scope of the sector

8/4/2019 Scope of the Sector

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Scope Of The Sector

The Indian FMCG sector with a market size of US$13.1 billion is the fourth largest sector inthe economy. A well-established distribution network, intense competition between the

organized and unorganized segments characterize the sector. FMCG Sector is expected to growby over 60% by 2010. That will translate into an annual growth of 10% over a 5-year period. Ithas been estimated that FMCG sector will rise from around Rs 56,500 crores in 2005 to Rs92,100 crores in 2010. Hair care, household care, male grooming, female hygiene, and thechocolates and confectionery categories are estimated to be the fastest growing segments, says anHSBC report. Though the sector witnessed a slower growth in 2002-2004, it has been able tomake a fine recovery since then.For example, Hindustan Levers Limited (HLL) has shown a healthy growth in the last quarter.An estimated double-digit growth over the next few years shows that the good times are likely tocontinue.

Growth ProspectsWith the presence of 12.2% of the world population in the villages of India, the Indian ruralFMCG market is something no one can overlook. Increased focus on farm sector will boost ruralincomes, hence providing better growth prospects to the FMCG companies. Better infrastructurefacilities will improve their supply chain. FMCG sector is also likely to benefit from growingdemand in the market. Because of the low per capita consumption for almost all the products inthe country, FMCG companies have immense possibilities for growth. And if the companies areable to change the mindset of the consumers, i.e. if they are able to take the consumers tobranded products and offer new generation products, they would be able to generate highergrowth in the near future. It is expected that the rural income will rise in 2007, boostingpurchasing power in the countryside. However, the demand in urban areas would be the keygrowth driver over the long term. Also, increase in the urban population, along with increase inincome levels and the availability of new categories, would help the urban areas maintain theirposition in terms of consumption. At present, urban India accounts for 66% of total FMCGconsumption, with rural India accounting for the remaining 34%. However, rural India accountsfor more than 40% consumption in major FMCG categories such as personal care, fabric care,and hot beverages. In urban areas, home and personal care category, including skin care,household care and feminine hygiene, will keep growing at relatively attractive rates. Within thefoods segment, it is estimated that processed foods, bakery, and dairy are long-term growthcategories in both rural and urban areas.

Indian Competitiveness and Comparison with the World Markets

The following factors make India a competitive player in FMCG sector:

Availability of raw materialsBecause of the diverse agro-climatic conditions in India, there is a large raw material basesuitable for food processing industries. India is the largest producer of livestock, milk, sugarcane,coconut, spices and cashew and is the second largest producer of rice, wheat and fruits&vegetables. India also produces caustic soda and soda ash, which are required for the


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production of soaps and detergents. The availability of these raw materials gives India thelocation advantage.

Labor cost comparison

Low cost labor gives India a competitive advantage. India's labor cost is amongst the lowest inthe world, after China & Indonesia. Low labor costs give the advantage of low cost of

production. Many MNC's have established their plants in India to outsource for domestic andexport markets.

Presence across value chain

Indian companies have their presence across the value chain of FMCG sector, right from the

supply of raw materials to packaged goods in the food-processing sector. This brings India a

more cost competitive advantage. For example, Amul supplies milk as well as dairy products like

cheese, butter, etc.

Indian Fmcg Industry

INDUSTRY STRUCTURE AND DEVELOPMENT

India's fast moving consumer goods (FMCG) sector is the fourth largest sector in the economy. Its

principal constituents are foods, personal care, fabric care and household products. The total FMCG

market is in excess of US$ 17.36 billion and is set to treble from US$ 11.6 billion in 2003 to US$ 33.4

billion in 2015.

The industry is characterized by a large unorganized sector, low penetration levels, well-established


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distribution network, low operating cost and lower per capita consumption.

Most products are manufactured by simple manufacturing processes that require fairly low capital

investments. This has made the proliferation of localized brands and products being offered in loose

form possible in small towns and rural India where brand awareness is low.

Brand building and product differentiation hence play a pivotal role in the success of a product in the

FMCG sector. Consumer in sighting and innovation assume great importance. Where innovation is low,

smaller players are able to offer similar products at reasonable prices, making cost management another

key to successful performance in the sector.

While the penetration of some product categories is high, there are several product segments in which

the consumer spends as a proportion of disposable income appears very low when compared to other

emerging Asian economies. Improvement in incomes is likely to steadily drive increased consumption in

packaged foods, personal care and household products.

Most large FMCG companies have established nation wide distribution networks comprising company's

C&F agents, distributors, wholesalers and retailers. These intermediaries ensure widespread presence

for the brand so that products are available to consumers where they want them. The influx of the

modern retail formats (organized retail) in the country is likely to catalyze acceleration of growth in

FMCG categories where consumer interaction with products...

Recession report - Indian FMCG sector upbeat

India's fast moving consumer goods industry has so far been resilient to the slowdown in the

economy and a dip in consumer sentiment. If we go by the numbers for October 2008 andestimates for November 2008, the growth only seems to have got better when compared to theearlier months.

In October 2008, the soap and colors categories recorded a 22% and 27% value growthrespectively. The estimates for November2008 are also good, whereas in September 2008, thegrowth was 12% to 13%.

As per report, consumers are holding on to their monies due to the uncertainties in the markets.However, they are spending, but on small purchases. Hence, the volumes and growth in theFMCG sector has not seen a dip.

FMCG sectorIs growth, a major issue for the FMCG sector?


