CONCEPT & DESIGN BY NOSHE OCEANIC

Foreword
The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 24 Bn. It has a strong MNC presence and is characterized by well established distribution networks, intense competition between the organized and unorganized segments and low operational cost. All businesses face the twin issues of how to survive and grow in spite of the challenging external environment and intensifying competition. In view of this, successful companies continuously look for new operational paradigms. Coupled with this are rapidly evolving consumer tastes and preferences and regulatory, trade and logistics development. Given the changing scenario, FMCG companies need to look beyond their normal strategic frameworks and evaluate opportunities in areas where they may not have ventured earlier using innovation and new technologies as part of their arsenal for surmounting emerging challenges. CII has undertaken various initiatives in the FMCG sector. Amongst them, some of the key activities have focused on GST, Environment Protection Act notification on use of plastics; Sugar Representation; Cross Border Taxation and the Competition Act. Today's conference will discuss New Opportunities, Wider Markets and Sustainable Business in the FMCG Sector. The sub topics of this Conference would weave in the interrelated aspects of the Modern Trade; Market trends Urban Vs Rural; Integrated Role of Information Technology; Innovation and its critical impact on the FMCG business and the emerging role of Branding with Sustainability. The Conference Programme and the White Paper prepared by our Knowledge Partner, YFactor would discuss how FMCG Companies can grow and prosper in times to come. Wishing you all success for the event.

Contents

FMCG Market Historical Trends and Growth Drivers; North Zone Developments Modern Trade FMCG Market Urban vs Rural Information Technology and FMCG Companies Innovation: A Framework for FMCG Companies Sustainability Branding

01 04 08 12 16 19

Mr. Vikram Bakshi Conference Chairman Joint Venture Partner and Managing Director McDonald's India (North & East)

Mr. Divyaroop Bhatnagar Managing Director YFactor Marketing Private Ltd

FMCG NEW OPPORTUNITIES

FMCG Market Historical Trends and Growth Drivers
FMCG Market Size and Growth
The FMCG Market in India is estimated at around Rs 130,000 Crores (US$ 24Bn)1 in 2010. India's robust consumption patterns ensure relatively steady growth even in times of economic slowdown. Future projections indicate a projected growth rate of 12 15% over the next few years leading to a projected market size of Rs 230,000 Rs 260,000 Crores (US$ 42Bn US 47 Bn) by 2015. Historically,
US$ Per Capita Skin Care Shampoo Ice Cream China 7.9 2.3 3.3

The FMCG landscape in North India is also very vibrant due to the following reasons: Tax concessions provided by the hill states of J&K, HP and Uttarakhand have resulted in most FMCG companies moving their manufacturing to these locations. This has resulted in significant employment generation and growth in GDP. Locations like Samba and Kathua (near Jammu), Baddi, Nalagarh and Parwanoo (in Himachal Pradesh) and Haridwar, Pantnagar and Dehradun in Uttarakhand have become m a j o r centres for FMCG manufacturers. This has also resulted in many packaging and raw material suppliers setting up their factories nearby. From the supply chain point of view, the region has seen steady growth. Many FMCG companies have established Mother Godowns in locations like Zirakpur, Punjab to cater to all India logistics. Per capita income and GDP growth has been extremely high in the states of Punjab, Chandigarh, Haryana, Delhi and West UP. This has resulted in the development of sophisticated FMCG categories like Personal Care faster than the rest of the country. Innovative companies from the North Zone have driven growth in a variety of categories, Some examples are given below: o Dabur needs no introduction. They have leveraged the power of traditional Indian Ayurveda to create a w h o l e r a n g e o f products that touch the hearts of Indian consumers. Kashmir Apiaries based in Punjab are the largest exporters of honey in India. They have also pioneered a large range of honey varieties and blended products for the Indian market including Organic Honey that has become very popular in the Modern Trade. Bharat Box headquartered in Ludhiana, have leveraged their product development, supply chain and manufacturing capabilities to enter the market with a range of FMCG products.

Mrs Bector's has given a run for their money to the large MNCs with innovative and well-presented food products. Bagrrys has come up with a range of healthy breakfast cereals, oats and muesli for the health c o n s c i o u s m o d e r n I n d i a n consumer. Ghari Detergents based in Kanpur have become a major force in the Detergents market by initially keeping a strong focus on their home market of UP before expanding to other parts of the country.

FMCG Market Growth is correlated with GDP growth and we have seen acceleration from close to 6% to over 15% in FMCG Market Growth from the middle of the decade when India's GDP started growing faster.2 Per Capita Consumption for key FMCG Categories is very much lower than for other developing countries indicating substantial headroom for growth3

FMCG Sectors and Categories Packaged Foods including Beverages account for close to 45% of the total FMCG Market. Personal Care contributes 26% and Home Care 15%. The balance comprises of Tobacco products. Underpenetrated categories such as Fruit Juices, Skin Care and Hair Care exhibit faster growth rates than categories such as Cooking Oil, Toothpaste, Laundry and Toilet Soaps where usership is nearing saturation.6 FMCG Players The FMCG Sector comprises of five types of players:

Indonesia 4.3 2.1 1.7

India 0.8 0.6 0.4

North Zone FMCG Development

2011 Population4 Chandigarh Haryana Himachal Pradesh Jammu & Kashmir Delhi Punjab Rajasthan Uttar Pradesh Uttarakhand North Zone All India North Zone % 10,54,686 2,53,53,081 68,56,509 1,25,48,926 1,67,53,235 2,77,04,236 6,86,21,012 19,95,81,477 1,01,16,752 36,85,89,914 1,21,01,93,422 30.5% 2011 GDP (RsCrores)5 20,704 2,57,793 52,426 47,709 2,58,808 2,21,332 3,03,358 5,88,467 77,580 18,28,177 73,06,990 25.0% Per capita GDP 1,96,305 1,01,681 76,462 38,018 1,54,482 79,891 44,208 29,485 76,685 49,599 60,379

