Food Supply Chain In India

Food Supply Chain in India

In India, about 60 percent of food quality is lost in the supply chain from the farm to the final consumer. Consumers actually end up paying approximately about 35 percent more than what they could be paying if the supply chain was improved, because of wastage as well as multiple margins in the current supply structure. The farmer in India gets around 30 percent of what the consumer pays at the retail store. Compare this with the situation obtaining in the USA, where farmers can receive up to 70 percent of the final retail price and wastage levels are as low as 4 to 6 percent. One can easily understand the benefits that could be generated from emulating those practices and tapping that expertise for the supply chain in India.

As supply chain Management involves procuring the right inputs (raw materials, components and capital equipments); converting them efficiently into finished products and dispatching them to the final destinations; there is a need to study as to how the company's suppliers obtain their inputs. The supply chain perspective can help the retailers identify superior suppliers and distributors and help them improve productivity, which ultimately brings down the customers costs. At the same time, Market logistics helps planning the infrastructure to meet demand, then implementing and controlling the physical flows of material and final goods from point of origin to points of use, to meet customer requirements at a profit.

Till now most retailers in India have invested majorly into the front end, but relatively little on the back end and supply chain. Even in countries like the USA, Germany and England, where organized retail is highly developed; supply chain efficiency is a major concern. The nature of retail sector in India is different from other countries around the world. The organized retail sector in India is highly fragmented and there are huge inefficiencies in the supply chain.

The most important part of retailing business is to find a balance between investing in front-end and back-end operations. The channel dynamics is going to change over next couple of years as the retailers start growing in size and their bargaining power is likely to increase. Probably that would bring some kind of mutual understanding between manufactures and retailers to develop strong supply chain network. In such a scenario, both the existing operators and new operators must put collaborative efforts to phase out inefficiencies in the supply chain network.

Now, let us try to find out what efforts are being taken up by the big retailers in India like Future Group with retail stores like Big Bazaar and Pantaloons, Reliance Retail and Wal-Mart & Bharti to improve the efficiency and effectiveness of supply chain and logistics. We will also try to find out the changed role of Agriculture Produce Marketing Cooperatives and third party sourcing firms.

Future Group Future Group is the country's leading retail business group that caters to the entire Indian consumption space. It

operates through six verticals: Future Retail (encompassing all lines of retail business), Future Capital (financial products and services), Future Brands (all brands owned or managed by group companies), Future Space (management of retail real estate), Future Logistics (management of supply chain and distribution) and Future Media (development and management of retail media spaces).

The group's flagship company, Pantaloon Retail (India) Limited operates over 5 million square feet through 450 stores in 40 cities. Some of its leading retail formats include, Pantaloons, Big Bazaar, Central, Food Bazaar, Home Town, EZone, Depot, Health & Beauty Malls and online retail format. The group's joint venture partners include Italian insurance major, Generali, French retailer ETAM group, US-based stationary products retailer, Staples and UK-based Lee Cooper and India-based Talwalkar's, Blue Foods and Liberty Shoes.

Future Group is working on the vendor network as well as the logistics network. The company has identified up to 40 anchor vendors, each with turnovers of US$45 million, to achieve economies of scale. The group is also keen to ensure that its smaller vendors are able to reach turnovers of around US$1 million and a growth rate of 40% annually, to be able to pass on the benefits of scales. The company is also working towards bringing its 1,200 vendors online, like WalMart.

Going further in this direction, the Future Group has also launched Future Logistics initially aimed at handling the supply chain logistics of the group. However, sensing immense opportunity in this area, the company is now looking to offer its services to its 1000-odd vendors, spread across consumer related goods, to reach a targeted turnover of about Rs.700 crore by 2010.The thrust at present will be on modes of surface transport like roads and rail only. However, at a later stage, sea and air modes might also be considered as per the requirement, said sources.

In India, Future group derives significant economies of scale in managing their supply chain. With more than 170000 products, the company maintains a strong supplier relationship in a partnership mode, avoiding the exploitative supplier – buyer transactional philosophy. The IT enabled back-end operations and supply chain management increases the reliability and efficiency of the business.

As part of the operation, Future Group is also undertaking to reduce its warehousing costs through a consolidation process. In a country like India, where most retail stores are located in the heart of the city—where rents are high and storage space is scarce—supply chain management has even more serious business implications. Future Logistics now handles two-and-a-half million SKUs (or stock keeping units) a day across the Future Group's various retail formats around the country. By 2010, this number is expected to increase to more than 30 million SKUs a day. Even with 98% accuracy, some 600,000 pieces will not be delivered correctly, resulting in an estimated sales loss of more than Rs 4 crore a day.

The biggest driver in consumer logistics is going to be zero defect in managing the supply chain. While infrastructure, technology, automation, processes and people will all play an important role, zero defect can only be achieved through vertical integration across the entire supply chain—from raw material supply, production, wholesale and retail. The

different parts of the supply chain will no longer be able to work in silos as they do today.

Reliance Fresh Reliance Retail is also going to open one store for every 3,000 families within a radius of 2 km across all locations by 2011. The company is competing directly with the large number of traditional local provision stores. Reliance Retail is either going to set up new stores in the identified areas or take over existing stores. The company has already done that in Mumbai and other cities.

Of the four million sq ft of retail space to be created under the "Reliance Fresh" brand (for groceries), one million will be through acquisitions. The retailer is also moving into laundry, personal care and apparel product lines, in which it plans to launch private labels. Reliance is planning to roll out its specialty format stores this year, beginning with consumer durables, for which it has struck sourcing deals with companies in Hong Kong, the Chinese mainland and with Videocon in India.

To strengthen its links with farmers, the company is setting up integrated agri-retail business centres, which include three processing and distribution centres, 51 retail outlets for farmers and 75 rural business hubs, all with an investment of US$445 million. Many companies, looking at the retail boom in food and grocery, are setting up ventures to help retailers source these goods.

Reliance Logistics Ltd part of Reliance Industries Ltd, currently handles Reliance Retail's logistics services.

Wal-Mart and Bharti The success of Wal-Mart is well known all across the world. One of the major factors behind their success is the right implementation of supply and logistics management. Now the same Supply Chain and Logistics Management take a front seat here and that's why Wal-Mart is coming to India in a joint venture with Bharti Group. Here, Wal-Mart is going to manage the back end operation, while Bharti will manage the front end operations.

Wal-Mart has also stated that it would replicate its global supply chain model in India, while taking into account the unique features of the Indian market. They are also going to emphasise on local sourcing of goods. Besides sourcing locally, Wal-Mart, through its international operations is also in a position to source globally. The company is set to roll out its first set of stores by the first quarter of 2008, in cities that have a population of one million. Wal-Mart claims it will take 35% of the Indian retail market by 2015.

It is the sheer importance of the logistics management that Wal-Mart's fully-owned logistics arm Gazeley has already confirmed its India foray and is going to look after the Wal-Mart and Bharti retail venture. They are closely studying various logistics providers like Radhakrishnan Foods, before they finally closes on its India model. Again, Bharti Enterprises is directly negotiating with the rail authorities instead of negotiating with a logistics provider.

Wal-Mart and Bharti FieldFresh Just like Reliance Fresh, Bharti Group in a joint venture with NM Rothschild is launching Field Fresh to provide premium quality fresh produce to markets worldwide. It has over 5,000 acres of land under cultivation all over the country producing many varieties of fruits and vegetables and is planning to double land under cultivation by the end of 2007.

The company is to supply fresh produce to the Bharti-Wal-Mart venture. To ensure best qualities and varieties, Field Fresh has engaged ACM China, an industry leader in building greenhouses, to set up state-of-the-art glass-based greenhouses at the Field Fresh Agri Centre of Excellence in the Punjab. Field Fresh is also planning investments to the tune of US$220 million in the backend, including investments in cold chains and warehouses. Bharti's Field Fresh will enter this segment within the next three months. A number of companies are also venturing into this segment to service the backend needs of retailers.

Agriculture Produce Marketing Cooperatives in India The Indian Retail Revolution is also changing the way farm produce was marketed in India. Now even the farmers are getting benefited due to less or no middlemen involved in the selling process. Till now, the Indian fresh produce marketing was controlled by state-owned Agriculture Produce Marketing Cooperatives (APMCs). Now it is also changing with reforms in the APMC Act in many states. This has opened up the space for private players, and all major retailers are setting up private 'mandis' (marketplaces), from where they can directly source their requirements of fresh foods. Almost everyone in the retail sector like Reliance, Future Group, Bharti – Wal-Mart, Subhiksha are setting their bases at the places of farm produce to source vegetable, fruits and other farm products.

Sourcing Firms Besides the presence of retailers in the countryside for farm produce sourcing, now there are also few players; who are helping various retail chains for their sourcing requirements. For instance, DCM Shriram Consolidated Ltd (DSCL) is in the process of tying up with them to source fruits and vegetables from farmers and supply to the retail chains. DSCL is already doing this for Future Group's Food Bazaar, south based Subhiksha and RPG's Spencer. The new tie-ups would help the company to operate on economies of scale, and to operate all over the country.

Ordering Process : Team Members to maintain the log book for their section (as given in 'order log book' sheet)

 Stockist to check the Ware house quantity.  Team Leaders to see the requirement for the stock & raise a purchase quantity & fill in the log Book.TL will place the order in line with the MBQ fixed.  Vendor wise log file to be passed to cataloguers for generating the final PO  Cataloguers to sign the register while receiving the ordering log book & while giving back to TL /DM.  DM authorizes the final PO  For the stock lifting of promotional offer ASM to be involved.

A big challenge in retail organizations to know supply chain management. Often, the functions merge with purchasing and inventory management. So, as a purchasing professional, you must understand inventory management principles to remain valuable. * First, you must know how much inventory to have on hand to ensure continuity of supply in the event of an uncharacteristic increase in either demand and/or lead time. This quantity of inventory is called the safety stock. There is no universally used formula for determining safety stock quantity, but Purchase Tips suggested a risk adverse calculation. * Second, you must know when to reorder materials for inventory. Generally, this point in time is determined when the quantity of materials in stock decreases to a certain level, called the reorder point. The reorder point is determined by the formula: ROP = SSQ + (QUD x ALT) Where, ROP = Reorder Point SSQ = Safety Stock Quantity QUD = Quantity Used Daily ALT = Average Lead Time (in days) Third, you must know how much to order. A complex mathematical equation determines the Economic Order Quantity, or EOQ. The equation recognizes the tug of war between acquisition costs and inventory carrying costs: when you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due

to higher inventory levels. Conversely, when you order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering. The EOQ is the order quantity that minimizes the sum of these two costs.

Here the EOQ formula:

Where: EOQ = Economic Order Quantity ACPO = Acquisition Costs Per Order AUU = Annual Usage in Units UC = Unit Cost CCP = Carrying Cost Percentage Example So, if you know that it costs you 150 Rs. in overhead per order, you use 5,000 widgets a year, you pay 200 Rs per widget, and your Finance Department tells you that annual carrying costs are equal to 20% of the value of the goods in stock, you should order...

What is the value of the marginal revenue when total revenue increasing when revenue totals is maximum when total revenue decrease? Marginal revenue is the amount of revenue which comes from every increase of unit sales. Take an example. 5 mangoes sold at 60 Rs. 6 mangos sold at Rs 70. Thus the marginal revenue for 6th mango is 10/- Rs .

