Drivers and Inhibtors
1. Disposable Income: There is increase in disposable income, observed in both rural and
urban consumers, which is giving opportunity to many rural consumers to shift from
traditional unorganized unbranded products to branded FMCG products and urban fraternity
to splurge on value added and lifestyle products. The increasing salaries, along with rising
trend of perks in the corporate sector at regular intervals, have increased people’s spending
power. As per some research, there is a high correlation between Disposable per capita and
HPC per capita.
2. Organized Retail: The emergence of organized retail have lead to more variety with ease
in browsing, opportunity to compare with different products in a category, one stop
destination (entertainment, food and shopping) etc, which is playing an important role in
bringing boom in the Indian FMCG market. Out of India’s total retail sector size of $450 bn
organized retail contributes to nearly 6% and this figure is pegged to reach 25% in 2025. This
clearly indicates that there is immense potential for growth for FMCG companies. Also, as the
credit card and organized retail trend picks up, people won’t think much while buying and
buy more.
3. Distribution Depth - Rural Penetration:
70% of India’s population lives in rural areas which amounts to 815mn people, transalating to
151 mn households. This base is itself equivalent to the population of US, UK, France, Japan,
Italy and Germany put together. As per the Census 2001, out of 593,731 villages , 17% OF
THEM HAVE A POPULATION of 2000+. The majority of the 62% rural retail infrastructure is
located in these villages. This offers an immense opportunity for the marketers to capitalize
on their presence and make theproducts available.
Rural India contributes to over 54% of India’s GDP. As a measure of monthly monthly
expenditure, the rural India is 55% of the total national monthly per capita
expenditure(MPCE). Suprisingly, its non food item spends are equivalent to the urban
counterpart.
At the national level rural share is about 34% of the total FMCG sales. As per Nielson study the
rural contribution to FMCG sales is much higher in states that have significant rural
population. Within this segment the personal care products grew in rural areas than the urban
areas during the period Jan-May 2010. We can notice a good growth in rural demand in
different sectors like rural durable goods market is growing at 25% vis-à-vis 10% of urban
durable market. Similarly rural and semi urban market contribute to 40% of the sales of auto
industry.
As per NCEAR the lower middle class in the rural areas has been shrunk by 2/3 in the last 15
years. Even the scenario of the occupation has changed drastically. Apart from agriculture,
manufacturing, self employment,contruction and other servicesghas also been a contributor
in the rise of earnings and thus more disposable income of rural India.
As per neilson report the FMCG market in India grew by 14% in 12 month ending N0vember
2009. The rural demand accounted for 18% of the growth while urban only 12%. This clearly
shows tht rural India is poise to be a driver for the FMCG sector.
As it can be seen in 2009, rural grew more than urban. Though the non food category has
been at the same level, the FMCG growth is driven by the food category.
Value Contribution % FMCG sales (Rural)
High Utensil Cleaner, Biscuits, Washing
>22% Chocolates, Noodles Powders, Packaged
and Vermicelli tea, Non Refined oil,
Iodinized salt, salty
snacks
Medium Hair dyes, milk Detergents Bars, Skin
Rate Growth %
>=14% to <=22% powder, tooth Creams, Hair oils,
brushes, digestives. beverages, mosquito
repellants, milk
foods.
Low Talcum Powder, Toilet Soap, tooth
<14% safety razor, tooth paste, refined
powder, analgesic edivble oils,
tab, coffee shampoos, vanaspati
To <= 1% >1%
Low High
(source: Neilson Audit)
From the above chart we can see that the lifestyle products contributed significantly and
therefore big growth potential. Detergent bars, beverages, milk food, branded biscuits and
packaged tea moderate to high acceptance.
The Government of India through its various initiatives and sponsored schemes like national
Rural Employmetn Guarantee Act (NREGA), Sampoorna Grameen Rogar Yojana (SGRY),
Pradhan Mantri Gram Sadak Yojana (PMGSY) and Swarnajayanti Gram Swarojgar Yojana (SGSY)
is funding the rural development and fuelling its growth. A total of INR 535 was allocated in
2009-2010 alone and the allocations have more than double in the last 4 years. The
correlation between the Govt. Expenditure and FMCG value offtake from the following chart.
(Source: Neilson Analytics)
Development of support services is critical to foster growth. From the above data we can
infer that huge investments in infrastructure projects, education sector has led to an positive
outcome which has the ability of creating more employment opportunities and will boost the
rural economy.
4. Buying Pattern Shift: The crisis of declining FMCG markets during 2001-04 was driven by
new avenues of expenditure for growing consumer income such as consumer durables,
entertainment, mobiles, motorbikes etc. Now, as many consumers have already upgraded,
their income is being directed towards pampering themselves.
5. Favorable Indian Economy & Demographics: 45% people in India are under 20 years of
age. Per capita disposable income has increased from $550 to $600 in 2007 (9% increase). The
Indian economy entered 2009/10 against the backdrop of a significant slowdown in growth rate, with
the GDP growing at just 6% during the second half of 2008/09. A delayed and severely sub-normal
monsoon coupled with continued recession in the developed world for the better part of 2008/09 served to
exacerbate the macroeconomic context. Yet, the economy staged a remarkable recovery to grow at 7.2%
during the year.
he MGI (Mckinsey Global institute) report said that Indian private and public consumption would
increase four fold to us$1.5-trillion by 2025. Additionally, MGI said that over the 20 year period
from 2005 to 2025 Indian household income would grow an average of 5.3 percent annually.
number of middle class Indian households stands today at 50-million. MGI says this number will
grow to 583-million by 2025. This clearly shows that the rising middle class will also contribute
as the biggest growth driver for the FMCG sector.
Inhibtors
Inflation
The last few years were a golden period for the FMCG industry. The economy was growing
at a faster rate, input prices were low, and inflation was low.
This year the food inflation is really very high. While the overall wholesale price index (WPI) based
inflation was 9.9% on a year-on-year basis in March 2010, food inflation was as high as 16.6%, reflecting
the severe adverse impact of a deficient monsoon. Iinflation in non-food manufactured products has also
rised to 4.7% in March 2010 from (–) 0.4% in November 2009.
Due to this the raw material cost has increased upto 15 to 20 percent compared to last
year. The operating margins which are typically about 20 percent in the last few years have
seen a drop to almost 16 percent.
High food inflation has an adverse affect on the FMCG industry. People will spend less
money on discretionary items which will hit he FMCG industry.
High input costs are another worry for existing woes. The cost of milk powder and sugar has
gone up by 35 percent and 19 percent YOY. Companies like Nestle India is really struggling
on its margins. The wheat used in ITC’s biscuits is up 10-15 percent this year, the Copra
used by Marico cost 10 percent more, the coconut and palm kernel oil used by Godrej
Consumer has risen by 15-20 percent, and the menthol used by Emami has gone up by 20
percent. So, maintaining the margins is a tough task for the companies. The packaging cost
which is very important in the FMCG sector has shot up by around 10 percent this year.
Even the rising crude prices will effect the inflation and restrain the growth of the FMCG
sector.
Tax structure
At almost 30% , taxation levels in India are much higher benchmarked internationally. Also,
the tax structure creates logistical delays because of its multi level system at central and
state levels, with each state itself having different taxation structures.
This reduces the efficiency of the FMCG companies and thus is an inhibitor in the FMCg
sector.
Counterfeit Products
Lack of enforcement of Trademark and copyrights laws counterfeit products has deeply enrooted itself
in the FMCG sector. This accounts for almost 5% of the industry production and poses serious challenges
in the growth of FMCG sector. It also reduces the Government’s tax collections significantly.
