Rural India drives growth story of FMCG industry

The good monsoon in 2016, resulting in increasing disposable income in rural India, is driving FMCG growth in the country. However, the industry is hit by counterfeit products and poor supply chain in the hinterland. MOHD MUSTAQUIM highlights the issue
Rural India drives growth story of FMCG industry

The sluggish rural economy in the past two years had an adverse impact on fast moving consumer goods (FMCG) industry. However, constituting 40 percent market share, the rural economy, riding on the good monsoon resulting into better farm output, has shown a green shoot in the financial year 2016-17. 

The good monsoon rainfall has shown the signs of revival of rural economy from an economic down turn. Hence, having a larger consumer base as well as supplying raw material to one of the largest FMCG segments, food and beverages, rural India is going to drive the growth of FMCG industry. One good monsoon brings confidence into the industry for a couple of years. A recent study, released by Assocham and TechSci Research, has projected that FMCG market in India would double from current US$ 49 billion to US$ 104 billion by 2020. In this, rural demand is expected to play important role.

Highlighting the surge in rural demand, Sunil Kanoria, Vice Chairman, SREI Infrastructure says, “The good monsoon is expected to fuel the rural demand for FMCG products. Direct Benefit Transfer scheme, Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), Jan Dhan Yojana have increased the rural income which would certainly play vital role in increasing rural consumption. Considering the emergence of rural markets in India, the foreign multinationals are foraying here.”

The optimism is based on steady economic growth, increasing share of organised retail, improving awareness about health and ethnic products, increasing rural demand while a favourable demographic dividend is already given. It is certainly good news for a much-needed consumption boost to the economy.

Currently, India accounts for a share of just 0.68 percent of the Global FMCG market, this share is expected to increase significantly over the next 5 years mainly due to the macroeconomic factors such as improving demographics, rising disposable income, expansion of organised retail in tier II & III cities. Tier III cities play the role of threshold for rural distribution of consumer products. The wholesalers and distributors who cater to the rural retail stores are basically based in the tier III cities.

FMCG is the fourth largest sector in Indian economy and provides employment to around three million people, accounting for approximately 5 percent of the total factory employment in India. The growth of the FMCG sector, which primarily includes food and beverages, personal care and household care has been driven in both the rural and urban segments. Rural consumption growth has outpaced urban consumption with the increase in percentage in monthly per capita expenditure in rural markets surpassing its urban counterparts over the past five years.

Growth in rural consumption has increased and hence there is an increased demand for branded products in this huge untapped market. For instance, Godrej launched OneRural programme to generate more revenues from rural areas. Rural India is estimated to account for 50 percent of the total FMCG market in next 5 years.

Leading companies in FMCG sector have a strong distribution network in rural India are benefiting from the contribution of technological advances such as internet and better logistics services.

Most of the personal and household care products sold in India still have low market penetration in rural and semi-urban areas. This offers a wide opportunity for marketers to tap these markets by offering low cost, small packaging products. 

Although the rural demand is increasing and expected to be the driving force behind the growth of FMCG sector, the sector is facing tremendous challenges on the other hand, most significantly the attack of counterfeit products and poor supply chain infrastructure.

According to the TechSci Research report, in 2015, sales of counterfeit products stood at more than US$ 1 billion in India and the larger contribution was made by the rural areas. The fragmented market structure, remote locations, low literacy rate and low consumer awareness make the villages more vulnerable for penetration of counterfeit products than urban centres.

Counterfeit products have an economy effect on trade, investment, employment, innovation, environment, and most importantly on the health and safety of consumers. In terms of revenue loss, it not only hurts the FMCG companies, but also to the public exchequer.

Mohan Goenka, Director, Emami says, “Counterfeit products have big impact on producers. It effects the company first, then the consumers too as they get low quality products with health and safety hazards. Further, it creates big loss to the public exchequer in the form of tax loss.”

Indian FMCG sector is heavily dependent on the unorganised retail sector. While the growing landscape provides great shopping choices to the consumers, while the availability of counterfeit products has also grown rapidly in the market. Indian supply chain infrastructure is not equipped in terms of their ability to protect and detect the penetration of counterfeit goods.

Some of the technologies used by the FMCG players to tackle counterfeiting include usage of tamper evident packaging, barcodes with proper standards, laser coding and optically variable features. Companies should focus on utilising universally accepted global standards and organisations should implement a comprehensive track and trace system.

Highlighting the overall impact of counterfeit products on the country’s economy, Devdas Baliga, Vice President – legal, Coca Cola India says, “GST is expected to help grow GDP 1.5 percent more while the counterfeiting is pulling us back. Thus, the government also need to give special focus to check the counterfeiting. Counterfeits in food and beverages, consumers goods, FMCG, drugs are grown leap and bounds.”

This is true that counterfeit products are harmful for the health of consumers. But, there has been instances when genuine products are found hazardous for the people’s health. In the first week of October, a study released by the Durgs Technical Advisory Board, a body under Ministry of Health and Family Welfare, Government of India, found five different toxins — heavy metals antimony, lead, chromium and cadmium and the compound DEHP or Di(2-ethylhexyl) phthalate — in cold drinks, produced by two major multinational companies, PepsiCo and Coca Cola.

The study found that these toxins leached into five cold drink samples picked up for the study — Pepsi, Coca Cola, Mountain Dew, Sprite and 7Up — from the PET (polyethylene terephthalate) bottles. Mountain Dew and 7Up are owned by Pepsico, while Sprite is owned by Coca Cola. So the big question arises that if counterfeit products are hazardous for human health, how safe the genuine ones?

And therefore, the companies need to focus on giving impetus on quality standards. In a recent conference, organised by industry body Assocham, Ram Vilas Paswan, Union Minister for Consumers Affairs, Food and Public Distribution said, “Abroad, I have noticed even Indians do not wish to buy ‘Made in India’ products. There is an opinion set in the minds that developing countries do not manufacture good quality products. To change this attitude, our industry should comply with quality standards."

“The Government alone cannot do anything without the support from the industry. But the credibility of the industry is very much important. There should be profit, but it should not be rampant,” Paswan added.

To put a check on adulteration and guard the consumers’ interest, the Government has decided to table a new Consumer Protection Bill in the next Parliament session.

Poor Supply Chain Infra
Lack of storage and transport facilities coupled with rising costs of raw materials and energy has been major challenges for the Indian FMCG market. Food items tend to have significantly shorter shelf life require quick delivery system, regular replenishment of the products on the shelf, and vast different distribution and storage requirements. A large number of small towns and villages lack of adequate infrastructure are the major bottlenecks in setting up supply chain infrastructure in the hinterland. It is easier to bring home and personal care products to rural India as the shelf life is comparatively higher than food and beverage products which have shorter shelf life and need investment in cold chain sector.

Raising concerns, Vikas Jain, Joint Managing Director, PMV Nutrient Products says, “Supply chain due to poor infrastructure is a big challenge in front of the FMCG industry. We should look food and agriculture sector differently from other sectors as these are the backbone of Indian economy.”

If the industry doesn’t focus on last mile delivery of products and services, all the investments, R&D and all efforts will be wasted. The day marketers start thinking themselves smarter than consumers, the business starts going down. Learning from the demographic changes and increasing internet penetration, the FMCG industry need to bring a paradigm shift in their consumer outreach programmes in rural India. Digitisation of consumer outreach will strengthen the supply chain infrastructure which would boost the FMCG industry.

In a diversified country like India where even a village is different from others, the marketing and consumer outreach policies need to be customised as per the local needs.   

The Changing Face of Rural India