Formula of marginal revenue = total sales value / no of units (-) total sales value / no of units (after adding the units) 4

Food & Groceries to drive topline growth… The entire retail industry can be divided into two segments Value retailing, which is typically a low margin-high volume business (primarily food and groceries) and Lifestyle retailing, a high margin-low volume business (primarily apparel, footwear, etc.). Pantaloon is currently the only listed player in the retail industry that caters significantly to both the Value and Lifestyle business segments. Despite being a low margin business, Value retailing has been able to attract much greater customer traffic at retail malls and has helped retail companies, such as Pantaloon, to record a stupendous topline growth over the last few years. For Pantaloon, the contribution of the Value retailing business rose from 52% of the topline in Q1 FY05 (quarter ending Sep’04) to 72% in Q1 FY07 (quarter ending Sep’06). New entrants in the Indian retail industry, such as Reliance and the upcoming Bharti-Wal Mart, are also aiming to tap the Value-retailing segment in a big way and expect food and groceries to contribute around 40% to the topline. Both Reliance and Bharti-Wal Mart have already taken initiatives for regular supply of groceries and food items and are in the process of entering into agreements with big farmers for direct procurement of their food production at a price that is slightly higher than the prevailing market price. Such agreements between farmers and retailers will create a win-win situation for both the parties, as the former will obtain a better price for their production, while the latter will be able to attract increased customers by providing low cost products. The only losers will be the intermediaries.

Margin pressure to continue into the future… A higher contribution from the low margin Value retailing segment will maintain the pressure on the margins of retailers in the coming years. Moreover, higher operating expenses, primarily employee cost, lease rentals and selling and distribution expenses will further increase the pressure on

margins in the coming years. The rise in employee cost is primarily due to shortage of talented and skilled manpower in the industry, which is typical of a fast growth industry. Moreover with an increase in the number of retail players in the domestic industry, both the existing as well as the Despite being a low margin business, Value retailing has been able to attract much greater customer traffic at retail malls and has helped retail companies, such as Pantaloon, to record a stupendous topline growth over the last few years Both Reliance and Bharti-Wal Mart have already taken initiatives for regular supply of groceries and food items and are in the process of entering into agreements with big farmers for direct procurement of their food production at a price that is slightly higher than the prevailing market price A higher contribution from the low margin Value retailing segment will maintain the pressure on the margins of retailers in the coming years. Moreover, higher operating expenses, primarily employee cost, lease rentals and selling and distribution expenses will further increase the pressure on margins in the coming years… … with an increase in the number of retail players in the domestic industry, both the existing as well as the new entrants will be forced to incur higher selling and distribution cost towards brand promotion and efficient sourcing of goods

FIRST GLOBAL www.firstglobal.in India Research EBIDTA Margin (%) trend

3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Q1FY05 Q2FY05 Q3FY05 Q4FY05 Q1FY06 Q2FY06 Q3FY06 Q4FY06 Q1FY07 Q2FY07

Shopper's Stop Pantaloon Trent

new entrants will be forced to incur higher selling and distribution cost towards brand promotion and efficient sourcing of goods. The fact that the market is unlikely to grow fast enough to absorb the investments being made in the industry (see “The First Global’s Series on the Indian Retail

Sector”, Part-I) only means greater competition to get the consumer’s attention and share of wallet. Source: Company Financials, First Global

Even historically, such a rise in operating expenses has kept margins under pressure and we believe that a further rise is inevitable, which will therefore, mean a continued margin squeeze.. We believe that margin pressure will be common feature for all the industry players, as players in the Lifestyle segment, such as Shopper’s Stop and Trent, who have minimum presence in the Value retailing segment, will also face the problem of high employee cost and selling & distribution cost, as well as competition from both nationwide, as well as more regional chains. Even historically, such a rise in operating expenses has kept margins under pressure and we believe that a further rise is inevitable

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companies ahead… Till now, the big FMCG giants and consumer durable companies had much greater bargaining power, which provided them enough muscle to arm-twist the small unorganised retailers. However, with the conversion of unorganised retail to organized retail, several large organized retail players will emerge, which will lead to a decline in the bargaining power of the former and may have an adverse impact on their margins and/or working capital. This is something, which is already visible in developed economies. The success of both organized retail companies as well as the FMCG/Consumer durables company are complementary to each other. For instance, both Reliance and HLL are complementary for each other’s success, since a Reliance store without any HLL product may not be able to attract much customers and similarly HLL may miss an opportunity if its products are not available in a Reliance store, especially considering its fast-pace expansion plan. We believe that since the FMCG/Consumer durable companies will not be able to With the conversion of unorganised retail to organized retail, several large organized retail players will emerge, which will lead to a decline in the bargaining power of the former and

may have an adverse impact on their margins and/or working capital. This is something, which is already visible in developed economies FIRST GLOBAL www.firstglobal.in India Research

enjoy the same high bargaining power with organized retailers, as earlier with the unorganised (primarily Kirana stores) retail players, they will definitely face margin pressure in the coming years. The extent of such margin pressure will depend upon the bargaining power of both organized retail players as well as the FMCG/Consumer durables companies, since both are complementary to each other. The more likely impact will be on working capital management, where the negative working capital historically enjoyed by major FMCG companies, which could arm-twist their distributors to pay cash in advance, may be a thing of the past. for Integrated Learning in Management, New Delhi.

Dabur India—Working Capital and Cost Management Narender L. Ahuja Sweta Gupta After running as a family business for over 100 years, when in late 1990s, the management of the Dabur was handed over to a team of professional managers, the new management faced a gigantic task of improving performance in several critical areas. In particular, working capital and cost management required urgent attention as the company’s performance in these areas had been far from satisfactory. The then prevailing current ratio of 3:2 and quick ratio of 2:4 were considered too high and indicative of heavy unnecessary investments in working capital that would have a negative effect on company’s profitability. Efforts to improve the working capital efficiency were met with stiff resistance from various quarters, but finally yielded results. The case study discusses the measures taken to improve the working capital and cost management performance, and how with concerted efforts the management turned around a highly inefficient working capital management into one of the most efficient in the FMCG sector of the Indian industry. In fact, the company seemed to have taken the matter to the other extreme of negative working capital, with the current ratio declining to 0:8 and the quick ratio to just 0.4 in 2004–05. In 2005–06 as the company was ready to launch itself into the next phase of fast growth, several critical issues related to the liquidity and solvency of the company confronted the management which are also discussed in the case study.

company’s staff canteen. Bo (nick named for Bose) had spent the morning studying

the company’s balance sheets for the years 2003–04 and 2004–05 and was surprised to see that the company’s current liabilities exceeded its current assets. He remembered reading in his textbooks that such a situation GLOBAL BUSINESS REVIEW, 8:2 (2007): 335–350 SAGE Publications Los Angeles/London/New Delhi/Singapore DOI: 10.1177/097215090700800210 by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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indicated that the company could face difficulties in meeting its short-term liabilities. ‘I don’t know about that’, Sharad replied, ‘but I think it is a highly profitable company’. ‘Sure, no problem with the company’s profitability. In fact the net profit in 2004–05 jumped by as much as 46 per cent to Rs 148 crore from Rs 101 crore last year’. ‘Wow, that’s a lot of increase in one year,’ Sharad said, ‘in fact I am told that the company has an impressive market share in its product line and is the fourth largest FMCG company in India. But if the company is making high profits and has a good market share, then where is the problem?’ Bo was ready with his reply, ‘The way I understand, that could be a common trap for the profitable but fast growing companies. Liquidity and profitability are two separate issues and it is naïve to assume that a profitable company would necessarily be liquid too. See, what happens is that in order to provide finance for expansion and diversification projects, a company could cut down on inventories, reduce the credit period to customers while at the same time seek extended credit facilities from its suppliers of raw materials, other goods and services. Also, it tries to manage with nil or as little cash in hand as possible. As a result, the current assets represented by inventories, debtors and cash would be reduced and current liabilities represented by creditors would increase, culminating in a situation when the company might not have enough current assets to pay for its current liabilities if all creditors wanted them to be settled at once, what to talk about leaving some surplus to continue with its normal business operations’. Bo said emphatically. Dabur India’s corporate office was housed in a beautifully landscaped, imposing six storied glass building set on several acres of

prime land at Kaushambi adjacent to New Delhi. ‘Well, if the company can make its working capital more efficient, I don’t see anybody should have a problem with that. But don’t forget we have an orientation meeting with the finance department in a little while from now’. Bo was too engrossed with his own thoughts to be affected by such interruption, and continued, ‘The traditional wisdom of having a positive networking capital means that at least some part of the working capital finance should come from the company’s long term sources so that at any time, even if the company has to settle all its current liabilities at once, it would still be left with some minimum current assets with which it could continue to do its normal business. In technical terms, they say a company needs some permanent working capital and a fluctuating working capital. From what I have read, ideally the permanent working capital and maybe some part of the fluctuating working capital also should be financed out of the company’s long-term sources in order to ensure good liquidity and avoid the threat to its solvency’. Sharad looked at his watch, ‘My friend, times are changing. Reduction in inventory and debtors could as well be a management strategy. The Japanese have shown the world how to manage with zero inventories. As far as debtors are concerned, when a firm can sell on cash or near cash terms, why should it sell on credit just to make the balance sheet fit in to your traditional wisdom? Modern by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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enterprises have to be efficient, lean and mean, if we could put it that way, to remain competitive’. Bo did not like this argument and said, ‘You don’t get the point, do you? Once a company defaults on payment of any of its current liabilities, the word spreads like wild fire and affects the company’s image and credit rating. With lower credit rating, not many lenders would come forward if it wanted to borrow more, and even if they do, it would cost the company dearer. All this might just start a roller coaster the company might not have bargained for’.

Sharad did not like Bo’s habit of lecturing, and firmly said, ‘Bo, come out of the textbooks. I think there’s more to liquidity than just the ratio of current assets and current liabilities’. Then getting up he said, ‘Any ways, let’s not be late for the orientation meeting. We can continue with our discussion later on’. The stage was already set for the orientation meeting by the time Bo and Sharad walked in. The meeting had a touch of professional perfection and was more detailed and thorough than they had anticipated. Mr D.K. Chhabra, Additional GM—Financial Planning, made an impressive PowerPoint presentation and dealt with many aspects including the company’s history, handing over of the management to professional team, current challenges and future strategy. Some PowerPoint slides are reproduced in the annexure.

The Company The story of Dabur began with a visionary endeavor by Dr S.K. Burman to provide effective and affordable natural cures for the killer diseases of those days like cholera, malaria and plague for ordinary people in far-flung villages in Bengal. Soon ‘Daktar’ (Doctor) Burman became popular for his effective cures, and that is how his venture Dabur got its name—derived from the Devanagri rendition of Daktar Burman. Dr. Burman set up Dabur in 1884 to produce and dispense Ayurvedic medicines, with the vision of good health for all. More than a century later, by 1990s Dabur had grown manifold. Over the years, the family has understood the need for incorporating a professional management team that would be able to launch Dabur onto a high growth path in the emerging competitive environment. Therefore, in 1998, the Burman family started handing over the management of the company to professionals and downscaled its direct involvement in day-to-day operations. In 2003, with the approval of the Delhi High Court, the company demerged its pharmaceutical business to a new company, Dabur Pharma Limited, to ‘unlock value in both pharma & FMCG business’. As a result, the entire pharma business was transferred to the said company.