Entrenched, well established MNCs such as HUL, Reckitt Benckiser, ITC or Nestle who have developed a deep understanding of the Indian Consumer over the years. They are good examples of 'think global and act local' Pepsi and Coke also fall into this category though they are later entrants. Relatively new MNC entrants. Examples such as Lreal, Amway, Kellogg or P&G. In general these companies tend to be more global in outlook and treat the Indian market as an integral part of their Regional/Global Strategy. Large Indian companies such as Dabur, Godrej, Marico, Emami and CavinKare. Over the years

Per Capita GDP is co-related with FMCG Market Size. As GDP increases, consumers tend to use more sophisticated products especially in categories like Personal Care. The North Zone has 31% of India's population but contributes only 25% of National GDP.
US$ to INR assumed at 55 Source Technopak and Booz Analysis 3 Source Euromonitor 2010 and HUL Presentation 2011 4 Census of India 5 VMW Analytics Services
2 1

States like UP, Rajasthan and J&K are below the national average while Chandigarh, Haryana and Delhi are well above. This variation means that North Zone has a varied landscape for FMCG products and all segments of the market have a presence here.

01

Source AC Nielsen and Technopak

02

FMCG NEW OPPORTUNITIES

these companies have grown rapidly in scale and sophistication and the quality of their management is rapidly levelling the playing field. Single category large Indian companies such as Nirma, Ghari, Power Detergents and Ruchi Soya. Emerging Indian companies, better known for their brands such as Vasmol, Himgange, Lotus Herbals, Crax, Forest Essentials and others who are currently regional or limited players but are k e e n to scale up rapidly.7 It would be fair to say that the MNCs are facing keen competition from local players in India. Access to technology, sophisticated design and packaging and high quality advertising has narrowed the capability gap between local players and the MNCs.

FMCG Growth Drivers The factors influencing growth of the FMCG Sector may be classified as Extrinsic or Intrinsic to the sector.
Extrinsic Factors Growth in GDP and Disposable Income Increasing Urbanisation Media Explosion Rural Prosperity Government Policy (NREGA, Tax Reform) Growth of Modern Trade Mega Trends in Health/Wellness and Environment Protection Intrinsic Factors Competition leading to: Cost effectiveness and keeping pricing in check Intense market activity (new launches, relaunches, advertising and sales promotion) Innovation in product development, marketing and distribution strategies Increasing usage of IT in FMCG companies Integration of the product and service experience (Lakme, Streak, Kaya) Encouraging Up Trading HUL in Skin Care

Modern Trade
Modern/Organised retailing is growing at an aggressive pace in urban India, fuelled by bourgeoning economic activity. Organized retail revenues are expected to increase from an estimated US$ 12.9 billion per annum in 2005-06 to more than US$ 43 billion by 2009-10. A large number of domestic and international players are setting up base and expanding their business with newer organized retail formats and intense competition driving innovation in formats.8 Between 2005 and 2009, Organised Retail in India has grown at 24% CAGR.9

81%

85%

55% 40% 30% 20% 4.80%

It has often been said that India offers a bewildering diversity in terms of languages, religions, castes, income stratification and education. This vibrant marketplace has found a fitting resonance with FMCG Marketers. As the consumer market deepens and matures marketers have hastened to widen their offerings to cater to all shades of this diversity. There is a place for every kind of consumer product at all price points, with every consumer benefit possible catering to myriad geographies. Conference Themes Several important themes emerge from the foregoing analysis of the FMCG Sector and the key drivers
03
7

M al ay si a

C hi na

Ta iw an

Impact of the Modern Trade Urban vs Rural Market Role of IT and Innovation inFMCG companies Sustainability Branding

Figure : Organized Retail Penetration in Select Economies10

Retail is an extremely significant part of the Indian Economy estimated at 39% of GDP.11 Yet organised retail contribution is only at 4.8% of the total market (2009) especially when compared to other developing countries. (Figure 1)

Source YFactor Presentation

IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in) IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis 10 IBEF, Centrum Research Report 2009, Technopak, Booz & Company analysis 11 Confederation of Indian Industry & AT Kearney Report (2006)
9

In do n

Th ai la nd

affecting growth. The following issues that are of paramount importance will be taken up for discussion in this paper and in the conference today:

es ia

di a

In

U S

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FMCG NEW OPPORTUNITIES

Retail spending habits in India
Home, 3% Books, Music & Gifts, 3% Durables, 10% Clothing & Textile, 36% Footwear, 13% Pharma, 2% Entertainment, 1% Health & Beauty, 1%

2.

Current Shopping Habits of Urban Indians: The urban Indian is very used to convenience catered to by traditional retailing with primary presence of neighbourhood 'kirana' stores, push-cart vendors, 'melas' and mandis' 15 .They offer home delivery, easy access and a personal touch. Indians also tend to buy frequently, especially food and in the case of the lower income strata small volume, low unit price packs. The weekly or fortnightly shopping habit does not work in India, where 'fresh' food items are bought virtually on a daily basis.

b.

Larger product range for an increasingly demanding urban consumer of the many Indias. 16

But replacing current shopping habits is not easy. And with high costs there is an increasing need to make modern trade profitable faster. For FMCG products, opportunities could be in:

FMCG and Modern Trade Can Modern Trade compete with current traditional sales distribution networks?
Watch & Jewellery, 17%

1.

