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

Wal-Mart.

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)

4Food & Groceries to drive topline growth…The entire retail industry can be divided into two segments - Value retailing, which is typically alow margin-high volume business (primarily food and groceries) and Lifestyle retailing, a highmargin-low volume business (primarily apparel, footwear, etc.). Pantaloon is currently the onlylisted player in the retail industry that caterssignificantly to both the Value and Lifestyle businesssegments. Despite being a low margin business, Valueretailing has been able to attract much greater customertraffic at retail malls and has helped retail companies,such as Pantaloon, to record a stupendous topline growthover the last few years. For Pantaloon, the contributionof the Value retailing business rose from 52% of thetopline in Q1 FY05 (quarter ending Sep’04) to 72% inQ1 FY07 (quarter ending Sep’06).New entrants in the Indian retail industry, such as Reliance and the upcoming Bharti-Wal Mart, arealso aiming to tap the Value-retailing segment in a big way and expect food and groceries tocontribute around 40% to the topline. Both Reliance and Bharti-Wal Mart have already takeninitiatives for regular supply of groceries and fooditems and are in the process of entering intoagreements with big farmers for direct procurement oftheir food production at a price that is slightly higherthan the prevailing market price. Such agreementsbetween farmers and retailers will create a win-winsituation for both the parties, as the former will obtaina better price for their production, while the latter willbe able to attract increased customers by providinglow cost products. The only losers will be theintermediaries.Margin pressure to continue into the future…A higher contribution from the low marginValue retailing segment will maintain thepressure on the margins of retailers in thecoming years. Moreover, higher operatingexpenses, primarily employee cost, leaserentals and selling and distribution expenseswill further increase the pressure on

margins in the coming years. The rise inemployee cost is primarily due to shortageof talented and skilled manpower in theindustry, which is typical of a fast growthindustry. Moreover with an increase in thenumber of retail players in the domesticindustry, both the existing as well as theDespite being a low margin business,Value retailing has been able toattract much greater customer trafficat retail malls and has helped retailcompanies, such as Pantaloon, torecord a stupendous topline growthover the last few yearsBoth Reliance and Bharti-Wal Marthave already taken initiatives forregular supply of groceries and fooditems and are in the process of enteringinto agreements with big farmers fordirect procurement of their foodproduction at a price that is slightlyhigher than the prevailing market priceA higher contribution from the low margin Valueretailing segment will maintain the pressure onthe margins of retailers in the coming years.Moreover, higher operating expenses, primarilyemployee cost, lease rentals and selling anddistribution expenses will further increase thepressure on margins in the coming years…… with an increase in the number of retail playersin the domestic industry, both the existing as wellas the new entrants will be forced to incur higherselling and distribution cost towards brandpromotion and efficient sourcing of goodsFIRST GLOBAL www.firstglobal.inIndia ResearchEBIDTA Margin (%) trend3%4%5%6%7%8%9%10%11%12%Q1FY05 Q2FY05 Q3FY05 Q4FY05 Q1FY06 Q2FY06 Q3FY06 Q4FY06 Q1FY07 Q2FY07Shopper's Stop Pantaloon Trent

new entrants will be forced to incur higher selling and distribution cost towards brand promotion andefficient sourcing of goods. The fact that the market is unlikely to grow fast enough to absorb theinvestments 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 ofwallet.Source: Company Financials, First GlobalEven historically, such a rise in operating expenses has kept margins under pressure and we believethat a further rise is inevitable, which will therefore, mean acontinued margin squeeze.. We believe that margin pressurewill be common feature for all the industry players, as playersin 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 inoperating expenses has keptmargins under pressure and webelieve that a further rise isinevitable9companies ahead…Till now, the big FMCG giants and consumer durable companies had much greater bargainingpower, which provided them enough muscle to arm-twist the small unorganised retailers. However,with the conversion of unorganised retail toorganized retail, several large organized retailplayers will emerge, which will lead to a decline inthe bargaining power of the former and may havean adverse impact on their margins and/or workingcapital. This is something, which is already visiblein developed economies.The success of both organized retail companies aswell as the FMCG/Consumer durables companyare complementary to each other. For instance,both Reliance and HLL are complementary foreach other’s success, since a Reliance storewithout any HLL product may not be able to attract much customers and similarly HLL may miss anopportunity if its products are not available in a Reliance store, especially considering its fast-paceexpansion plan. We believe that since the FMCG/Consumer durable companies will not be able toWith the conversion of unorganisedretail to organized retail, several largeorganized retail players will emerge,which will lead to a decline in thebargaining power of the former and

may have an adverse impact on theirmargins and/or working capital. This issomething, which is already visible indeveloped economiesFIRST GLOBAL www.firstglobal.inIndia Researchenjoy 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 retailplayers as well as the FMCG/Consumer durables companies, since both are complementary to eachother. The more likely impact will be on working capital management, where the negative workingcapital historically enjoyed by major FMCG companies, which could arm-twist their distributorsto pay cash in advance, may be a thing of the past.for Integrated Learning in Management, New Delhi.

Dabur India—Working Capital and Cost ManagementNarender L. AhujaSweta GuptaAfter running as a family business for over 100 years, when in late 1990s, the management of the Daburwas handed over to a team of professional managers, the new management faced a gigantic task of improvingperformance in several critical areas. In particular, working capital and cost management required urgentattention as the company’s performance in these areas had been far from satisfactory. The then prevailingcurrent ratio of 3:2 and quick ratio of 2:4 were considered too high and indicative of heavy unnecessaryinvestments 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 andcost management performance, and how with concerted efforts the management turned around a highly inefficientworking 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, withthe 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 criticalissues related to the liquidity and solvency of the company confronted the management which are also discussedin the case study.company’s staff canteen. Bo (nick namedfor Bose) had spent the morning studying

the company’s balance sheets for the years2003–04 and 2004–05 and was surprised tosee that the company’s current liabilities exceededits current assets. He rememberedreading in his textbooks that such a situationGLOBAL BUSINESS REVIEW, 8:2 (2007): 335–350SAGE Publications Los Angeles/London/New Delhi/SingaporeDOI: 10.1177/097215090700800210by on November 20, 2008 http://gbr.sagepub.com Downloaded from

336 _ Narender L. Ahuja and Sweta GuptaGlobal Business Review, 8:2 (2007): 335–350indicated that the company could face difficultiesin 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 2004–05jumped by as much as 46 per cent to Rs 148crore 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 companyhas an impressive market share in itsproduct line and is the fourth largest FMCGcompany in India. But if the company ismaking high profits and has a good marketshare, then where is the problem?’Bo was ready with his reply, ‘The wayI understand, that could be a common trapfor the profitable but fast growing companies.Liquidity and profitability are twoseparate issues and it is naïve to assume thata profitable company would necessarily beliquid too. See, what happens is that in orderto provide finance for expansion and diversificationprojects, a company could cut downon inventories, reduce the credit period tocustomers while at the same time seek extendedcredit facilities from its suppliers ofraw materials, other goods and services.Also, it tries to manage with nil or as little cashin hand as possible. As a result, the currentassets represented by inventories, debtorsand cash would be reduced and currentliabilities represented by creditors wouldincrease, culminating in a situation when thecompany might not have enough currentassets to pay for its current liabilities if allcreditors wanted them to be settled at once,what to talk about leaving some surplus tocontinue with its normal business operations’.Bo said emphatically.Dabur India’s corporate office was housedin a beautifully landscaped, imposing sixstoried glass building set on several acres of

