MICHAEL PORTER S 5 FORCES MODEL AND FUTURE TRENDS OF FMCG INDUSTRY

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1 MICHAEL PORTER S 5 FORCES MODEL AND FUTURE TRENDS OF FMCG INDUSTRY

2 \ 1. Barriers to Entry : - Entry of new players in an industry raises the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants, FMCG ). Key barriers to entry include:- Economies of scale Product differentiation Brand Identity Customer switching costs Access to industry distribution channels Capital requirement Access to technology Government Protection

3 6 Barriers to Entry Barriers to Entry Economies of Scale are the key determinants of market structure and entry for any organization. In FMCG Sector Economics of scale is highly attractive because units produced of goods is very larger scale and the costs incurred on those is very less Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products, in FMCG sector differentiation has been done via color, size, shape, quantity etc. Product differentiation in FMCG sector is highly attractive The most visible elements of a brand are colors, design, logotype, name, symbol, etc. A well-built brand identity will effectively communicate a company s personality and its product value to potential customers, helping build brand recognition, association and loyalty. So the brand identity is very high in FMCG Industry and the customer switching cost is very low because there are ample no. players in the market There are huge availability of distribution channels in FMCG like manufacture, retail outlets, wholesaler etc and Retail outlets Wholesaler custmers Manufacture The Indian FMCG Industry is characterized with modest entry and exit barriers.

4 2. Rivalry Among competitors:- Competitiveness among the Indian FMCG players is high. With more MNCs entering the country, the industry has become highly fragmented. Spending on advertisements continues to grow and marketing budgets as well as strategies are becoming more aggressive. Rivalry among competitors is includes:- Number of competitors Industry growth Differentiation Switching cost Openness of terms of sale Excess capacity Strategic stakes Rivalry among competitors Rivalry among competitors The availability of market players in FMCG is really high which increase competition in market The Top 5 market leaders in FMCG Industry, in terms of revenue and profits

5 FY15 Revenue(Cr.) FY15 Profit(Cr.) FMCG has been a safe sector for investors looking for predictable margins and stable returns during the economic crisis. So we can say that the industry growth in the FMCG sector is high. The product differentiation is moderate in FMCG Sector that s by the differentiation in competitors is also moderate and switching cost from one company to another is low in this sector The intensity of competitive rivalry increases when success in an industry is important to a large number of firms. For example, the success of a diversified firm may be important to its effectiveness in other industries, especially when the firm is in interdependent or related industries. The high strategic stakes impact the long term profit potential for an organization in this sector there are ample no. of competitors so that we can say that the excess capacity is high and contribution of investor and stakeholders is also high. 3. Bargaining Power of Suppliers :- Suppliers to the industry wish to capture as much of the profit in the value chain as possible prices are generally governed by international commodity markets, making most of the FMCG companies a price takers. Due to the long term relationships with suppliers etc., the FMCG companies negotiate better rates during times of high input cost inflation. If an intermediary is earning excessive profits, suppliers will raise prices in order to capture a greater share of the profit The bargaining power of suppliers includes:- Number of suppliers

6 Availability of substitute Supplier s threat of forward integration Industry s threat of backward integration Contribution to cost Industry s importance to supplier In this sector the power of suppliers of raw materials and intermediate goods is not very high because there is ample number of substitute suppliers available so the bargaining power of the suppliers is low All firms must recognize that they compete against firms producing substitute products, those products that are capable of satisfying similar customer needs but come from outside the industry and thus have different characteristics. So the availability of substitute is really high in FMCG sector high-volume, low-margin fast-moving consumer goods industry contributed moderate rate of cost due to the involvement of advertisement, manufacturing, packaging so that importance to supplier is also moderate 6 Bargaining power of suppliers No. of suppliers Availability of substitutes Supplier's threat of forward integration Industry s threat of backward integration Contribution to cost Industry s importance to supplier Bargaining power of suppliers 4. Threat of Substitutes: - The presence of substitute products in FMCG industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: Availability of close substitute

7 Switching cost The relative price and performance of substitutes Profitability of the producers of substitutes Being an essential commodity the demand for consumer products is elastic. Several brands are positioned with narrow product differentiation. Companies entering a category /trying to gain market share compete on pricing which increases products substitution. Hence, threat of substitute is high in the FMCG industry. E.g. Available substitutes of Colgate in market the cost of switching from one supplier s product to another supplier s product is easy if the switching cost is lower but if it s high then it s difficult to buyers, the switching cost in FMCG sector is low because of easy availability of products the relative price and performance of substitutes are closely related in this sector and profitability of producers is depend on the performance of the substitute Threat of substitutes Availabiity of close substitute Switching Cost The relative price and performance of substitutes Profitability of the producers of substitute