By 2005, Dabur India had emerged as a leading nature-based health and family care products company with eight manufacturing units, 5,000 distributors and over 1.5 million retail outlets spread all over India and abroad. Dabur crossed a turnover of Rs 1, 000 crores in year 2000–01, and further Rs 1,300 crore in 2004–05; thereby establishing its market leadership in its line of activity. Its main product lines include: • Hair-care: Vatika, Dabur Amla Hair Oil by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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• Health supplements: Glocose-D, Dabur Honey, Chyawanprash, Real • Digestives and confectionaries: Hajmola, Anardana Churan • Oral care: Dabur Lal Dant Manjan, Dabur Red Toothpaste • Baby and skin care: Dabur Tel, Gulabari

The New Management

With the professional management team taking over in 1998, there was a significant change in the focus, approach and strategy of managing the company. Earlier, the company used to focus mainly on bottomline growth, that is, on improving the profits, while the new management stressed on improving efficiency and performance in all areas. With the help of management consultants from Mckinsey, the company changed its organizational structure for better responsibility accounting. Various departments were introduced/rationalized including the supply-chain, sales and marketing, purchase/ procurement etc and their functions were clearly defined. The planning and budgeting activity was strengthened, performance oriented incentives were put in place and the finance department was made the custodian of all MIS. The finance department instituted a system of regular comparative evaluation of the company’s performance vis-à-vis other FMCG competitors using detailed financial ratios analysis; this aspect was somehow not given due importance in the earlier management regime. The main idea behind introducing such changes was to improve not only the bottom-line of the company but to induce competency in all functional areas. One area which the new management considered as full of potential was the management

of working capital. A lot of investment seemed blocked in inventories and debtors, which was pulling down the overall return on capital employed (ROCE). There was an opportunity and a need to trim down investment in this area. Therefore, the company focused on reducing the working capital needed for the operations. The company set a target of achieving zero networking capital by year 2000–01 and aimed at further reducing it to negative levels in the long term. A number of initiatives were taken to reduce the cost of different components of working capital. However, it was not an easy task as the management faced stiff resistance and opposition from its bulk customers and stockists, suppliers of raw materials and other services, as well as internal departments.

Inventory Management and Cost Reduction Given the large variety of products that are manufactured and marketed, and hundreds of different raw materials used by the company, accurate forecasting of inventory is very important for effective working capital management. A wrong forecast can lead to piles of inventory, thus blocking unnecessary investment and increasing storage cost as well as the risk of damage associated with perishable items. After the new management took over, an inventory management system was instituted involving all related departments like procurement, manufacturing, marketing, sales and supply chain. The finance department is involved throughout the process and by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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helps in linking all operations and controlling flow of information through various departments. The annual planning process begins in November–December each year with the objective of finalizing the company’s annual budget, before the start of the next accounting year from April. The sales targets for the forthcoming period are set by MANCOM (Management Committee), which comprises the heads of functional areas like Sales, Marketing, Human Resource, Commercial, Supply chain, and Production and Finance taking the company’s product-packaging mix of approximately one thousand (1,000)

SKU’s (Stock Keeping Units) into consideration. The sales targets take into account the sales trends and special promotion schemes. On the basis of sales targets set for the forthcoming period, the sales department establishes product-wise requirements of the finished goods. This information is used by the production department to prepare a rolling production plan and establish the quantity of each type of raw material required for meeting the production targets. This information on raw material requirements is then communicated to the purchase/procurement department. As the production department itself establishes the requirements of raw materials to be purchased, it prevents excess purchases and helps in reducing the storage cost as well as the cost of funds blocked in inventories. For each item purchased, a safety stock is identified and maintained to take care of any fluctuations in lead-time and usage of raw materials before fresh supplies would arrive. Suitable safety stocks are maintained for finished goods too. Raw materials have been classified on the basis of value, quantity required and location of procurement. While purchases of more valuable items are taken care of by the central procurement unit, low-value and/or low-number items may be locally purchased on a decentralized basis. The main aim is to minimize the cost of the raw materials including transportation cost. Specialized professionals (called Category Managers) are appointed to look after the procurement of various types of raw materials. As far as possible, the company procures materials on back-to-back basis following the Just-in-Time (JIT) approach. However, JIT inventory system is not applicable for all inputs. Many of its inputs are agricultural products that are available at cheaper prices seasonally when fresh crops arrive into the market. If the annual requirement of raw materials is not purchased/tied-up during this period, the company may have to pay much higher prices which could rise by as much as 50 per cent to 75 per cent in the off-season months. As a result, the company must procure such raw materials within the period of their seasonal abundance (typically just 45–

65 days) and preserve them for later use. Often, enough stocks are procured to partly use them in the current year (40 per cent) and partly (60 per cent) next year. Fortunately, with the start of the Commodities Exchange in India, the company has an alternative way of managing raw material cost, and that is by taking a position in the derivatives (futures and options) market. For example, suppose the company can buy a call option for 1 million kg of material X at an exercise price of Rs 15 per kg with a maturity by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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of 3 months. The call option gives the company a right (but not obligation) to buy the stated quantity of X at the agreed exercise price. To buy a call option the company will have to pay a cost, called premium (say Rs 0.50 per kg), but at the same time the call option will hedge it against possible losses if the market price of X rises beyond the exercise price before the maturity of the option. For example, if the price of X rises to Rs 18 per kg, the company will find it advantageous to exercise its option to buy it at Rs 15. Usually, the company enters into futures and options contracts for periods ranging from 3 to 9 months. Hedging combined with e-procurement has significantly helped the company in cost control and reduction. According to the CFO, Mr Rajan Varma, ‘We managed to cut costs through our e-procurement system. We as a company may or may not have control over commodity prices, but our marketing and purchase guys are taking futuristic positions and even though this practice constitutes a business risk it is beginning to show results’. Another significant tool of cost reduction used by Dabur India is ‘value engineering’ to identify and develop more cost effective materials. For example, this has resulted in reducing the cost of packaging for several of the company products. Research and development activities have also helped in reducing the time of processing which has increased productivity. In non-manufacturing areas too, the company has been looking for opportunities to cut down the costs. In 2003, the company applied for and got the court approval for

de-listing of its shares from several regional stock-exchanges including Ahmedabad, Bangalore, Delhi, Jaipur, Ludhiana, Magadh and Uttar Pradesh stock exchanges. The trading volumes of the company’s shares at these stock exchanges had been negligible for many years and by de-listing its shares from these regional stock exchanges, the company saved itself from considerable costs as well as regulatory provisions.

Debtors Management The company has mainly three types of customers: stockists, institutions and international/ export customers. The company does not have a standard credit policy that could be applied to all customers. Instead, distinct credit terms are offered to each group depending upon various factors such as the product, place, price, demand and competition. 1. Stockists: In 2005, the company had about 1.5 million stockists. The credit terms to the stockists vary from 1–10 days depending upon factors stated above as well as their locations vis-àvis the depot towns. Depot towns are mostly the state capitals or other commercial towns/cities where the company has its own sales depots operating. • Stockists in town depots: 70 per cent of the company’s stockists are located in or around the depot towns. At these places, the company uses the Cash Management System (CMS) offered by banks; stockists’ cheques collected till the end of a day by on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 341 Global Business Review, 8:2 (2007): 335–350

are deposited next morning into the company’s local bank account from where the funds are transferred to the corporate bank account. Earlier these stockists used to enjoy five days credit period but now the company has decreased the time frame to one day. For new stockists, sales are normally made through demand drafts. If a stockist’s cheque bounces, then the party has to make payment only by demand-draft. If a party defaults on payment (or a party’s cheques bounce) more than

once, then for all its transactions with Dabur India in the coming year, the party would be required to make payments only by demand-drafts. • Stockists in remote areas: The rest 30 per cent of the turnover with stockists takes place at remote places away from depot towns with no easy access to banks so that the ‘anywhere cheque’ system is logistically not possible. Such stockists may be allowed a credit period of up to 10 days. On the average, the money is credited in company’s bank account in 3–7 days. 2. Institutions: Institutions like canteen stores department (CSD), large stores, hotels and modern malls are offered soft payment terms that may range from 15 to 90 days. Though such institutions are slower in making payments, the higher profit margins on such sales more than make up the cost of extended credit. 3. International Customers: Similarly, credit terms negotiated with export customers would depend on the international competition and product pricing. Where longer credit terms must be offered as a part of the marketing strategy, the company often resorts to ‘factoring’ as a means of financing debtors. The factoring arrangements are made with banks or specialized factoring companies. In these cases, the company makes sure that profit margins from such sales are high enough to cover the cost of factoring.

Cash Management As stated above, the company maintains bank accounts at all depots towns. Cheques/ drafts received from customers in nearby places are sent for local clearing to initially collect funds in these bank accounts. This reduces the average collection period (as compared to the time it would take if customer cheques were first received at headoffice and then sent for out-station clearing); thereby increasing the velocity of cash inflows. Funds thus collected at the depot towns are each day transferred to the company’s head-office (or corporate) bank account. The

company has a ‘sweeping arrangement’ with the bank at head-office by which any funds transferred from the depot towns are automatically applied towards settling the company’s cash credit loan from the bank and reducing its debit balance. These steps have resulted in reducing and controlling the cost of interest to the company. When the company has surplus funds, the company invests the same in short-term by on November 20, 2008 http://gbr.sagepub.com Downloaded from

342 _ Narender L. Ahuja and Sweta Gupta Global Business Review, 8:2 (2007): 335–350

investments or instruments like mutual funds and government securities.

Suppliers

The company has more then 1,000 suppliers inclusive of service providers like advertisement companies. Out of these, 100–150 are regular suppliers. Most suppliers are small business units with annual trading volume of Rs 2–3 crore with Dabur India. The company enjoys credit periods ranging from seven to 90 days from the creditors, which can at times be extended up to 120 days. The suppliers use the bills discounting to avail bank financing against their receivables from Dabur India and bear the bank charges as well. However, if the credit period is extended beyond 120 days, the bills discounting charges are borne by Dabur India. Financing Working Capital: The company makes an aggressive use of all ethical means to increase the velocity of cash inflows from customers and tries to slow down the cash outflows to creditors. Credit facilities from suppliers of raw materials, other goods and services are therefore the main sources of financing working capital. However, it has not been easy for the company to negotiate favourable terms with its debtors and creditors. The Dabur management spends considerable time and effort to train debtors and suppliers in modern ways of financing such as factoring or bills discounting, and helps them by bank introductions etc. When a policy change in credit terms seems necessary, it is first negotiated with the big creditors and debtors before being implemented for all suppliers and customers. Discussions with suppliers take place in a highly transparent manner. Among the methods used to control credit are techniques

such as regression, progression, slap or standardized terms. The management identifies and bridges the communication gaps through educating the suppliers.