Food & Grocery, 14%

De-intermediation: By directly supplying products to stores, companies are effectively cutting out the wholesaler margins and can offer better rates to Modern Trade which could result in increased profitability. Economies of Scale: Directly supplying stores results in lower transportation costs, savings on time and increased efficiency. Intensity of Interaction and Measurement: Modern Trade offers an opportunity for companies to directly i n t e r a c t w i t h t h e consumer. Observe trends, run promotions, assess the effectiveness of promotional activities and promote general awareness of their brands. Companies should also view their shelf space as a platform for this kind of interaction and take advantage of it.

a.

Figure : Retail Categories12 There is clearly a huge opportunity for growth in all these categories in the Organised Retail Sector.

2.

Home Delivery: The highest level of convenience no traffic, no parking. You could guarantee ticket sizes by having minimum orders and reduce costs by servicing orders directly from warehouses. Smaller convenience stores that have easy access to consumers. Prime locations are unlikely to be in malls which attract footfalls bent more on entertainment than grocery shopping, but more in residential a r e a s which can then cater to an everyday need. The target would be for repeat consumers, constant footfalls and high conversion rates. Such stores would need to differentiate themselves from traditional m o m a n d p o p shops by offering better hygiene, consistent products availability, longer working hours and attractive pricing based on a consolidated supply chain. Supply Chain: Organized retailers are going to be increasingly interested in reducing time-tomarket. To achieve this, it will be important to invest in inventory management and related technology for capturing sales data, forecasting demand and generating automatic replenishment. Decreasing inventory levels will also require strong backward integration with distributors or manufacturers. Retailers will also
06

b.

3. Factors contributing to low penetration of organised retail in India 1. Modern Trade is an Urban Business: Urbanization is an integral part of the process of economic growth. As in most countries, India's towns and cities make a major contribution to the country's economy. With less than 1/3 of India's people, its urban areas generate over 2/3 of the country's GDP and account for 90% of government revenues.13 a. Congestion in Urban India: Lack of good public transportation, traffic and parking woes makes store access a factor. If stores are 'destinations' then convenience of access is an issue and they could be limited to their catchment area only. For a very large store this could have an impact on yield per square foot o r p ro f i t a b i l i t y. T h i s f a c t o r effectively rules out setting up mega stores 30-40 Km from the city centre as in m o s t developed markets. Also such stores would exclude the bulk of Indian consumers who do not have the means of transport to travel and shop at such distances. b. Increasing Property prices in Urban India: Based on the above, city centric stores seem to be the way forward. However, such city centric locations hugely increase the cost of real estate. Property prices in U r b a n I n d i a have doubled in the last few years encouraging retailers to rent not buy. Rental clauses come with a 15% every three years escalation.14

Challenges to Modern Trade in current Market situation 1. Convenience of Access: Challenges of Urban Living in India are those of space and time. Congestion, traffic and parking woes are a reality. Kirana stores and other traditional 'mom and pop' outfits are more convenient with their easy access (walking distance) and home delivery systems. Modern Trade could have some distinct advantages: a. Hygienic, clean shopping environment 2.

05

ZENITH International Journal of Multidisciplinary Research Vol.2 Issue 1, January 2012, ISSN 2231 5780 http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21207992~pagePK:141137~piPK: 14 1127~theSitePK:295584,00.html 14 International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 24 (2009) EuroJournals Publishing, Inc. 2009 15 IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in)
13

12

16FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 31

FMCG NEW OPPORTUNITIES

need to optimize logistics further in terms of warehousing and transportation etc. For this it 17 will be imperative to increase supplier collaborations. 3. In Store Brands: They give a retailer the highest profitability as margins on these brands are 3035%. They also help distinguish between retailers as they are unique to the store. Current penetration in India is quite low as compared to other countries indicating a potential for future growth. (See Figure 3) This could pose a major challenge to FMCG companies in the future.

Retail spending habits in India

46% 40% 35% 29% 27% 21% 20% 11% 20%

FMCG Market Urban Vs Rural

Overview Here's a simple statistic. Over 300 million Urban Indians live in 5,000 metros, cities and towns with an average population density of 5,000 people per sq. km. But 800 million Rural Indians live in 627,000 villages with an average population density of only 150 people per sq. km. When you factor in Urban per capital income is 4X that of rural income, you start understanding the concentration of purchasing power in urban areas why marketing to urban consumers has been the 'low hanging' fruit, while rural marketing has faced huge economic challenges.

Number of Villages and UAS / Towns by size class and their population
Ranges
Switzerland UK Germany Spain France
18

No. of Villages 45,276 46,276 127,511 145,402 129,977 80,413 14,799 3,961 593,615

Population 2,274,375 6,912,023 43,960,187 105,274,341 183,294,133 239,184,866 98,112,136 63,478,578 742,490,639

Ranges Less than 5000 5,000-9,999 10,000-19,999 20,000-49,999 50,000-99,999 1,00,000-4,99,999 5,00,000-9,99,999 10,00,000-& above Total

No. of UAs/Towns 192 879 1,346 1,163 404 320 39 35 4,378

Population 667,772 6,658,356 19,458,295 35,154,857 27,832,412 60,554,358 27,503,626 108,290,013 286,119,689

Australia

USA

India

World Average

Less than 100 100-199 200-499 500-999 1,000-1,999 2,000-9,999 5,000-9,999 10,000 & above Total

Figure : Private Label Share in overall Organised Retail Sales

To face this challenge, FMCG players will need to exploit their brand power, develop relationships with their retail partners, provide better rates and invest more in developing and expanding their categories. Summary and Key Takeaways Modern Trade has been growing rapidly in India. It has faced challenges too based on the high costs of real

estate in India and customers' shopping habits. FMCG companies have faced challenges too due to the increasing power of the modern retailer. As the presence of Modern Trade deepens and intensifies, FMCG companies need to understand how to partner with them to maximise mutual benefits.

Source: Primary Census Abstract, India, Census of India 2001.