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A scan of the industry would show up a few exceptions, which have grown year-on-year, thoughthe sector as whole seems to be under pressure. There could be several explanations for this:

FMCG is a typically defensive sectorwith a relatively inelastic demand. Neither the sector'srevenues dip when prices rise or incomes contract, nor they expand when prices fall or incomesexpand. There is also a time lag between the contraction/expansion of incomes and the impact onFMCG revenues because of the `daily necessity' nature of these products; it takes time forconsumers to move away or into these products. However, within a given group of FMCGproducts, there would be down and up trading; consumers moving from a low value for money(VFM) products sold on imagery to high VFM products during a recession and do the reverseduring revival.

In the current economic revival too, these movements will happen in the FMCG sector but with a

time lag. There may be a visible impact in the coming quarters, especially in respect ofcompanies where there is a clear movement towards providing higher value added products.

And, amid the hype of de-growth, many developments could have been missed out. The FMCGsector has acquired many new consumers through better penetration using the smaller pack or thelow unit price strategy; volumes are yet to rise significantly, though.

But the real market growth could be a little better than what the research numbers show. For,Direct/Multi-level marketing, store brands and imported products are not necessarily captured bythe market research agencies. And, the menace of unfair competitioncounterfeiters,adulterators, etc.,could be taking away 5-10 per cent of the industry's turnover. But, yes,

compared to the rest of the economy, the growth rates in the sector have not been dazzling.

FMCG to escape recession

Despite the global meltdown, Amway, Indias number one direct selling company is confident ofachieving a growth of over 25 per cent.
https://sites.google.com/a/groupzeus.com/home/our-research/fmcg-2/FMCG%20Graph.bmp?attredirects=0


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"I am not saying that our company is recession-proof but it is recession-resilient," the AmwayIndia Enterprises managing director and chief executive, Mr William Pinckney, said.

He was talking to a group of journalists from Kolkata during a factory-visit at Baddi in HimachalPradesh. Over 80 per cent of the Amway products sold in India are manufactured at the Baddi

factory. The state-of-art plant is spread over 110,000 square feet and employs 500 people.

Mr Pinckney claimed that FMCG unlike the automobile industry would not be badly affected bythe economic crisis. "People may stop or postpone purchasing a car but they will certainly notstop purchasing a shampoo bottle or a shaving cream tube," he added.

He attributed what he described as "this year phenomenal growth" to a couple of factors:introduction of energy drink and energy bar segments and the launching of great value productssuch as coconut oil, Amla hair oil, dispensable razor and shaving cream.

Is the FMCG sector, losing its pricing power, because of intense competition?

One of the much-commented sidelights of economic liberalisation in India is the "emergence" ofa large middle-class, and its ability to absorb many FMCG items. Such was the hype createdabout these factors that many players, not even in FMCG business, entered the sector with avariety of products leading to intensified competition at various points, especially at the regionallevels.

With no entry barriersin terms of technology or investmentsthe FMCG business seems aneasy sector to get in. There has been many a case of a new product reaching dizzy heights of

turnover in a short time, but falling by the wayside once the consumer realises that the valueequation is not working out.

Although the role of the intermediary is important, especially as the influencer at the point ofpurchase, the consumer will go for a product that he wants, not necessarily the one the tradepushes.

Also, as the supply chain environment has improved with better infrastructure, mere availabilityof products at retail outlets is not going to be enough; a value proposition is needed to break theincreasing clutter of products.

In some categories, such as toilet soaps, there has been little creativity and innovation, andinstead a misplaced insistence on `bribing' the consumers with freebies. In such cases, theconsumer have realised that the USP is just a better effective pricean effective loss of pricingpower through a move away from branding into commoditisation.

Imagery and price premium is central to FMCG marketing propositions. However, that needs tobe backed by a clear value add. Taking the consumer for granted does not pay; companies that


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"fleece" the consumer with unduly high margins may eventually be forced to compete with oneanother in taking price cuts!

The writing on the wall is clear: The consumer, and not the competition, is the queen!

Is there scope for the FMCG sector to get re-rated on the bourses?

Unlike other sectors, FMCG, being a defensive play, would take time to bloom in a marketboom. The time lag would depend upon the magnitude and pace of the greater realisation of thepotential of up-trading and movement of smarter companies up the value chain throughinnovation.

There are some other relevant and recent factors, such as Unilever, the company with the largestmarket capitalisation in the FMCG industry, losing considerable value on the bourses.

This has taken some sheen off the sector. Recent hype about price wars could dissuade investorsfrom getting into the warring MNCs as also into the affected Indian companies. Then there is thedelisting of such companies as Cadbury and Reckitt, which leaves few "good" options forinvestors.

The trend is, therefore, likely to be in favour of companies that have not merely made brandpromises, but also kept them! Thus, while the entire sector may not get re-rated, there will surelybe some value picks.

FMCG firms chart new cost cutting plans

To tide over the high cost of inputs, the fast moving consumer goods (FMCG) companies aredesigning new strategies. The firms have introduced new packs into the market which arecostlier when compared to the actual quantity they contain.

For instance, global beverages major Coca Cola introduced most of its major brands, includingCoca Cola, Diet Coke, Thumps Up and Mazaa, in new size of 350 ml. The company alsointroduced the new Xpress 350 ml pack for its Sprite brand. The company already has 500 mlbottles in the market priced at Rs 20. However, the recently introduced 350 ml pack, which cost

Rs 15, is helping companies to widen their profit margin by Re 1 on each bottle.