Supply Chain Management The supply chain management in Dabur India is a key factor impacting sales, profitability and working capital. Exhibit 1 shows the supply chain flowchart. An efficient supply chain system helps in value creation for the business in four important ways. These are: (i) Positive impact on sales: created by improved service through reliable and regular flow of quality goods to retailers and end-use customers. (ii) Reducing investment in inventories and increasing accounts payables, (iii) Cost management: lower inventory levels result in lower carrying cost, which is approximately 10 per cent per annum on the average inventory held. Thus, if inventory holding reduces by Rs 10 million, it will lead to a saving in carrying cost of about Rs 1 million per annum. Cost savings also result from the better coordination between inventory planning, acquisition and usage departments and (iv) Facilitating optimum use of the firm’s fixed assets and infrastructure by increasing inventory turnover. Role of the Finance Department The finance department is involved in all aspects of financial planning and control. It maintains a quarterly score card, which helps by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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the company to evaluate the performance of employees in terms of cost to company (CTC). Managerial remuneration consists of a fixed salary plus bonuses based on performance on a variety of parameters including maintenance of inventory levels and other working capital items within agreed limits. The department also prepares MIS and communicates the same to all the concerned departments. It also continuously monitors the management of inventory, debtors and creditors to ensure that the net working capital remains within the budgeted levels. If, for example, the investment in inventory exceeds the planned limits due to some unavoidable circumstances, it must be offset by either an increase in creditors or a

reduction in debtors. The orientation meeting was coming to a close. The AGM concluded by saying, ‘Ever since the professional management took over the reigns of the company, efforts have been made to upgrade efficiency in all aspects of business to build a competitive edge and improve the return on investment. I may add here that, in my personal opinion, the balance sheet as per the current provisions of the Companies Act does not show a true picture of the company’s liquidity. This is because the company’s investment in marketable securities is at present not allowed to be included in the current assets. Therefore, the company actually has a better liquidity position than reflected by the net working capital as shown in the balance sheet.’ Bo was so absorbed in the presentation that he remained seated even after it was over and others starting leaving the small but well furnished conference hall. He was shaken out of his thoughts when he heard Sharad, Exhibit 1 Supply Chain Flow Chart by on November 20, 2008 http://gbr.sagepub.com Downloaded from

344 _ Narender L. Ahuja and Sweta Gupta Global Business Review, 8:2 (2007): 335–350

‘Wow, I didn’t know managing working capital involved so many aspects. What do you think?’ ‘Well, definitely it has been a learning experience. I guess I have to start analysing the company performance all over again. To fully understand the evolving financial strategy, may be I should begin with a comparative analysis of Dabur India’s performance against its competitors, say HLL, for some years before and after 1998 when the change in management took place’. Bo said as they followed others out of the hall.

Questions

1. Assume this is 1998–99. The new management wants to identify areas with potential for improving performance, particularly in the area of working capital. For this purpose, taking HLL financial performance as a benchmark, carry out a financial ratios analysis for Dabur India for the period 1995 to 1998, and identify the areas where there is need for improving performance. Use the summarized data in Exhibits 2 and 3

for this purpose. 2. Using data in Exhibit 4, calculate various working capital ratios for Dabur India for the years 2003–04 and 2004– 05. Compare these with similar ratios for the years 1995 to 1998. Identify the trends and discuss their implications on cost management and other aspects. 3. What do you think are the advantages and disadvantages of a ‘negative’ net working capital policy? If you are the CFO of a company, which policy would you like to follow and why? 4. What is the importance of cost control and reduction in the emerging business environment? Using Dabur India’s experience as an illustration, discuss the techniques or methods that a company could use to reduce costs. 5. What is hedging and how can futures and options contracts be used to hedge against adverse price rises? Prepare a note on Commodities Futures and Options markets in India. (Skip this question if not relevant to the specific training group). 6. Using internet and other available sources collect latest financial information on major competitors in the FMCG sector and carry out a detailed financial ratios analysis covering as many aspects as possible. by on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 345 Global Business Review, 8:2 (2007): 335–350 Exhibit 2a HLL Summarized P & L Accounts: 1995–98 (Rs. Crore) 1995 1996 1997 1998 Sales and other income 3434 6718 8004 9727 Expenditure Operating expenses 3018 6001 7062 8466 Depreciation 24 55 58 102 Interest 20 57 34 29 Total Expenditure 3062 6113 7154 8597 Profit before tax 372 605 850 1130 Tax for the year 133 192 270 293 Profit after tax 239 413 580 837 Source: Annual Reports of HLL. Exhibit 2b HLL Summarised Balance Sheets: 1995–98 (Rs. Crores) 1995 1996 1997 1998 Sources of Funds Shareholders’ funds 816 1170 1261 1713 Share Capital 146 200 199 220 Reserves and surplus 670 970 1062 1493 Loan funds 160 259 187 264

Total 976 1429 1448 1977 Application of Funds Net Fixed assets 396 722 794 1054 Investments 122 328 532 697 Current Assets 1337 1829 2201 2609 Inventories 685 904 1045 1146 Receivables 563 722 582 803 Cash and bank balances 89 203 574 660 Current Liabilities and Provisions 879 1450 2079 2383 Net Current Assets 458 379 122 226 Total 976 1429 1448 1977 Source: Annual Reports of HLL. by on November 20, 2008 http://gbr.sagepub.com Downloaded from

346 _ Narender L. Ahuja and Sweta Gupta Global Business Review, 8:2 (2007): 335–350 Exhibit 3a Dabur India Summarised P & L Accounts: 1995–98 (Rs. Crores) 1995 1996 1997 1998 Sales and other income 436.6 608.6 716.2 835.3 Expenditure Operating expenses 379.3 530.6 629.4 745.9 Depreciation 8.1 12.1 11.3 16.2 Interest 18.3 24.5 32.0 29.4 Total Expenditure 405.7 567.2 672.7 791.5 Profit before tax 30.9 41.4 43.5 43.8 Tax for the year 7.0 7.0 1.1 0.3 Profit after tax 23.9 34.4 42.4 43.5 Source: CMIE software ‘Prowess’. Exhibit 3b Dabur India’s Summarised Balance Sheets: 1995–98 (Rs. Crores) 1995 1996 1997 1998 Sources of Funds Shareholders’ funds 135.2 161.0 194.8 227.3 Share Capital 28.5 28.5 28.5 28.5 Reserves and surplus 106.7 132.5 166.3 198.8 Loan funds 144.2 191.1 214.0 271.4 Total 279.4 352.1 408.8 498.7 Application of Funds Net Fixed assets 72.2 105.6 160.6 206.0 Investments 35.5 24.5 34.1 43.1 Current Assets 246.1 317.2 290.5 327.3 Inventories 62.8 107.5 96.8 118.1 Receivables 176.8 203.3 187.2 188.8 Cash and bank balances 6.5 6.4 6.5 20.4 Current Liabilities and Provisions 77.4 97.8 78.8 85.7 Net Current Assets 168.7 219.4 211.7 241.6 Misc. expenses not w.off 3.0 2.6 2.4 8.0 Total 279.4 352.1 408.8 498.7 Source: CMIE software ‘Prowess’. by on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 347 Global Business Review, 8:2 (2007): 335–350 Exhibit 4a Dabur India Balance Sheets as at 31st March 2005 and 2004 by on November 20, 2008 http://gbr.sagepub.com Downloaded from

348 _ Narender L. Ahuja and Sweta Gupta Global Business Review, 8:2 (2007): 335–350 Exhibit 4b Dabur India Profit & Loss Account for the years ended 31st March 2005 and 2004 by on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 349 Global Business Review, 8:2 (2007): 335–350

ANNEXURES

Dabur’s Vision and Philosophy

1. Ownership 2. Passion for Winning 3. People Development 4. Consumer Focus 5. Team Work 6. Innovation 7. Integrity This is our company. We accept personal responsibility, and accountability to meet business needs. We all are leaders in our area of responsibility, with a deep commitment to deliver results. We are determined to be the best at doing what matters most. People are our most important asset. We add value through result driven training, and we encourage & reward excellence. We have superior understanding of consumer needs and develop products to fulfill them better. We work together on the principle of mutual trust & transparency in a boundary-less organisation. We are intellectually honest in advocating proposals, including recognizing risks. Continuous innovation in products & processes is the basis of our success. We are committed to the achievement of business success with integrity. We are honest with consumers, with business partners and with each other. Dabur Mile Stones • 1884: The birth of Dabur • 1986: Registered as a Public Limited Company • 1972: The company shifts to Delhi from Kolkata • 1994: Company gets listed • 1995: First Ayurvedic Company to get ISO 9002 Certification • 1998: Professional CEO inducted • 2000: Dabur reaches a turnover of Rs 1000 crores • 2001: Board restructured, more professionals inducted • 2003: De-merger of Pharmaceuticals business • 2005: Profit exceeds Rs 150 crores by on November 20, 2008 http://gbr.sagepub.com Downloaded from

350 _ Narender L. Ahuja and Sweta Gupta Global Business Review, 8:2 (2007): 335–350 Dabur Business Structure by on November 20, 2008 http://gbr.sagepub.com Downloaded from

FAST MOVING CONSUMER GOODS www.ibef.org

WHY INDIA 3 INDIA COMPETITIVENESS AND COMPARISON WITH 7 THE WORLD MARKETS POLICY 9 TRENDS AND PLAYERS 12 MARKET OPPORTUNITIES FOR INVESTMENT 32 ANNEX: APEX CONTACTS AGENCIES 38 A report by PricewaterhouseCoopers for IBEF

FAST MOVING CONSUMER GOODS

The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. It has a strong MNC presence and is characterised by a wellestablished

distribution network, intense competition between the organised and unorganised segments and low operational cost. Availability of key raw materials, cheaper labour costs and presence across the entire value chain gives India a competitive advantage. The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential. Burgeoning Indian population, particularly the middle class and the rural segments, presents an opportunity to makers of branded products to convert consumers to branded products. Growth is also likely to come from consumer 'upgrading' in the matured product categories. With 200 million people expected to shift to processed and packaged food by 2010, India needs around US$ 28 billion of investment in the food-processing industry.

Executive summary

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WHY INDIA

Large domestic market India is one of the largest emerging markets, with a population of over one billion. India is one of the largest economies in the world in terms of purchasing power and has a strong middle class base of 300 million.

Rural and urban potential Rural-urban profile

Urban Rural Population 2001-02 (mn household) 53 135 Population 2009-10 (mn household) 69 153 % Distribution (2001-02) 28 72 Market (Towns/Villages) 3,768 627,000 Universe of Outlets (mn) 1 3.3 Source: Statistical Outline of India (2001-02), NCAER

Around 70 per cent of the total households in India (188 million) resides in the rural areas. The total number of rural households are expected to rise from 135 million in 2001-02 to 153 million in 2009-10. This presents the largest potential market in the world. The annual size of the rural FMCG market was estimated at around US$ 10.5 billion in 2001-02. With growing incomes at both the rural and the urban level, the market potential is expected to expand further.

India - a large consumer goods spender An average Indian spends around 40 per cent of his income on grocery and 8 per cent on personal care products. The large share of fast moving consumer goods (FMCG) in total individual spending along with the large population base is another factor that makes India one of the largest FMCG markets. Consumption pie Source: KSA Technopak Consumer Outlook 2004.

Even on an international scale, total consumer expenditure on food in India at US$ 120 billion is amongst the largest in the emerging markets, next only to China. Consumer expenditure on food (US$ billion) Source: Euro monitor.

