Gunjan Bagla, Amritt, Inc.08.02.13
Rather than set up business in India, some multinational consumer products companies have considered the country to be too unfamiliar and too remote. It is time to discard this notion. The Indian market, especially in consumer packaged goods (CPG), is fast-paced and growing. This article will address key market drivers along with the main trends based on news as well as our own insights into the current changes in India. Our purpose is to enable better understanding of the opportunities as well as problems that are unique to India, and to dispose of a few inaccurate misconceptions.
Most experts project that during the next 30 years, India will become the world’s third-largest economy behind China and the US. India’s $1.8 trillion economy offers global CPG companies a rapidly expanding middle class of enthusiastic consumers, an improving infrastructure and a young, well-educated, motivated labor force with senior managers who often become candidates for larger roles in their global organizations. Early entrants such as PepsiCo, Unilever, Nestle and Amway are hugely profitable in India today, but there is room for many more players.
Evidence of India’s momentum is reflected in the foreign direct investment process. In March 2013, the country’s Foreign Investment Promotion Board approved 12 projects, several of which were in the single brand retail sector that was previously closed to foreign investment.1 Currently, Indian companies are strong in the CPG segment, but international brands have made significant inroads by offering quality improvements, an element of global sophistication that appeals to consumers, and massive marketing support. As a counter, Indian CPG companies have improved their products and packaging, introduced brand extensions, and expanded their distribution deeper into rural markets and overseas to other developing markets, particularly in South America, Southeast Asia and Africa.
Although much of the consumer segment is still served by traditional retail outlets, there is a shift of retail revenue toward the rapid development of modern retail stores. In addition, India’s federal government now allows 51% foreign direct investment (FDI) in multi-brand retail outlets and 100% FDI in single-brand retail outlets. Ikea and Walmart are among the first large companies expected to consider opening retail stores in India.
Here are some noteworthy factors about India’s CPG market:
Market Drivers
The most important factor that drives the market today is retail. According to Business Monitor International’s 2011 India Retail Report, total retail sales in India will grow from $396 billion in 2011 to $785 billion in 2015. The strong underlying economic growth, population expansion, increasing wealth of individuals and the rapid development of an organized retail infrastructure are the key factors behind the growth forecast.
Due to recent changes in government restrictions, the economy is expected to get a lift from an increased rate of investment by major foreign companies in the Indian consumer markets, specifically retail, consumer packaged goods, luxury brands and e-commerce sectors. According to India’s finance minister, the economy is capable of absorbing $50 billion in foreign direct investment a year.
The rise of the luxury segment is another key driver in the market. According to the Cap Gemini-Merrill Lynch World Wealth report, India was home to 153,000 high net worth individuals. This list grew 21% in 2010 and is still growing rapidly. As these individuals become more affluent, they want products and services that are similar to those found in Europe and America; no wonder why India is the world’s 12th largest luxury market.3
Trends
In my 2008 book, “Doing Business in 21st Century India” (Hachette Business Plus), I outlined the six “Cs” that drive change in the growing middle-class of urban India: credit, cars, condominium ownership, cchutti (vacations), cable TV and cell phones. Cell phones have had the greatest impact in developing countries by increasing communication. India now has more than 800 million cell phones.
As Indian CPG companies expand into global markets to supplement their growth at home and generate funds to meet their competitive challenges, the number of acquisitions is growing. For example, India’s largest CPG company, Dabur, paid $84 million for Chicago-based Namaste Laboratories, which gave it a strong foothold in the promising $1.5 billion ethnic hair care product market. Earlier it bought Hobi Kozmetik, a Turkish hair care and personal care company, for $60 million.
Another trend is an increase in distribution. Indian CPG companies are now much more competitive in brand development, promotion and the effectiveness of their distribution networks. Leading consumer products companies have strong distribution networks in rural India, and technological advances are providing better logistical management and delivery execution.4
According to the Asia B2C E-Commerce Report 2013, less than 1% of all retail sales in India are generated online. A study by McKinsey showed that e-commerce contributed $30 billion to India’s GDP in 2011 and could potentially contribute up to $100 billion by 2015 driven by as many as 370 million users.
The McKinsey study on urbanization of Indian cities indicated that the number of cities in India with populations greater than one million could increase from the current 42 to 68 by 2030. Furthermore, the mid-size and smaller towns are becoming more populated with a sizeable middle-class population that will drive consumption.5
Marketing
Product designs and services must often be modified to Indian needs or else they may fail to attract consumers. Johnson & Johnson found that it had to reformulate its adhesive bandages to accommodate not only the heat and humidity of India, but also the somewhat oilier Indian skin. Indians are also quite brand-conscious and relatively conservative about trying new brands. It may take a great deal of advertisement campaigns and time for new brand products to penetrate the market.