The Urban and Rural segments of the Indian FMCG Market have always had different growth paths. Urban 'India', although much smaller, in absolute household numbers, had much higher per capita incomes and so traditionally accounted for the largest segment (if not majority) by value for most FMCG companies. Key drivers of urban markets were increasing urbanization => more absolute households industry & services grew faster than agriculture => faster growth of urban incomes

explosion in cable TV, newspapers, mobiles and internet => higher media penetration easier distribution access =>lower distribution costs and better controls

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17FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 37 18 FMCG Roadmap to 2020, Booz & Co. for CII 2010 Page 38,Technopak, Booz & Company analysis

FMCG consumers were rapidly getting penetrated and simultaneously trading up to better (and higher margin) products. This was a ready market with visible drivers, and everyone wanted their share. Classical marketing strategies were 'trickle down' focused on penetrating Metros, then working down Tier I and II towns to smaller markets over time.

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FMCG NEW OPPORTUNITIES

Unfortunately, the entry of new MNC companies, and Large and Emerging Indian companies, turned marketing in Urban India into an expensive slugging match with your competitors. By contrast, the lure of tapping large numbers of under penetrated consumers in Rural Bharat has always fascinated marketers. Traditionally, the Entrenched MNC's were active in rural markets, keen to fuel growth by seeding their brands amongst new consumers and building competitive advantage through consumer loyalty. With their higher volumes and larger P&Ls, they could invest in small distributor or rural wholesaler coverage programs, coupled with rural consumer activation programs such as sampling. In many cases they were the 'first and only' rural brands. Subsequently, strategic thinking like Goldmine at the Bottom of the Pyramid has become mainstream. Considering that only 38% of India's population will be Urban by 2020, rural marketing is an essential part of every FMCG company's plans. FMCG Distribution System

Factory

C&FA

Key Accounts

Stockist

Super Stockist

Penetration and per capita consumption (Rural - urban penetration 2002)

Category Market Size (US$ million) Urban Penetration (%) Rural Penetration (%) Total Penetration (%)

Urban Wholesaler

Urban Retailer

Van Sales

Modern Trade

Project Shakti

Sub Stockist

High Penetration categories >50% Drive upgradation and consumption Fabric Wash Personal Wash Packet Tea 1210 938 635 89.6 97.9 91.2 82.9 90.7 82.2 84.9 92.8 84.9

Urban Retailer

Rural Wholesaler

Rural Retailer

Rural Consumer

Rural Retailer

Low Penetration categories: Drive Penetration Toothpaste Skin Hair Wash Talcum Powder Branded Atta Dish Wash Instant Coffee R&G Coffee Ketchups Deodorants Jams 409 312 230 148 107 102 55 30 25 19 13 69.8 36.6 40.1 66 44 54.6 12.5 32.3 19.8 16.3 36.8 30.2 11.5 0.7 43.5 24.7 23.3 45.1 34.3 24.4 4.2 -

Rural Retailer

Bulk of Rural Sales

Over the years FMCG companies have tried various methods to directly reach the rural areas. On the Marketing side since the reach of traditional media used to be poor they went in for: Wall and shop paintings Cinema and demonstration vans Participation in rural fairs and festivals Van operations that are partially or fully subsidised by the company HUL has started Operation Shakti that is aimed at directly reaching rural consumers Rural oriented supermarkets like Hariyali and Khushali E Choupal

Source: HLL, Indian Readership Survey.

Exploiting the under penetrated potential of 'Bharat' verses 'India' represents an obvious opportunity for brands; however the marketing and distribution methods to reach those remote customers are not so clear. Challenges of Rural Markets - Reach The biggest single challenge of 'Bharat' is the ability of marketers to profitably reach and sell to these consumers and retailers. Typically, revenue per day per rural sales route may be only 25% that of urban routes and van distribution costs like fuel and salaries may be 50% higher. The combination of lower revenue and higher costs means that, company

09

run rural distribution systems have a natural 'economic reach', beyond which the stockist loses money. Any distribution activity beyond this natural 'economic reach' has to be supported by the company, otherwise it won't happen. As an example, only 3% of India's villages, with a population above 5,000, were found to be viable for rural distribution by leading FMCG companies. Thus, most of the FMCG products reaching rural retailers and consumers move still move through the wholesale markets. This leads to a lack of control and focus that is of concern to FMCG companies.

With increasing penetration of TV and other conventional media, reliance on these activities has come down to some extent but has not been eliminated altogether. On the distribution side, FMCG companies have experimented with several techniques: Wholesale on Wheels' The United Villages Experience19 As discussed above only 3% of India's villages are accessible through conventional single company run direct distribution systems. UV found that rural
19

It is fair to say that direct reach to the rural areas is still limited. The key challenge is that any one company's turnover is not sufficient to pay for the higher costs that rural distribution entails. As explained above, direct 'economic reach' to the rural areas is limited to the largest villages while the large extent of rural India is still fed through wholesale markets. retailers had to visit the nearest town to procure 81% of the goods that they were selling. These visits were typically made twice a month leading to a large amount of cost and disruption in their operations. United Villages has set up a pilot project in Jaipur
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YFactor Client

FMCG NEW OPPORTUNITIES

(Rajasthan) catering to 5000 rural retailers near Jaipur. The pilot has now been extended to Kota and will extend other parts of the state by the year end. The salient features are: UV Sales Executives operating on motorcycles procure orders from rural retailers operating on a weekly or fortnightly contact cycle. Goods are procured from Cash & Carry stores (Carrefour, Metro and Walmart) on a daily basis. No inventory is maintained by UV. The product range is carefully selected and includes FMCG products from major companies as well as smaller ones. Durables and store brands are also carried by the UV system. Orders are taken on a mobile phone application specially developed for UV. These orders are sent to the central computer and serviced within 2 days. The mobile based application provides rich information for the company's operations. Since goods are aggregated across companies the combined sales volume is sufficient to pay for distribution costs. UV is leveraging its rural reach to extend other services for its rural customers as well as extending marketing support for its distribution partners.