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Rapid urbanisation, increased literacy and rising per capita income, have all caused rapid growth and change in demand patterns, leading to an explosion of new opportunities. Around 45 per cent of the population in India is below 20 years of age and the young population is set to rise further. Aspiration levels in this age group have been fuelled by greater media exposure, unleashing a latent demand with more money and a new mindset.

Demand-supply gap Currently, only a small percentage of the raw materials in India are processed into value added products even as the demand for processed and convenience food is on the rise. This demand supply gap indicates an untapped opportunity in areas such as packaged form, convenience food and drinks, milk products etc. In the personal care segment, the low penetration rate in both the rural and urban areas indicates a market potential.

Change in the Indian consumer profile Consumer Profile

1999 2001 2006 Population (millions) 846 1,012 1,087 Population < 25 years of age 480 546 565 Urbanisation (%) 26 28 31 Source: Statistical Outline of India (2002-03).

FMCG Category and products

Category Products Household Care Fabric wash (laundry soaps and synthetic detergents); household cleaners (dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticides and mosquito repellents, metal polish and furniture polish). Food and Health beverages; soft drinks; staples/cereals; Beverages bakery products (biscuits, bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks; processed fruits, vegetables; dairy products; bottled water; branded flour; branded rice; branded sugar; juices etc. Personal Care Oral care, hair care, skin care, personal wash (soaps); cosmetics and toiletries; deodorants; perfumes; feminine hygiene; paper products. FAST MOVING CONSUMER GOODS PAGE 7

INDIA COMPETITIVENESS AND COMPARISON WITH THE WORLD MARKETS Materials availability

India has a diverse agro-climatic condition due to which there exists a wide-ranging and large raw material base suitable 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 has an ample supply of caustic soda and soda ash, the raw materials in the production of soaps and detergents - India produced 1.6 million tonnes of caustic soda in 2003-04. Tata

Chemicals, one of the largest producers of synthetic soda ash in the world is located in India. The availability of these raw materials gives India the locational advantage.

Cost competitiveness Labour cost comparison Source: DIPP.

Apart from the advantage in terms of ample raw material availability, existence of low-cost labour force also works in favour of India. Labour cost in India is amongst the lowest in Asian countries. Easy raw material availability and low labour costs have resulted in a lower cost of production. Many multi-nationals have set up large low cost production bases in India to outsource for domestic as well as export markets.

Leveraging the cost advantage Global major, Unilever, sources a major portion of its product requirements from its Indian subsidiary, HLL. In 2003-04, Unilever outsourced around US$ 218 million of home and personal care along with food products to leverage on the cost arbitrage opportunities with the West. To take another case, Procter & Gamble (P&G) outsourced the manufacture of Vicks Vaporub to contract manufacturers in Hyderabad, India. This enables P&G to continue exporting Vicks Vaporub to Australia, Japan and other Asian countries, but at more competitive rates, whilst maintaining its high quality and cost efficiency.

Presence across value chain

Indian firms also have a presence across the entire value chain of the FMCG industry from supply of raw material to final processed and packaged goods, both in the personal care products and in the food processing sector. For instance, Indian firm Amul's product portfolio includes supply of milk as well as the supply of processed dairy products like cheese and butter. This makes the firms located in India more cost competitive. FAST MOVING CONSUMER GOODS PAGE 9

POLICY

India has enacted policies aimed at attaining international competitiveness through lifting of the quantitative restrictions, reduced excise duties, automatic foreign investment and food laws resulting in an environment that fosters growth. 100 per cent export oriented units can be set up by government approval and use of foreign brand names is now freely permitted.

FDI Policy

Automatic investment approval (including foreign technology agreements within specified norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food processing sector except malted food, alcoholic beverages and those reserved for small scale industries (SSI). 24 per cent foreign equity is permitted in the small-scale sector. Temporary approvals for imports for test marketing can also be obtained from the Director General of Foreign Trade. The evolution of a more liberal FDI policy environment in India is clearly supported by the successful operation

of some of the global majors like PepsiCo in India.

PepsiCo's India experience

After a not so successful attempt to enter the Indian market in 1985, Pepsi re-entered in 1988 with a joint venture of PepsiCo, Punjab government-owned Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited. By 1994, Pepsi took advantage of the liberalised policies and took control of Pepsi Foods by making an offer to both Voltas and PAIC to buy their equity. The Indian government gave concessions to the company, Pepsi was allowed to increase its turnover of beverages component to beyond 25 per cent and was no longer restricted by its commitment to export 50 per cent of its turnover. The government approved more than US$ 400 million worth of investment of which over US$ 330 million has already been invested. The government also allowed PepsiCo to set up a new company in India called PepsiCo India Holdings Pvt Ltd, a wholly owned subsidiary of PepsiCo International, which is engaged in beverage manufacturing, bottling and exports activities as Pepsi Foods Ltd. Since then, the company has bought over bottlers in different parts of India along with Dukes, a popular soft-drink brand in western India to consolidate its market share. This was followed by an introduction of Tropicana juice in the New Delhi and Bangalore markets in 1999. Currently, soft drink concentrate, snack foods and vegetable and food processing are the key products of the company. Pepsi considers India, along with China, as one of the two largest and fastest growing businesses outside North America. Pepsi has 19 company owned factories while their Indian bottling partners own 21. The company has set up 8 greenfield sites in backward regions of different states. PepsiCo intends to expand its operations and is planning an investment of approximately US$ 150 million in the next two-three years.

Removal of Quantitative Restrictions and Reservation Policy The Indian government has abolished licensing for almost all food and agro-processing industries except for some items like alcohol, cane sugar, hydrogenated animal fats and oils etc., and items reserved for the exclusive manufacture in the small scale industry (SSI) sector. Quantitative restrictions were removed in 2001 and Union Budget 2004-05 further identified 85 items that would be taken out of the reserved list. This has resulted in a boom in the FMCG market through market expansion and greater product opportunities. FAST MOVING CONSUMER GOODS PAGE 11

Central and state initiatives Various states governments like Himachal Pradesh, Uttaranchal and Jammu & Kashmir have encouraged companies to set up manufacturing facilities in their regions through a package of fiscal incentives. Jammu and Kashmir offers incentives such as allotment of land at concessional rates, 100 per cent subsidy on project reports and 30 per cent capital investment subsidy on fixed capital

investment upto US$ 63,000. The Himachal Pradesh government offers sales tax and power concessions, capital subsidies and other incentives for setting up a plant in its tax free zones. Five-year tax holiday for new food processing units in fruits and vegetable processing have also been extended in the Union Budget 2004-05. Wide-ranging fiscal policy changes have been introduced progressively. Excise and import duty rates have been reduced substantially. Many processed food items are totally exempt from excise duty. Customs duties have been substantially reduced on plant and equipment, as well as on raw materials and intermediates, especially for export production. Capital goods are also freely importable, including second hand ones in the food-processing sector.

Food laws

Consumer protection against adulterated food has been brought to the fore by "The Prevention of Food Adulteration Act (PFA), 1954", which applies to domestic and imported food commodities, encompassing food colour and preservatives, pesticide residues, packaging, labelling and regulation of sales.

TRENDS AND PLAYERS The structure The Indian FMCG sector is the fourth largest sector in the economy and creates employment for three million people in downstream activities. Within the FMCG sector, the Indian food processing industry represented 6.3 per cent of GDP and accounted for 13 per cent of the country's exports in 2003-04. A distinct feature of the FMCG industry is the presence of most global players through their subsidiaries (HLL, P&G, Nestle), which ensures new product launches in the Indian market from the parent's portfolio.

Critical operating rules in Indian FMCG sector

• Heavy launch costs on new products on launch advertisements, free samples and product promotions. • Majority of the product classes require very low investment in fixed assets • Existence of contract manufacturing • Marketing assumes a significant place in the brand building process • Extensive distribution networks and logistics are key to achieving a high level of penetration in both the urban and rural markets • Factors like low entry barriers in terms of low capital investment, fiscal incentives from government and low brand awareness in rural areas have led to the mushrooming of the unorganised sector • Providing good price points is the key to success FAST MOVING CONSUMER GOODS PAGE 13

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

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

High Penetration categories >50%: Drive upgradation and consumption Fabric Wash 1210 89.6 82.9 84.9 Personal Wash 938 97.9 90.7 92.8 Packet Tea 635 91.2 82.2 84.9 Low penetration categories: Drive penetration Toothpaste 409 69.8 32.3 43.5 Skin 312 36.6 19.8 24.7 Hair Wash 230 40.1 16.3 23.3 Talcum Powder 148 66 36.8 45.1 Branded Atta 107 44 30.2 34.3 Dish Wash 102 54.6 11.5 24.4 Instant Coffee 55 - - R&G Coffee 30 - - Ketchups 25 12.5 0.7 4.2 Deodorants 19 - - Jams 13 - - Source: HLL, Indian Readership Survey.

Penetration level in most product categories like jams, toothpaste, skin care, hair wash etc in India is low. The contrast is particularly striking between the rural and urban segments - the average consumption by rural households is much lower than their urban counterparts. Low penetration indicates the existence of unsaturated markets, which are likely to expand as the income levels rise. This provides an excellent opportunity for the industry players in the form of a vastly untapped market. Moreover, per capita consumption in most of the FMCG categories (including the high penetration categories) in India is low as compared to both the developed markets and other emerging economies. A rise in per capita consumption, with improvement in incomes and affordability and change in tastes and preferences, is further expected to boost FMCG demand. Growth is also likely to come from consumer "upgrading", especially in the matured product categories. Detergent per capita consumption (in kg) (2001) Tea per capita consumption (in kg) (2001) FAST MOVING CONSUMER GOODS PAGE 15

Personal wash per capita consumption (in kg) (2001) Toothpaste per capita consumption (in kg) (2001) Skin care products per capita consumption (in Rs) (2001) US$ 1=Rs 47.2 Ice cream per capita consumption (in litre) (2001) Shampoo per capita consumption (in kg) (2001) Fabric wash per capita consumption (in kg) (2001) FAST MOVING CONSUMER GOODS

The rural urban break-up

Source: Indian Market Demographic Report, NCAER. Indian FMCG market - urban Indian FMCG market - rural PAGE 17

Most Indian FMCG companies focus on urban markets for value and rural markets for volumes. The total market has expanded from US$ 17.6 billion in 1992-93 to US$ 22 billion in 1998-99 at current

prices. Rural demand constituted around 52.5 per cent of the total demand in 1998-99. Hence, rural marketing has become a critical factor in boosting bottomlines. As a result, most companies' have offered low price products in convenient packaging. These contribute the majority of the sales volume. In comparison, the urban elite consumes a proportionately higher value of FMCGs, but not volume. Rural markets: small is beautiful By the early nineties FMCG marketers had figured out two things • Rural markets are vital for survival since the urban markets were getting saturated • Rural markets are extremely price-sensitive Thus, a number of companies followed the strategy of launching a wide range of package sizes and prices to suit the purchasing preferences of India's varied consumer segments. Hindustan Lever, a subsidiary of Unilever, coined the term nano-marketing in the early nineties, when it introduced its products in small sachets. Small sachets were introduced in almost all the FMCG segments from oil, shampoo, and detergents to beverages. Cola major, Coke, brought down the average price of its products from around twenty cents to ten cents, thereby bridging the gap between soft drinks and other local options like tea, butter milk or lemon juice. It also doubled the number of outlets in rural areas from 80,000 during 2001 to 160,000 the next year, thereby almost doubling its market penetration from 13 per cent to 25 per cent. This along with greater marketing, led to the rural market accounting for 80 per cent of new Coke drinkers and 30 per cent of its total volumes. The rural market for colas grew at 37 per cent in 2002, against a 24 per cent growth in urban areas. The per capita consumption in rural areas also doubled during 2000-02. FAST MOVING CONSUMER GOODS

Source: HLL, NCAER. Household income distribution - 2003 Household income distribution - 2015 PAGE 19

Consumer-class boom Demand for FMCG products is set to boom by almost 60 per cent by 2007 and more than 100 per cent by 2015. This will be driven by the rise in share of middle class (defined as the climbers and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom in various consumer categories, further, indicates a latent demand for various product segments. For example, the upper end of very rich and a part of the consuming class indicate a small but rapidly growing segment for branded products. The middle segment, on the other hand, indicates a large market for the mass end products. The BRICs report indicates that India's per capita disposable income, currently at US$ 556 per annum, will rise to US$ 1150 by 2015 another FMCG demand driver. Spurt in the industrial and services sector growth is also likely to boost the urban consumption demand. Source: Euro monitor, BRICs Report (Goldman Sachs).

