SANTANU DAS

VIJAY KUMAR H SAVLA

MAHAVEER JAYANTH

SHIVAPPA VENKATAPUR

CHINTHA GANESH

BHAVAN-MARSHALL INSTITUTE OF

MANAGEMENT

STRATEGIC MANAGEMENT

FAST MOVING CONSUMER GOODS INDUSTRY

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TABLE OF CONTENTS

SL. NO. TOPIC PAGE NO.

1 Introduction 1

2 Purpose 2

3 Key Segments 3

4 Porter's Five Forces Model 5

5 Hindustan Unilever Limited (HUL) 6

6 Organization Culture 7

7 Ethical Corporate Governance 10

8 BCG Matrix 12

9 Overview 13

10 Conclusion 14

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1. INTRODUCTION

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 characterized by a well-established

distribution network, intense competition between the organized and unorganized segments and low

operational cost. Availability of key raw materials, cheaper labor 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.

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.

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2. PURPOSE

Indian Economy is among one of the fastest growing economies in the World. It has registered a

robust growth rate in past few years. But weakening of U.S. Economy, higher inflation rate, higher

interest rate, higher crude prices and higher commodity prices have a reflection on Indian Economy too.

The Index of Industrial Production (IIP) has registered a double digit growth of 11.5 per cent in

the year 2006-07 but it slip down by 300bp to 8.5 per cent in the year 2007-08. According to Centre for

Monitoring Indian Economy (CMIE) forecast, the IIP could be at 4.5 per cent for the year 2008-09.

Source: CMIE

FMCG Sector is one of the most important sectors for each and every Economy. It plays a vital

role being a necessity and inelastic product which touches every life in one or the other aspect.

The FMCG Industry remained insulated from inflation led demand slowdown. Inflation as

measured by the wholesale price index (WPI) shot up to 9.5 percent in June 2008 quarter and further

climbed up to 12.63 percent in September quarter. In both these quarters, industry sales accelerated by

more than 15 per cent backed by healthy growth in off take as well as price hikes affected. During this

period, the industry was largely able to hold on to margins through a combination of strategies such as

reduction in packaging cost and changes in product mix. Since October, inflation rate has been waning

and fell to 5.91 per cent for the week ended 27th December 2008. Thus demand for personal care

products is likely to remain buoyant.

Even during the slowdown of the economy, the FMCG sector has registered a growth rate of

14.5 per cent for the year 2007-08. There is a huge growth potential for all the FMCG companies as the

per capita consumption of almost all products in the country is amongst the lowest in the world.

Federation of Indian Chambers of Commerce and Industry (FICCI) predicted that the Indian FMCG

industry sales could grow 16 percent during 2008-09. According to Credit Rating Information Services

of India Limited (CRISIL) anticipation, FMCG sector could touch around INR 140,000 Crores / 33.4

Billion USD by 2015. The key players in FMCG sector are HUL, Dabur India Limited, Procter &

Gamble Hygiene & Health Care Limited, Nirma Limited, Emami Limited, Colgate Palmolive India

Limited, Godrej Consumer Products Limited to name a few.

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3. KEY SEGMENTS

The FMCG sector consists of three product categories, each with its own hosts of products that

have relatively quick turnover and low costs:

• Household Care

• Personal Care

• Food & Beverage

3.1 Household Care

• The fabric wash market and household cleaner market are well in excess of US$1.2billion.

• Traditionally, the fabric wash market has driven the majority of India’s total household care

sales.

• Major players in this segment include Hindustan Lever, Nirma and Reckitt & Colman

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)

Personal Care

•Oral care, hair care, skin care, personal wash (soaps)

•Cosmetics and toiletriesdeodorants

•Perfumes

•Feminine hygiene

•Paper product

Food & Beverage

•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

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3.2 Personal Care

• Traditionally, personal wash and hair care products, the basics personal hygiene, dominated the

personal care segment with excess of USD$1.8 million.

• Demand for skin and cosmetic care products, compared to other personal care product

categories, has been relatively low.

• Major players in this segment include Hindustan Lever; Godrej Soaps, Colgate-Palmolive,

Marico, Dabur and Procter & Gamble.