Henkel India Ltd recently introduced a 400 gram pack Henko detergent. The company till a fewmonths back was producing 500 gram Henko detergent packs priced at Rs 60. The new 400 grampack which cost Rs 50, helping it to widen its profit margin by Rs 2 on each packet. Accordingto Devashis Das, category manager, Henkel India Ltd, the company went for such measure to puta check on de-growth during the period when the crude prices were ruling record-high.


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Besides increase in the profit margins, convenience is another reason why these companies aregoing for such packs. Meeting the requirement of the consumers who are looking at singleconsumption packs of 300 ml is not comparable with glass bottles which are not hygienic, anindustry analyst said.

According to leading provider of knowledge services, Evalueserve, the current easing off ofcommodity prices will certainly give breathing space and there will be some improvement inmargins, in the immediate future. The latest Unctad Trade and Development Report 2008

predicts volatility of commodity prices, which indicates that they will have to battle pressures onmargins over the next few quarters.

The decision that most firms will have to make is how much of the increase in input costs can bepassed on to the consumer. In any case competitive pressures will limit the amount that can bepassed on directly, so companies will continue to adopt value-based measures in the currentscenario.

HR Innovations

The recession is about the creative Human Resources Management. The HRM Function is askedto bring new ideas, to change the HRM Processes and to develop or change the procedures. Andthis effort has to be cheap or it has to cut the costs of the organization. The HRM Innovation iseasy in times of the business growth, but the recession is not good for big innovative HRMInitiatives.

The HR Management has to focus on unpopular innovations during the recession as the role of

HR during the recession is to save money to the organization. The senior management expects allthe support functions to bring innovative ideas and solutions which will lead to strongerorganization, when the next growth era comes.

The point has to be focused by HR management during recession are as follows:

To optimize the manpower strength. To take strategic initiatives to increase the productivity and efficiency of the entire

organization. To work on compensation benefits. Redesign training and development programs.

On the other hand the HR Management has to find some innovative solutions during therecession like,

To identify the real key employees and to intact them in the organization To identify the real top potentials and to strengthen their development program


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The HR Management has to have priorities in mind and the strategic impact of the HRMInnovations in the recession time. The role of the HR Management is not to minimize the costsfor the time being, but to make the organization stronger and ready for the future growth.

How to intact your employee during recession:

Here is how to keep your employees with you and away from your competitors during tougheconomic times.

Differentiate Between Your Good and Average Employees Redirect Your Employees to Other Departments (Job Rotation) Listen to Your Employees Keep Them Motivated and Busy (Communicate-Communicate and Communicate) Show them the long term vision

The above steps will enable the employer to hold its team together during a recession, and willeven make bond between all of you stronger. Employees should be motivated enough to stick tothe employer during tough times and put in the extra effort required for the organization growth.

Recommendations while your employer facing negative challenges during recession:

1. Top management should know the contingency plan.

2. Do the brainstorming session with your top management and contribute in their strategicplanning.

3. A complete or partial job freeze, however, communicate to the workforce that the company

many continue to recruit key individuals even in difficult times.

4. Review the employee performance evaluations to determine the key people that company

cannot afford to lose.

5. Flow of Communicate should be from top to down that will help in making conducive

atmosphere within the organization.

6. Make prepare yourself for individual and group concerns therefore there should be a proper

counseling session.

7. To maintain a calm atmosphere.

8. Review all HR policies, processes and procedures to ensure that they are purposeful and

contribute directly to the success of the company.


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9. Suppose the company has to lay-off staffs ensure that there are no other opportunities for them

in other functions or divisions of the organization.

10. Advise managers to deal the process of managing change.

Managing Human Resources (HR) in a difficult economic environment is even more demandingthan working in times of rapid growth. Therefore the task of HR is very important to maintainequilibrium throughout the hierarchy.

HR trends in FMCG firms

HR IN FAST moving consumer goods (FMCG) firms is progressively being pushed down the

line, providing an opportunity to build partnerships and ensure business units exhibit a level ofself-management when it comes to HR responsibilities.

A recent survey of FMCG companies found that even in companies with several sites, HR still

commonly remains a centralised function. As company size increases to more than 1,000

employees, HR tends to take on a more decentralised structure, often with site HR managers

reporting into a central HR head office.

The survey examined the HR practices of 58 FMCG companies across the world such as

Cadbury Schweppes, Coca-Cola Amatil, Colgate-Palmolive, GlaxoSmithKline, Lion Nathan and

Unilever.

It also found that training and development was most common HR KPI for coming 12 months

(45 per cent), followed by staff retention (29 per cent), culture change (21 per cent) and

performance management (21 per cent).

The survey also revealed that paid parental leave is becoming commonplace, with 54 per cent of

FMCG companies providing paid parental leave for females with 35 per cent also providing a

similar policy for males. Another 21 per cent indicated an intention to introduce paid parental

leave in the next 12 months.

Rural Market Last Updated: August 2011

Rural MarketsBrief Overview

Indias growth trajectory is highly driven by the development of the rural clan. Players in various

industries such as retail, fast moving consumer goods (FMCG), consumer durables, automobileset al, are looking towards the untapped potential hinterlands possess.


