The rapidly growing FMCG sector in India accounts for about 2.2% of the GDP. The sector has stood its ground in the midst of recessionary pressure and volatility in the markets, and is poised to register steady growth. With rising disposable incomes, evolving consumer lifestyles, growth of modern trade, greater awareness of products/brands, and availability of online channels, the imperative for firms in India to develop core areas of differentiation is on rise.
An impetus on environmentally friendly business practices under the ambit of enhanced social responsibility is one such differentiating strategy that FMCG majors like HUL, P&G and ITC are now deploying. Some of the drivers for this differentiation have been the increasing concern for climate change, depleting natural resources and action by different stakeholders: the government through policy, the consumers through brand selection, and the community (NGOs) through increased awareness.
There are 3 major practices that FMCG firms in India can utilize to realize the sustainability advantage:
- Green Energy Sourcing
- Product and Service labeling
- Packaging Material
An analysis of these options from the perspective of the 4 major stakeholders of FMCG firms – the Government, the Investors, Retailers & Consumers, and NGOs is as follows:
Green energy sourcing
Sourcing energy from renewable sources (Wind and Solar) has the potential to reduce the energy costs of FMCG majors in India by up to 90% and carbon foot-print by 85% depending on the location and the availability of power evacuation infrastructure near the factories, warehouses or installations. One of the major policies formulated by the Government to incentivize greening of energy sources by the industry was the Accelerated Depreciation and Generation Based Incentives offered. Apart from meeting the strategic cost management targets, these schemes have served as alternate sources of revenue for FMCG majors. This led to a massive increase (21% over 2010-12) in the percentage of energy sourced by FMCG majors from green energy. HUL and ITC spearheaded this growth.
However, with the replacement of the generation based incentive regime by the Renewable energy certificates mechanism, a slow-down in the rate of installation of the green-energy capacity has been observed.
Another major opportunity that the FMCG firms can leverage is the sustainability certification system. Various green certifications like ISO 14001 and Leeds Green Building/Factory are opportunities for differentiation. These certifications have gained special relevance given the rising consumer awareness and sensitivity to environmental issues.
Product and Service labeling
Benchmarking production processes and services to best sustainability practices is increasingly emerging as another major differentiation. The eco-label, green-seal and eco-logo stamps are being deployed on offerings to differentiate them from competition offerings. In India, this concept has gained traction recently with the development of the Ecomark scheme by the Central Pollution Control Board (Ministry of Environment and Forests). The major driver of the Ecomark scheme is the reduction of environmental and health hazards due to industrialization. Signaling through accreditation encourages aware consumers make informed decisions and can thus be leveraged by FMCG firms.
Innovative sustainable packaging is another thrust area for the FMCG industry. Given the increasing cost and environmental ramifications of conventional packaging solutions (in spite of recycling and reusing), FMCG firms are increasingly evaluating biodegradable options for packaging. The use of biodegradable films and paper-centric packaging solutions has witnessed a tremendous (160%) rise during 2009-2012.
Innovative methods of utilizing non-biodegradable waste are also an opportunity that the FMCG sector is undertaking. A case-in-point in this regard is the initiative by a Canadian firm Terracycle, which converts cigarette butts into plastic skillets and containers.
With increasing levels of consumer awareness and government regulations, sustainability is gradually transforming from being a differentiator, into a primary business driver. Major FMCG firms must capitalize on the first mover advantages and establish themselves as industry leaders in this space.
Rohit Sharma is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club.