prime land at Kaushambi adjacent to NewDelhi. ‘Well, if the company can make itsworking capital more efficient, I don’t seeanybody should have a problem with that.But don’t forget we have an orientation meetingwith the finance department in a littlewhile from now’.Bo was too engrossed with his ownthoughts to be affected by such interruption,and continued, ‘The traditional wisdom ofhaving a positive networking capital meansthat at least some part of the working capitalfinance should come from the company’slong term sources so that at any time, even ifthe company has to settle all its current liabilitiesat once, it would still be left with someminimum current assets with which it couldcontinue to do its normal business. In technicalterms, they say a company needs somepermanent working capital and a fluctuatingworking capital. From what I have read,ideally the permanent working capital andmaybe some part of the fluctuating workingcapital also should be financed out of thecompany’s long-term sources in order to ensuregood liquidity and avoid the threat toits solvency’.Sharad looked at his watch, ‘My friend,times are changing. Reduction in inventoryand debtors could as well be a managementstrategy. The Japanese have shown the worldhow to manage with zero inventories. As faras debtors are concerned, when a firm cansell on cash or near cash terms, why shouldit sell on credit just to make the balance sheetfit in to your traditional wisdom? Modernby on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 337Global Business Review, 8:2 (2007): 335–350enterprises have to be efficient, lean andmean, if we could put it that way, to remaincompetitive’.Bo did not like this argument and said,‘You don’t get the point, do you? Once a companydefaults on payment of any of its currentliabilities, the word spreads like wild fireand affects the company’s image and creditrating. With lower credit rating, not manylenders would come forward if it wanted toborrow more, and even if they do, it wouldcost the company dearer. All this might juststart a roller coaster the company might nothave 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 thanjust 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 orientationmeeting by the time Bo and Sharadwalked in. The meeting had a touch of professionalperfection and was more detailedand thorough than they had anticipated.Mr D.K. Chhabra, Additional GM—FinancialPlanning, made an impressive PowerPointpresentation and dealt with many aspects includingthe company’s history, handing overof the management to professional team, currentchallenges and future strategy. SomePowerPoint slides are reproduced in theannexure.The CompanyThe story of Dabur began with a visionaryendeavor by Dr S.K. Burman to provideeffective and affordable natural cures for thekiller diseases of those days like cholera,malaria and plague for ordinary people infar-flung villages in Bengal. Soon ‘Daktar’(Doctor) Burman became popular for hiseffective cures, and that is how his ventureDabur got its name—derived from theDevanagri rendition of Daktar Burman.Dr. Burman set up Dabur in 1884 to produceand dispense Ayurvedic medicines, with thevision of good health for all.More than a century later, by 1990s Daburhad grown manifold. Over the years, thefamily has understood the need for incorporatinga professional management team thatwould be able to launch Dabur onto a highgrowth path in the emerging competitiveenvironment. Therefore, in 1998, the Burmanfamily started handing over the managementof the company to professionals and downscaledits direct involvement in day-to-dayoperations.In 2003, with the approval of the Delhi HighCourt, the company demerged its pharmaceuticalbusiness to a new company, DaburPharma Limited, to ‘unlock value in bothpharma & FMCG business’. As a result, theentire pharma business was transferred to thesaid company.

By 2005, Dabur India had emerged as aleading nature-based health and family careproducts company with eight manufacturingunits, 5,000 distributors and over 1.5 millionretail outlets spread all over India andabroad. Dabur crossed a turnover of Rs 1, 000crores in year 2000–01, and further Rs 1,300crore in 2004–05; thereby establishing its marketleadership in its line of activity. Its mainproduct lines include:• Hair-care: Vatika, Dabur Amla Hair Oilby on November 20, 2008 http://gbr.sagepub.com Downloaded from

338 _ Narender L. Ahuja and Sweta GuptaGlobal Business Review, 8:2 (2007): 335–350• Health supplements: Glocose-D, DaburHoney, Chyawanprash, Real• Digestives and confectionaries: Hajmola,Anardana Churan• Oral care: Dabur Lal Dant Manjan,Dabur Red Toothpaste• Baby and skin care: Dabur Tel, GulabariThe New ManagementWith the professional management teamtaking over in 1998, there was a significantchange in the focus, approach and strategyof managing the company. Earlier, the companyused to focus mainly on bottomlinegrowth, that is, on improving the profits,while the new management stressed onimproving efficiency and performance in allareas. With the help of management consultantsfrom Mckinsey, the company changedits organizational structure for better responsibilityaccounting. Various departmentswere introduced/rationalized including thesupply-chain, sales and marketing, purchase/procurement etc and their functions wereclearly defined. The planning and budgetingactivity was strengthened, performance orientedincentives were put in place and thefinance department was made the custodianof all MIS. The finance department instituteda system of regular comparative evaluationof the company’s performance vis-à-vis otherFMCG competitors using detailed financialratios analysis; this aspect was somehow notgiven due importance in the earlier managementregime. The main idea behind introducingsuch changes was to improve not onlythe bottom-line of the company but to inducecompetency in all functional areas.One area which the new management consideredas full of potential was the management

of working capital. A lot of investmentseemed blocked in inventories and debtors,which was pulling down the overall returnon capital employed (ROCE). There was anopportunity and a need to trim down investmentin this area. Therefore, the companyfocused on reducing the working capitalneeded for the operations. The company seta target of achieving zero networking capitalby year 2000–01 and aimed at further reducingit to negative levels in the long term. Anumber of initiatives were taken to reducethe cost of different components of workingcapital. However, it was not an easy task asthe management faced stiff resistance andopposition from its bulk customers andstockists, suppliers of raw materials and otherservices, as well as internal departments.Inventory Management and Cost ReductionGiven the large variety of products that aremanufactured and marketed, and hundredsof different raw materials used by the company,accurate forecasting of inventory isvery important for effective working capitalmanagement. A wrong forecast can lead topiles of inventory, thus blocking unnecessaryinvestment and increasing storage cost aswell as the risk of damage associated withperishable items.After the new management took over, aninventory management system was institutedinvolving all related departments likeprocurement, manufacturing, marketing,sales and supply chain. The finance departmentis involved throughout the process andby on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 339Global Business Review, 8:2 (2007): 335–350helps in linking all operations and controllingflow of information through variousdepartments.The annual planning process begins inNovember–December each year with theobjective of finalizing the company’s annualbudget, before the start of the next accountingyear from April. The sales targets for theforthcoming period are set by MANCOM(Management Committee), which comprisesthe heads of functional areas like Sales,Marketing, Human Resource, Commercial,Supply chain, and Production and Financetaking the company’s product-packagingmix of approximately one thousand (1,000)

SKU’s (Stock Keeping Units) into consideration.The sales targets take into account thesales trends and special promotion schemes.On the basis of sales targets set for theforthcoming period, the sales departmentestablishes product-wise requirements of thefinished goods. This information is used bythe production department to prepare a rollingproduction plan and establish the quantityof each type of raw material required formeeting the production targets. This informationon raw material requirements is thencommunicated to the purchase/procurementdepartment.As the production department itself establishesthe requirements of raw materials tobe purchased, it prevents excess purchasesand helps in reducing the storage cost as wellas the cost of funds blocked in inventories.For each item purchased, a safety stock isidentified and maintained to take care of anyfluctuations in lead-time and usage of rawmaterials before fresh supplies would arrive.Suitable safety stocks are maintained forfinished goods too.Raw materials have been classified on thebasis of value, quantity required and locationof procurement. While purchases of morevaluable items are taken care of by the centralprocurement unit, low-value and/orlow-number items may be locally purchasedon a decentralized basis. The main aim is tominimize the cost of the raw materials includingtransportation cost. Specialized professionals(called Category Managers) areappointed to look after the procurement ofvarious types of raw materials.As far as possible, the company procuresmaterials on back-to-back basis following theJust-in-Time (JIT) approach. However, JITinventory system is not applicable for all inputs.Many of its inputs are agriculturalproducts that are available at cheaper pricesseasonally when fresh crops arrive into themarket. If the annual requirement of raw materialsis not purchased/tied-up during thisperiod, the company may have to pay muchhigher prices which could rise by as muchas 50 per cent to 75 per cent in the off-seasonmonths. As a result, the company must procuresuch raw materials within the period oftheir seasonal abundance (typically just 45–

65 days) and preserve them for later use.Often, enough stocks are procured to partlyuse them in the current year (40 per cent) andpartly (60 per cent) next year.Fortunately, with the start of the CommoditiesExchange in India, the company has analternative way of managing raw materialcost, and that is by taking a position in thederivatives (futures and options) market. Forexample, suppose the company can buy a calloption for 1 million kg of material X at anexercise price of Rs 15 per kg with a maturityby on November 20, 2008 http://gbr.sagepub.com Downloaded from

