growth
unaware that their victory may by providing significant direct and
well have been compromised by the • Generate a full basket of indirect employment opportunities,
failure to address issues that could possibilities, but home-in on a few making vast contributions to the
have much more impact on retailer prioritized opportunities that are exchequer, and supporting growth
and supplier profits, such as in-store critical to both businesses. of agriculture through backward
availability. The shelves are still not linkages. The government has taken
fully stocked, and what seemed like • Establish an open dialogue, several steps towards inclusive
a highly profitable day’s work is but ensure that the terms of all growth of the FMCG industry by
actually only a slightly larger share of agreements are explicitly defined supporting the demand growth, which
a smaller pie. upfront. should be continued in the future.
However, on the supply side, there
The nascent stage of modern trade • Create transparency by sharing are a few areas which need regulatory
in India provides FMCG players benefits, costs, and information intervention to unlock the break-
and also the retailers with a unique openly, but build in appropriate through potential of the industry.
opportunity to learn from global confidentiality measures. These include implementation of GST
models and get to a win-win position which can save FMCG companies
at a faster rate. The benefits of • Set both short- and long-term from multi-layered taxes and drive
collaboration include: agendas with supply partners to long-term efficiencies in supply
capture value quickly but still chain; allowing FDI in multi-brand
Revenue-margin enhancement: pursue the big ideas. retail which will enable large global
Working jointly to harness retailers to bring best-practices to
complementary skills and apply the • Gain top-level support, but stay India; enforcing regulations to curb
knowledge needed to grow a category focused on the execution. counterfeit consumer products which
can be a win-win proposition. This will significantly reduce economic
effort can be as simple as linking • Be more open with all suppliers, loss to the industry; revamping the
the supplier’s consumer insight but choose collaboration partners Agriculture Products Marketing Act
to the retailer’s proper process wisely. to allow food processing players
improvement. A wide range of to buy directly from the farmers;
supplier-related processes can be 4.3. Implications for Other and revamping labour laws to
improved by more collaborative Stakeholders drive efficiencies among FMCG
retailer–supplier relationships, While FMCG companies will have manufacturers.
including promotion planning and to significantly change to meet
execution, demand forecasting, and the requirements of the evolving 4.3.2. Retailers
stock replenishment. One of the best industry, this will also have an As discussed earlier, retailers and
sources of information for improving impact on the entire ecosystem and FMCG players have a symbiotic
these processes is the retailer’s point- other stakeholders. We have broadly relationship and need to co-operate
of-sale data. divided the stakeholders in the FMCG with each other for smooth
industry into these five entities— operations and growth enhancement.
Supply chain improvements: More FMCG players, government, retailers, Both traditional retailers and
efficient distribution, streamlined NGOs and investors. organized retailers will need to
inventory, increased product collaborate with the FMCG players
availability, and improved Each of these stakeholders will need for driving breakthrough growth
merchandising operations are all to play a key role to support the in the sector. They should focus on

co-investment in technology and practices, while driving overall FMCG rural markets, acting as financial
improvement of infrastructure. growth. enablers by giving credit to small
For the traditional retailers, better retailers / entrepreneurs and through
infrastructure is required at the point- 4.3.3. NGOs other measures.
of-sale which ensures uninterrupted NGOs which act as the guard rails of
electricity, IT infrastructure for the FMCG industry can have a major 4.3.4. Investors
capturing sales and collection. For the role to play in driving sustainability Global as well as domestic investors
organized retailers, while the focus efforts. Going forward, NGOs should seriously consider the
has to be on increasing efficiency and would need to act aggressively as Indian FMCG industry for future
driving differentiation, investment in the sustainability gatekeepers, and investments given the highly attractive
supply chain and greater partnership increasingly monitor and track the market. Also, along with market
with suppliers for the overall category industry to ensure that best-practices expansion, investors will need to
development will be required to are highlighted and sustainability monitor FMCG companies, tracking
derive long-term economic benefits. agenda is not ignored. Secondly, their expenditures to ensure that the
Also, organized retailers and FMCG NGOs can indirectly continue to bottom-line growth matches / exceeds
players can share talent and best enable expansion FMCG offtake into the top-line growth.
Exhibit 31: FMCG Industry Stakeholder Map
FMCG
Players
Government Retailers
NGOs Investors