Information Technology and FMCG Companies

IT has become an essential part of operations in IT companies. Broadly, the role of IT encompasses the following aspects: How to choose the right one for my business? Implementation is difficult Failure rates are high

Summary and Key Takeaways As competition in the urban areas intensifies, the rural market represents a major opportunity for FMCG companies. However, the high cost of distribution has been a barrier for direct distribution. Most of rural demand is still being met through the wholesale trade. FMCG companies have experimented with various systems for reaching the rural areas with varying degrees of success. With an underpenetrated rural population and growing rural incomes this segment will continue to be of high interest to FMCG marketers in future.

Financial accounting, MIS, planning and control Sales force automation and analytics Communication Since this aspect pervades through all companies, not only FMCG, it will not be discussed here.

Experience21 suggests that an FMCG company in India with a turnover of over Rs 200 Crores may be ready for an ERP installation. Such a company will in all probability have: Multiple manufacturing plants Distribution in more than one region. There will be a HO and Regional Offices Distributed purchasing there may be a HO purchase function but there is likely to be local purchasing at the plant level 200+ employees

Not so long ago, financial accounting and MIS were handled manually in most FMCG companies. Thereafter accounting packages like Tally started making their appearance. Many companies went in for computerization of their accounting systems but failed to integrate the supply chain and sales. Later on, this led to a plethora of software 'fixes' most of them developed in house. As companies grew, it has led to a number of spread sheet based systems that have become very cumbersome and complex to 20 handle. The earliest ERP systems started out as MRP (Manufacturing Resource Planning) systems. They have now evolved into fully integrated ERPs encompassing all aspects of a company's working. All the larger FMCG companies have adopted ERP systems already. Smaller companies have been slower to move in this direction. There are many apprehensions about ERP systems that have been expressed by smaller FMCG companies:
20

In our view, one of the most critical issues facing FMCG companies is that over the years they have developed 'work around' solutions for many accounting and other matters. Similarly, they may have a multiplicity of distribution systems. As an example Company X22 has the following distribution systems in place: Delhi/NCR C&FA Rest of North India CSA Mumbai 3rd party outsourced system South India Super Stockists

ERP systems are very expensive

The field force is a blend of in house Territory Sales

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YFactor Analysis YFactor experience spread over several FMCG companies 22 YFactor Client
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FMCG NEW OPPORTUNITIES

Incharges and outsourced Sales Personnel. Purchase has a multiplicity of vendors with varying trading terms for the same material at different locations. Materials are not coded and there is no standardization. In such an environment, it becomes difficult to proceed with implementation of an ERP system immediately. Our experience suggests that it is better to undertake a comprehensive Business Process Review (BPR) before embarking on an ERP implementation. In general, the less the customization required for an ERP the better would be the implementation. If an 'in principle' decision to evaluate the benefits of an ERP implementation has been taken in the company, the following steps may be required for taking it forward: Discussion on whether to go with a BPR. In many cases, the companies who undertake BPRs are also ERP implementers and the discussion will help to clarify the way forward. Preliminary discussions with a few ERP vendors. This will help to obtain a ball park idea of cost and a first cut feel of the various ERP solutions. Site visits to reference clients will also be helpful. Formation of a core in-house team headed by the CEO/CFO/CIO to evaluate ERP solutions. The same team should be enhanced later for implementation. Structured evaluation of ERP options. Many methodologies are available for this purpose and it is outside the scope of this article to present them. However, some of key principles to be followed are:23 Objective decision process The criteria and the scoring system must be agreed in advance prior to viewing any potential systems. The criteria must be wide-ranging and decided upon by as many objective people as possible within and external to the enterprise. Full involvement by all personnel The decision on the system must be made by all stakeholders within the enterprise. "It requires top management leadership and participation it involves virtually every department within the company". Implementation24 There are several pitfalls to avoid during implementation. While there is no 'one size fits all' solution, the following issues are very important: Reference to the Business Case keep what you had agreed earlier with respect to the cost benefits always in mind while implementing. Choose your implementation partner with great care. Have a core in-house team dedicated full time to the implementation. This must be a cross functional team drawn from all departments involved with the ERP. There must be an internal champion preferably the CIO. Have frequent reviews with top management. Don't be wedded to your own processes even if you have gone through a BPR. There is a high risk and cost attached to customization. Avoid the 'big bang' approach. Most smaller companies don't have the resources to handle all the implementation in one go. Sales force targets, retail schemes and product promotions are usually based on Secondary Sales. This is done in order to prevent dumping at the stockist level. Primary Sales which actually generate revenue for the company are on a replenishment basis for the stockist. Hitherto most companies used to follow a manual system of recording and monitoring secondary sales. The company Territory Sales in Charge would fill up a daily sales report which would record all sales made to retailers on that day. Subsequently a 'Stockist Sales and Stock Control Statement' would be prepared every month. Figures would be manually compiled upto the national level. These systems have remained virtually unchanged for the last 40 50 years. The advent of hand held devices and improved communication technology has changed the scenario in the last few years. The front line sales person now carries a hand held device on which he books retail orders (Secondary Sales). These are downloaded into the Stockist's computer at the end of the day and serviced the next day. Compilation is done automatically and a wealth of information is available for analysis including details of sales personnel working, productivity, schemes and target achievement. One example of a hand held system implemented by Hemas, Sri Lanka26 is shown below. Many modifications are possible to suit a particular company's requirements. Benefits of ERP Implementation There are 3 key areas in which ERP implementation will help the company25 Help reduce operating cost o Reduce inventory o Lower production costs o Manpower savings in finance and planning areas Sales Force Automation FMCG companies are strongly driven by Secondary Sales. These refer to sales made by the stockist to the Facilitate day to day management o Real time information access o Reporting o Data integrity and commonality across all parts of the company o Activity based costing Support strategic planning o Mid-term forecasting retailer and are hence not the sales that are recorded in the company's books.