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The household consumer expenditure survey for 2009-10, released by the National SampleSurvey Office (NSSO), reveals that rural Indian households are spending more on consumergoods like durables, beverages and services as compared to their expenses on such things fiveyears back. The 66th round of the National Sample Survey showed that monthly per capitaexpenditure (MPCE) in rural India was Rs 953.05 (US$ 20.69) in 2009-10, an increase of 64.6

per cent from 2004-05.

The Indian consumer base is highly supported by the rural population (about 70 per cent of thecountrys population), which drives revenues for many major conglomerates operating in diverse

markets in India. Key developments and investments pertaining to various sectors are discussedhereafter.

Retail in Rural India

For many years, rural India was not much acknowledged by the retailers. But as the bottom ofthe pyramid is getting empowered with education, higher purchasing power and awareness,

companies are looking for opportunities in hinterlands.

Aadhar, the Future Group and Godrej Agrovet's joint venture (JV) in agri-service-cum-ruralretailing is undergoing a revamp, wherein the model will follow hub-n-spoke concept to drivehigher profits for the company.

DCM Shriram Consolidated Limited (DSCL), which operates 270 stores of Hariyali KisaanBazaar (one of the largest national rural retail chains of India), plans to open 20 more outlets bythe end of 2011.

FMCG

Increasing levels of income in the hands of rural households, coupled with massiveadvertisements by the market players, would take rural FMCG market from current Rs 87,900crore (US$ 19.08 billion) to a market size of over Rs 1,06300 crore (US$ 23.08 billion) by 2012,according to an analysis carried out by a leading industry body. This entails a compoundedannual growth rate (CAGR) of 10 per cent in totality for rural and semi-urban areas.

Meanwhile, a recent study by global information and measurement company Nielsen hasrevealed that over 80 per cent of FMCG categories are growing faster in rural India as againsturban India.

FMCG players like HUL and ITC have already established their foothold in hinterlands. ITCsChaupal Sagar offers huge variety of FMCG products in villages while HUL expects

contribution of rural markets to grow from 40 per cent to 50 per cent in next 4-5 years in itsturnover.

Consumer Durables


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Indias consumer durables market is anticipated to expand by 40 per cent in 2011-12, accordingto a study by a leading industry body - Rise of Consumer Durables in Rural India.

Mobile handset companies are betting on low-end models to target a significant segment in thesociety that wants basic vanilla communication tool to stay connected to the world. Indian

companies like Tata and MTS are fighting for rural market share with Chinese brands likeLawow and G'Five. Players like Videocon and Micromax have also rolled out models that aremeant for sizeable price-sensitive customer segment.

Moon B Shin, Managing Director, LG Electronicshas revealed in his recent interview that ruralIndia stands as a great opportunity for the company in future and provides 15-20 per cent of thebusiness to the company.

Automobiles

In a bid to connect with rural households, automobile companies are continuously on their toes to

develop appropriate products, schemes and services.

Indias second biggest automaker, Hyundai Motors, may establish a network of as many as 1,000

rural outlets and introduce a cheaper small car to fight competition in rural and semi-urban areas.

Indias largest carmaker, Maruti Suzuki India, is devising marketing tactics to attract first timebuyers that would majorly include those form hinterland.

The world's largest motorcycle maker, Japan's Honda Motor, is pushing its small capacity 100-cceconomy bike model to get closer to rural Indian consumer. The company, which sold its stake inthe alliance (Hero Honda) with Hero brand, is reversing its sales strategy to lay the thrust on

Indian hinterland which has been a major contributor in the former alliances revenue.

Internet Reach in Rural Areas

According to a new research study, titled 'Internet in Rural India', by Internet and MobileAssociation of India (IAMAI) and IMRB International, total number of active internet users inrural areas is projected to rise by 98 percent to touch 24 million by December 2011 from 12.1million in December 2010. The study further stated that currently, about 69 per cent of the ruralIndia is aware of Internet as against 16 per cent projected of it in 2010.

Services

Hindustan Unilever Ltd (HUL), which targets to have a million outlets in rural areas by 2011-end, has initiated a project named 'Gateway to Rural: Beyond FMCG'. In a bid to penetratedeeper into rural India in a cost-effective manner, the company is in talks with telecom firms,banks and financial services companies to create a joint distribution model to cover India's 6.38lakh villages.


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Pilot project initiated with India's largest bank, the State Bank of India (SBI) in Maharashtra andKarnataka, has shown amazing results with the help of HUL's Shakti Ammas. They havedoubled up as customer service-providers and opened around 1,000 accounts for the rural clan. Ifthis exercise proves viable, HUL would roll out the plan across the country by 2012.

Similarly, the world's largest bicycle maker Hero Cycles has initiated discussions with insurancecompanies to provide health cover to its rural customers as a part of its poor-emancipationprogram.

Moreover, as part of its new rural dealership scheme, State-run SAIL will appoint more than1,000 dealers in rural India by March 2012. The initiative is aimed at deeper penetration of thecompanys branded products in villages.

Rural India - Government Initiatives

The Ministry of Rural Development is presentlyimplementing schemes like the Pradhan Mantri

Gram Sadak Yojana, Indira Awas Yojana, Mahatma Gandhi National Rural EmploymentGuarantee Scheme (MGNREGS) in variousstates with an annual outlay of around Rs 1,00,000crore (US$ 21.71 billion).

Also, the World Bank has agreed to help Indian government by approving US$ 1 billion creditfor National Rural Livelihoods Project (NRLP), under newly launched National RuralLivelihoods Mission (NRLM).

