Macro Environmental Analysis of the Indian FMCG Market

The life styles and culture of India is changing drastically. The population of India is increasing every year and this will have a direct impact on the FMCG industry and its organizations. Although population of India is increasing every year the population growth rate is decreasing over a period of time. In 2008 the population growth rate is 1.6%, in 2009 it is 1.5%. In 2010 the growth rate is 1.3%. Although the figures didn’t change drastically, the supply and demand of the FMCG products will be affected due to change in population structure. There will be decrease in demand and intense competition as the birth rates and number of customers decrease. Most importantly it is the change is life style of Indian customers and social behavior will affect the FMCG industry in India. It will demand a new products and services over the time and will lead to increase in investment in R&D of FMCG companies. Now the world is facing with food shortage leading to increasing invest in food production. If the organizations fail to offer products and services according to changing lifestyle and behavior then it will be difficult for any organization to survive in the market.
Economic:
Current slowdown in global economic scenario affected almost every industry across the world. There has been increase in unemployment and low consumer spending power. This leads to consumers not opting to buy expensive products or services. This further pressurizes the RMCG companies to reduce the prices for the products and services.
Organizations will have to review this economic ride and have to respond accordingly,
A successful organization will respond according changing economic conditions, consumer and stakeholder behavior. An efficient organization must be aware of the changing economic condition across the country and global and should employ a suitable strategy to stay in the market.
Political:
Political factors will have a greater influence on the organization and industry and it is the duty of the organizations to comply with it. It is necessary for the organizations to comply with the legislations implemented non conformance of which may lead to serious implications on the organization. The government has implemented certain restriction in the import policies. However tax exemptions in sales and excise duty are provided for the small scale industries. This will allow the SMEs to invest more and will increase the number of new entrants. Transportation and infrastructure facilities are improving not only in urban but also in the rural area which will help in distribution network.
Technological:
Advancement in technology boost the production with enhancement in quality of products and services rendered to the customers. Organizations began to adopt e-business to improve brand communication and market. Technological advancement makes the supply chain and transactions along the chain simple. Organizations reduced costs with effective IT technologies and increased the rate of information transactions. Technology is playing a key and huge part in the FMCG sector by developing the new packaging, increasing productivity and longer shelf life of food products.

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Better, stronger, more effective and faster are the key elements that all manufacturers in this sector push for, as it drives sales. The advancement enhances the sales by enabling the manufactures to produce better products with attractive packaging and better communication. With advancement in communication technology and rising social media network it enables the organizations to communicate better to the customers by improved marketing campaigns.
International trends:
The economic crisis and slowdown had greatly affected the sales FMCG goods across the world. However emerging economies like India, China and Brazil are not greatly affected and manage to do well to recover quickly. A common trend that was followed across the world during economic slowdown was trading down. Because, customers became more cautious looking for less expensive brands, special offers and discounts. This added tremendous pressure on the market prices due to severe competition and down trading. However emerging economies like India, China and Brazil saw development in hypermarkets helping the growth of FMCG markets in these countries.
Macro environmental opportunities:
India has Vast Rural Market with majority of population where the market is still untapped market. India has cheap labour to provide cost advantage over other countries. Many multinational companies are having cost advantage by outsourcing its product requirements from its Indian company.
ENVIRONMENTAL THREATS AND OPPORTUNITIES:
Industry structure:
The FMCG market of India divided into two sectors the organized sector and the unorganized sector. The organized sector has only few Indian companies and MNCS whereas the unorganized sector is crowded by a many local players.
Indian FMCG market accounts for about Rs.460 billion where the market has been highly occupied by local and unbranded products. This has been a challenge for many organized players to successfully launch a product and to occupy the market share. Distribution and supply chain has also been a challenge as India’s infrastructure and transport systems not quite helpful with millions of retail outlets in the country. Although infrastructure and transportation system is developing in recent times it is still considered as a challenge by many players.
The FMCG sector has a wide range of products including confectioneries, beverages, detergents, toothpaste, toilet soaps, shampoos, creams, powders, food products, cigarettes.
Typical characteristics of FMCG products are:
The products cater to necessity, comfort and luxury.
Price and income elasticity of demand varies across products and consumers.
Individual items are of small value (small SKU’s) although all FMCG products put together account for a significant part of the consumer’s budget.
The consumer spends little time on the purchase decision. He seldom ever looks at the technical specifications. Brand loyalties or recommendations of reliable retailer/ dealer drive purchase decisions.
Limited inventory of these products (many of which are perishable) are kept by consumer and prefers to purchase them frequently, as and when required.
Brand switching is often induced by heavy advertisement, recommendation of the retailer or word of mouth.
Distinguishing features of Indian FMCG Business
FMCG companies sell their products directly to consumers. Major features that distinguish this sector from the others include the following:
Design and Manufacturing
Low Capital Intensity as most of products in FMCG requires relatively little investment in plan, machinery and other fixed assets.
Basic technology required for manufacturing is easily available.
Third party manufacturing is common and the benefits include production and inventory planning flexibility, flexibility in controlling labor costs and logistics.
Marketing and Distribution
High Initial Launch Cost with huge investment in product development, market research, test marketing and launch. Creating awareness for a new brand requires enormous initial expenditure.
Huge Distribution Network as India has millions of retail outlets across the country making the logistics functions difficult for many players.
Competition
Market is crowded with many unorganized players. Presence of many unorganized players and highly capable MNCs provides fierce competition in the market to launch many new brands. This gives wide range of choice of brands for the customers.