Factory

Primary Sales
C&FA

Stockist

Secondary Sales

Retailer

Structured approach A detailed document outlining all the steps that will be followed for the evaluation should be prepared by the core team prior to starting the evaluation process. Focused demonstrations There is no point in demonstrations by vendors that do not pertain to the FMCG Business. Similarly, site visits to reference FMCG clients is a good idea.

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24

Adapted from Wikipedia Adapted from Michael Burns 180 Systems

25

26

R.A. Anthony YFactor Client

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FMCG NEW OPPORTUNITIES

Hand Held System Operation

Innovation: A Framework for FMCG Companies

Innovation is the specific act of entrepreneurship. It is the act that endows resources with a new capacity to create wealth Peter F. Drucker All of us are aware of the tremendous power of innovation. It is a well-known fact that a powerful new concept gains high market shares while followers have to make do with much smaller figures. One of the most striking examples of innovation in the recent past has been the success of Apple. Products such as I Phone and I Pad were world firsts and have resulted in the company achieving a valuation of $600 Bn27. Companies like Reckitt Benckiser and J&J have a strong focus on innovation. One of the key metrics28 used is the percentage of turnover coming from new products launched in the last 36 months. For most successful companies this should be at least 15%29. Some of the most successful examples of FMCG innovation in India have been: Nirma who pioneered the concept of an economical and effective detergent powder as an alternative to laundry soap and built a revolutionary demand pull model based on intensive advertising. HUL who realized that Indian housewives prefer washing their clothes without soaking them in a bucket while still wanting better performance than laundry soap. This resulted in the launch of Rin detergent bar. Later, similar thinking led to the introduction of Vim as a dish wash bar. Amul who introduced the concept of milk cooperatives and helped reduce milk shortages. HUL who innovated the world's first fairness cream (Fair & Lovely) that tapped into a deep seated need of Asian and African consumers. Now all FMCG companies have fairness products as a major part of their portfolio. Reckitt Benckiser who successfully extended the germ-kill property of Dettol into toilet soap. Hygienic Research Institute who introduced hair dye in a hair oil form liked by Indians. Their product, Super Vasmol is a block buster. Low cost manufacturing: o The Nano o Pharmaceuticals o Product development of low cost FMCG products by an Indian company for a US MNC How do we identify an innovative company or what are the factors required for fostering an innovation culture within an organization? This paper examines two aspects: How do we evaluate where our company stands on innovation? Are we good at it or not and in what directions to we need to improve. How to create an innovation oriented culture and process within the company?

Advantages Order booking at the retail level is fast and accurate. The sales person is well aware of product availability, schemes and his daily target. Pricing is also controlled as it is built in into the system. The hand held device records all control information like time of first and last call, time spent in the market and productivity of the sales person. Replenishment for the Stockist is automatic and works on a re-order level mechanism. The stockist's c o m p u t e r t h r o w s a n o r d e r automatically to the C&FA and goods are dispatched accordingly. The hand held system links seamlessly with the company's ERP.

Data is transferred at the end of the day to the company from all parts of the country. It can also be real time if the hand held device 'talks' directly to the central computer.

Summary and Key Takeaways Information technology is rapidly changing the way that FMCG companies operate. ERP systems are becoming more affordable and even mid-size companies can take advantage of the increased efficiency that they provide. Similarly, Sales Force Automation using hand held devices can revolutionize the way that companies manage their secondary sales systems.

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CNN Money 10.04.12 YFactor Analysis 29 YFactor Analysis 30 YFactor Client

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FMCG NEW OPPORTUNITIES

The first important issue is that innovation is not restricted to product innovation alone. Nirmalya Kumar31 talks about India's 'invisible innovation' comprising of work that we do not see the 'Intel Inside' concept. Mohan Sawhney32 of North Western University has propounded the concept of 'The The Innovation Radar Mohan Sawhney Stage-Gate Product Innovation Process
Supply Chain Channel Ecosystem Product Platform Solution
GATE 1

Innovation Radar' that identifies 12 key vectors or directions of innovation in a company.In essence, innovative ideas should pervade through the organization and employees need to strive to do things differently and better in all aspects of their work.

conventionally structured with a constituted leader or decision making process. However, senior management review and feedback is critical for the team to function effectively. Cross Functional Teams have been used successfully through the entire innovation process. From ideation to evaluation to implementation.

Stage-Gate Process Cross functional teams are best used in conjunction with an established Stage Gate or Innovation Funnel process. It is a well-known fact that barely 1 in 10 new product launches actually succeed. In order to increase the percentage of success companies need to implement a structured stage gate process.