3.3 Food & Beverage

• The size of the food processing industry exceeds US$65.6 billion.

• The size of the semi-processed/ready-to-eat food segment is over $1.1 billion.

• Of the food processing industry,

Bread and biscuits sales exceeds US$1.7 billion;

Health beverage sales exceeds US$ 230 million;

Ice cream exceeds US$188 million

Chocolates sales exceeds US$73 million

• In the hot beverage market, tea rather than coffee dominates. Coffee is consumed largely in the

southern states.

• The soft drink (carbonated beverages and juices) market is in excess of US$1 billion,

predominantly urban (>70%), and its consumption is highly seasonal.

• Major players in this segment include Hindustan Lever, Nestle, Cadbury and Dabur

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4. PORTER'S FIVE FORCES MODEL

4.1 Rivalry among Competing Firms: In the FMCG Industry, rivalry among competitors is

very fierce. There are scarce customers because the industry is highly saturated and the

competitors try to snatch their share of market. Market Players use all sorts of tactics and

activities from intensive advertisement campaigns to promotional stuff and price wars etc.

Hence the intensity of rivalry is very high.

4.2 Potential Entry of New Competitors: FMCG Industry does not have any measures which

can control the entry of new firms. The resistance is very low and the structure of the

industry is so complex that new firms can easily enter and also offer tough competition due

to cost effectiveness. Hence potential entry of new firms is highly viable.

4.3 Potential Development of Substitute Products: There are complex and never ending

consumer needs and no firm can satisfy all sorts of needs alone. There are plenty of substitute

goods available in the market that can be re-placed if consumers are not satisfied with one.

The wide range of choices and needs give a sufficient room for new product development

that can replace existing goods. This leads to higher consumer’s expectation.

4.4 Bargaining Power of Suppliers: The bargaining power of suppliers of raw materials and

intermediate goods is not very high. There is ample number of substitute suppliers available

and the raw materials are also readily available and most of the raw materials are

homogeneous. There is no monopoly situation in the supplier side because the suppliers are

also competing among themselves.

4.5 Bargaining Power of Consumers: Bargaining power of consumers is also very high. This is

because in FMCG industry the switching costs of most of the goods is very low and there is

no threat of buying one product over other. Customers are never reluctant to buy or try new

things off the shelf.

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5. HINDUSTAN UNILEVER LIMITED (HUL)

HUL (HUL) is India’s largest fast moving consumer

goods company, with le adership in Home & Personal Care

Products and Foods & Beverages. HUL's brands, spread across

20 distinct consumer categories, touch the lives of two out of

three Indians. They endow the company with a scale of

combined volumes of about 4 million tonnes and sales of Rs.

13,718 crores. The mission that inspires HUL's over 15,000

employees is to "add vitality to life". With 35 Power Brands, HUL meets every day needs for nutrition,

hygiene, and personal care with brands that help people feel good, look good and get more out of life. It

is a mission HUL shares with its parent company, HUL, which holds 52.10% of the equity. A Fortune

500 transnational, HUL sells Foods and Home and Personal Care brands in about 100 countries

worldwide.

Particulars Key Brands Market Size (in Rs Cr.) Market Share Rank

Fabric wash Surf Excel, Wheel 8988 37.5% 1

Personal Wash Dove, Lux, Lifebuoy 6632 54.3% 1

Dish wash 57.3% 1

Skin Ponds 2792 54.5% 1

Shampoo Sunsilk, Clinic plus 2168 47.8% 1

Talcum Powder 59.7% 1

Packet Tea Red Label 4452 22.7% 1

Coffee Bru 708 44.0% 1

Jams 67.5% 1

Toothpaste Pepsodent, Closeup 2764 29.5% 2

Ketchups 28.1% 2

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6. ORGANIZATION CULTURE

6.1 Mission

HUL's mission is to add Vitality to life. We meet everyday needs for nutrition, hygiene, and

personal care with brands that help people feel good, look good and get more out of life.

6.2 Corporate Purpose

Our deep roots in local cultures and markets around the world give us our strong relationship

with consumers and are the foundation for our future growth. We will bring our wealth of knowledge

and international expertise to the service of local consumers - a truly multi-local multinational. Our

long-term success requires a total commitment to exceptional standards of performance and

productivity, to working together effectively, and to a willingness to embrace new ideas and learn

continuously. To succeed also requires, we believe, the highest standards of corporate behavior towards

everyone we work with, the communities we touch, and the environment on which we have an impact.