Since labor is inexpensive and storage space inside homes is at a premium, Indian consumers are not attracted to oversize packages that Americans love to purchase at Costco and Sam’s Club. In fact, Indians will pay a slight price premium for products packaged and sold in single-serving portions. In some cases pay-as-you-go or pay-per-use pricing is a better way to attract and retain Indian consumers.
Celebrity sponsors are often referred to as brand ambassadors in India, and play an important role in attracting consumers. Cricket athletes and Bollywood stars are often the most powerful brand ambassadors. Amitabh Bachchan, known as Big B, is an entertainer, but he was seen advertising Binani Cement. Can you imagine Leonardo DiCaprio or Tom Cruise promoting concrete on mainstream television? Welcome to 21st Century India!
The Future
India is no longer the isolated market that’s long on potential but short on profits. The Indian economy is one of the best markets for foreign investors. With a decade of high growth and significant gains in per capita consumption, India has enjoyed a higher level of consumer confidence and consumption than many other markets. A growing urban middle class, wealth creation in rural areas, a new government focus on policies that encourage business growth and foreign investment, and an entrepreneurial business class have allowed many CPG companies to benefit during the past 20 years. Its culture may seem unfamiliar, but India is the largest untapped consumer market in the world. For many American companies, India represents the best new source of significant revenue and is worth the effort to learn about its unique characteristics.
References:
About the Author
Gunjan Bagla is managing director of Amritt, Inc. (www.amritt.com/industries/india-consumer-packaged-goods-market/), a California-based management consultancy that helps American CPG companies to succeed in India. Companies that have benefitted from Amritt’s expertise include Paramount Farms, Grace Kennedy Foods, Kraft, Burt’s Bees, Reckitt Benckiser and many others. An extended version of this article is available at no-charge by sending a request to usa@amritt.com with the subject line Happi Magazine CPG article.
Most experts project that during the next 30 years, India will become the world’s third-largest economy behind China and the US. India’s $1.8 trillion economy offers global CPG companies a rapidly expanding middle class of enthusiastic consumers, an improving infrastructure and a young, well-educated, motivated labor force with senior managers who often become candidates for larger roles in their global organizations. Early entrants such as PepsiCo, Unilever, Nestle and Amway are hugely profitable in India today, but there is room for many more players.
Evidence of India’s momentum is reflected in the foreign direct investment process. In March 2013, the country’s Foreign Investment Promotion Board approved 12 projects, several of which were in the single brand retail sector that was previously closed to foreign investment.1 Currently, Indian companies are strong in the CPG segment, but international brands have made significant inroads by offering quality improvements, an element of global sophistication that appeals to consumers, and massive marketing support. As a counter, Indian CPG companies have improved their products and packaging, introduced brand extensions, and expanded their distribution deeper into rural markets and overseas to other developing markets, particularly in South America, Southeast Asia and Africa.
Although much of the consumer segment is still served by traditional retail outlets, there is a shift of retail revenue toward the rapid development of modern retail stores. In addition, India’s federal government now allows 51% foreign direct investment (FDI) in multi-brand retail outlets and 100% FDI in single-brand retail outlets. Ikea and Walmart are among the first large companies expected to consider opening retail stores in India.
Here are some noteworthy factors about India’s CPG market:
- India’s retail sector, including both unbranded bulk commodities and CPG, is the fourth largest sector in its economy following agriculture, textile manufacturing, and services.
- While the “modern retail” segment of the CPG sector represents only 5% of India’s retail sales, Indian shoppers are expected to increase spending on CPG at modern retail stores from $1.8 billion to $5 billion by 2015.2
- 7.8 million “traditional” retail outlets sell CPG in India as opposed to 1.5 million in the US. Most of these outlets are owner-operated locations with no room for shopping carts or aisles for product display. Many resemble western style kiosks.
Market Drivers
The most important factor that drives the market today is retail. According to Business Monitor International’s 2011 India Retail Report, total retail sales in India will grow from $396 billion in 2011 to $785 billion in 2015. The strong underlying economic growth, population expansion, increasing wealth of individuals and the rapid development of an organized retail infrastructure are the key factors behind the growth forecast.
Due to recent changes in government restrictions, the economy is expected to get a lift from an increased rate of investment by major foreign companies in the Indian consumer markets, specifically retail, consumer packaged goods, luxury brands and e-commerce sectors. According to India’s finance minister, the economy is capable of absorbing $50 billion in foreign direct investment a year.
