INTRODUCTION

Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a handful of global players, India's Rs 460 billion FMCG market remains highly fragmented with roughly half the market going to unbranded, unpackaged home made products. This presents a tremendous opportunity for makers of branded products who can convert consumers to branded products. However, successfully launching and growing market share around a branded product in India presents tremendous challenges. Take distribution as an example. India is home to six million retail outlets and super markets virtually do not exist. This makes logistics particularly for new players extremely difficult. Other challenges of similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a structurally unattractive industry in which to participate. Even so, the opportunity keeps FMCG makers trying. One of the latest such examples comes from the Godrej Group, which in December 2002 entered the tea market with the introduction of two new tea brands, Godrej Noble House and Godrej Chai House. The following case study presents a review of the industry structure for FMCG as well as the entry strategy Godrej is employing to make FMCG business a structurally more attractive industry in which to participate.

STRUCTURAL ANALSYS OF FMCG INDUSTRY

FMCG refers to consumer non-durable goods required for daily or frequent use. Typically, a consumer buys these goods at least once a month. The sector covers a wide gamut of products such as detergents, toilet soaps, toothpaste, shampoos, creams, powders, food products, confectioneries, beverages, and cigarettes. Typical characteristics of FMCG products are:

o Individual items are of small value although all FMCG products put together account for a significant part of the consumer's budget.
o The consumer keeps limited inventory of these products and prefers to purchase them frequently, as and when required. Many of these products are perishable.
o The consumer spends little time on the purchase decision. Rarely does he/she look for technical specifications (in contrast to industrial goods). Brand loyalties or recommendations of reliable retailer/ dealer drive purchase decisions.
o Trial of a new product i.e. brand switching is often induced by heavy advertisement, recommendation of the retailer or neighbors/ friends.
o These products cater to necessities, comforts as well as luxuries. They meet the demands of the entire cross section of population. Price and income elasticity of demand varies across products and consumers.

Distinguishing Characteristics of India's FMCG Business

FMCG companies sell their products directly to consumers. Major features that distinguish this sector from the others include the following:

Design and Manufacturing
o Low Capital Intensity - Most product categories in FMCG require relatively minor investment in plan and machinery and other fixed assets. Also, the business has low working capital intensity as bulk of sales from manufacturing take place on a cash basis.
o Technology - Basic technology for manufacturing is easily available. Also, technology for most products has been fairly stable. Modifications and improvements rarely change the basic process.
o Third-party Manufacturing - Manufacturing of products by third party vendors is quite common. Benefits associated with third party manufacturing include (1) flexibility in production and inventory planning; (2) flexibility in controlling labor costs; and (3) logistics - sometimes its essential to get certain products manufactured near the market.

Marketing and Distribution
In relative terms, marketing function has greater importance in FMCG companies. The players have to reach out to mass population and compete with several other brands that offer similar products. Major features of the marketing function include the following
o High Initial Launch Cost - New products require a large front-ended investment in product development, market research, test marketing and launch. Creating awareness and develop franchise for a new brand requires enormous initial expenditure on launch advertisements, free samples and product promotions. Launch costs are as high as 50-100% of revenue in the first year. For established brands, advertisement expenditure varies from 5 - 12% depending on the categories.
o Limited Mass Media Options - The challenge associated with the launch and/or brand-building initiatives is that few no mass media options. TV reaches 67% of urban consumers and 35% of rural consumers. Alternatives like wall paintings, theatres, video vehicles, special packaging and consumer promotions become an expensive but required activity associated with a successful FMCG.
o Huge Distribution Network - India is home to six million retail outlets, including 2 million in 5,160 towns and four million in 627,000 villages. Super markets virtually do not exist in India. This makes logistics particularly for new players extremely difficult. It also makes new product launches difficult since retailers are reluctant to allocate resources and time to slow moving products. Critical factors for success are the ability to build, develop, and maintain a robust distribution network.

Notably, the unorganized retail sector occupies a powerful position vis-à-vis a FMCG maker. These retailers identify and own key customers by monitoring what's bought, quantities, frequency and providing relevant value to a consumer either in the form of service and credit, differential pricing or product authority.