Road Ahead

Industry experts believe that rural India will play an active role in the countrys upcoming

progress. Players in different industries like telecom, media, information technology, healthcare,banking and education are participating intensely to offer services to rural households toempower them.

According to Private equity major Blackstone Groups Akhil Gupta, Indian rural markets offerplethora of opportunities. Driven by changing consumption patterns and higher disposableincome, the rural consumption market is expected to expand three-fold from the current level ofUS$ 190 billion to US$ 600 billion by 2020.

FMCG Distribution Channels in India:

Challenges and Opportunities forManufacturers and Retailers

ABSTRACT


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India's economy is projected to grow at a fast clip over the next few years. With increasingpurchasing power and a rising middle class, the fast moving consumer goods (FMCG) industry isposed to grow dramatically. To leverage opportunities, FMCG manufacturers and retailers willhave to develop and implement deliberate strategies for gaining market access. This paperprovides an in-depth look at the strategic role of distribution channels in the FMCG industry.

Specifically, it surveys the state of current distribution channels in India and identifies fourarchetypes that FMCG firms can use as a starting point to develop their distribution strategy.

With a population in excess of 1 billion and current annual GDP growth of 9% (Vietor andThompson 2007), India is a major player in the world economy. Not surprisingly, by 2050 thecountry is projected to become the third largest economy after China and the United States(Hawksworth 2006). India's economic prowess is being driven by the purchasing power of aburgeoning middle class as wealth steadily trickles down to the bottom of the economic pyramid.Given this brisk growth, domestic industries are in a race against time to ramp up capacity,increase production, and achieve market access via channels of distribution. One sector that isexpected to bear the brunt of this demand is the fast moving consumer goods (FMCG) industry

with retail sales expected to top $40 billion by 2015 (India Brand Equity Foundation 2008).FMCG's encompass a wide range of products such as toiletries, soap, cosmetics, toothpaste,shaving cream, and detergents (Coulthart 2006). Multinationals with a significant FMCG

presence in India are Unilever, Procter and Gamble, Nestl, and Cadbury.

Despite its potential, the FMCG industry faces several significant marketing constraints. First,manufacturers and retailers have to grapple with fragmented markets and a plethora of channelforms in a constant state of flux In particular, numerous street-side vendors, hawkers, androughly 12 million unregulated neighborhood mom-and-pop or kirana stores create stronginstitutional forces that cannot be ignored. second, frequent regulatory changes affect channelstructure and exacerbate adaptation challenges. For example, in 2006 the government allowed

direct foreign entry by single brand retailers (Lakshman 2007). Consequently, firms scamperedfor upscale retail space in a hypercompetitive real estate market while domestic manufacturersfaced a multitude of challenges in the areas of new product introduction, line stretching, andbranding

Given the importance of distribution channels to the Indian economy, one would expect aconsiderable body of relevant academic research to be readily available. However, a carefulappraisal of extant research belies this expectation. While India has garnered much attention, thefocus has primarily been on general topics pertaining to the socio-economic, political, andbusiness environments (Basu 2008; Khanna 2008; Vietor and Thompson 2007). In recent years,the emphasis has shifted to include research on other topics like entry modes (Johnson and Tellis

2008), and outsourcing (Marshall 2002). However, there remains a paucity of systematic workon the impact of distribution on the Indian economy in general and the FMCG industry inparticular.

This study attempts to bridge the gap in our understanding of FMCG distribution channels inIndia. More specifically, the objectives of this research are: a) to appraise distribution channelstructure and management challenges for FMCG products, b) to delineate variations in channel


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forms across markets, and c) to outline the strategic role of FMCG distribution channels ingaining market access and achieving competitive advantage.

The paper is organized in the following manner. First, I discuss the impact of changes in theregulatory environment on the FMCG industry in India. The next section assesses the

heterogeneous nature of supply and demand by outlining and discussing a framework forclassifying consumer markets given myriad market variations. This is followed by a discussionof specific channel archetypes that collectively describe variations in channel forms acrossmarkets. This section also describes the marketing implications of channel archetypes for FMCGmanufacturers and retailers. I conclude by highlighting the contribution of this study tomarketing practice.

The Regulatory Environment

India gained independence from the British in 1947 and decided to create an egalitarian societyby adopting the Soviet model of centralized economic planning. The hallmarks of this command

and control economy were: a) the primacy of the public sector or govern ment enterprises in coresectors, b) import substitution and protection of domestic firms, and c) tighter control ofeconomic activity via a license and permit regime. Over time, this system engendered a colossal,insular, and highly inefficient bureaucracy, which could not replicate the free market. Forexample, political considerations forced bureaucrats to subsidize and administer prices in keyinfrastructure industries such as construction, electricity, and water thereby discouraging privateinvestment. Not surprisingly, overall economic growth stalled, the rich-poor chasm worsened,and the government faced a severe balance-of-pay ment crisis in 1991 with foreign reservesenough to last just two weeks. At the behest of the International Monetary Fund, the governmentushered in economic reforms by opening up the economy to foreign and domestic privateinvestment. As reforms accelerated, multinational firms such as Procter and Gamble entered the

FMCG market. At the same time, a number of domestic retailers such as Pantaloon and Relianceopened up western style retail channels in the major urban centers of the country.

