The Sustainability Imperative in FMCG

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.

Figure 1. Growth in the Indian FMCG Sector (CII FMCG Roadmap 2020)

Figure 1. Growth in the Indian FMCG Sector (CII FMCG Roadmap 2020)

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.

Figure 2.  FMCG Focus Areas (Booz and Co.)

Figure 2. FMCG Focus Areas (Booz and Co.)

 

Opportunities

There are 3 major practices that FMCG firms in India can utilize to realize the sustainability advantage:

  1. Green Energy Sourcing
  2. Product and Service labeling
  3. 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

rohit blog 4

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.

Figure 3. Differentiating eco-product marks in-use around the world

Figure 3. Differentiating eco-product marks in-use around the world

Packaging Material

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.

Figure 4. Terracycle - Model

Figure 4. Terracycle – Model

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. 

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Much ado about Sachets

In the FMCG industry, packaging of products has always been the most important factor driving consumer behaviour and fuelling marketing initiatives. A change in packaging technology always brings about a paradigm change in consumer patterns. Tetra Pak, a Swedish company introduced a flexible packaging product in the 1950s and forever changed the packaging of liquid consumables.

The next breakthrough in flexible-packaging occurred in 1983. C.K. Ranganathan, a Madras based entrepreneur started selling shampoo in small packets (later called ‘sachet’, meaning small bag in French), instead of bottles, to make it affordable to the poor. These sachets were small, flexible, and inexpensive. Ranganathan’s firm, now known as Cavin Kare, started on a shoestring investment of $300 became the market leader in shampoo in the Indian rural market by the early 1990s.

There was a fortune to be explored at the bottom of the pyramid. Even today, around 4 billion of the global population of 7 billion are living on a budget of less than $2 per day. These potential consumers are hungry to improve the quality of their lives by using new technology. With this in view, MNCs like Unilever and Johnson & Johnson entered the sachet market through India in the mid-1990s. The advent of the new millennium already saw 60% of shampoo sales in India in the form of sachets (see Exhibit 1 for complete evolution). Early in the 2000s, P&G, the largest consumer goods company globally started selling their flagship shampoo brand – Pantene in sachets in South-east Asia and India. The sachet market was no longer constrained to India. It was a huge opportunity for all companies to grow their businesses across categories in developing markets. Industry bigwigs like Unilever, P&G, Nestle, Kraft, ITC, L’Oreal and others started selling everything from food & beverages to laundry products in the form of sachets.

Exhibit 1: Evolution of Sachets in the Hair Care Market Segment

Himanshu FMCG 1

This large-scale explosion of sachets was great news for consumers. The minimum price payable for a premium product like Olay had gone down from $10 for a tube to Rs.10 for a sachet. Sachets had opened a new plethora of products for consumers worldwide. The developing markets witnessed an unprecedented growth in their demand for consumer goods in the new millennium. Nearly 90% of this growth was driven by demand for sachets (Exhibit 2 shows the approximate number of sachet users in India in the 2000s).

Himanshu FMCG 2

(Data as per IRI’s 2011 FMCG review)

For manufacturing companies, the picture was not so rosy. For small companies like Cavin Kare, which had introduced the world to the concept of sachet, it was now difficult to compete with MNCs like Unilever and P&G. They could not leverage scale across products like the MNCs. While Cavin Kare cannot manage more than 5 variants in their sachet SKUs (Stock Keeping Units), Unilever has more than 100 sachet SKU variants. As a result of fierce competition, MNCs emerged on top with growing market shares (See Exhibit 3 for total sachet market share split in India).

Himanshu FMCG 3

(Data as per IRI’s 2011 FMCG review)

For the conglomerates like Unilever and P&G, sales volumes had increased multifold. However, this had come at the cost of diminishing profits. Large scale proliferation of sachets had led to price wars in almost every market category. Returning to the shampoo industry example, the typical gross margin for any shampoo making company is around 70% – 80% for bottles. This number comes down to almost 20% – 30% for sachets. Therefore, the increase in profits is not proportional to the increase in sales for any manufacturer. Further, price wars in almost every category have led to companies selling their product at a loss in order to grow market share and maintain marketing momentum. When P&G launched the Rs.3 Pantene sachet, Unilever immediately slashed the price of their Clear sachet to Re.1. Cavin Kare responded by launching a 50 paise Chik shampoo sachet. Consequently, profit margins keep going down with increase in sales. Further, manufacturing costs also have risen with companies vying for higher service levels and increased manufacturing capacity. Almost every company today faces the higher profitability vs. greater market share conundrum.

The cost pressure has led to new capabilities in supply chain excellence for companies to reduce costs. Relatively new concepts, such as ‘Shelf Back Design’, may be the path forward. The idea is to design and operate the supply chain “from the shelf back”, delivering whatever it takes to win the consumer (see Exhibit 4 for an example). However, this design requires a lot of flexibility and responsiveness, which may limit the cost reduction potential of the design.