Rise in Indian disposable income (US$/annum) FAST MOVING CONSUMER GOODS

Identifying the segments in FMCG A brief description of the Indian FMCG industry is given in the table below. Segment Unit Size Key Players Share of market leader (%) Household care 62 Fabric wash market Mn tonnes 50 HLL, P&G, Nirma, SPIC 38 Laundry soaps/bars US$ mn 1102 Detergent cakes Mn tonnes 15 Washing powder Mn tonnes 26 Dish wash US$ mn 93 HLL 59 Personal care 58 Soap & Toiletries Mn tonnes 60 HLL, Nirma, Godrej Personal wash market US$ mn 989 HLL, Nirma, Godrej Oral care US$ mn 537 Colgate Palmolive, HLL 40 Skin care & cosmetics US$ mn 274 HLL, Dabur, P&G 58 Hair care US$ mn 831 Marico, HLL, CavinKare, 54 Procter & Gamble, Dabur, Godrej Feminine hygiene US$ mn 44 Procter & Gamble, Johnson and Johnson Food and Beverages Bakery products Mn tonnes 30 Britannia, Parle, ITC Tea 000 tonnes 870 HLL, Tata Tea 31 Coffee 000 tonnes 20 Nestle, HLL, Tata Tea 49* Mineral water Mn crates 65 Parle Bisleri, Parle Agro, Coca Cola, Pepsi Soft Drink Mn crates 284 Coca Cola, Pepsi Branded atta 000 tonnes 750 Pillsbury, HLL, Agro Tech, Nature Fresh, ITC 15 Health beverages 000 tonnes 120 SmithKline Beecham, Cadbury, Nestle, Amul Milk and Dairy products US$ mn 653 Amul, Britannia, Nestle Chocolates US$ mn 174 Cadbury's, Nestle Culinary products US$ mn 326 HLL, Nestle 78 Edible oil Mn tonnes 13 Ruchi Soya, Marico, ITC Agrotech 28 Note: *R&G Source: ORG Marg, AC Nielson, FICCI, India Stat and HLL.

Product wise production (2004) PAGE 21

Household care The size of the fabric wash market is estimated to be US$ 1 billion, household cleaners to be US$ 239 million and the production of synthetic detergents at 2.6 million tonnes. The demand for detergents has been growing at an annual growth rate of 10 to 11 per cent during the past five years. The urban market prefers washing powder and detergents to bars on account of convenience of usage, increased purchasing power, aggressive advertising and increased penetration of washing machines. The regional and smallunorganised players account for a major share of the total detergent market in volumes.

Personal care The size of the personal wash products is estimated at US$ 989 million; hair care products at US$ 831 million and oral care products at US$ 537 million. While the overall personal wash market is

growing at one per cent, the premium and middle-end soaps are growing at a rate of 10 per cent. The leading players in this market are HLL, Nirma, Godrej Soaps and Reckitt & Colman. The oral care market, especially toothpastes, remains under penetrated in India (with penetration level below 45 per cent) due to lack of hygiene awareness among rural markets. The industry is very competitive both for organised and smaller regional players. The Indian skin care and cosmetics market is valued at US$ 274 million and dominated by HLL, Colgate Palmolive, Gillette India and Godrej Soaps. This segment has witnessed the entry of a number of international brands, like Oriflame, Avon and Aviance leading to increased competition. The coconut oil market accounts for 72 per cent share in the hair oil market. In the branded coconut hair oil market, Marico (with Parachute) and Dabur are the leading players. The market for branded coconut oil is valued at approximately US$ 174 million. FAST MOVING CONSUMER GOODS PAGE 23

Food and Beverages Food

According to the Ministry of Food Processing, the size of the Indian food processing industry is around US$ 65.6 billion including US$ 20.6 billion of value added products. Of this, the health beverage industry is valued at US$ 230 billion; bread and biscuits at US$ 1.7 billion; chocolates at US$ 73 million and ice creams at US$ 188 million. The size of the semi-processed/ready to eat food segment is over US$ 1.1 billion. Large biscuits & confectionery units, soyaprocessing units and starch/glucose/sorbitol producing units have also come up, catering to domestic and international markets. The three largest consumed categories of packaged foods are packed tea, biscuits and soft drinks.

Beverages

The Indian beverage industry faces over supply in segments like coffee and tea. However, more than half of this is available in unpacked or loose form. Indian hot beverage market is a tea dominant market. Consumers in different parts of the country have heterogeneous tastes. Dust tea is popular in southern India, while loose tea in preferred in western India. The urban-rural split of the tea market was 51:49 in 2000. Coffee is consumed largely in the southern states. The size of the total packaged coffee market is 19,600 tonnes or US$ 87 million. The urban rural split in the coffee market was 61:39 in 2000 as against 59:41 in 1995. The total soft drink (carbonated beverages and juices) market is estimated at 284 million crates a year or US$ 1 billion. The market is highly seasonal in nature with consumption varying from 25 million crates per month during peak season to 15 million during offseason. The market is predominantly urban with 25 per cent contribution from rural areas. Coca cola and Pepsi dominate the Indian soft drinks market. Mineral water market in India is a 65 million crates (US$ 50 million) industry. On an average, the monthly consumption is estimated at 4.9 million crates, which increases to 5.2 million

during peak season.

Exports

India is one of the world's largest producers for a number of FMCG products but its exports are a very small proportion of the overall production. Total exports of food processing industry was US$ 2.9 billion in 2001-02 and marine products accounted for 40 per cent of the total exports. Though the Indian companies are going global, they are focusing more on the overseas markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries because of the similar lifestyle and consumption habits between these countries and India. HLL, Godrej Consumer, Marico, Dabur and Vicco laboratories are amongst the top exporting companies.

Investment in the FMCG sector

The FMCG sector accounts for around 3 per cent of the total FDI inflow and roughly 7.3 per cent of the total sectoral investment. The food-processing sector attracts the highest FDI, while the vegetable oils and vanaspati sector accounts for the highest domestic investment in the FMCG sector. Source: SIA Newsletter, DIPP. Investments in the FMCG sector (August 1991-April 2004) FAST MOVING CONSUMER GOODS PAGE 25

Domestic players Britannia India Ltd (BIL)

Britannia India Ltd was incorporated in 1918 as Britannia Biscuit Co Ltd and currently the Groupe Danone (GD) of France (a global major in the food processing business) and the Nusli Wadia Group hold a 45.3 per cent equity stake in BIL through AIBH Ltd (a 50:50 joint venture). BIL is a dominant player in the Indian biscuit industry, with major brands such as Tiger glucose, Mariegold, Fifty-Fifty, Good Day, Pure Magic, Bourbon etc. The company holds a 40 per cent market share in the overall organised biscuit market and has a capacity of 300,000 tonne per annum. Currently, the bakery product business accounts for 99.1 per cent of BIL's turnover. The company reported net sales of US$ 280 million in 2002-03. Britannia Industries Ltd (BIL) plans to increase its manufacturing capacity through outsourced contract manufacturing and a greenfield plant in Uttaranchal to expand its share in the domestic biscuit and confectionery market.

Dabur India Ltd Established in 1884, Dabur India Ltd is the largest Indian FMCG and ayurvedic products company. The group comprises Dabur Finance, Dabur Nepal Pvt Ltd, Dabur Egypt Ltd, Dabur Overseas Ltd and Dabur International Ltd. The product portfolio of the company includes health care, food products, natural gums & allied chemicals, pharma, and veterinary products. Some of its leading brands are Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola, Lal Dant Manjan, Pudin Hara and the Real range of fruit juices. The company reported net sales of US$ 218 million in 200304. Dabur has firmed up plans to restructure its sales and distribution structure and focus on its core businesses of fast-moving consumer good products and over-the-counter drugs. Under the restructured set-up, the company plans to increase direct coverage

to gap outlets and gap towns where Dabur is not present. A roadmap is also being prepared to rationalise the stockists' network in different regions between various products and divisions.

Indian Tobacco Corporation Ltd (ITCL) Indian Tobacco Corporation Ltd is an associate of British American Tobacco with a 37 per cent stake. In 1910 the company's operations were restricted to trading in imported cigarettes. The company changed its name to ITC Limited in the mid seventies when it diversified into other businesses. ITC is one of India's foremost private sector companies with a turnover of US$ 2.6 billion. While ITC is an outstanding market leader in its traditional businesses of cigarettes, hotels, paperboards, packaging and agriexports, it is rapidly gaining market share even in its nascent businesses of branded apparel, greeting cards and packaged foods and confectionary. After the merger of ITC Hotels with ITC Ltd, the company will ramp up its growth plans by strengthening its alliance with Sheraton and through focus on international projects in Dubai and the Far East. ITC's subsidiary, International Travel House (ITH) also aims to launch new products and services by way of boutiques that will provide complete travel services.

Marico Marico is a leading Indian Group incorporated in 1990 and operating in consumer products, aesthetics services and global ayurvedic businesses. The company also markets food products and distributes third party products. Marico owns well-known brands such as Parachute, Saffola, Sweekar, Shanti Amla, Hair & Care, Revive, Mediker, Oil of Malabar and the Sil range of processed foods. It has six factories, and sub-contract facilities for production. In 2003-04, the company reported a turnover of US$ 200 million. The overseas sales franchise of Marico's branded FMCG products is one of the largest amongst Indian companies. It is also the largest Indian FMCG company in Bangladesh. FAST MOVING CONSUMER GOODS PAGE 27

The company plans to capture growth through constant realignment of portfolio along higher margin lines and focus on volume growth, consolidation of market shares, strengthening flagship brands and new product offerings (2-3 new product launches are expected in 2004-05). It also plans to expand its international business to Pakistan.