340 _ Narender L. Ahuja and Sweta GuptaGlobal Business Review, 8:2 (2007): 335–350of 3 months. The call option gives the companya right (but not obligation) to buy thestated quantity of X at the agreed exerciseprice. To buy a call option the company willhave to pay a cost, called premium (sayRs 0.50 per kg), but at the same time the calloption will hedge it against possible lossesif the market price of X rises beyond the exerciseprice before the maturity of the option.For example, if the price of X rises to Rs 18per kg, the company will find it advantageousto exercise its option to buy it at Rs 15.Usually, the company enters into futures andoptions contracts for periods ranging from3 to 9 months. Hedging combined withe-procurement has significantly helped thecompany in cost control and reduction.According to the CFO, Mr Rajan Varma,‘We managed to cut costs through oure-procurement system. We as a companymay or may not have control over commodityprices, but our marketing and purchaseguys are taking futuristic positions and eventhough this practice constitutes a businessrisk it is beginning to show results’.Another significant tool of cost reductionused by Dabur India is ‘value engineering’to identify and develop more cost effectivematerials. For example, this has resulted inreducing the cost of packaging for several ofthe company products. Research and developmentactivities have also helped in reducingthe time of processing which hasincreased productivity.In non-manufacturing areas too, thecompany has been looking for opportunitiesto cut down the costs. In 2003, the companyapplied for and got the court approval for

de-listing of its shares from several regionalstock-exchanges including Ahmedabad,Bangalore, Delhi, Jaipur, Ludhiana, Magadhand Uttar Pradesh stock exchanges. The tradingvolumes of the company’s shares at thesestock exchanges had been negligible formany years and by de-listing its shares fromthese regional stock exchanges, the companysaved itself from considerable costs as wellas regulatory provisions.Debtors ManagementThe company has mainly three types of customers:stockists, institutions and international/export customers. The companydoes not have a standard credit policy thatcould be applied to all customers. Instead,distinct credit terms are offered to eachgroup depending upon various factors suchas the product, place, price, demand andcompetition.1. Stockists: In 2005, the company hadabout 1.5 million stockists. The creditterms to the stockists vary from 1–10days depending upon factors statedabove as well as their locations vis-àvisthe depot towns. Depot towns aremostly the state capitals or other commercialtowns/cities where the companyhas its own sales depots operating.• Stockists in town depots: 70 per centof the company’s stockists are locatedin or around the depot towns.At these places, the company usesthe Cash Management System(CMS) offered by banks; stockists’cheques collected till the end of a dayby on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 341Global Business Review, 8:2 (2007): 335–350are deposited next morning into thecompany’s local bank account fromwhere the funds are transferred tothe corporate bank account.Earlier these stockists used to enjoyfive days credit period but now thecompany has decreased the timeframe to one day. For new stockists,sales are normally made throughdemand drafts. If a stockist’s chequebounces, then the party has to makepayment only by demand-draft. Ifa party defaults on payment (or aparty’s cheques bounce) more than

once, then for all its transactionswith Dabur India in the coming year,the party would be required to makepayments only by demand-drafts.• Stockists in remote areas: The rest30 per cent of the turnover withstockists takes place at remote placesaway from depot towns with no easyaccess to banks so that the ‘anywherecheque’ system is logistically not possible.Such stockists may be alloweda credit period of up to 10 days. Onthe average, the money is creditedin company’s bank account in 3–7days.2. Institutions: Institutions like canteenstores department (CSD), large stores,hotels and modern malls are offeredsoft payment terms that may rangefrom 15 to 90 days. Though such institutionsare slower in making payments,the higher profit margins on such salesmore than make up the cost of extendedcredit.3. International Customers: Similarly,credit terms negotiated with exportcustomers would depend on the internationalcompetition and productpricing.Where longer credit terms must be offeredas a part of the marketing strategy, the companyoften resorts to ‘factoring’ as a meansof financing debtors. The factoring arrangementsare made with banks or specializedfactoring companies. In these cases, the companymakes sure that profit margins fromsuch sales are high enough to cover the costof factoring.Cash ManagementAs stated above, the company maintainsbank accounts at all depots towns. Cheques/drafts received from customers in nearbyplaces are sent for local clearing to initiallycollect funds in these bank accounts. Thisreduces the average collection period (ascompared to the time it would take if customercheques were first received at headofficeand then sent for out-station clearing);thereby increasing the velocity of cash inflows.Funds thus collected at the depot townsare each day transferred to the company’shead-office (or corporate) bank account. The

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

342 _ Narender L. Ahuja and Sweta GuptaGlobal Business Review, 8:2 (2007): 335–350investments or instruments like mutualfunds and government securities.SuppliersThe company has more then 1,000 suppliersinclusive of service providers like advertisementcompanies. Out of these, 100–150 areregular suppliers. Most suppliers are smallbusiness units with annual trading volumeof Rs 2–3 crore with Dabur India.The company enjoys credit periods rangingfrom seven to 90 days from the creditors,which can at times be extended up to 120 days.The suppliers use the bills discounting toavail bank financing against their receivablesfrom Dabur India and bear the bank chargesas well. However, if the credit period is extendedbeyond 120 days, the bills discountingcharges are borne by Dabur India.Financing Working Capital: The companymakes an aggressive use of all ethical meansto increase the velocity of cash inflows fromcustomers and tries to slow down the cashoutflows to creditors. Credit facilities fromsuppliers of raw materials, other goods andservices are therefore the main sources offinancing working capital. However, it hasnot been easy for the company to negotiatefavourable terms with its debtors and creditors.The Dabur management spends considerabletime and effort to train debtors andsuppliers in modern ways of financing suchas factoring or bills discounting, and helpsthem by bank introductions etc. When a policychange in credit terms seems necessary,it is first negotiated with the big creditors anddebtors before being implemented for allsuppliers and customers.Discussions with suppliers take place ina highly transparent manner. Among themethods used to control credit are techniques

such as regression, progression, slap or standardizedterms. The management identifiesand bridges the communication gaps througheducating the suppliers.Supply Chain ManagementThe supply chain management in DaburIndia is a key factor impacting sales, profitabilityand working capital. Exhibit 1 showsthe supply chain flowchart.An efficient supply chain system helps invalue creation for the business in four importantways. These are: (i) Positive impacton sales: created by improved service throughreliable and regular flow of quality goods toretailers and end-use customers. (ii) Reducinginvestment in inventories and increasingaccounts payables, (iii) Cost management:lower inventory levels result in lower carryingcost, which is approximately 10 per centper annum on the average inventory held.Thus, if inventory holding reduces by Rs 10million, it will lead to a saving in carrying costof about Rs 1 million per annum. Cost savingsalso result from the better coordinationbetween inventory planning, acquisitionand usage departments and (iv) Facilitatingoptimum use of the firm’s fixed assetsand infrastructure by increasing inventoryturnover.Role of the Finance DepartmentThe finance department is involved in allaspects of financial planning and control. Itmaintains a quarterly score card, which helpsby on November 20, 2008 http://gbr.sagepub.com Downloaded from

Dabur India—Working Capital and Cost Management _ 343Global Business Review, 8:2 (2007): 335–350the company to evaluate the performanceof employees in terms of cost to company(CTC). Managerial remuneration consists ofa fixed salary plus bonuses based on performanceon a variety of parameters includingmaintenance of inventory levels andother working capital items within agreedlimits. The department also prepares MISand communicates the same to all the concerneddepartments. It also continuouslymonitors the management of inventory,debtors and creditors to ensure that the networking capital remains within the budgetedlevels. If, for example, the investment in inventoryexceeds the planned limits due tosome unavoidable circumstances, it must beoffset by either an increase in creditors or a

reduction in debtors.The orientation meeting was coming to aclose. The AGM concluded by saying, ‘Eversince the professional management took overthe reigns of the company, efforts have beenmade to upgrade efficiency in all aspects ofbusiness to build a competitive edge andimprove the return on investment. I may addhere that, in my personal opinion, the balancesheet as per the current provisions ofthe Companies Act does not show a truepicture of the company’s liquidity. This is becausethe company’s investment in marketablesecurities is at present not allowed to beincluded in the current assets. Therefore, thecompany actually has a better liquidity positionthan reflected by the net working capitalas shown in the balance sheet.’Bo was so absorbed in the presentationthat he remained seated even after it was overand others starting leaving the small but wellfurnished conference hall. He was shaken outof his thoughts when he heard Sharad,Exhibit 1Supply Chain Flow Chartby on November 20, 2008 http://gbr.sagepub.com Downloaded from

344 _ Narender L. Ahuja and Sweta GuptaGlobal Business Review, 8:2 (2007): 335–350‘Wow, I didn’t know managing workingcapital involved so many aspects. What doyou think?’‘Well, definitely it has been a learningexperience. I guess I have to start analysingthe company performance all over again. Tofully understand the evolving financial strategy,may be I should begin with a comparativeanalysis of Dabur India’s performanceagainst its competitors, say HLL, for someyears before and after 1998 when the changein management took place’. Bo said as theyfollowed others out of the hall.Questions1. Assume this is 1998–99. The new managementwants to identify areas withpotential for improving performance,particularly in the area of working capital.For this purpose, taking HLL financialperformance as a benchmark, carryout a financial ratios analysis for DaburIndia for the period 1995 to 1998, andidentify the areas where there is needfor improving performance. Use thesummarized data in Exhibits 2 and 3

for this purpose.2. Using data in Exhibit 4, calculate variousworking capital ratios for DaburIndia for the years 2003–04 and 2004–05. Compare these with similar ratiosfor the years 1995 to 1998. Identify thetrends and discuss their implicationson cost management and other aspects.3. What do you think are the advantagesand disadvantages of a ‘negative’ networking capital policy? If you are theCFO of a company, which policy wouldyou like to follow and why?4. What is the importance of cost controland reduction in the emerging businessenvironment? Using Dabur India’s experienceas an illustration, discuss thetechniques or methods that a companycould use to reduce costs.5. What is hedging and how can futuresand options contracts be used to hedgeagainst adverse price rises? Preparea note on Commodities Futures andOptions markets in India. (Skip thisquestion if not relevant to the specifictraining group).6. Using internet and other availablesources collect latest financial informationon major competitors in the FMCGsector and carry out a detailed financialratios analysis covering as many aspectsas possible.by on November 20, 2008 http://gbr.sagepub.com Downloaded from

