202 Corporate Finance
THE FMCG INDUSTRY
The consumer products’ industry comprises personal care, cosmetics, and home products. The sector is sub-
divided into dental care, soaps, detergents, surface cleaning products, skin care, and hair care products. The
market size and penetration of different products is provided in Exhibit 10.2.
Exhibit 10.2 Market share of consumer products
Market size
Penetration (percent)Segments (Rs in billion) Urban Rural
Toilet soaps 46.0 95 percent 85.0 percent
Detergents 38.0 95 percent 85.0 percent
Hair color 2.4 20 percent 10.0 percent
Skin care 7 40 percent 10.0 percent
Oral care 21 75 percent 20.0 percent
Source: equitymaster.com.
FMCG products like detergents are of low value but the cumulative budget allocated to these products by
the consumers is significant. The price and income elasticity of demand varies across products. FMCG
products are backed by heavy advertising and sales promotion to induce consumers to buy. FMCG products
are neither capital intensive nor technology intensive. That is, technology is easily available and stable. One
of the key features of the FMCG industry is third party manufacturing (TPM). TPM used to offer fiscal
advantages, especially excise duty, that has now been rationalized. It provides other benefits like:
- Allowing the company (say, HLL) to concentrate on marketing and liberate manufacturing and the
associated overheads and inventory. - Reduction in labor costs. Third party manufacturers are usually small because of which overheads and
labor costs are low. These companies do not have the problems arising out of unionization that big com-
panies face. - Greater control over logistics. It is often necessary to get the product manufactured near the market to
control logistics. A company may enter into agreements with many third party manufacturers instead of
setting up plants all over the country.
Detergents India acts as a third party manufacturer to HLL in addition to catering to the parent (to
manufacture Chek and Regal). Just as DIL acts as a TPM to HLL, other companies like Venkateshwara
Detergents and Naga Oil Mills have agreements with DIL. Third party operations are of two types:
- Processing arrangements
- Principal to principal arrangements
In a processing arrangement, the raw material and packing material is provided to the third parties and they
are paid a processing charge for processing the raw material into the finished product. DIL has a processing
arrangement with HLL for its product, 501 Bar.
In a principal to principal arrangement, the third party would be completely responsible for all operations
from procurement of raw materials to conversion into finished product. DIL has this agreement with Shaw
Wallace for all their branded products and with Hindustan Lever for its product Wheel.