6.3 Code of Business Principles

HUL has earned a reputation for conducting its business with integrity and with respect for the

interests of those their activities can affect. This reputation is an asset, just as real as their people and

brands. HUL’s first priority is to be a successful business and that means investing for growth and

balancing short term and long term interests. It also means caring about their consumers, employees and

shareholders, their business partners and the world in which they live.

6.4 Standard of Conduct

HUL conducts their operation with honesty, integrity and openness, and with respect for the

human rights and interests of their employees. They similarly respect the legitimate interests of those

with whom they have relationships.

6.5 Obeying the Law

HUL companies and their employees are required to comply with the laws and regulations of the

countries in which they operate.

6.6 Employees

HUL is committed to diversity in a working environment where there is mutual trust and respect

and where everyone feels responsible for the performance and reputation of their company. They recruit,

employ and promote employees on the sole basis of the qualifications and abilities needed for the work

to be performed. They are committed to safe and healthy working conditions for all employees. They do

not use any form of forced, compulsory or child labor. They are committed to working with employees

to develop and enhance each individual's skills and capabilities. They respect the dignity of the

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individual and the right of employees to freedom of association. They maintain good communications

with employees through company based information and consultation procedures.

6.7 Consumers

HUL is committed to providing branded products and services which consistently offer value in

terms of price and quality, and which are safe for their intended use. Products and services are

accurately and properly labeled, advertised and communicated.

6.8 Shareholders

HUL conducts its operations in accordance with internationally accepted principles of good

corporate governance. They provide timely, regular and reliable information on their activities, structure,

financial situation and performance to all shareholders.

6.9 Business Partners

HUL is committed to establishing mutually beneficial relations with their suppliers, customers

and business partners. In their business dealings they expect their business partners to adhere to business

principles consistent with their own.

6.10 Community Involvement

HUL strives to be a trusted corporate citizen and, as an integral part of society, to fulfill their

responsibilities to the societies and communities in which they operate.

6.11 Public Activities

HUL companies are encouraged to promote and defend their legitimate business interests. HUL

co-operates with governments and other organizations, both directly and through bodies such as trade

associations, in the development of proposed legislation and other regulations which may affect

legitimate business interests. HUL neither supports political parties nor contributes to the funds of

groups whose activities are calculated to promote party interests.

6.12 The Environment

HUL is committed to making continuous improvements in the management of their

environmental impact and to the longer-term goal of developing a sustainable business. HUL will work

in partnership with others to promote environmental care, increase understanding of environmental

issues and disseminate good practice.

6.13 Innovation

In their scientific innovation to meet consumer needs they respect the concerns of their

consumers and of society. HUL works on the basis of sound science applying rigorous standards of

product safety.

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6.14 Competition

HUL believes in vigorous yet fair competition and supports the development of appropriate

competition laws. HUL companies and employees will conduct their operations in accordance with the

principles of fair competition and all applicable regulations.

6.15 Business Integrity

HUL does not give or receive whether directly or indirectly bribes or other improper advantages

for business or financial gain. No employee may offer give or receive any gift or payment which is, or

may be construed as being, a bribe. Any demand for, or offer of, a bribe are rejected immediately and

reported to management. HUL accounting records and supporting documents are accurately described

and reflect the nature of the underlying transactions. No undisclosed or unrecorded account, fund or

asset are established or maintained.

6.16 Conflicts of Interests

All HUL employees are expected to avoid personal activities and financial interests which could

conflict with their responsibilities to the company. HUL employees must not seek gain for themselves or

others through misuse of their positions. This is our road to sustainable, profitable growth, creating long-

term value for our shareholders, our people, and our business partners.

