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 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 insighting 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 at the point of purchase is reasonably high. Penetration of the modern retail formats is still low at under 5%. However, this is expected to increase steadily over the next few years.
OPPORTUNITIES AND THREATS
Economic Growth and rise in Disposable Income
The Indian consumer remains one of the most upbeat globally. Indians are currently amongst the most optimistic about their job prospects and personal finances. This opens attractive avenues for industries planning to tap the Indian consumer market.
The per capita income in India has nearly doubled in a short span of four years to just under US$ 800 in 2006-07 (from around US$ 450 in 2002-03). The Indian working class is getting richer and the income pyramid is getting heavier at the top. Corporate salaries in India are increasing at a rate faster than in most parts of the world. With rising income levels, there is a decline in the propensity to save. Moreover, the attitude towards debt and leverage is undergoing a change. Consumers are exhibiting a greater willingness to spend using credit. It is expected that the surge in consumer spending along with the changes in consumer tastes and low penetration levels of the organized sector in several products is likely to ensure high growth rates across a range of FMCG categories.
Rise of the Urban Indian Middle Class
India is getting urbanized at a faster rate than the rest of the world and, by 2030, 40.7 per cent of the country's population will be living in urban areas, according to a report by the United Nations Population Fund (UNFPA). This provides the opportunity of a large market concentrated in India's urban centers.
Rising disposable incomes are leading to a change in mindset towards indulgence and "consumerism". Increased afford ability is fuelling uptrading in FMCG products from unbranded and loose to branded and further to premium aspirational products.
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