Almost three fourths of India's population or approximately 700 million people live in rural areas(Rangan and Rajan, 2006), which lack basic infrastructure such as roads, transportation,electricity, water, health, and education. Under centralized planning the rural populationlanguished at the bottom of the economic ladder with meager discretionary purchasing power.For decades, the average rural person had to sustain his family on a wage of less than one dollara day. Given the lack of roads and viable means of transportation, FMCG firms had to navigatethrough a labyrinthine maze of fragmented, improvised, long, and inefficient channels forgaining access to rural markets. To overcome infrastructure bottlenecks, a multitude of regionalmanufacturers serving a narrow geographical market cropped up. The mushrooming of localproduction and ensuing brand clutter created differentiation challenges for national firms whichwere further exacerbated by widespread production and marketing of copycat products and fakebrands.

In contrast to rural areas, urban markets with well developed distribution channels offerrelatively seamless market access to FMCG firms. For the most part, these channels are theubiquitous small kirana or mom and pop stores employing fewer than four people and selling a


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narrow range of products. Customers value these outlets because of their convenient locationwithin walking distance of home or work, free home delivery, familiarity, and the provision ofcredit. In recent years, with economic liberalization, private firms such as Big Bazaar,Subhiksha, Reliance Fresh and Vishal Mega Mart, all employing western style retailing formatshave entered urban markets in a major way. Of late, the rate of growth of western style retailing

outlets has accelerated with the Indian government paving the way for foreign direct investmentin shopping malls and warehouses (Baijal and Mardsen 2005). Kirana stores, fearing a directthreat to their livelihood have secured the backing of trade unions and rabble-rousing politiciansto stage massive protests against organized retail (Lakshman 2007). Realizing the opportunity tobenefit from a captive and disgruntled vote-bank, some political parties have promised to changelaws favoring organized retail. The present government is treading gingerly on this issue and as asop to kirana stores has allowed only single brand retailers to enter the country, which in effecthas locked out behemoths like Wal-Mart and Carrefour from the market.

Classifying Consumer Markets in India

The task of classifying the consumer market in India into a meaningful and useful taxonomy ischallenging given the perplexing linguistic, cultural, political, geographical, and economicdiversity of the country. Unlike China, where Mandarin is the main language, there are sixteenofficial languages and more than 500 dialects spoken in India. English, a legacy of the Britishrule, remains a link language and the major means of communication in government, commerce,and law. Hinduism, with a pantheon of gods at its core is the dominant faith. However, inpractice, numerous variations of gods, goddesses, deities, temples, and an almost endlesspotpourri of festivals, beliefs, rituals, and customs characterize the religious milieu. India is afederation of states with the federal government in charge of significant national matters likecurrency, defense and foreign affairs. The Congress party, which was at the vanguard of India'sfreedom movement, ruled the country for more than four decades after India gainedindependence from the British in 1947. The party was wedded to socialism and state control ofthe economy and during its rule, private business could not thrive. Today there are hundreds ofpolitical parties split along narrow caste, geographic, economic, and religious lines, which clutterthe political scene. While national parties like the Congress and the Bharatiya Janata Party (BJP)still exist, they have to rely on support from several smaller parties to remain in power. A directconsequence of these fluid political alliances is that businesses have to contend with federal andstate laws that are in a constant state of flux.

Given environmental diversity and its impact on consumer supply and demand, developing aparsimonious taxonomy involving multiple dimensions such as religion, culture, etc. will becomea complex undertaking However, recall from an earlier discussion that the main consequences ofinefficient central control have been lack of infrastructure and uneven economic growth.Translated to the present context, the major implications for the FMCG industry are: i) a lack ofinfrastructure and the means to access far-flung rural markets, and b) the yawning gap inpurchasing power between the rich and poor. The taxonomy is presented in Figure 1.

As depicted in Figure 1, FMCG firms face challenges in accessing markets with differentdegrees of economic potential. In cell 1, firms cater to markets with reasonably high purchasingpower and consumer demand. These urban and semi-urban markets also have access to relatively


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efficient channels of distribution. Emerging markets depicted in cell 2 provide easy marketaccess but the purchasing power of consumers is low. These markets are satellite towns andcities, which develop gradually around a major metropolitan area. For example, the town ofGurgaon in the state of Haryana was an appendage of Delhi that supplied cheap migrant labor tonearby farms and cities. Over time, Gurgaon has grown into a booming metropolis with a

proliferation of shopping malls, call centers, and modern retail stores. Cell 3 represents a sizeableportion of the country's rural 'bottom of the pyramid' (BOP) population without access to roadsand infrastructure. While per capita demand is low, the sheer size of this market estimated atbetween 250 million and 300 million people offers tremendous business potential. Finally, cell 4is an oasis market where purchasing power is relatively high but market access is poor. In somesouth Indian states like Kerala and Andhra Pradesh there are many remote villages with highpurchasing power due to currency remittances by large groups of expatriate Indians working inMiddle Eastern countries. Despite the economic bonanza, these villages lack proper roads andinfrastructure.

Using the taxonomy of Figure l as a starting point, in the next section I describe the distribution

channel archetype in each cell labeled as A, A1, A2, A3, and B. I provide a discussion of eachchannel archetype follwed by implications for FMCG manufacturers and retailers.

Distribution Channel Archetypes

Channel Archetypes A, A1

Most large Indian FMCG firms are organized around profit centers comprising groups of brandsbelonging to related product lines. Over time, incumbent firms have reacted to competitivepressures by stretching their existing brands and creating numerous variants. In the absence ofproper management, the sheer number of branded variants or SKU's (stock keeping units) creates

the potential for inefficiencies such as brand dilution and contamination. In most firms, the profitcenter is responsible for brand management decisions involving resource allocation, productimprovement, new product introduction, line stretching, and market share growth. As anorganizational unit, a firm's profit center also makes decisions in the area of sales promotion,distribution channels, advertising, and pricing.