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

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

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

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

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

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

1. Ownership2. Passion for Winning3. People Development4. Consumer Focus5. Team Work6. Innovation7. IntegrityThis 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 tobe the best at doing what matters most.People are our most important asset. We add value through result driven training, and we encourage & rewardexcellence.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 areintellectually 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, withbusiness 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 croresby on November 20, 2008 http://gbr.sagepub.com Downloaded from

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

FAST MOVINGCONSUMER GOODSwww.ibef.org

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

FAST MOVINGCONSUMER GOODSThe Indian FMCG sector is the fourth largest sector in the economywith 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 betweenthe organised and unorganised segments and low operational cost.Availability of key raw materials, cheaper labour costs and presenceacross the entire value chain gives India a competitive advantage.The FMCG market is set to treble from US$ 11.6 billion in 2003to US$ 33.4 billion in 2015. Penetration level as well as per capitaconsumption in most product categories like jams, toothpaste, skincare, hair wash etc in India is low indicating the untapped marketpotential. Burgeoning Indian population, particularly the middle classand the rural segments, presents an opportunity to makersof branded products to convert consumers to branded products.Growth is also likely to come from consumer 'upgrading' in thematured product categories. With 200 million people expected toshift to processed and packaged food by 2010, India needs aroundUS$ 28 billion of investment in the food-processing industry.Executive summaryFAST MOVING CONSUMER GOODS PAGE 3

WHY INDIALarge domestic marketIndia is one of the largest emerging markets, with a population ofover one billion. India is one of the largest economies in the worldin terms of purchasing power and has a strong middle class base of300 million.Rural and urban potentialRural-urban profileUrban RuralPopulation 2001-02 (mn household) 53 135Population 2009-10 (mn household) 69 153% Distribution (2001-02) 28 72Market (Towns/Villages) 3,768 627,000Universe of Outlets (mn) 1 3.3Source: Statistical Outline of India (2001-02), NCAERAround 70 per cent of the total households in India (188 million)resides in the rural areas. The total number of rural households areexpected to rise from 135 million in 2001-02 to 153 million in2009-10. This presents the largest potential market in the world.The annual size of the rural FMCG market was estimated at aroundUS$ 10.5 billion in 2001-02. With growing incomes at both therural and the urban level, the market potential is expected toexpand further.India - a large consumer goods spenderAn average Indian spends around 40 per cent of his income ongrocery and 8 per cent on personal care products. The large shareof fast moving consumer goods (FMCG) in total individual spendingalong with the large population base is another factor that makesIndia one of the largest FMCG markets.Consumption pieSource: KSA Technopak Consumer Outlook 2004.Even on an international scale, total consumer expenditure on foodin India at US$ 120 billion is amongst the largest in the emergingmarkets, next only to China.Consumer expenditure on food (US$ billion)Source: Euro monitor.

FAST MOVING CONSUMER GOODS PAGE 5

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 centof the population in India is below 20 years of age and the youngpopulation is set to rise further. Aspiration levels in this age grouphave been fuelled by greater media exposure, unleashing a latentdemand with more money and a new mindset.Demand-supply gapCurrently, only a small percentage of the raw materials in Indiaare processed into value added products even as the demandfor processed and convenience food is on the rise. This demandsupply gap indicates an untapped opportunity in areas such aspackaged form, convenience food and drinks, milk products etc.In the personal care segment, the low penetration rate in boththe rural and urban areas indicates a market potential.Change in the Indian consumer profileConsumer Profile1999 2001 2006Population (millions) 846 1,012 1,087Population < 25 years of age 480 546 565Urbanisation (%) 26 28 31Source: Statistical Outline of India (2002-03).FMCG Category and productsCategory ProductsHousehold Care Fabric wash (laundry soaps and syntheticdetergents); household cleaners (dish/utensilcleaners, floor cleaners, toilet cleaners, airfresheners, insecticides and mosquito repellents,metal polish and furniture polish).Food and Health beverages; soft drinks; staples/cereals;Beverages bakery products (biscuits, bread, cakes); snackfood; chocolates; ice cream; tea; coffee; softdrinks; processed fruits, vegetables; dairyproducts; bottled water; branded flour; brandedrice; 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 ANDCOMPARISON WITH THE WORLDMARKETSMaterials availabilityIndia has a diverse agro-climatic condition due to which there existsa wide-ranging and large raw material base suitable for foodprocessing industries. India is the largest producer of livestock, milk,sugarcane, coconut, spices and cashew and is the second largestproducer of rice, wheat and fruits & vegetables.India also has an ample supply of caustic soda and soda ash, the rawmaterials in the production of soaps and detergents - Indiaproduced 1.6 million tonnes of caustic soda in 2003-04. Tata

Chemicals, one of the largest producers of synthetic soda ash in theworld is located in India. The availability of these raw materials givesIndia the locational advantage.Cost competitivenessLabour cost comparisonSource: 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. Easyraw material availability and low labour costs have resulted in a lowercost of production. Many multi-nationals have set up large low costproduction bases in India to outsource for domestic as well asexport markets.Leveraging the cost advantageGlobal major, Unilever, sources a major portion of its productrequirements from its Indian subsidiary, HLL. In 2003-04, Unileveroutsourced around US$ 218 million of home and personal carealong with food products to leverage on the cost arbitrageopportunities with the West.To take another case, Procter & Gamble (P&G) outsourced themanufacture of Vicks Vaporub to contract manufacturers inHyderabad, India. This enables P&G to continue exporting VicksVaporub to Australia, Japan and other Asian countries, but atmore competitive rates, whilst maintaining its high quality and costefficiency.Presence across value chainIndian firms also have a presence across the entire value chain of theFMCG industry from supply of raw material to final processed andpackaged goods, both in the personal care products and in the foodprocessing sector. For instance, Indian firm Amul's product portfolioincludes supply of milk as well as the supply of processed dairyproducts like cheese and butter. This makes the firms located in Indiamore cost competitive.FAST MOVING CONSUMER GOODS PAGE 9

POLICYIndia has enacted policies aimed at attaining internationalcompetitiveness through lifting of the quantitative restrictions,reduced excise duties, automatic foreign investment and food lawsresulting in an environment that fosters growth. 100 per cent exportoriented units can be set up by government approval and use offoreign brand names is now freely permitted.FDI PolicyAutomatic investment approval (including foreign technologyagreements within specified norms), up to 100 per cent foreignequity or 100 per cent for NRI and Overseas Corporate Bodies(OCBs) investment, is allowed for most of the food processingsector except malted food, alcoholic beverages and those reservedfor small scale industries (SSI). 24 per cent foreign equity ispermitted in the small-scale sector. Temporary approvals forimports for test marketing can also be obtained from the DirectorGeneral of Foreign Trade. The evolution of a more liberal FDI policyenvironment in India is clearly supported by the successful operation

of some of the global majors like PepsiCo in India.PepsiCo's India experienceAfter a not so successful attempt to enter the Indian market in1985, 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 advantageof the liberalised policies and took control of Pepsi Foods bymaking an offer to both Voltas and PAIC to buy their equity. TheIndian government gave concessions to the company, Pepsi wasallowed to increase its turnover of beverages component tobeyond 25 per cent and was no longer restricted by itscommitment to export 50 per cent of its turnover. Thegovernment approved more than US$ 400 million worth ofinvestment of which over US$ 330 million has already beeninvested. The government also allowed PepsiCo to set up a newcompany in India called PepsiCo India Holdings Pvt Ltd, a whollyowned subsidiary of PepsiCo International, which is engaged inbeverage manufacturing, bottling and exports activities as PepsiFoods Ltd.Since then, the company has bought over bottlers in differentparts of India along with Dukes, a popular soft-drink brand inwestern India to consolidate its market share. This was followedby an introduction of Tropicana juice in the New Delhi andBangalore markets in 1999.Currently, soft drink concentrate, snack foods and vegetable andfood processing are the key products of the company. Pepsiconsiders India, along with China, as one of the two largest andfastest growing businesses outside North America. Pepsi has 19company owned factories while their Indian bottling partners own21. The company has set up 8 greenfield sites in backward regionsof different states. PepsiCo intends to expand its operations and isplanning an investment of approximately US$ 150 million in thenext two-three years.Removal of Quantitative Restrictionsand Reservation PolicyThe Indian government has abolished licensing for almost all foodand agro-processing industries except for some items like alcohol,cane sugar, hydrogenated animal fats and oils etc., and itemsreserved for the exclusive manufacture in the small scale industry(SSI) sector. Quantitative restrictions were removed in 2001 andUnion Budget 2004-05 further identified 85 items that would betaken out of the reserved list. This has resulted in a boom in theFMCG market through market expansion and greater productopportunities.FAST MOVING CONSUMER GOODS PAGE 11