Scoping
STAGE 1

Build Business Case

GATE 2 STAGE 2 GATE 3

Development
STAGE 3 GATE 4

Testing and Validation

STAGE 4 GATE 5

Launch
STAGE 5

Partnerships

Offerings

Idea Screen

Second Screen

Go to Development

Go to Testing

Go to Launch

Operations Management Value Capture Process

Customer Customer Interaction Marketing Communication

Using the Innovation Radar to evaluate your company's innovative strength in all areas33 of activity can help companies in the following ways:34 Innovation Diagnostic Tool - Assess your company's innovation performance and discover overlooked opportunities Expert Assessment - Discover how your customers, vendors, distributors, and network participants perceive your innovation capabilities Competitive Assessment - Analyze the innovation capabilities of competitors Brainstorming Catalyst - Explore dimensions of innovation in a systematic & holistic manner New Venture Design Guide - Design and track the development of complete business systems Portfolio Tool - Manage innovation efforts as a portfolio across your company

important for building innovation capability. In our view, innovation rarely comes from the outside. It emerges from a deep understanding of consumer needs and organizational capabilities. Thus, the twin concepts of ideation and filtration are the key drivers of the innovation process: Cross functional teams for relevant ideation and follow through. The 'Stage Gate' or Innovation Funnel process for providing a systematic filtration technique for new ideas.
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A Stage-Gate Process is a conceptual and operational roadmap for moving a new-product project from idea to launch. Stage-Gate divides the effort into distinct stages separated by management decision gates. Cross-functional teams must successfully complete a prescribed set of related cross-functional tasks in each stage prior to obtaining management approval to proceed to the next stage of product development. Stage-Gate divides this process into a series of activities (stages) and decision points (gates).36 Stages are: Where the action occurs - the project team completes key activities to advance the project to the next gate Cross-functional (there is no R&D or marketing stage) and each activity is undertaken in parallel to accelerate speed Where risk is managed - vital information is gathered - technical, market, financial, operations - to manage risk Incremental - each stage costs more than the preceding one resulting in incremental commitments. As uncertainties decrease, expenditures are allowed to rise and risk is managed Where the Go/Kill and prioritization decisions are made

Where mediocre projects are culled out and resources are allocated to the best projects Focused on three key issues: quality of execution; business rationale; and the quality of the action plan Where scorecards and criteria are used to evaluate the project's potential for success37 Innovation is not restricted to product development but encompasses all areas of a company's operations. It is vital to create a culture of innovation. Companies should undertake a review of their position on innovation and identify areas of improvement. A structured innovation process needs to be put into place using cross functional teams for: o Identifying innovative ideas for improving all aspects of business operations including new product development. o A stage gate or innovation funnel process should be instituted to reduce risk and increase the chances of s u c c e s s f u l innovation.

Conclusions and Key Takeaways

Having identified the key areas where your company lacks innovative depth, two key concepts are
31 32

A cross-functional team is a group of people drawn from various departments within the organization such as R&D, Marketing, Sales, HR, Finance or IT. It will include people at varying levels and may also include outside stakeholders like Advertising and MR agencies, Suppliers or external consultants. The team thus constituted is multidimensional in nature. It responds best to directional guidelines rather than specific goals. Such teams gather information through a multiplicity of sources and they may not be

Gates are:
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http://www.ted.com/talks/lang/en/nirmalya_kumar_india_s_invisible_entrepreneurs.html Mohan Sawhney The Innovation Radar 33 http://sloanreview.mit.edu/the-magazine/2006-spring/47314/the-different-ways-for-companies-to-innovate/ 34 http://www.devoteam.se/index.php?option=com_content&task=view&id=280&pays=se&Itemid=480&lang=5 35 Stage Gate International

Stage Gate Navigator Stage Gate International

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FMCG NEW OPPORTUNITIES

Hazare and TV shows like SatyamevJayate. It finds resonance in campaigns to Save the Tiger and to plant a million trees in the national capital. There is an increasing concern for what we are doing as citizens and as human beings. We have started realising that the earth does not have infinite resources for man to exploit. It is in that context that many companies are moving towards a wider definition of what is success. The triple bottom line as opposed to a narrow financial objective is often quoted in this context: financial (economic) sustainability.

The first tentative steps are being taken in this direction. Pepsi states that they put back more groundwater than they consume. Coke mentions that a large percentage of the plastic used in their bottles is recycled. These may be small steps, but they are part of a larger movement that is waiting to happen. Unilever A corporate paradigm Unilever has expressed the case for case for the 'triple bottom line' graphically in the following way:

Sustainability Branding
Definitions
There is a need to define exactly what 'Sustainability Branding' is. In the recent past there have been a number of references to 'Green Brands' and to 'Sustainable Brands' The commonly accepted view at this point seems to be: Green Brands are those brands that consumers associate with environmental conservation and sustainable business practices.38 The terminology 'Sustainable Brands' can be misleading as 'Sustainable' may refer to the brand having been around for a long time without any reference to its commitment to sustainable values. Sustainability Brands (the most commonly accepted term) are products and services that are branded to signify a special added value in terms of environmental and social benefits to the customer and thus enable the differentiation from competitors. in the public interest and will profit from doing so is fundamentally flawed. - AneelKarnani Contrast these views with the concept of trusteeship put forward by Mahatma Gandhi: Supposing I have come by a fair amount of wealtheither by way of legacy, or by means of trade and industryI must know that all that wealth does not belong to me; what belongs to me is the right to an honourable livelihood, no better than that enjoyed by millions of others. The rest of my wealth belongs to the community and must be used for the welfare of the community. It may be argued, and rightly so, that the views of Michael Porter and others are more practical and relevant in today's materialistic world. However, the same gurus will also agree that what is important is what consumers want. Ultimately, businesses and therefore brands will evolve as the consumer wishes them to and it is here that the most fundamental changes are taking place. It may be argued that the Indian consumer has not reached the stage of willingness to pay a premium for Sustainability Brands (Body Shop was built on this premise). However, fundamental changes are taking place. Fab India, Forest Essentials, and a host of 'organic' products are making their mark in India. There is an ever increasing concern for the environment and for social equity. At a conceptual level it finds expression in movements like Anna

ecological (environmental), social (equity), and

The Case for Sustainability Traditionally, many management gurus have argued that the primary objective of business is to generate profit for its shareholders and that they should not attempt to assume a larger societal role. No business can solve all of society's problems or bear the cost of doing so. - Michael Porter and Mark Kramer the idea that companies have a responsibility to act
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They have also developed a 'Vitality Framework' to help them deliver their mission in a systematic and

measurable way. This also focuses Brand Development along the lines of Sustainability.39