Archetype A in Figure 2 is the most common channel structure in urban and semi-urban markets.Typically, firms ship products from their manufacturing facilities to carrying and forwardingagents (CFA) located in each state. CFA's are atypical channel members since they do not taketitle to goods and are not customers of the firm. On the other hand, CFA's collect taxes from themanufacturer and remit proceeds to the government. The CFA's charge a small fee to firms anddispatch products to redistribution stockists or wholesalers located in different parts of a state.Wholesalers, in turn, ship products to numerous retail or neighborhood kirana stores which serveend customers.

In recent years the advent of modern retailing formats and chain stores has led to variation in thischannel as depicted in archetype A1 of Figure 2. Specifically, in urban markets wholesalers haveto sell products to chains which use central ordering and processing systems. Small wholesalersoften lack the capacity to meet the demand of large retail chains. In such situations, firms


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augment the channel effort by using additional mechanisms for satisfying the needs of largeretailers.

The advent of modern retailing in urban and semi urban areas has significantly altered themarketing approaches of FMCG firms. In the conventional archetype A channel form, sales

teams dedicated to individual profit centers call on wholesalers and carry out important channelfunctions such as negotiating terms of trade, fulfilling demand, obtaining customer feedback, etc.Since each profit center is responsible for its own set of brands, different sales teams belongingto different profit centers may call on the same wholesaler. Firms have realized that instead ofduplication and dilution of sales effort, such a multi-pronged approach preserves brand equityand leads to superior channel outcomes.

While dealing with wholesalers via multiple sales teams works well in archetype A, such anapproach has severe limitations when FMCG firms deal with modern retail chains. This isbecause individual stores belonging to a chain rarely negotiate terms of trade directly with aFMCG manufacturer. On the other hand, most buying decisions are made by a centralized

procurement and purchasing department. Deploying multiple sales force teams is highlyineffective since each team has to individually negotiate terms of trade with the centralizedpurchasing department. As such, many FMCG firms have to reorganize their sales force bydeveloping negotiating teams comprising members from different profit centers. Such a team canshowcase the entire range of a company's product portfolio and is better positioned to negotiatewith modern chain retailers. The solid lines in Figure 2 denote how FMCG firms may reorganizetheir profit centers and sales teams to meet the needs of modern organized retailers. It isimportant to note that creating new sales teams across multiple profit centers is not an easy task.

First, organized retailers are more powerful vis--vis smaller wholesalers. Salespeople who

have previously dealt with smaller and less powerful wholesalers face steep learning hurdles andadaptation challenges in dealing with organized retailers. Second, firms have to develop

appropriate incentive and monitoring schemes to ensure that members of a team work towards acommon goal instead of maximizing the objectives of an individual profit center.

The main challenge for modern FMCG retailers is to position their offering as a superioralternative to the neighborhood kirana store that has historically offered a familiar andconvenient shopping option to customers. Customers in India are often skeptical of large retailstores and feel that they have to pay a high price at modern stores. To overcome such negativeperceptions, modern stores such as Big Bazaar have developed creative ways of signaling valueto customers (Raman and Winig 2006). For example, to create a familiar shopping environment,Big Bazaar's store layout mimicked the chaos of a traditional bazaar. The store also prominentlyadvertised trade-ins whereby customers could bring their old merchandise and exchange them for

store coupons. Finally, the company successfully organized 'Big Day' sales around the time oflocal religious festivals when customers typically go on a shopping spree. All these efforts havepaid off handsomely and today Big Bazaar is one of the fastest growing retail chains in India.

Although Big Bazaar has been relatively successful in weaning customers away from kiranastores, other retailers have stumbled. For example, Reliance Fresh, a retail chain owned byReliance Industries, a large conglomerate has faced stiff opposition from kirana stores andneighborhood retailers in many parts of the country. This backlash stems from Reliance's


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decision to position its stores as smaller convenience outlets located in far flung neighborhoodswhere kirana stores are still extremely popular. The company had to close down its stores inmany states given protests and damage to property. In some states the company has adapted bynarrowing its product line and focusing on offerings that do not substantially overlap with kiranastores.

n sum, in urban markets the traditional channel archetype has undergone profound change andthe emerging structure represents opportunities and challenges for FMCG firms and retailersalike. Although the ubiquitous kirana store will still dominate the landscape, with the passage oftime the modern retail format will take roots in urban areas. FMCG firms will have to undertakesignificant organizational changes to realize the opportunity in urban markets.

Channel archetypes As, A3

As depicted in Figure 2, archetypes A2 and A3 are extensions of the basic channel A archetype.Consider first the characteristics of archetype A2. Here, FMCG firms assess demand in low per

capita markets adjacent to urban areas and develop optimal routing schedules and journey plansfor urban retail stockists. Since the overall demand is not very high, urban stockists visit theseadjacent markets relatively infrequently and supply products to retailers. In contrast to A2,archetype A3 represents a channel form designed to serve high potential markets with relativelypoor market access. FMCG firms typically appoint rural wholesalers who are in close proximityto these markets. These wholesalers solve the last mile problem by contracting with individualswho carry products using local means of transport such as motorcycles, three wheelers, bicycles,bullock carts, etc. and deliver them to distributors in nearby villages. FMCG firms facechallenges in developing detailed stocking and replenishment plans for these channels given lackof access to end customers.