Central and state initiativesVarious states governments like Himachal Pradesh, Uttaranchaland Jammu & Kashmir have encouraged companies to set upmanufacturing facilities in their regions through a package of fiscalincentives. Jammu and Kashmir offers incentives such as allotment ofland at concessional rates, 100 per cent subsidy on project reportsand 30 per cent capital investment subsidy on fixed capital

investment upto US$ 63,000. The Himachal Pradesh governmentoffers sales tax and power concessions, capital subsidies and otherincentives for setting up a plant in its tax free zones. Five-year taxholiday for new food processing units in fruits and vegetableprocessing have also been extended in the Union Budget 2004-05.Wide-ranging fiscal policy changes have been introducedprogressively. Excise and import duty rates have been reducedsubstantially. Many processed food items are totally exempt fromexcise duty. Customs duties have been substantially reducedon plant and equipment, as well as on raw materials andintermediates, especially for export production. Capital goodsare also freely importable, including second hand ones in thefood-processing sector.Food lawsConsumer protection against adulterated food has been brought tothe 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 PLAYERSThe structureThe Indian FMCG sector is the fourth largest sector in the economyand creates employment for three million people in downstreamactivities. Within the FMCG sector, the Indian food processingindustry represented 6.3 per cent of GDP and accounted for 13 percent of the country's exports in 2003-04.A distinct feature of the FMCG industry is the presence of mostglobal players through their subsidiaries (HLL, P&G, Nestle), whichensures new product launches in the Indian market from theparent's portfolio.Critical operating rules in Indian FMCG sector• Heavy launch costs on new products on launchadvertisements, free samples and product promotions.• Majority of the product classes require very low investmentin fixed assets• Existence of contract manufacturing• Marketing assumes a significant place in the brand buildingprocess• Extensive distribution networks and logistics are key toachieving a high level of penetration in both the urbanand rural markets• Factors like low entry barriers in terms of low capitalinvestment, fiscal incentives from government and low brandawareness in rural areas have led to the mushrooming ofthe unorganised sector• Providing good price points is the key to successFAST MOVING CONSUMER GOODS PAGE 13

Penetration and per capita consumptionRural - urban penetration (2002)Category Market Size Urban Rural Total(US$ million) Penetration Penetration Penetration(%) (%) (%)

High Penetration categories >50%: Drive upgradation andconsumptionFabric Wash 1210 89.6 82.9 84.9PersonalWash 938 97.9 90.7 92.8Packet Tea 635 91.2 82.2 84.9Low penetration categories: Drive penetrationToothpaste 409 69.8 32.3 43.5Skin 312 36.6 19.8 24.7Hair Wash 230 40.1 16.3 23.3TalcumPowder 148 66 36.8 45.1Branded Atta 107 44 30.2 34.3Dish Wash 102 54.6 11.5 24.4Instant Coffee 55 - - -R&G Coffee 30 - - -Ketchups 25 12.5 0.7 4.2Deodorants 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 particularlystriking between the rural and urban segments - the averageconsumption by rural households is much lower than their urbancounterparts. Low penetration indicates the existence ofunsaturated markets, which are likely to expand as the income levelsrise. This provides an excellent opportunity for the industry playersin 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 ascompared to both the developed markets and other emergingeconomies. A rise in per capita consumption, with improvement inincomes and affordability and change in tastes and preferences, isfurther expected to boost FMCG demand. Growth is also likely tocome from consumer "upgrading", especially in the matured productcategories.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 47.2Ice 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-upSource: Indian Market Demographic Report, NCAER.Indian FMCG market - urbanIndian FMCG market - ruralPAGE 17

Most Indian FMCG companies focus on urban markets for value andrural 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 totaldemand in 1998-99. Hence, rural marketing has become a criticalfactor in boosting bottomlines. As a result, most companies' haveoffered low price products in convenient packaging. Thesecontribute the majority of the sales volume. In comparison, theurban elite consumes a proportionately higher value of FMCGs, butnot volume.Rural markets: small is beautifulBy the early nineties FMCG marketers had figured out two things• Rural markets are vital for survival since the urbanmarkets were getting saturated• Rural markets are extremely price-sensitiveThus, a number of companies followed the strategy of launchinga wide range of package sizes and prices to suit the purchasingpreferences of India's varied consumer segments. HindustanLever, a subsidiary of Unilever, coined the term nano-marketingin the early nineties, when it introduced its products in smallsachets. Small sachets were introduced in almost all the FMCGsegments from oil, shampoo, and detergents to beverages.Cola major, Coke, brought down the average price of itsproducts from around twenty cents to ten cents, therebybridging the gap between soft drinks and other local options liketea, butter milk or lemon juice. It also doubled the number ofoutlets in rural areas from 80,000 during 2001 to 160,000 thenext year, thereby almost doubling its market penetration from13 per cent to 25 per cent. This along with greater marketing,led to the rural market accounting for 80 per centof new Coke drinkers and 30 per cent of its total volumes.The rural market for colas grew at 37 per cent in 2002, against a24 per cent growth in urban areas. The per capita consumption inrural areas also doubled during 2000-02.FAST MOVING CONSUMER GOODS

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

Consumer-class boomDemand for FMCG products is set to boom by almost 60 per centby 2007 and more than 100 per cent by 2015. This will be drivenby the rise in share of middle class (defined as the climbers andconsuming class) from 67 per cent in 2003 to 88 per cent in 2015.The boom in various consumer categories, further, indicates a latentdemand for various product segments. For example, the upper endof very rich and a part of the consuming class indicatea small but rapidly growing segment for branded products.The middle segment, on the other hand, indicates a large market forthe 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 servicessector growth is also likely to boost the urban consumptiondemand.Source: Euro monitor, BRICs Report (Goldman Sachs).

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

Identifying the segments in FMCGA brief description of the Indian FMCG industry is given in the table below.Segment Unit Size Key Players Share ofmarketleader(%)Household care 62Fabric wash market Mn tonnes 50 HLL, P&G, Nirma, SPIC 38Laundry soaps/bars US$ mn 1102Detergent cakes Mn tonnes 15Washing powder Mn tonnes 26Dish wash US$ mn 93 HLL 59Personal care 58Soap & Toiletries Mn tonnes 60 HLL, Nirma, GodrejPersonal wash market US$ mn 989 HLL, Nirma, GodrejOral care US$ mn 537 Colgate Palmolive, HLL 40Skin care & cosmetics US$ mn 274 HLL, Dabur, P&G 58Hair care US$ mn 831 Marico, HLL, CavinKare, 54Procter & Gamble, Dabur, GodrejFeminine hygiene US$ mn 44 Procter & Gamble, Johnson and JohnsonFood and BeveragesBakery products Mn tonnes 30 Britannia, Parle, ITCTea 000 tonnes 870 HLL, Tata Tea 31Coffee 000 tonnes 20 Nestle, HLL, Tata Tea 49*Mineral water Mn crates 65 Parle Bisleri, Parle Agro, Coca Cola, PepsiSoft Drink Mn crates 284 Coca Cola, PepsiBranded atta 000 tonnes 750 Pillsbury, HLL, Agro Tech, Nature Fresh, ITC 15Health beverages 000 tonnes 120 SmithKline Beecham, Cadbury, Nestle, AmulMilk and Dairy products US$ mn 653 Amul, Britannia, NestleChocolates US$ mn 174 Cadbury's, NestleCulinary products US$ mn 326 HLL, Nestle 78Edible oil Mn tonnes 13 Ruchi Soya, Marico, ITC Agrotech 28Note: *R&G Source: ORG Marg, AC Nielson, FICCI, India Statand HLL.Product wise production (2004)PAGE 21