The rise of the luxury segment is another key driver in the market. According to the Cap Gemini-Merrill Lynch World Wealth report, India was home to 153,000 high net worth individuals. This list grew 21% in 2010 and is still growing rapidly. As these individuals become more affluent, they want products and services that are similar to those found in Europe and America; no wonder why India is the world’s 12th largest luxury market.3
Trends
In my 2008 book, “Doing Business in 21st Century India” (Hachette Business Plus), I outlined the six “Cs” that drive change in the growing middle-class of urban India: credit, cars, condominium ownership, cchutti (vacations), cable TV and cell phones. Cell phones have had the greatest impact in developing countries by increasing communication. India now has more than 800 million cell phones.
As Indian CPG companies expand into global markets to supplement their growth at home and generate funds to meet their competitive challenges, the number of acquisitions is growing. For example, India’s largest CPG company, Dabur, paid $84 million for Chicago-based Namaste Laboratories, which gave it a strong foothold in the promising $1.5 billion ethnic hair care product market. Earlier it bought Hobi Kozmetik, a Turkish hair care and personal care company, for $60 million.
Another trend is an increase in distribution. Indian CPG companies are now much more competitive in brand development, promotion and the effectiveness of their distribution networks. Leading consumer products companies have strong distribution networks in rural India, and technological advances are providing better logistical management and delivery execution.4
According to the Asia B2C E-Commerce Report 2013, less than 1% of all retail sales in India are generated online. A study by McKinsey showed that e-commerce contributed $30 billion to India’s GDP in 2011 and could potentially contribute up to $100 billion by 2015 driven by as many as 370 million users.
The McKinsey study on urbanization of Indian cities indicated that the number of cities in India with populations greater than one million could increase from the current 42 to 68 by 2030. Furthermore, the mid-size and smaller towns are becoming more populated with a sizeable middle-class population that will drive consumption.5
Marketing
Product designs and services must often be modified to Indian needs or else they may fail to attract consumers. Johnson & Johnson found that it had to reformulate its adhesive bandages to accommodate not only the heat and humidity of India, but also the somewhat oilier Indian skin. Indians are also quite brand-conscious and relatively conservative about trying new brands. It may take a great deal of advertisement campaigns and time for new brand products to penetrate the market.
Since labor is inexpensive and storage space inside homes is at a premium, Indian consumers are not attracted to oversize packages that Americans love to purchase at Costco and Sam’s Club. In fact, Indians will pay a slight price premium for products packaged and sold in single-serving portions. In some cases pay-as-you-go or pay-per-use pricing is a better way to attract and retain Indian consumers.
Celebrity sponsors are often referred to as brand ambassadors in India, and play an important role in attracting consumers. Cricket athletes and Bollywood stars are often the most powerful brand ambassadors. Amitabh Bachchan, known as Big B, is an entertainer, but he was seen advertising Binani Cement. Can you imagine Leonardo DiCaprio or Tom Cruise promoting concrete on mainstream television? Welcome to 21st Century India!
The Future
India is no longer the isolated market that’s long on potential but short on profits. The Indian economy is one of the best markets for foreign investors. With a decade of high growth and significant gains in per capita consumption, India has enjoyed a higher level of consumer confidence and consumption than many other markets. A growing urban middle class, wealth creation in rural areas, a new government focus on policies that encourage business growth and foreign investment, and an entrepreneurial business class have allowed many CPG companies to benefit during the past 20 years. Its culture may seem unfamiliar, but India is the largest untapped consumer market in the world. For many American companies, India represents the best new source of significant revenue and is worth the effort to learn about its unique characteristics.
References:
- The Times of India, 22 March 2013
- http://businesstoday.intoday.in/story/the-indian-fmcg-boom/1/11309.html
- http://www.businessworld.in/businessworld/businessworld/content/Pashas-Luxury.html
- http://www.ibef.org/download/FMCG50112.pdf
- http://www.businessworld.in/businessworld/businessworld/content/Buy-India-Buy.html
About the Author
Gunjan Bagla is managing director of Amritt, Inc. (www.amritt.com/industries/india-consumer-packaged-goods-market/), a California-based management consultancy that helps American CPG companies to succeed in India. Companies that have benefitted from Amritt’s expertise include Paramount Farms, Grace Kennedy Foods, Kraft, Burt’s Bees, Reckitt Benckiser and many others. An extended version of this article is available at no-charge by sending a request to usa@amritt.com with the subject line Happi Magazine CPG article.