Although the lack of viable infrastructure poses considerable challenges, some FMCG firmshave developed creative product and package designs to penetrate rural markets. For example,Unilever has pioneered the development of low priced packets (LPPs) for a variety of FMCGgoods such as shampoos, detergent, tea, etc. which retail for a few cents. Given that the averageperson in rural India still earns less than $2 per day, it is simply impossible for him to affordbigger sized consumer products such as shampoo and detergents. Hence, LPP's represented aconvenient solution for the customer and also create huge profits in aggregate for the FMCGmanufacturer. Today, Unilever's approach has been widely copied by other firms and a variety ofproducts is sold in LPP's. This packaging innovation also helps companies access remotemarkets by overcoming transportation bottlenecks.

Channel archetype B

Accessing the bottom of the economic pyramid poses considerable challenges to FMCG firmsand it is almost impossible to specify a widely generalizable channel archetype. In reality, BOPmarkets are located in far flung rural areas where the average per capita income of people iswoefully low. Though no uniform archetype emerges in these markets, it is useful to consider theapproach of some companies that have practiced BOP marketing with varying degrees ofsuccess.


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Unilever has launched a BOP marketing initiative called "Project Shakti" in the state of AndhraPradesh. Essentially, the company works with non-governmental organizations (NGO's) toidentify individuals who possess a strong entrepreneurial drive that will motivate them to stockand sell the company's FMCG lines to other customers. Unilever ensures that these entrepreneurshave access to credit, are trained in appropriate selling techniques, and can develop into

economically responsible individuals. Entrepreneurs are required to carry inventory and althoughthey are free to sell products to rural retailers, the main focus is on selling products to fellowvillagers. Since the project's inception, about 12,000 women entrepreneurs have been appointedand the company has penetrated about 50,000 rural villages (Rangan and Rajan 2006).

ITC, a major FMCG producer has successfully introduced an innovative supply chain initiativecalled eChoupal designed to benefit small farmers (Upton and Fuller, 2004). Historically, manyfarmers grow soybean but face insurmountable odds in gaining market access and fair prices fortheir product They are often caught in an antiquated procurement system involving a number ofmiddlemen who set prices arbitrarily and shortchange them. With little education, many farmersaccept low prices as a fait accompli. Against this background, ITC, which uses soybean for its

consumer products lines decided to change the rules of the game by ushering in an innovativedirect procurement model. By using the Internet, the company created a transparent pricingsystem by providing farmers with real time information about world commodity prices andfluctuations. In addition, farmers had access to a wide variety of information for improvingfarming techniques and crop yields. The company also undertook physical investments in ruralareas by creating depots where farmers could bring their produce for sale. These depots alsofunctioned as bidirectional channels since the company not only procured soybean but also soldother FMCG products through these channels. The eChoupal model per se has been extremelysuccessful and is often hailed as an exemplar of successful BOP marketing.

The Indian Postal System which operates in excess of 150,000 offices has an unrivalled presencein rural areas. The system has grown by relying on private entrepreneurs who offer a range ofpostal services from their own premises in return for an allowance. In addition to delivering mail,today this channel is being strategically used by private firms such as ICICI-Prudential forselling life insurance policies and mutual funds. In rural areas, the postal channel works bi-directionally in delivering mail and accepting deposits for insurance and mutual funds. Suchsynergies may also be creatively exploited by FMCG firms, which can market LPP's thoughthese channels.

Conclusion

The main objective of this study has been to appraise the distribution channel challenges facedby the FMCG industry in India. This analysis sheds light on the challenges and opportunities forFMCG firms and retailers alike. While the FMCG industry is well developed in the west, in Indiathe industry is in its incipient stages. To this extent, FMCG markets represent huge opportunitiesfor domestic and multinational firms. However, market access and success is affected by severalfactors such as infrastructure, diversity in channel forms, and regulatory changes. By using thefour channel archetypes in this paper as a starting point, firms can gain a better understandingabout the Indian FMCG industry.


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While the focus has been on the FMCG industry, several parallels can be drawn with distributionchallenges being faced by other industries in India. For example, recently the Tata MotorCompany announced that it will produce a passenger car in India called the Nano at a price of$2000. This car will be aimed primarily at the rural market. However, a main challenge facingthe company is the lack of proper roads for transporting the manufactured car to end markets. To

overcome distribution challenges, the company has decided to ship the car in semiknocked downkits that will be assembled at the rural dealerships. The main implication here is that companieshave to think creatively for overcoming distribution challenges and infrastructure bottlenecks.

Finally, although the paper concentrates on one element of marketing mix, i.e., channels, inreality, companies have to consider and strategically combine additional elements such as price,product design etc, into their overall marketing strategy. Consider the case of Nokia, which hasmore than three fourths of the market for mobile phone handsets in India. In addition to reachingrural markets creatively, Nokia also implemented a unique pricing structure to help peopleacquire handsets faster. When Nokia entered the market, the price of an average phone was $20,an amount beyond the reach of most people in rural areas. The company encouraged people to

form buying groups where individuals would contribute a fixed amount every month for a certainnumber of months. Every month, one person in the group would get a new phone by lottery. Inthe end, after a certain period of time every person would end up getting a new phone. Hence,although everybody would end up contributing the same amount of money, the probability ofgetting a new phone would be higher on average.

scope of the sector

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