Wikipedia

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Source: Presentation by Santiago Gowland, Unilever

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FMCG NEW OPPORTUNITIES

Core Sustainability should be tied to the core business through assessing the socio-ecological impacts of products along the entire life-cycle of the products and finding out the socio-ecological hot-spots of the product-life-cycle. Co-operative The solutions to the main socio-ecological problems associated with products along the entire life cycle require - both in the process of innovating and marketing sustainable products and services - cooperation with suppliers, retailers, consumers, scientists, and other non-market actors (e.g. NGO's). Credible Fundamentals of credibility are first the solving of key socio-ecological problems associated with companies' products and second tying sustainability to the core business. Co-operations with trustworthy partners and the use of independent, third-party labels (e.g. labels like Bio or MSC) such as a high level of transparency (e.g. through an online tracking system, which enables consumers to see the world of behind the product) can additionally increase the credibility of sustainability brands. Consumer Benefits It allows brand managers to explore opportunities to innovate and improve their brands in three ways: Boosting people's personal vitality and wellbeing Addressing social issues Reducing environmental impacts Four 'Vitality Metrics' measure the framework's performance: Greenhouse gas emissions Water Waste Sustainable Sourcing or sustainable' Sofia Reberio of Kiwano Marketing says that sustainability should be everywhere in the company: Products/Services: the products or professional services that the company offers and the markets/clients that it serves. Business Standards: the unique tools, processes, business strategies, delivery methods, knowledge base, core values and techniques that the company brings to a project. Company Style: the organization's personality, the way that businesses communicate and relate to the marketplace, and the distinct flair that the company possesses. Socio-ecological characteristics or attributes of products usually just play an auxiliary role (no core benefits). To broaden the appeal of sustainability brands, the companies should emphasize the inherent consumer benefits of socio-ecological attributes, including efficiency and cost effectiveness, health and safety, symbolism and status. Further they should align socio-ecological attributes with benefits such as functionality, design, and durability to create motive alliances. Conversational Sustainability branding is more effective as a two-way conversation, rather than a one-way announcement. Inviting consumers to enter into dialogues about the sustainability process strengthens the brandconsumer relationship. Consistency If sustainability is the key to brand positioning, this requires a kind of integrated approach to sustainability communication: it is important to communicate in a consistent way, including e.g. advertising, personal selling or online communication. In addition to that, the sustainability product brand has to be consistent with the overall environmental and social performance of the company. Commitment Sustainability branding not only requires the commitment of the PR department and the sustainability officers but also requires the commitment of top management and marketing decision makers. Continuity Sustainability must reflect the core values of the brand and contribute to delivering the brand promise over the long-term. This means that a brand cannot change its sustainability focus too often, or engage in too many non-related areas. Summary and Key Takeaways The case for Sustainability Branding is really based on evolving consumer needs and preferences. In all aspects of life, people are looking for products and services that are less damaging to the environment and evoke respect from society. Marketers would be well advised to take cognizance of this trend and to initiate the transformation within their own organisations. Sustainability Branding is a holistic process wherein the entire business has to move towards the new paradigm of environment, social and financial well-being.Sustainability Branding is in its infancy in India. However, we are not immune from the global trend of concern for the environment, social equity and economic uplift. A small beginning has already been made and we can foresee it becoming a much larger area in future.

Sustainability Construct Sustainability has to pervade through all aspects of a company for it to be successful. It is not sufficient that one of the company's brands projects itself as 'green
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Martin Belz and others have propagated the concept of 8 C's of sustainability branding which can serve as a guide for companies that are interested in Sustainability Branding:40

Source Wikipedia

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FMCG NEW OPPORTUNITIES

YFactor
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 117 years ago, it is India's premier business association, with a direct membership of over 7000 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. The CII Theme for 2012-13, 'Reviving Economic Growth: Reforms and Governance,' accords top priority to restoring the growth trajectory of the nation, while building Global Competitiveness, Inclusivity and Sustainability. Towards this, CII advocacy will focus on structural reforms, both at the Centre and in the States, and effective governance, while taking efforts and initiatives in Affirmative Action, Skill Development, and International Engagement to the next level. With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community. YFactor provides Management Advisory Services focused on FMCG and Consumer Facing Businesses in India and South Asia. The company was promoted by Debu Bhatnagar (IIT Kanpur, IIM Calcutta) and Shashi Kalathil (DCE, IIM-Bangalore) who are both seasoned professionals in consumer oriented businesses. Their professional experience spans companies such as Hindustan Lever, Pepsi, RPG, Tata, Future Group and Hemas Sri Lanka. YFactor's services cover three key areas: Management Advisory Private Equity Placement India Entry Strategies for foreign companies

YFactor clients range from companies in Packaged Foods, Home & Personal Care and OTC. YFactor's work includes formulation of launch strategies for branded FMCG, Organization Restructuring, Distribution System Revamp, Development and implementation of advertising and support plans, Techno-Commercial feasibility studies for setting up a Personal Care Factory in India for an MNC and Company Turnaround. Most of the engagements are medium to long term in nature covering Diagnostics, Strategy Formulation and Implementation. The approach is multi-dimensional in nature providing support to clients in all aspects of business. YFactor has created a vibrant eco-system of Partners and Advisors to provide management capabilities that entrepreneurs running consumer facing businesses can immensely benefit from.

YFactor Marketing Private Limited 1176 Sector A, Pocket A, Vasant Kunj New Delhi 110070 (India) Tel: +91 11 2613 6369; Mob: +91 97177 74290 (Debu Bhatnagar) E -mail: debu.bhatnagar@yfactor.in Website: www.yfactor.in

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