PORTER’S FIVE COMPETITIVE FORCES:
BUYER POWER:
The consumer base of this industry is larger than any other industry and they have little or no influence on the price of the product. The consumer always possesses great choice of brands within the product category and they can shift from one to another without much influence. Hence, buyer power is not quite strong in this industry. But they have power when they provide threat to shift from one brand to another brand. In FMCG retailers should also taken into the account for analysis. Retailers can always decide which brand to stock and consumers don’t show much interest to wait if one brand of choice is not available. So retailers can always make choice between brands and they have more buyer power than consumers.
SUPPLIER POWER:
Supplier power is little or limited in the FMCG industry. The industry always has great number of suppliers with great size. There will not be any uniqueness in the product or service of suppliers and the manufacturer can always shift from one supplier to other supplier. However manufacturer faces some amount of supplier power due to the cost they have to incur when switching suppliers. Suppliers who do large business with manufacturers are always obliged to their customers.
THREAT OF NEW ENTRANTS:
Threat of new entrants is limited in this industry. The new entrants generally cater to local or small markets contributing to the large unorganized sector. Raw materials for most of the segments in FMCG industry can be easily procured. The investment will not be high for machinery and other assets required for most of the products in the industry. Also the basic technology is easily available. These factors can make the local or small manufactures to enter easily in the industry. But this industry requires high initial launch cost and distribution network is always a challenge. These factors act as a barrier for any new entrants in the industry and virtually provide low threat of new entrants.
THREAT OF SUBSTITUTES:
The FMCG industry bears a high threat of substitutes. The industry possesses many organized players with great number of local manufactures. The products in the industry can always be imitated and marketed. The industry possesses high level threat of substitutes in rural market than in the urban.
DEGREE OF RIVALRY:
The degree of rivalry is high in the industry. There are many global players along with local manufacturers. The industry enjoys low customer loyalty. The customers always have wide choice of brands and the switching cost is always minimum or negligible. There will be only slight difference in the quality of brands. So the competition is fierce in the industry to attract customers and retain them.
Strategic groups in the industry:
Among the FMCG companies in India Hindustan Unilever Limited is most catered company to almost every segment in the industry. Its competitors are only catered to certain segments but HUL faces stiff competition from all competitors in every segments. The major companies of strategic groups in FMCG industry are Hindustan Unilever Limited, ITC Limited, Nestle India, Emami Limited, Colgate-Palmolive (India) Limited, Dabur India Limited, Procter & Gamble, Godrej Consumer Products Limited and Cadbury India.
International Competition:
India is an emerging market and has become a hotspot for many multinational FMCG companies like HUL, Proctor & Gamble and Nestle. However domestic companies like Marico, Dabur and Emami are giving tough competition to them. These companies step into natural product category by offering herbal products and managed to occupy the market. For instance, Marico’s flagship brand Parachute Coconut Oil has no foreign competition. The presence of international competition is restricted to areas of where they can act and categories like natural products did not interest the global players.
Industry Threats:
The organized players in the industry are facing problems high magnitude of imitative products. The fake products are seen highly in rural markets and the Indian FMCG sector is losing large amount of money due to presence of counterfeits products. The industry is facing increasing input costs due to increase in price of the raw materials due to global economic slowdown and potential impact of rising crude oil prices
Industry Opportunities:
The FMCG sector is the fourth-largest sector in the Indian economy and has been growing considerably over the past few years due to changing lifestyle, consumer preferences and high disposable income. The rural market is being highly untapped and provides favorable condition for growth of the companies in this sector.
EVALUATING HUL STRENGTHS AND WEAKNESS:
VRIO Framework of Hindustan Unilever Limited:
The value of HUL lies in their ability to offer different products and cater to the different segments in the industry. The organization has international expertise and wealth of knowledge to cater to different segments satisfying the customer needs. The organization is displaying high standards of corporate behavior towards its stakeholders. The company realizes that its employees are the primary source of success and well committed to their employees. The organization encourages the open communication with customers to get feedback and improve its product offerings.
Rarity:
The company enjoys the competitive advantage in its robust supply chain and distribution network. Though the company resources are not rare it enjoys the competitive advantage in its resources employed in supply chain and distribution network.
Imitability:
The organization possesses valuable and rare resources in its supply chain and distribution network that the competitors did not have cost advantage in imitating the resource. The social relationships entailed in resources are complex that the competitors cannot easily imitate and manage well.
Organization:
The organization structure of HUL with its empowered managers across the company’s nationwide operations imparts speed and flexibility in decision-making and implementation. The organization leverages its resources for efficient management. The company realizes that its employees are the primary source of success and well committed to their employees.
Analysis of Corporate Strategies:
Hindustan Unilever Limited has robust supply chain and distribution network covering over 3400 distributors and 16 million outlets. HUL’s sales organization structure integrates the Household, Personal Care and foods distribution networks together. By this the organization aligns all the units of its organization towards the common goal.
Analysis of Business Strategies:
HUL introduces wide variety of products in different segments at different price points. HUL analyses its strategy to improve its foothold in the processed foods category which is largely unoccupied.
HUL Strengths:
The company has variety of products in each category giving wide array of choice to customers.
Robust Distribution Network covering over 3400 distributors and 16 million outlets.
The Company enjoys many reputed brands and created a well reputed brand image in the customers mind through advertisement.
Well developed quality management.
The company has highly capable and well developed R&D resources.
HUL Weakness
HUL not able to compete effectively with local competitor in the rural market:
The Company’s product mostly target middle class and lower middle class population. So the upper middle class population terms the company’s product as a cheap product with low quality
HUL is over dependent on Indian market and depends on it for majority of revenue generation. This makes the company subject to changes in weather, political and economic conditions and also makes it vulnerable to potential risks arising in India.