Household careThe size of the fabric wash market is estimated to be US$ 1 billion,household cleaners to be US$ 239 million and the production ofsynthetic detergents at 2.6 million tonnes. The demand fordetergents has been growing at an annual growth rate of 10 to 11per cent during the past five years. The urban market preferswashing powder and detergents to bars on account of convenienceof usage, increased purchasing power, aggressive advertising andincreased penetration of washing machines. The regional and smallunorganisedplayers account for a major share of the total detergentmarket in volumes.Personal careThe size of the personal wash products is estimated at US$ 989million; hair care products at US$ 831 million and oral care productsat US$ 537 million. While the overall personal wash market is

growing at one per cent, the premium and middle-end soaps aregrowing at a rate of 10 per cent. The leading players in this marketare HLL, Nirma, Godrej Soaps and Reckitt & Colman. The oral caremarket, especially toothpastes, remains under penetrated in India(with penetration level below 45 per cent) due to lack of hygieneawareness among rural markets. The industry is very competitiveboth for organised and smaller regional players.The Indian skin care and cosmetics market is valued at US$ 274million and dominated by HLL, Colgate Palmolive, Gillette India andGodrej Soaps. This segment has witnessed the entry of a number ofinternational brands, like Oriflame, Avon and Aviance leading toincreased competition. The coconut oil market accounts for 72 percent share in the hair oil market. In the branded coconut hair oilmarket, 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 BeveragesFoodAccording to the Ministry of Food Processing, the size of the Indianfood processing industry is around US$ 65.6 billion including US$20.6 billion of value added products. Of this, the health beverageindustry is valued at US$ 230 billion; bread and biscuits at US$ 1.7billion; chocolates at US$ 73 million and ice creams at US$ 188million.The size of the semi-processed/ready to eat food segment isover US$ 1.1 billion. Large biscuits & confectionery units, soyaprocessingunits and starch/glucose/sorbitol producing units havealso come up, catering to domestic and international markets.The three largest consumed categories of packaged foods arepacked tea, biscuits and soft drinks.BeveragesThe Indian beverage industry faces over supply in segments likecoffee and tea. However, more than half of this is available inunpacked or loose form. Indian hot beverage market is a teadominant market. Consumers in different parts of the countryhave heterogeneous tastes. Dust tea is popular in southern India,while loose tea in preferred in western India. The urban-rural split ofthe tea market was 51:49 in 2000. Coffee is consumed largelyin the southern states. The size of the total packaged coffee marketis 19,600 tonnes or US$ 87 million. The urban rural splitin the coffee market was 61:39 in 2000 as against 59:41 in 1995.The total soft drink (carbonated beverages and juices) market isestimated at 284 million crates a year or US$ 1 billion. The marketis highly seasonal in nature with consumption varying from 25 millioncrates per month during peak season to 15 million during offseason.The market is predominantly urban with 25 per centcontribution from rural areas. Coca cola and Pepsi dominate theIndian 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 at4.9 million crates, which increases to 5.2 million

during peak season.ExportsIndia is one of the world's largest producers for a number of FMCGproducts but its exports are a very small proportion of the overallproduction. Total exports of food processing industry was US$ 2.9billion in 2001-02 and marine products accounted for 40 per cent ofthe 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 thesimilar lifestyle and consumption habits between these countries andIndia. HLL, Godrej Consumer, Marico, Dabur and Vicco laboratoriesare amongst the top exporting companies.Investment in the FMCG sectorThe FMCG sector accounts for around 3 per cent of the total FDIinflow and roughly 7.3 per cent of the total sectoral investment. Thefood-processing sector attracts the highest FDI, while the vegetableoils and vanaspati sector accounts for the highest domesticinvestment in the FMCG sector.Source: SIA Newsletter, DIPP.Investments in the FMCG sector (August 1991-April 2004)FAST MOVING CONSUMER GOODS PAGE 25

Domestic playersBritannia India Ltd (BIL)Britannia India Ltd was incorporated in 1918 as Britannia Biscuit CoLtd and currently the Groupe Danone (GD) of France (a globalmajor in the food processing business) and the Nusli Wadia Grouphold a 45.3 per cent equity stake in BIL through AIBH Ltd (a 50:50joint venture). BIL is a dominant player in the Indian biscuit industry,with major brands such as Tiger glucose, Mariegold, Fifty-Fifty, GoodDay, Pure Magic, Bourbon etc.The company holds a 40 per cent market share in the overallorganised biscuit market and has a capacity of 300,000 tonne perannum. Currently, the bakery product business accounts for 99.1per cent of BIL's turnover. The company reported net sales of US$280 million in 2002-03. Britannia Industries Ltd (BIL) plans toincrease its manufacturing capacity through outsourced contractmanufacturing and a greenfield plant in Uttaranchal to expand itsshare in the domestic biscuit and confectionery market.Dabur India LtdEstablished in 1884, Dabur India Ltd is the largest Indian FMCGand ayurvedic products company. The group comprises DaburFinance, Dabur Nepal Pvt Ltd, Dabur Egypt Ltd, Dabur OverseasLtd and Dabur International Ltd. The product portfolio of thecompany includes health care, food products, natural gums& allied chemicals, pharma, and veterinary products. Some of itsleading brands are Dabur Amla, Dabur Chyawanprash, Vatika,Hajmola, Lal Dant Manjan, Pudin Hara and the Real range of fruitjuices. The company reported net sales of US$ 218 million in 2003-04. Dabur has firmed up plans to restructure its sales anddistribution structure and focus on its core businesses of fast-movingconsumer good products and over-the-counter drugs. Under therestructured set-up, the company plans to increase direct coverage

to gap outlets and gap towns where Dabur is notpresent. A roadmap is also being prepared to rationalise thestockists' network in different regions between various products anddivisions.Indian Tobacco Corporation Ltd (ITCL)Indian Tobacco Corporation Ltd is an associate of British AmericanTobacco with a 37 per cent stake. In 1910 the company's operationswere restricted to trading in imported cigarettes.The company changed its name to ITC Limited in the mid seventieswhen it diversified into other businesses. ITC is one of India'sforemost private sector companies with a turnover of US$ 2.6billion. While ITC is an outstanding market leader in its traditionalbusinesses of cigarettes, hotels, paperboards, packaging and agriexports,it is rapidly gaining market share even in its nascentbusinesses of branded apparel, greeting cards and packaged foodsand confectionary. After the merger of ITC Hotels with ITC Ltd, thecompany will ramp up its growth plans by strengthening its alliancewith Sheraton and through focus on international projects in Dubaiand the Far East. ITC's subsidiary, International Travel House (ITH)also aims to launch new products and servicesby way of boutiques that will provide complete travel services.MaricoMarico is a leading Indian Group incorporated in 1990 and operatingin consumer products, aesthetics services and global ayurvedicbusinesses. The company also markets food products and distributesthird party products. Marico owns well-known brands such asParachute, Saffola, Sweekar, Shanti Amla, Hair & Care, Revive,Mediker, Oil of Malabar and the Sil range of processed foods. It hassix factories, and sub-contract facilities for production. In 2003-04,the company reported a turnover of US$ 200 million. The overseassales franchise of Marico's branded FMCG products is one of thelargest 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 realignmentof portfolio along higher margin lines and focus on volume growth,consolidation of market shares, strengthening flagship brands andnew product offerings (2-3 new product launches are expected in2004-05). It also plans to expand its international business toPakistan.Nirma LimitedNirma Ltd, promoted by Karsanbhai Patel, is a homegrown FMCGmajor with a presence in the detergent and soap markets. It wasincorporated in 1980 as a private company and was listed in fiscal1994. Associate companies' Nirma Detergents, Shiva Soaps andDetergents, Nirma Soaps and Detergents and Nilnita Chemicalswere merged with Nirma in 1996-1997. The company has also setup a wholly owned subsidiary Nirma Consumer Care Ltd, which isthe sole marketing licensee of the Nirma brand in India. Nirma alsomakes alfa olefin, fatty acid and glycerine. Nirma is one of the mostsuccessful brands in the rural markets with extremely low pricedofferings. Nirma has plants located in Gujarat, Madhya Pradesh and