Competition
o Significant Presence of Unorganized Sector - Factors that enable small, unorganized players with local presence to flourish include the following:
o Basic technology for most products is fairly simple and easily available.
o The small-scale sector in India enjoys exemption/ lower rates of excise duty, sales tax etc. This makes them more price competitive vis-a-vis the organized sector.
o A highly scattered market and poor transport infrastructure limits the ability of MNCs and national players to reach out to remote rural areas and small towns.
o Low brand awareness enables local players to market their spurious lookalike brands.
o Lower overheads due to limited geography, family management, focussed product lines and minimal expenditure on marketing.

Assessment: FMCG Not Structurally Attractive Industry to Enter

New entrants into India's FMCG face several hindrances in converting the Even so, the Godrej Group recently entered the tea business with the launch latent potential of Indian market. Entry barriers are high due the nightmare logistics associated with distributing a FMCG and the limited mass media options available to build a brand. Likewise, the intensity of competition from branded and unbranded goods and the power of retailers make the FMCG a structurally unattractive industry in which to enter and difficult industry in which to remain a competitive player.

GOODREJ GROUP STRATEGY FOR ENTERING THE TEA MARKET

Even so, the Godrej Group recently entered the tea business with the launch of two new tea products, Godrej Noble House and Godrej Chai House. Godrej Chai House is targeted at the popular and mid-premium segments, while Godrej Noble House is being positioned in the premium category.

Market opportunity: Branded tea experiencing strong growth

Godrej Tea enters the market hoping to latch on to the opportunity of consumers converting to branded tea products. The Rs 4,000 crore branded tea market constitutes 44% of the total tea market in the country, up from 32.5% in 1999, and is growing at a faster pace as compared to the loose tea market due to conversions. The Rs 9,000 crore total tea market is said to be growing at 1.5 to two per cent annually.

Tea consumption in India grew by 4.5% per year in the mid-80s before dropping to the 2% range in the later half of the 1990s. Over this period, the market share for branded tea surged to 44% from 25% thanks in large part to the introduction of polyester pouch packaging by Tata Tea. The polypacks took 12% share from the loose tea market and account for almost half of the branded segment. Besides being cost effective, the polypacks retain freshness and reduce lead time to reach consumers. Hindustan Lever Ltd. is the lead player in the packet tea business with a 45% market share.

Strategy for launch and growth of market share

The company is conducting a phased roll-out of its two brands over the country beginning with Andhra Pradesh, Tamil Nadu, Uttar Pradesh, New Delhi and Mumbai. The firm is offering different types of tea in different parts of the country. The tea available in the south will be mainly dust, whereas the north would have leaf tea. These product variations reflect the fact that consumers in different parts of the country have heterogeneous taste. Dust tea is very popular in the south. In the western states, good quality loose tea is preferred in Gujarat, whereas in Maharashtra, consumers provide a large market to packet as well as unbranded tea. The eastern states of West Bengal and Orissa consume CTC broken. Among the northern states, CTC fannings is liked in Rajasthan and CTC broken in others states of the North. The Central India is predominantly a dust market.

Price, positioning and packaging

Nobel House is priced at Rs 55 for a 250 gm pack for its leaf varient and Rs 48 for the dust. Chai House similarly, is priced at Rs 40 for a 250 gm pack of leaf and Rs 37 for dust. The firm is selling the tea in 2kg, 1kg, 500gm, 250gm, 100gm, 50gm and 25gm packaging at prices as low as Rs 3. Goodrej Tea also plans to introduce Re 1 packs. The pricing on both products represents a 13% discount to the Tata Tea and Hindustan Lever Ltd. counterparts.

Promotion

The company has an introductory offer for its teas, giving away fair glow soaps and Cinthol Original for approximately 1-1.5 months.

Distribution

Godrej Tea is utilizing 50% to 60% the existing Godrej Group distributors, while it has appointed an additional 500 distributors on its own.

CONCLUSIONS

India's Rs 460 billion market for FMCG presents an attractive but challenging proposition for participants. Low entry barriers, limited infrastructure to support branding initiatives, challenge logistics and a powerful retail sector allow local and regional players as well as unbranded products to flourish.

Nonetheless, product makers can find opportunities in product segments like tea where consumers are converting to branded products from unbranded products. Companies well positioned to take advantage of this trend already have a distribution system in place that they can utilize to reach India's six million retail outlets. Additionally, companies can overcome challenges to product awareness and demand creation by bundling new products with already established, popular product lines. Additional measures companies should take include introducing product variants that account for distinctive regional tastes as well as a wide range of package size and prices to account for purchasing preferences of India's many consumer segments.

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