8 5. Bargaining Power of Consumers: - Bargaining power of buyers or consumers depends on:- Number of buyers Availability of suppliers Switching cost Contribution to quality Contribution to cost While firms seek to maximize their return on invested capital, buyers are interested in purchasing products at the lowest possible price. To reduce cost or maximize value, customers bargain for higher quality or greater levels of service at the lowest possible price by encouraging competition among firms in the industry. Into this sector the availability of buyers are high. High brand loyalty for a product discourages customers product shift. But low switching cost and aggressive marketing strategies under intense competition between the FMCG companies, induce consumers to switch between products, thereby driving value for money deals for consumers. Brand loyalty for a product contributed good quality and high cost. Bargaining power of buyers No. of buyers Availability of suppliers Switching cost Contribution to quality Contribution to cost Bargaining power of buyers Overall assessment:-

9 6 FMCG Industry Threat of new entrants Rivalry among competitores Power of Power of buyers suppliers FMCG Industry Overall assessment Threat of substitutes Overall Attractiveness Future trends of FMCG industry:- Fast moving consumer goods will become a Rs 4,-crore industry by 22. the FMCG sector witnessed robust year-on-year growth of approx. 11 per cent in the last decade, almost tripling in size from Rs 47, crore in 2-1 to Rs 13, crore now (it accounts for 2.2 per cent of the country s GDP). Growth was even faster in the past five years almost 17 per cent annually since 25. It identifies robust GDP growth, opening up of rural markets, increased income in rural areas, growing urbanization along with evolving consumer lifestyles and buying behaviors as the key drivers of this growth Goods and Service Tax(GST), which will replace the multiple indirect taxes levied on FMCG sector with a uniform, simplified and single-pint taxation system, is likely to be implemented soon. A swift move to the proposed GST may reduce prices, bolstering consumption for FMCG products. FDI in retail- The decision to allow 51% FDI in multi brand retail and 1% FDI in single brand retail augers well for the outlook for the FMCG sector. The move is expected to bolster employment, and supply chains, apart from providing high visibility for FMCG brands in organized retail markets, bolstering consumer spending, and encouraging more product launches. FDI of 1% under the automatic route is allowed in the food processing sector, which is considered as a priority sector FMCG growth will be driven by new segments such as urban India s poorest households and lowincome value seekers visiting modern trade outlets for the first time

10 Expanding Distribution Network- In order to tap the growing potential of rural markets, the companies are now focused on improving their distribution networks to expand their reach in rural India. Rising Importance of Smaller-sized packs- Companies are increasingly introducing smaller stock keeping units (SKUs) at reduced prices. This helps them sustain margins, maintain volumes from price conscious costumers and increase their consumer base. Lifestyle Products- Increasing urbanization and higher disposable incomes are encouraging many consumers to move from unbranded to branded products, bolstering growth in the FMCG market. Despite the current slowdown, the demand for premium products (comprising of wheat cornflakes and muesli, baked and non-fried potato chips and snacks, and diet beverages, 1% juices and organic or green tea) in the health and wellness space, is rising, encouraging companies to launch more premium products. Moreover, demand for sophisticated personal care products is also on the rise as people become beauty and health conscious. The anti-ageing skincare category grew five times between 27 and 28. It s today the fastestgrowing segment in the skincare market. Olay, Procter & Gamble s premium anti-ageing skincare brand, captured 2 per cent of the market within a year of its launch in 27 and today dominates it with 37 per cent share. Entry of New Brands (Brand/ Line Extension)- Innovation is a driving factor in Indian FMCG. Several companies have started innovating or customizing their existing product portfolios for new consumer segments. Brand extensions are 5 times more successful than launching brands, increasing sales by 3% and contributing to 3% to brand sales Conclusion: - FMCG Sector is a high volume and low margin industry, according to Michael Porter s 5 forces model in FMCG industry, the number of the buyers and the number of suppliers both are high, competition is also very high that s by substitutes are easily available in there. If customers are not so very brand loyal that means because of substitute are easily available, the switching cost of buyers is also very low. So overall we can say that the FMCG sector is highly admirable in India because the contribution of this sector is almost 2.5% of the total GDP

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