Uttar Pradesh. Its new LAB plant is located in Baroda and the sodaash complex is located in Gujarat. Nirma has strong distributorstrength of 400 and a retail reach of over 1 million outlets. Thecompany reported gross sales of US$ 561 million in 2003-04. Itplans to continue to target the mid and mass segments for futuregrowth.Foreign playersCadbury India Ltd (CIL)Cadbury Indian Ltd is a 93.5 per cent subsidiary of CadburySchweppes Plc, UK, a global major in the chocolate and sugarconfectionery industry. CIL was set up as a trading concern in 1947and subsequently began its operations with the small scaleprocessing of imported chocolates and food drinks. CIL is currentlythe largest player in the chocolate industry in India with a 70 percent market share. The company is also a key player in the maltedfoods, cocoa powder, drinking chocolate, malt extract food andsugar confectionery segment. The company had also entered thesoft drinks market with brands like 'Canada Dry' and 'Crush', whichwere subsequently sold to Coca Cola in 1999. Established brandsinclude Dairy Milk, Perk, Crackle, 5 Star, Éclairs, Gems, Fructus,Bournvita etc. The company reported net sales of US$ 160 million in2003. The company plans to increase the number of retail outletsfor future growth and market expansion.CargillCargill Inc is one of the world's leading agri-business companies witha strong presence in processing and merchandising, industrialproduction and financial services. Its products and geographicdiversity (over 40 product lines with a direct presence in over 65countries and business activities in about 130 countries) as well as itsvast communication and transportation network help optimisecommodity movements and provide competitive advantage. CargillIndia was incorporated in April 1996 as a 100 per cent subsidiary ofCargill Inc of the US. It is engaged in trading in soyabean meals,wheat, edible oils, fertilisers and other agricultural commoditiesbesides marketing branded packaged foods. It has also set up its ownanchorage facilities at Rosy near Jamnagar in Gujarat for efficienthandling of its import and export consignments.FAST MOVING CONSUMER GOODS PAGE 29

Coca ColaCoca-Cola started its India operations in 1993. The Coca-Colasystem in India comprises 27 wholly company-owned bottlingoperations and another 17 franchisee-owned bottling operations.A network of 29 contract-packers also manufacture a range ofproducts for the company. Leading Indian brands Thums Up, Limca,Maaza, Citra and Gold Spot exist in the Company's internationalfamily of brands along with Coca-Cola, Diet Coke, Kinley, Sprite andFanta, 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$ 100million in its operations.Colgate-Palmolive IndiaColgate Palmolive India is a 51 per cent subsidiary of Colgate

Palmolive Company, USA. It is the market leader in the Indian oralcare market, with a 51 per cent market share in the toothpastesegment, 48 per cent market share in the toothpowder market anda 30 per cent share in the toothbrush market. The company alsohas a presence in the premium toilet soap segment and in shavingproducts, which are sold under the Palmolive brand. Other wellknownconsumer brands include Charmis skin cream and Axion dishwash. The company reported sales of US$ 226 million in 2003-04.The company's strategy is to focus on growing volumes byimproving penetration through aggressive campaigning andconsumer promotions. The company plans to launch new productsin oral and personal care segments and is prepared to continuespending on advertising and marketing to gain market share. Margingains are being targeted through efficient supply chain managementand bringing down cost of operations.H J Heinz CoA US$ 8.4 billion American foods major, H J Heinz Co comprises4,000 strong brand buffet in infant food, sauces and condiments.The company was the first to commence manufacturing and bottlingof tomato ketchup in 1876. In India, Heinz has a presence throughits 100 per cent subsidiary Heinz India Pvt Ltd. Heinz acquired theconsumer 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 heatpowder, besides the Heinz ketchup range.Hindustan Lever Ltd (HLL)Hindustan Lever Ltd is a 51 per cent owned subsidiary of theAnglo-Dutch giant Unilever, which has been expanding the scope ofits operations in India since 1888. It is the country's biggestconsumer goods company with net sales of US$ 2.4 billion in 2003.HLL is amongst the top five exporters of the country and also thebiggest exporter of tea and castor oil. The product portfolio of thecompany 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 networkcovering 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 growincludes focussing on the power brands' growth through consumerrelevant information, cross category extensions, leveraging channelopportunities 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 milkpowders (75 per cent market share) and cereals (80 per centmarket share). Nestle has also established its presence in chocolates,confectioneries and other processed foods. Soluble beverages andmilk products are the major contributors to Nestle's total sales.

Some of Nestle's popular brands are Nescafe, Milkmaid, Maggi andCerelac. The company has entered the chilled dairy segment withthe launch of Nestle Dahi and Nestle Butter. Nestle has also made aforay in non-carbonated cold beverages segment through placementof Nestea iced tea and Nescafe Frappe vending machines. Exportscontribute to 23 per cent of its turnover and the company reportednet sales of US$ 440 million in 2003.FAST MOVING CONSUMER GOODS PAGE 31

PepsiCoPepsiCo is a world leader in convenient foods and beverages,with revenues of about US$ 27 billion. PepsiCo brands are availablein nearly 200 markets across the world. The company has anextremely positive outlook for India. "Outside North America twoof 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 isconcentrating on three focus areas - soft drink concentrate, snackfoods and vegetable and food processing. PepsiCo's success is theresult of superior products, high standards of performance anddistinctive competitive strategies.Procter & Gamble Hygiene and Health Care LimitedRichardson Hindustan Limited (RHL), manufacturer of the Vicksrange of products, was rechristened 'Procter & Gamble India' inOctober 1985, following its affiliation to the 'Procter & GambleCompany', USA. Procter & Gamble Hygiene and Health CareLimited (PGHHCL) acquired its current name in 1998, reflecting thetwo key segments of its business. P&G, USA has a 65 per cent stakein PGHHCL. The parent also has a 100 per cent subsidiary, Procter& Gamble Home Products (PGHP). The overall portfolio of thecompany includes healthcare; feminine-care; hair care and fabric carebusinesses. PGHH operates in just two business segments - Vicksrange of cough & cold remedies and Whisper range of femininehygiene. The detergent and shampoo business has been relocatedglobally to Vietnam. The company importsand markets most of the products from South East Asian countriesand China, while manufacturing, marketing and export of Vicks andsanitary napkins has been retained in India. The company reportedsales of US$ 91 million in 2002-03. The parent company hasannounced its plan to explore further external collaborationsin India to meet its global innovation and knowledge needs.

MARKET OPPORTUNITIESFOR INVESTMENTMeasuring the opportunity: Domestic FMCGmarket to trebleSource: HH Panel dataAccording to estimates based on China's current per capitaconsumption, the Indian FMCG market is set to treble fromUS$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominanceof Indian markets by unbranded products, change in eating habits andthe increased affordability of the growing Indian population presentsan opportunity to makers of branded products, who can convertconsumers to branded products.

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

from increased rural and small town penetration. Technologicaladvances such as the internet and e-commerce will aid in betterlogistics and distribution in these areas. Already Indian corporatessuch as HLL and ITC have identified the opportunity and haveinitiated projects such as 'Project Shakti' and 'e-Choupal' to first,expand rural income, and then, to penetrate this market.Boosting rural income - novel experiments byIndian corporatesPROJECT SHAKTIFMCG giant Hindustan Lever initiated 'Project Shakti' to spurgrowth and increase the penetration of its products in ruralIndia while changing lives and boosting incomes. Through acombination of micro-credit and training in enterprisemanagement, women from self-help groups turned direct-tohomedistributors of a range of HLL products and helped thecompany test hitherto unexplored rural hinterlands. The projectwas piloted in Nalgonda district in Andhra Pradesh (AP) in2001, it has since been scaled up and extended to over 5,000villages in 52 districts in AP, Karnataka, Gujarat, Chattisgarh,Orissa and Madhya Pradesh with around 1,000 womenentrepreneurs in its fold. The vision is to create about 11,000Shakti entrepreneurs covering 100,000 villages and 100 millionrural consumers by 2010.For HLL, greater penetration in rural areas is also imperativesince over 50 per cent of its incomes for several of its productcategories like soaps and detergents come from rural India. Theproject has borne fruit for HLL. In Andhra Pradesh, so far, sincethe experiment began, HLL has seen 15 per cent incrementalsales from rural Andhra, which contributes 50 per cent tooverall sales from Andhra of HLL products.e-CHOUPALAn example of the successful application of IT is the e-Choupalexperiment kicked off by diversified tobacco giant ITC. ITC hasdesigned and set up internet kiosks called e-Choupals tosupport its agricultural product supply chain.The e-Choupals are totally owned and set up by ITC withthe 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 accessfor global market information to guide production and supplydecisions. It provides price information and thus, price certaintyto the farmers. In addition, the farmers get access tooperational information, developed by ITC experts, pertaining

to cropping, seeds, fertilisers etc.The initial benefits of the ITC effort include a substantialreduction in transaction costs, from 8 per cent to just 2 percent. These gains are shared roughly equally between ITC andindividual farmers. The longer-term goal is to usee-Choupals as sales points for soyabean oil and a range ofother consumer goods. ITC has also set up its first rural mallnear Bhopal, where it distributes products of other FMCGmajors as well. Hence, incomes generated throughe-choupals will be targeted by the FMCG major to drive theirproduct sales.Export potentialIndia has a locational advantage that can be exploited to use it asa sourcing base for FMCG exports. Export of pre-prepared mealswith Indian vegetables for large Asian ethnic population settled indeveloped countries is a very big opportunity for India. South EastAsia, which is presently being catered to by USA and EU, can besourced from India due to its lower freight cost.FAST MOVING CONSUMER GOODS PAGE 35

