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[saurabh (mahajan)]

hey fmcg maniacs..lets be updated about an industry which touches everyone everyday..so share your knowledge here..

In this article, we talk about the FMCG sector and what has made it the darling of the markets. It must be noted that the FMCG index had been underperforming the benchmark indices since a couple of years.

What's the growth driver?
Growth in the FMCG sector is being witnessed in urban as well as rural areas. It must be noted that 70% of Indian population lives in 627,000 villages, creating a huge market for FMCG companies and a market which they cannot afford to overlook. India's two largest companies, ITC and HLL, have already set shops for their rural patrons.

ITC, which commands about 70% of India's Rs 120 bn domestic cigarette market, has 6 out of the top 10 brands in India coming from the company's stable. However, the growing awareness on harmful effects of tobacco as well as the government's punitive tax policy forced ITC to move towards de-risking its revenue profile. Consequently, it merged the paperboards subsidiary with itself and invested in growing the hospitality, retailing, packaged foods and IT businesses.

The ITC group has emerged as the second biggest luxury hotel chain after Indian Hotels. In packaged foods, its product range includes ready to eat (Kitchens of India), staples (Aashirvaad Atta and Salt), confectionery (Mint-O and Candyman) and biscuits. ITC has also entered into garment retailing and has 42 Wills Lifestyle stores. Other initiatives include greeting cards (20% market share), safety matches and incense sticks.

On the other hand, HLL is India's largest FMCG company with a dominant presence in almost all consumer categories. The company's turnover at Rs 100 bn is over one third of the total branded/organized FMCG business in India. HLL's brand equity remains unrivalled in India. In the last couple of years, HLL has embarked on a major restructuring exercise focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs or spin-offs.

Latent demand?

Mkt size (Rs bn) Per-capita (US) Per-capita (others) Per-capita (INDIA) Per-capita (excluding BPL) India
Tobacco (Cigarette sticks) 142 2,082 1,790 117 189
Toothpaste (gms) 26 518 262 107 173
Personal Products(gms) 40 1,475 1,100 460 742
Detergents(kgs) 45 10 2.0 2.5 4.0
Bread and Biscuits(kgs) 80 4 0.8 0.5 0.8

* Source : (Newspapers/Equitymaster Research )

As can be seen from the table above, per capita consumption in India for every FMCG product is amongst the lowest in the world, even after eliminating Below Poverty Line (BPL) people who account for 38% of the country's total population. Hence, one can compare our consumption as against USA or even countries like Thailand or China and a back of the hand calculation will tell you all.

What's the scene like now?
Today, the FMCG sector is the fourth largest sector in the Indian economy with an estimated total market size of around Rs 450 bn. Further, the growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumer's mindset and offer new generation products, they would be able to generate higher growth. For example, Indian consumers used to wear non-branded clothes for years, but today, clothes of different brands are available and the same consumers are willing to pay almost 5 times more for branded quality clothes. It's the quality and innovation of products, which is really driving many sectors.

So what should investors do now?
In our view, testing times for the FMCG sector are over and rural penetration is the key, which is currently extremely low, as venturing into these markets is an expensive affair owing to infrastructure constraints, thus making distribution a barrier. Although companies like HLL and ITC have started Project Shakti and E-choupal respectively, but have not been able to tap the rural market significantly. Owing to the vast growth potential of the sector, companies like Reliance have also decided to jump onto the bandwagon and open retail chains. All these developments come as no surprise. With 12.2% of the world population living in the villages of India, the Indian rural market is a market that is hard to miss.

[abhishek1711 (shah)]

[abhishek1711 (shah)]

FAST Moving Consumer Goods (FMCG) sector will witness more than 50 per cent growth in rural and semi-urban India by 2010, according to an analysis carried out by the Associated Chambers of Commerce and Industry of India (Assocham).

In totality, it is projected to grow at a CAGR (compounded annual growth rate) of 10 per cent and increase its market size to Rs 100,000 crore from the present level of Rs 48,000 crore.

The growing penchant of rural and semi-urban folks for FMCG products will be mainly responsible for this development, as manufacturers will have to deepen their concentration for higher sales volumes.

In the rural and semi-urban areas, FMCG market penetration is currently less than 1 per cent in general as against its total growth rate of about 6.2 per cent, the President of Assocham, Mr Mahendra K. Sanghi, said while releasing the analysis.

The analysis is based on the feedback obtained from various district industry centres all over the country on the future demand-supply situation of FMCG products.

Mr Sanghi said the Indian rural market with its vast size and demand base offered a huge opportunity that FMCG companies cannot afford to ignore. With 128 million households, the rural population is nearly three times the urban.

Though the rural and semi-urban demand of FMCG products will grow, it will put a severe pressure on the margins of manufacturers of FMCG products due to cut-throat competition, finds the analysis. Companies in the sector to benefit will include known names such as Nirma, HLL, Dabur, ITC, Godrej, Britannia, Coca-Cola, Pepsi, among others.

The chamber is of the view that the rural market may be alluring but it is not without problems such as low per capita disposable incomes and large number of daily wage earners.

Some of the other problems associated with rural markets are acute dependence on the vagaries of the monsoon, seasonal consumption linked to harvests, festivals and special occasions, poor roads and power problems.

The other difficulty that FMCG companies are likely to face is that of logistics. India's 627,000 villages are spread over 3.2 million sq km. Delivering products to the 750 million Indians living in rural areas will be a tough task.