Nirma Limited Nirma Ltd, promoted by Karsanbhai Patel, is a homegrown FMCG major with a presence in the detergent and soap markets. It was incorporated in 1980 as a private company and was listed in fiscal 1994. Associate companies' Nirma Detergents, Shiva Soaps and Detergents, Nirma Soaps and Detergents and Nilnita Chemicals were merged with Nirma in 1996-1997. The company has also set up a wholly owned subsidiary Nirma Consumer Care Ltd, which is the sole marketing licensee of the Nirma brand in India. Nirma also makes alfa olefin, fatty acid and glycerine. Nirma is one of the most successful brands in the rural markets with extremely low priced offerings. Nirma has plants located in Gujarat, Madhya Pradesh and

Uttar Pradesh. Its new LAB plant is located in Baroda and the soda ash complex is located in Gujarat. Nirma has strong distributor strength of 400 and a retail reach of over 1 million outlets. The company reported gross sales of US$ 561 million in 2003-04. It plans to continue to target the mid and mass segments for future growth.

Foreign players Cadbury India Ltd (CIL) Cadbury Indian Ltd is a 93.5 per cent subsidiary of Cadbury Schweppes Plc, UK, a global major in the chocolate and sugar confectionery industry. CIL was set up as a trading concern in 1947 and subsequently began its operations with the small scale processing of imported chocolates and food drinks. CIL is currently the largest player in the chocolate industry in India with a 70 per cent market share. The company is also a key player in the malted foods, cocoa powder, drinking chocolate, malt extract food and sugar confectionery segment. The company had also entered the soft drinks market with brands like 'Canada Dry' and 'Crush', which were subsequently sold to Coca Cola in 1999. Established brands include Dairy Milk, Perk, Crackle, 5 Star, Éclairs, Gems, Fructus, Bournvita etc. The company reported net sales of US$ 160 million in 2003. The company plans to increase the number of retail outlets for future growth and market expansion.

Cargill

Cargill Inc is one of the world's leading agri-business companies with a strong presence in processing and merchandising, industrial production and financial services. Its products and geographic diversity (over 40 product lines with a direct presence in over 65 countries and business activities in about 130 countries) as well as its vast communication and transportation network help optimise commodity movements and provide competitive advantage. Cargill India was incorporated in April 1996 as a 100 per cent subsidiary of Cargill Inc of the US. It is engaged in trading in soyabean meals, wheat, edible oils, fertilisers and other agricultural commodities besides marketing branded packaged foods. It has also set up its own anchorage facilities at Rosy near Jamnagar in Gujarat for efficient handling of its import and export consignments. FAST MOVING CONSUMER GOODS PAGE 29

Coca Cola

Coca-Cola started its India operations in 1993. The Coca-Cola system in India comprises 27 wholly company-owned bottling operations and another 17 franchisee-owned bottling operations. A network of 29 contract-packers also manufacture a range of products for the company. Leading Indian brands Thums Up, Limca, Maaza, Citra and Gold Spot exist in the Company's international family of brands along with Coca-Cola, Diet Coke, Kinley, Sprite and Fanta, plus the Schweppes product range. During the past decade, the Coca-Cola system has invested more than US$ 1 billion in India. In 2003, Coca-Cola India pledged to invest a further US$ 100 million in its operations.

Colgate-Palmolive India Colgate Palmolive India is a 51 per cent subsidiary of Colgate

Palmolive Company, USA. It is the market leader in the Indian oral care market, with a 51 per cent market share in the toothpaste segment, 48 per cent market share in the toothpowder market and a 30 per cent share in the toothbrush market. The company also has a presence in the premium toilet soap segment and in shaving products, which are sold under the Palmolive brand. Other wellknown consumer brands include Charmis skin cream and Axion dish wash. The company reported sales of US$ 226 million in 2003-04. The company's strategy is to focus on growing volumes by improving penetration through aggressive campaigning and consumer promotions. The company plans to launch new products in oral and personal care segments and is prepared to continue spending on advertising and marketing to gain market share. Margin gains are being targeted through efficient supply chain management and bringing down cost of operations.

H J Heinz Co

A US$ 8.4 billion American foods major, H J Heinz Co comprises 4,000 strong brand buffet in infant food, sauces and condiments. The company was the first to commence manufacturing and bottling of tomato ketchup in 1876. In India, Heinz has a presence through its 100 per cent subsidiary Heinz India Pvt Ltd. Heinz acquired the consumer products division of pharmaceutical major Glaxo in 1994. Heinz's product range in India consists of Complan milk beverage, health drink Glucon-D, infant food Farex and Nycil prickly heat powder, besides the Heinz ketchup range.

Hindustan Lever Ltd (HLL) Hindustan Lever Ltd is a 51 per cent owned subsidiary of the Anglo-Dutch giant Unilever, which has been expanding the scope of its operations in India since 1888. It is the country's biggest consumer goods company with net sales of US$ 2.4 billion in 2003. HLL is amongst the top five exporters of the country and also the biggest exporter of tea and castor oil. The product portfolio of the company includes household and personal care products like soaps, detergents, shampoos, skin care products, colour cosmetics, deodorants and fragrances. It is also the market leader in tea, processed coffee, branded wheat flour, tomato products, ice cream, jams and squashes. HLL enjoys a formidable distribution network covering over 3,400 distributors and 16 million outlets. In the future, the company plans to concentrate on its herbal health care portfolio (Ayush) and confectionary business (Max). Its strategy to grow includes focussing on the power brands' growth through consumer relevant information, cross category extensions, leveraging channel opportunities and increased focus on rural growth.

Nestle India Ltd (NIL)

Nestle India Ltd a 59.8 per cent subsidiary of Nestle SA, Switzerland, is a leading manufacturer of food products in India. Its products include soluble coffee, coffee blends and teas, condensed milk, noodles (81 per cent market share), infant milk powders (75 per cent market share) and cereals (80 per cent market share). Nestle has also established its presence in chocolates, confectioneries and other processed foods. Soluble beverages and milk products are the major contributors to Nestle's total sales.

Some of Nestle's popular brands are Nescafe, Milkmaid, Maggi and Cerelac. The company has entered the chilled dairy segment with the launch of Nestle Dahi and Nestle Butter. Nestle has also made a foray in non-carbonated cold beverages segment through placement of Nestea iced tea and Nescafe Frappe vending machines. Exports contribute to 23 per cent of its turnover and the company reported net sales of US$ 440 million in 2003. FAST MOVING CONSUMER GOODS PAGE 31

PepsiCo

PepsiCo is a world leader in convenient foods and beverages, with revenues of about US$ 27 billion. PepsiCo brands are available in nearly 200 markets across the world. The company has an extremely positive outlook for India. "Outside North America two of our largest and fastest growing businesses are in India and China, which include more than a third of the world's population" (Pepsico's annual report). PepsiCo entered India in 1989 and is concentrating on three focus areas - soft drink concentrate, snack foods and vegetable and food processing. PepsiCo's success is the result of superior products, high standards of performance and distinctive competitive strategies.

Procter & Gamble Hygiene and Health Care Limited

Richardson Hindustan Limited (RHL), manufacturer of the Vicks range of products, was rechristened 'Procter & Gamble India' in October 1985, following its affiliation to the 'Procter & Gamble Company', USA. Procter & Gamble Hygiene and Health Care Limited (PGHHCL) acquired its current name in 1998, reflecting the two key segments of its business. P&G, USA has a 65 per cent stake in PGHHCL. The parent also has a 100 per cent subsidiary, Procter & Gamble Home Products (PGHP). The overall portfolio of the company includes healthcare; feminine-care; hair care and fabric care businesses. PGHH operates in just two business segments - Vicks range of cough & cold remedies and Whisper range of feminine hygiene. The detergent and shampoo business has been relocated globally to Vietnam. The company imports and markets most of the products from South East Asian countries and China, while manufacturing, marketing and export of Vicks and sanitary napkins has been retained in India. The company reported sales of US$ 91 million in 2002-03. The parent company has announced its plan to explore further external collaborations in India to meet its global innovation and knowledge needs.

MARKET OPPORTUNITIES FOR INVESTMENT Measuring the opportunity: Domestic FMCG market to treble Source: HH Panel data

According to estimates based on China's current per capita consumption, the Indian FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominance of Indian markets by unbranded products, change in eating habits and the increased affordability of the growing Indian population presents an opportunity to makers of branded products, who can convert consumers to branded products.

The investment potential in rural markets The Indian rural market with its vast size and demand base offers a huge opportunity for investment. Rural India has a large consuming class with 41 per cent of India's middle-class and 58 per cent of the total disposable income. With population in the rural areas set to rise to 153 million households by 2009-10 and with higher saturation in the urban markets, future growth in the FMCG sector will come FMCG Market Size (US$ billion) FAST MOVING CONSUMER GOODS PAGE 33

from increased rural and small town penetration. Technological advances such as the internet and e-commerce will aid in better logistics and distribution in these areas. Already Indian corporates such as HLL and ITC have identified the opportunity and have initiated projects such as 'Project Shakti' and 'e-Choupal' to first, expand rural income, and then, to penetrate this market.

Boosting rural income - novel experiments by Indian corporates PROJECT SHAKTI FMCG giant Hindustan Lever initiated 'Project Shakti' to spur growth and increase the penetration of its products in rural India while changing lives and boosting incomes. Through a combination of micro-credit and training in enterprise management, women from self-help groups turned direct-tohome distributors of a range of HLL products and helped the company test hitherto unexplored rural hinterlands. The project was piloted in Nalgonda district in Andhra Pradesh (AP) in 2001, it has since been scaled up and extended to over 5,000 villages in 52 districts in AP, Karnataka, Gujarat, Chattisgarh, Orissa and Madhya Pradesh with around 1,000 women entrepreneurs in its fold. The vision is to create about 11,000 Shakti entrepreneurs covering 100,000 villages and 100 million rural consumers by 2010. For HLL, greater penetration in rural areas is also imperative since over 50 per cent of its incomes for several of its product categories like soaps and detergents come from rural India. The project has borne fruit for HLL. In Andhra Pradesh, so far, since the experiment began, HLL has seen 15 per cent incremental sales from rural Andhra, which contributes 50 per cent to overall sales from Andhra of HLL products.

e-CHOUPAL

An example of the successful application of IT is the e-Choupal experiment kicked off by diversified tobacco giant ITC. ITC has designed and set up internet kiosks called e-Choupals to support its agricultural product supply chain. The e-Choupals are totally owned and set up by ITC with the operators not having any investment or risk of their own. There are four kinds of e-Choupals tailored for shrimps, coffee, wheat and soyabeans. The focus is on creating internet access for global market information to guide production and supply decisions. It provides price information and thus, price certainty to the farmers. In addition, the farmers get access to operational information, developed by ITC experts, pertaining

to cropping, seeds, fertilisers etc. The initial benefits of the ITC effort include a substantial reduction in transaction costs, from 8 per cent to just 2 per cent. These gains are shared roughly equally between ITC and individual farmers. The longer-term goal is to use e-Choupals as sales points for soyabean oil and a range of other consumer goods. ITC has also set up its first rural mall near Bhopal, where it distributes products of other FMCG majors as well. Hence, incomes generated through e-choupals will be targeted by the FMCG major to drive their product sales.