Endnotes
1
The FMCG industry has been defined to include these categories: food products, personal 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 rates 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 document.
2
According to Rostow, it is possible to identify all societies, in their economic 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
4
L’Oreal Deutsche Report, MSN News.
5
Source: Euromonitor
6
http://www.thehindubusinessline.com/2010/04/20/sories/2010042053960500.htm
7
Booz & Company, Bring Mass Broadband to India: Roles for Government and Industry, 2010.
8
Booz & Company, Next Generation Supply Chains, 2009.
About the Authors
Abhishek Malhotra is a Partner with Srishti Chaudhry is a senior consultant with

Booz & Company and is based in Mumbai. Booz & Company and is based in Gurgaon.
He leads the Consumer, Media & Retail She has experience in growth, financial plan-
work for the firm in India. ning and business transformation aspects of
Abhishek has 13 years of consulting consumer products, energy and healthcare
experience with Booz and his main focus industries. Srishti studied business manage-
has been business transformation and ment in the Indian Institute of Management,
operations strategy with experience in con- Ahmedabad.
sumer, media, retail and industrials products.
He has participated in engagements in Asia,
Australia, Europe, and North America.
Abhishek received his MBA from the
Indian Institute of Management, Ahmedabad,
India and his BE in Electronic Engineering
from Punjab Engineering College,
Chandigarh, India.
Vikash Agarwalla is a Senior 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 years of management con-
sulting experience and his main focus has
been business transformation and operations
strategy with experience in consumer, media,
retail and industrials products.
Vikash received his MBA from the Indian
Institute of Management, Lucknow, India and
his BE in Mechanical Engineering from Delhi
College of Engineering, Delhi, India.

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Confederation of Indian Industry

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Disclaimer and Confidentialities

Published by Confederation of Indian Industry, Northern Region

CONTENTS Message from Conference Chairman 3

2 FMCG Roadmap to 2020

FMCG Roadmap to 2020 3

4 FMCG Roadmap to 2020

FMCG Roadmap to 2020 5

6 FMCG Roadmap to 2020

FMCG Roadmap to 2020 7

Exhibit 2: Selected Category Growth

Source: IDFC Institutional Research, Euromonitor, Booz & Company analysis

8 FMCG Roadmap to 2020

Exhibit 3: Sales Growth – FMCG Players

Player Average Large Indian

Foreign MNCs Regional / Small Domestic

Source: CMIE, Booz & Company analysis of ~100 FMCG players

FMCG Roadmap to 2020 9

Exhibit 4: Key Drivers of the FMCG Industry in India

GDP Growth ~7% 8-9%

Population Growth 1.5% 1.2%

• ~14% annual growth • >15% annual growth

• 2.3% urbanization • 2.5% urbanization

10 FMCG Roadmap to 2020

Exhibit 5: FMCG Growth Ladder

Demand INCREASING UNFORESEEN

• Population growth • Increasing • Using premium,

Supply Modern Trade + Technology Investments + Regulations

FMCG Roadmap to 2020 11

Exhibit 6: Growth Scenarios of FMCG Sector

FY10E FY15P FY20P

Source: News articles, Booz & Company analysis

12 FMCG Roadmap to 2020

Exhibit 7: Key Trends Shaping the FMCG Market in India

1 Accelerating Premiumization 4 Rapid Globalization

Source: Booz & Company analysis

FMCG Roadmap to 2020 13

Exhibit 8: Household Distribution by Income and Profiles of Affluent Consumers in India

HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME AFFLUENT CONSUMERS

• Rich: Spend high

64% < INR 0.2 million

Source: McKinsey Global Institute, NCAER, Booz & Company analysis

14 FMCG Roadmap to 2020

‘Many consumers are likely to indulge

FMCG Roadmap to 2020 15

Exhibit 9: Estimated Age Distribution of Indian Population, 2010

20% >60 Yrs

Source: United Nations; Booz & Company analysis

16 FMCG Roadmap to 2020

Lately, in the oral hygiene category,

FMCG Roadmap to 2020 17

Exhibit 10: Evolving Needs of Middle Class Consumers in India

HOUSEHOLD DISTRIBUTION BY ANNUAL INCOME MIDDLE CLASS CONSUMERS

Evolving Needs: Increasingly

64% < INR 0.2 million

Source: McKinsey Global Institute, NCAER, Booz & Company analysis

18 FMCG Roadmap to 2020

‘In the skin category, there have