Himanshu FMCG 4

Overall, sachets have been instrumental in bringing about 2 key changes in the consumer goods industry. Consumer base has increased multifold on account of the packaging innovation while manufacturing firms been forced to look out for more innovative supply chain solutions to compete for cost. Technological and operational improvements at every link of the supply chain is now the need of the hour to sustain profitability.

Himanshu Pandey is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIM-A, he worked with Procter & Gamble in the Supply Chain function as a capacity planner and project manager. He holds a Bachelors degree in Aerospace Engineering from IIT Bombay.

The Cause Related Marketing Bandwagon in FMCG

FMCG GrowthThere has been strong growth in the Indian FMCG market over the years. The sector’s revenue reported a CAGR of 17.3% over 2006-2011. Consequently, today’s marketplace is flooded with brands in all product categories of the FMCG sector. With ever-increasing competition, a company is expected to do business in such a way that it stands for not just the financial returns, but for comprehensive social and economic returns to the society at large. Gillete’ Soldier for Women, Dove’s Real beauty sketches, Proctor & Gamble’s Thank you mom and Tata Tea’s Jaago re are a few examples of attempts made by leading corporations to do well financially by doing good socially. These campaigns are launched under a marketing strategy called ‘Cause-related Marketing’.

What is cause related marketing?

Cause related marketing is a marketing strategy wherein a product/brand/company is marketed in association with a ‘cause’. This identified cause is generally an issue that is prevailing in customers’ mindset. It can be social like child welfare, environmental like wildlife conservation or even abstract like uniqueness etc. Cause marketing campaign is used by companies strategically to create brand differentiation by enhancing brand equity and credibility. It can be employed by a company to achieve a number of marketing objectives, mainly, visibility, increased sales, repeat purchases, increased brand recognition, broadened customer base etc.

Now, more than ever, the companies are realizing the potential of aligning themselves with a cause. Earlier it was used mostly to increase sales and profits, but now it is used as a great brand positioning contrivance as it works on vitalizing brand equity and enhancing corporate image with sound economic and community impacts.

Cause-related marketing: differentiated from CSR

Cause Related Marketing and Corporate Social Responsibility (CSR) are often used interchangeably but there exists a vast difference between the two. CSR is primarily the philanthropic activities carried out by the company, generally in domains of social welfare or environment. The essential objective is to project the company as a responsible corporation resulting in positive brand image in eyes of consumer. Cause Related Marketing on the other hand is a marketing strategy done with a sole objective of building profit through goodwill. It is done by associating with a designated cause and is characterized as a profit-motivated giving. Unlike CSR, it is more targeted approach and a less selfless philanthropy.

Cause marketing practices

Cause related marketing is a flexible tool and can be employed in varied ways. Some of the common forms adopted by FMCG firms, of providing assistance to cause organisations are:

Transactional programs: This is the classic form of assistance to cause wherein a company donates a part of every sale of the affiliated product to the cause organisation. Many examples can be cited for this practice, a popular one being ITC’s INR 4 donation for the education of economically underprivileged students for every 4 Classmate notebooks sold.

Propaganda programs: Under these programs, the cause is promoted and contribution, in forms other than monetary, is made by the company. An example is Tata Tea’s Jaago Re campaign where the company promoted anti-corruption and encouraged the youth to vote. 

Time frame of the program

Cause marketing campaigns can be either strategic (long-term) or tactical (short-term). Long-term campaigns are generally found to help with enhancing brand loyalty, improving brand image and lowering apprehensions regarding company’s motivation. Proctor & Gamble’s Shiksha campaign has been contributing to the cause of child education since 2004. However, short-term associations are preferred by the companies at times, as they call for limited costs and bigger impact advantages. Lifebuoy’s ‘Roti Reminder’ at the Kumbh Mela 2013, which promoted the cause of hygiene, falls in this category.

Choice of cause

The fit between the selected cause and the profile of the company is an important variable in determining its impact.  For instance, Maggi’ Atta noodles promoting Taste bhi health bhi has high cause-company coherence, with the cause being health. In contrast Coca-Cola’s Arctic Home has rather low coherence. Generally, high coherence impedes the apprehensions arising in customer’s cognition and hence mobilizing the purchase intent due to higher urge to benefit the cause.

Epilogue

Cause related marketing fills a crucial void in society by giving the individuals an opportunity to contribute to the causes they feel for. If executed creatively, by carefully pairing cause and company, it can emerge as a rare and strong marketing contrivance which would converge social and corporate interests, favouring both equally.

Arushie Mangla is a PGP1 student at IIM Ahmedabad and a member of the Consult Club. She is a graduate from IIT Delhi in Civil Engineering with a minor area specialization in Business Management.