Investments can also be made in Indian dairy industries tomanufacture and package dairy food (through contract or localcollaboration) for export to Middle East, Singapore, Malaysia,Indonesia, Korea, Thailand and Hong Kong. Commodities like drymilk, condensed milk, ghee and certain cheese varieties that areutilised as ingredients in foreign countries can also be exported.These markets can be expanded to include value-added ingredientslike packaged cheese sauce and dehydrated cheese powders. Largeexport potential also exists in the soya products industry.Sectoral opportunitiesAccording to the Ministry of Food Processing, with 200 millionpeople expected to shift to processed and packaged food by 2010,India needs around US$ 28 billion of investment to raise foodprocessinglevels 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 expenditureon mass-based, high volume, low margin basic foods suchas wheat, wheat flour and homogenised milk is expected toincrease substantially with the rise in population, there is alsoa market for branded staples is also expected to emerge.Investment in branded staples is likely to rise with the popularityof branded rice and flour among urban population.• Dairy based products: India is the largest milk producerin the world, yet only 15 per cent of the milk is processed.The US$ 2.4 billion organised dairy industry requires hugeinvestment for conversion and growth. Investment opportunitiesexist in value-added products like desserts, puddings etc. Theorganised liquid milk business is in itsinfancy and also has large long-term growth potential.• Packaged food: Only about 8-10 per cent of output isprocessed and consumed in packaged form, thus highlightingthe huge potential for expansion of this industry. Currently, thesemi processed and ready to eat packaged food segment has a

size of over US$ 70 billion and is growing at 15 per cent perannum. Growth of dual income households, where both spousesare earning, has given rise to demand for instant foods, especiallyin urban areas. Increased health consciousness and abundantproduction of quality soyabean also indicates a growing demandfor soya food segment.• Personal care and hygiene: The oral care industry, especiallytoothpastes, remains under penetrated in India with penetrationrates below 45 per cent. With rise in per capita incomesand awareness of oral hygiene, the growth potential is huge.Lower price and smaller packs are also likely to drive potentialuptrading. In the personal care segment, according to forecastsmade by the Centre for Industrial and Economic Research(CIER), detergent demand is likely to rise to 4,180, 000 metrictonnes by 2011-12 with an annual growth rate of 7 per centbetween 2006 and 2012. The demand for toilet soapis expected to grow at an annual rate of 4 per cent between2006-12 to 870,000 metric tonnes by 2011-12. Rapidurbanisation is expected to propel the demand for cosmeticsto 100,000 metric tonnes by 2011-12, with an annual growthrate of 10 per cent.• Beverages: The US$ 2 billion Indian tea market has been growingat 1.5 to 2 per cent annually and is likely to see a further rise asIndian consumers convert from loose tea to branded teaproducts. In the aerated drinks segment, the per capitaconsumption of soft drinks in India is 6 bottles compared toPakistan's 17 bottles, Sri Lanka's 21, Thailand's 73, the Philippines173 and Mexico's 605. The demand for soft drinkin India is expected to grow at an annual rate of 10 per cent perannum between 2006-12 with demand at 805 million cases by2011-12. Per capita coffee consumption in India is beingpromoted by the coffee chains and by the emergence of instantFAST MOVING CONSUMER GOODS PAGE 37

cold coffee. According to CIER, demand for coffee isexpected to rise to 535,000 metric tonnes by 2012, withan annual growth rate of 5 per cent between 2006-12.• Edible oil: The demand for edible oil in India, accordingto CIER, is expected to rise to 21 million tonnes by2011-12 with an annual growth rate of 7 per centper annum.• Confectionary: The explosion of the young agepopulation in India will trigger a spurt in confectionaryproducts. In the long run the industry is slated to grow at8 to 10 per cent annually to 870,000 metric tonnes by2011-12.ANNEXURE: APEX CONTACT AGENCIESIndian Dairy Association (IDA)Established in 1948, Indian Dairy Association is the apex bodyof the dairy industry in India. The key functions of IDA aretransmission of technical/scientific information to the members, bothindividuals as well as institutions, to organise periodic conferences,seminars and workshops on subjects of current interest and toundertake consultancy projects both overseas

as well as in the country whenever such a request is receivedfrom any central ministry of the Government of India. IDA alsointervenes on the policy issues like presentation of pre-budgetmemorandum, 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 022IndiaTel: +91 11 26165355 / 26165237 / 26170781Fax: +91 11 26174719Web: http://www.indairyasso.org/The Solvent Extractors' Association of India (SEA)The Solvents Extractors' Association is an all India body of solventextraction industry having wide representative membershipconsisting of processors of rice bran, oilcakes, minor oilseeds andsoybean. SEA is the Trade Promotion Organisation for the exportsof various de-oiled meals (feed ingredients), animal and poultry feedsand minor oils (fats) from India. SEA acts as a catalyst betweeninternational buyers and local exporters and is responsible for exportpromotion and performs variousexport promotion functions.FAST MOVING CONSUMER GOODS PAGE 39

The Solvent Extractors' Association of IndiaPremier Association of Vegetable Oil Industry & Trade142, Jolly Maker Chambers No.2,14th Floor, 225 Nariman Point,Mumbai 400 021IndiaTel: +91 22 2202 1475/ 2282 1692Fax: +91 22 2202 1692Web: www.seaofindia.comE-mail: solvent@vsnl.comOTHERSIndian Soap & Toiletries Manufacturers AssociationRaheja Centre, 6th Floor, Room No. 614, Backbay Reclamation,Mumbai - 400 021IndiaTel: +91 22 2824115Fax: +91 22 2853649

E-Mail: istma@bom3.vsnl.net.inVanaspati Manufacturers Association of India903, Akashdeep Bldg,26-A, Barakhamba Road, New DelhiIndiaTel : +91 11 23312640, 23310758Fax : +91 11 011-65521E-mail: vmai.vanaspati@smy.sprintrpg.emsAll India Food Preservers Association206, Aurobindo Place Market ComplexHauz Khas, New Delhi - 110 016

IndiaTel: +91 11 26510860/26518848Fax: +91 11 26510860Web: http://www.aifpa.com/All India Bread Manufacturers AssociationCommercial Complex,9A, Connaught Place, New DelhiIndiaTel: +91 11 23327421Fax: +91 11 23324483Federation of Biscuit Manufacturers of India9A, Connaught Place, New Delhi.IndiaTel: +91 11 26863801Fax: +91 11 26863135Indian Soft Drinks manufacturers' AssociationNew Delhi.IndiaTel: +91 11 23716782Fax: +91 11 23327747DISCLAIMERThis 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 (includingphotocopying or storing it in any medium by electronic means and whether or nottransiently or incidentally to some other use of this publication), modified or in anymanner communicated to any third party except with the written approval of IBEF.This publication is for information purposes only. While due care has been takenduring the compilation of this publication to ensure that the information is accurateto the best of IBEF’s knowledge and belief, the content is not to be construed in anymanner whatsoever as a substitute for professional advice.IBEF neither recommends nor endorses any specific products or services that may havebeen mentioned in this publication and nor does it assume any liability or responsibilityfor the outcome of decisions taken as a result of any reliance placedon this publication.IBEF shall in no way, be liable for any direct or indirect damages that may arise dueto any act or omission on the part of the user due to any reliance placedor guidance taken from any portion of this publication.The India Brand Equity Foundation is a public-private partnershipbetween the Ministry of Commerce and Industry, Government of India andthe Confederation of Indian Industry. The Foundation's primary objectiveis to build positive economic perceptions of India globally.India Brand Equity Foundationc/o Confederation of Indian Industry249-F Sector 18Udyog Vihar Phase IVGurgaon 122015 HaryanaINDIATel +91 124 501 4087 Fax +91 124 501 3873E-mail ajay.khanna@ciionline.orgWeb www.ciionline.org

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