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7. ETHICAL CORPORATE GOVERNANCE

HUL believes that for a Company to be successful, it must maintain global standards of

Corporate Conduct towards all its stakeholders. The Company's foundation has therefore been rooted to

stringent Corporate Governance principles. At Hindustan HUL, we believe that the principles of

fairness, transparency and accountability are the cornerstones for good governance. The HUL Code of

Business Principles reflects the Company's commitment to these principles. It is the Company's

endeavor to continue to achieve highest governance levels. As regards the compliance with the

requirements of Clause 49 of the Listing Agreement with the Stock Exchanges, the Company is in full

compliance with the norms and disclosures.

HUL believes that for a Company to be successful, it must maintain global standards of

Corporate Conduct towards all its stakeholders. The Company's foundation has therefore been rooted to

stringent Corporate Governance principles. At Hindustan HUL, we believe that the principles of

fairness, transparency and accountability are the cornerstones for good governance. The HUL Code of

Business Principles reflects the Company's commitment to these principles. It is the Company's

endeavor to continue to achieve highest governance levels. As regards the compliance with the

requirements of Clause 49 of the Listing Agreement with the Stock Exchanges, the Company is in full

compliance with the norms and disclosures.

7.1 Board of Directors

The Board of Directors of the Company represents an optimum mix of professionalism,

knowledge and experience. The total strength of the Board of Directors of the Company is 10 Directors

comprising a Non-Executive Chairman, four Executive Directors and five Non-Executive Independent

Directors.

7.2 Committees of the Board

7.2.1 Audit Committee

The Audit Committee of the Company is entrusted with the responsibility to supervise the

Company’s internal control and financial reporting process. The Audit Committee also looks into

controls and security of the Company’s critical IT applications,

7.2.2 Remuneration and Compensation Committee

The Remuneration Committee is vested with all the necessary powers and authority to ensure

appropriate disclosure on the remuneration of whole-time Directors and to deal with all the elements of

remuneration package of all such Directors within the limits approved by the members of the Company.

The Compensation Committee administers the stock option plan of the Company.

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7.2.3 Shareholder/Investor Grievances Committee

The Committee specifically looks into redressing of investors’ complaints with respect to

transfer of shares, non-receipt of shares, non-receipt of declared dividends and ensure expeditious share

transfer process. The Committee also monitors and reviews the performance and service standards of the

Registrar and Share Transfer Agents of the Company and provides continuous guidance to improve the

service levels for investors.

7.2.4 Other Functional Committees Apart from the above statutory committees

The Board of Directors have constituted other functional committees such as committee for

approving disposal of surplus assets of the Company, committee for allotment of shares under ESOP to

raise the level of governance as also to meet the specific business needs.

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8. BCG MATRIX

Soap & Detergent and Tea are Cash Cow for the company. It has high relative market share and

low growth rate. Personal Products and Coffee are stars for the company as it have high relative market

share as well as high market growth rate.

Only food is a segment which is a Question Mark for the company. The company have a low relative

market share where as it is under high market growth rate. HUL is taking several steps to capture more

market share so that food segment can also be a part of Star.

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9. OVERVIEW

The Company is the largest FMCG player and market leader in most of the product category.

The Company has registered a robust growth rate over last few years and has wide market coverage.

HUL believe in product innovation and entrance into niche market. Recently company has launch Pureit,

a water purifier, received a good response from the market. The company has a good growth rate.

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10. CONCLUSION

FMCG companies such as HUL are still to be adversely hit by the economic slowdown, which is

beginning to make its impact felt across other sectors. They manufacture items of everyday consumption

and are usually the last to be hit by a slowdown. FMCG growth has been supported by strong demand in

rural markets, which has been growing at between 15% and 18%, after three years of good agricultural

output. HUL derives more than 50% of its sales from rural markets.

With the presence of 12.2% of the world population in the villages of India, the Indian rural

FMCG market is something no one can overlook. Increased focus on farm sector will boost rural

incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure

facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in

the market. Because of the low per capita consumption for almost all the products in the country, FMCG

companies have immense possibilities for growth. And if the companies are able to change the mindset

of the consumers, i.e. if they are able to take the consumers to branded products and offer new

generation products, they would be able to generate higher growth in the near future. It is expected that

the rural income will rise in 2009, boosting purchasing power in the countryside. However, the demand

in urban areas would be the key growth driver over the long term. Also, increase in the urban

population, along with increase in income levels and the availability of new categories, would help the

urban areas maintain their position in terms of consumption.