Export potential

India has a locational advantage that can be exploited to use it as a sourcing base for FMCG exports. Export of pre-prepared meals with Indian vegetables for large Asian ethnic population settled in developed countries is a very big opportunity for India. South East Asia, which is presently being catered to by USA and EU, can be sourced from India due to its lower freight cost. FAST MOVING CONSUMER GOODS PAGE 35

Investments can also be made in Indian dairy industries to manufacture and package dairy food (through contract or local collaboration) for export to Middle East, Singapore, Malaysia, Indonesia, Korea, Thailand and Hong Kong. Commodities like dry milk, condensed milk, ghee and certain cheese varieties that are utilised as ingredients in foreign countries can also be exported. These markets can be expanded to include value-added ingredients like packaged cheese sauce and dehydrated cheese powders. Large export potential also exists in the soya products industry.

Sectoral opportunities

According to the Ministry of Food Processing, with 200 million people expected to shift to processed and packaged food by 2010, India needs around US$ 28 billion of investment to raise foodprocessing levels by 8-10 per cent. In the personal care segment, the lower penetration rates also presents an untapped potential. Key sectoral opportunities are mentioned below: • Staple: branded and unbranded: While the expenditure on mass-based, high volume, low margin basic foods such as wheat, wheat flour and homogenised milk is expected to increase substantially with the rise in population, there is also a market for branded staples is also expected to emerge. Investment in branded staples is likely to rise with the popularity of branded rice and flour among urban population. • Dairy based products: India is the largest milk producer in the world, yet only 15 per cent of the milk is processed. The US$ 2.4 billion organised dairy industry requires huge investment for conversion and growth. Investment opportunities exist in value-added products like desserts, puddings etc. The organised liquid milk business is in its infancy and also has large long-term growth potential. • Packaged food: Only about 8-10 per cent of output is processed and consumed in packaged form, thus highlighting the huge potential for expansion of this industry. Currently, the semi processed and ready to eat packaged food segment has a

size of over US$ 70 billion and is growing at 15 per cent per annum. Growth of dual income households, where both spouses are earning, has given rise to demand for instant foods, especially in urban areas. Increased health consciousness and abundant production of quality soyabean also indicates a growing demand for soya food segment. • Personal care and hygiene: The oral care industry, especially toothpastes, remains under penetrated in India with penetration rates below 45 per cent. With rise in per capita incomes and awareness of oral hygiene, the growth potential is huge. Lower price and smaller packs are also likely to drive potential uptrading. In the personal care segment, according to forecasts made by the Centre for Industrial and Economic Research (CIER), detergent demand is likely to rise to 4,180, 000 metric tonnes by 2011-12 with an annual growth rate of 7 per cent between 2006 and 2012. The demand for toilet soap is expected to grow at an annual rate of 4 per cent between 2006-12 to 870,000 metric tonnes by 2011-12. Rapid urbanisation is expected to propel the demand for cosmetics to 100,000 metric tonnes by 2011-12, with an annual growth rate of 10 per cent. • Beverages: The US$ 2 billion Indian tea market has been growing at 1.5 to 2 per cent annually and is likely to see a further rise as Indian consumers convert from loose tea to branded tea products. In the aerated drinks segment, the per capita consumption of soft drinks in India is 6 bottles compared to Pakistan's 17 bottles, Sri Lanka's 21, Thailand's 73, the Philippines 173 and Mexico's 605. The demand for soft drink in India is expected to grow at an annual rate of 10 per cent per annum between 2006-12 with demand at 805 million cases by 2011-12. Per capita coffee consumption in India is being promoted by the coffee chains and by the emergence of instant FAST MOVING CONSUMER GOODS PAGE 37

cold coffee. According to CIER, demand for coffee is expected to rise to 535,000 metric tonnes by 2012, with an annual growth rate of 5 per cent between 2006-12. • Edible oil: The demand for edible oil in India, according to CIER, is expected to rise to 21 million tonnes by 2011-12 with an annual growth rate of 7 per cent per annum. • Confectionary: The explosion of the young age population in India will trigger a spurt in confectionary products. In the long run the industry is slated to grow at 8 to 10 per cent annually to 870,000 metric tonnes by 2011-12.

ANNEXURE: APEX CONTACT AGENCIES Indian Dairy Association (IDA)

Established in 1948, Indian Dairy Association is the apex body of the dairy industry in India. The key functions of IDA are transmission of technical/scientific information to the members, both individuals as well as institutions, to organise periodic conferences, seminars and workshops on subjects of current interest and to undertake consultancy projects both overseas

as well as in the country whenever such a request is received from any central ministry of the Government of India. IDA also intervenes on the policy issues like presentation of pre-budget memorandum, addressing issues arising out of the tariff rates, import/ export, sanitary standards including PFA issues etc.

Indian Dairy Association (IDA) Sector IV, R.K. Puram (Near Syndicate Bank), New Delhi - 110 022 India Tel: +91 11 26165355 / 26165237 / 26170781 Fax: +91 11 26174719 Web: http://www.indairyasso.org/

The Solvent Extractors' Association of India (SEA) The Solvents Extractors' Association is an all India body of solvent extraction industry having wide representative membership consisting of processors of rice bran, oilcakes, minor oilseeds and soybean. SEA is the Trade Promotion Organisation for the exports of various de-oiled meals (feed ingredients), animal and poultry feeds and minor oils (fats) from India. SEA acts as a catalyst between international buyers and local exporters and is responsible for export promotion and performs various export promotion functions. FAST MOVING CONSUMER GOODS PAGE 39

The Solvent Extractors' Association of India Premier Association of Vegetable Oil Industry & Trade 142, Jolly Maker Chambers No.2, 14th Floor, 225 Nariman Point, Mumbai 400 021 India Tel: +91 22 2202 1475/ 2282 1692 Fax: +91 22 2202 1692 Web: www.seaofindia.com E-mail: [email protected]

OTHERS Indian Soap & Toiletries Manufacturers Association Raheja Centre, 6th Floor, Room No. 614, Backbay Reclamation, Mumbai - 400 021 India Tel: +91 22 2824115 Fax: +91 22 2853649 E-Mail: [email protected] Vanaspati Manufacturers Association of India 903, Akashdeep Bldg, 26-A, Barakhamba Road, New Delhi India Tel : +91 11 23312640, 23310758 Fax : +91 11 011-65521 E-mail: [email protected] All India Food Preservers Association 206, Aurobindo Place Market Complex Hauz Khas, New Delhi - 110 016

India Tel: +91 11 26510860/26518848 Fax: +91 11 26510860 Web: http://www.aifpa.com/ All India Bread Manufacturers Association Commercial Complex, 9A, Connaught Place, New Delhi India Tel: +91 11 23327421 Fax: +91 11 23324483 Federation of Biscuit Manufacturers of India 9A, Connaught Place, New Delhi. India Tel: +91 11 26863801 Fax: +91 11 26863135 Indian Soft Drinks manufacturers' Association New Delhi. India Tel: +91 11 23716782 Fax: +91 11 23327747 DISCLAIMER This publication has been prepared for the India Brand Equity Foundation (“IBEF”). All rights reserved. All copyright in this publication and related works is owned by IBEF. The same may not be reproduced, wholly or in part in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication), modified or in any manner communicated to any third party except with the written approval of IBEF. This publication is for information purposes only. While due care has been taken during the compilation of this publication to ensure that the information is accurate to the best of IBEF’s knowledge and belief, the content is not to be construed in any manner whatsoever as a substitute for professional advice. IBEF neither recommends nor endorses any specific products or services that may have been mentioned in this publication and nor does it assume any liability or responsibility for the outcome of decisions taken as a result of any reliance placed on this publication. IBEF shall in no way, be liable for any direct or indirect damages that may arise due to any act or omission on the part of the user due to any reliance placed or guidance taken from any portion of this publication. The India Brand Equity Foundation is a public-private partnership between the Ministry of Commerce and Industry, Government of India and the Confederation of Indian Industry. The Foundation's primary objective is to build positive economic perceptions of India globally. India Brand Equity Foundation c/o Confederation of Indian Industry 249-F Sector 18 Udyog Vihar Phase IV Gurgaon 122015 Haryana INDIA Tel +91 124 501 4087 Fax +91 124 501 3873 E-mail [email protected] Web www.ciionline.org

Benefits: • Help reduce purchasing and

inventory costs. Connect inventory control, purchasing, and sales order processing with demand planning and help reduce costs, improve cash flow, and help ensure that you have the right stock available when you need it. • Gain visibility into inventory processes. Effectively balance availability with demand and track items and their possible expiration dates throughout the supply chain to help minimize on-hand inventory, optimize replenishment, and increase warehouse efficiency. • improve customer satisfaction. Make more accurate order promises and intelligent last-minute exceptions with access to up-to-date inventory information. Respond quickly and knowledgably to customer queries for improved customer service. • Reduce time to market. With integrated order, inventory, and distribution processes, as well as item tracking capabilities, your business can reduce manual data entry and get your goods to market fast. Tighten inventory management processes to help increase operational efficiency across your business, improve customer service, and reduce inventory and distribution costs with Inventory Management in Microsoft DynamicsTM NAV. Increased automation and item tracking capabilities help you improve inventory accuracy and better match the goods you have on hand with customer demand. Quickly identify discrepancies in your inventory by comparing actual quantities with system records.

Inventory costing Understand item costs throughout your warehouse and production processes, including inventory, work-in-process (WIP), and cost of goods sold (COGS), to help efficiently manage sales and purchase prices and line discounts with customers and vendors. Break down costs according to categories such as materials, capacity, subcontracting, and overhead. Tighten control of closing processes, improve batch-job costing, and streamline reconciliation with the general ledger. Automated Data Collection System (ADCS) Help increase the accuracy and efficiency of your warehouse management—picking and putting away of items, physical inventory counts, and moving items from bin to bin—with ADCS. Radio frequency identification (RFID) enablement Comply more easily with customer or supply chain mandates for RFID. Order processing Provide customers with accurate item availability and deliver on time with support for available-to-promise (ATP) and capable-to-promise (CTP) insight. Returns management Process returned inventory and account for additional costs. Automatically organize credit memos, replacement goods, returns to vendors, and partial or combined return of shipments or receipts. Exact cost reversal helps increase inventory accuracy. Item tracking Trace lot or serial numbers to quickly determine where items were purchased, processed, or sold. Help eliminate waste due to expiration of goods with support for first expired/first out (FEFO) handling.

Item substitution Offer customers alternative items when those they want are out of stock, or if the alternatives can be provided less expensively with a higher profit margin. Item cross-references Identify what your customers want by cross-referencing any customer code, internal code, or vendor code. Internal pick/put-away Pick or put away items and debit or credit inventory records independently of purchase receipts, sales, or other source documents to help maintain accurate inventory records even when you access items for testing, display purposes, or other internal or operational needs. Multiple locations and responsibility centers Provide customers who request non-stock items with immediate quotes. Automatically create non-stock items and process them in the same way you process stock items. Location transfers Manage items individually per location. By grouping items into stockkeeping units, items can be described and managed individually per location—including replenishment methods, safety stock, and costs. Stockkeeping units Handle inventory across multiple locations from one database to gain a complete, realtime business overview and create manageable cost and profit centers. Warehouse management system Help reduce costs through effective warehouse processes such as directed pick and put-away and automatic bin replenishment. Cycle counting Determine the counting frequency per item or stockkeeping unit to help increase inventory accuracy and meet shipping deadlines. Business notifications Generate e-mail messages to alert your people, suppliers, or partners to changes in critical inventory levels, order status, or replenishment needs.

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