Qaseemuddin Chawla – Assignment # 1

March 2, 2011

Consumer Industry of Pakistan – FMCG

Introduction
FMCG is the abbreviation of Fast Moving Consumer Goods which is more aptly known as
Consumer Packaged Goods (CPG). Fast moving consumer goods are products that have a quick
turnover, and relatively low cost. They generally include a wide range of often purchased
consumer products such as toiletries, soap, cosmetics, teeth cleaning products, shaving
products and detergents, as well as other non-durables such as glassware, bulbs, batteries,
paper products and plastic goods. The thought-process is also relatively less significant for
purchase of an FMCG product than for other products such as electronic items e.g. refrigerator,
air-conditioners. In FMCG business absolute profit made on the products is relatively small
because it is highly volume-driven. Thus, the overall profit on such products can be huge.

Growth Trends
In comparison with other industries such as automobiles, electronics, financial services,
agricultural and airlines; FMCG business has a steady rate of growth but it gets dented badly
from huge recession and layoffs every time the economy starts to dip. Pakistan's fast moving
consumer goods (FMCG) sector is the fifth largest sector in the economy. Its principal
constituents are foods, personal care, fabric care and household products. The industry is
characterized by a large unorganized sector, low penetration levels, well-established
distribution network, low operating cost and lower per capita consumption.

Inflation is a key indicator of a country and provides important insight on the state of the
economy and the sound macroeconomic policies that govern it. A stable inflation not only gives
a nurturing environment for economic growth, but also uplifts the poor and fixed income
citizens who are the most vulnerable in society. Despite counting on a highly favorable
demographic outlook, Pakistan’s consumer story continues to be restrained by a tense security
climate and a fairly subdued economic outlook that reflects the inability of its economy to
takeoff. An inflation pierce into double-digit territory is another key risk. Bearing in mind how
sensitive to prices Pakistani consumers already are, double digit inflation would impede
disposable income growth and in turn affect trade-up trends within food and drink and finally
stifle the pace at which an empowered middle-class emerges.

Purchasing Power
Brand building and product differentiation play a crucial role in the success of a product in the
FMCG sector. Consumer insights and innovation assume great importance where smaller
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players are able to offer similar products at reasonable prices, making cost management
another key to successful performance in the sector. While the penetration of some product
categories is high, there are several product segments in which the consumer spends as a
proportion of disposable income appears very low when compared to other emerging Asian
economies. Improvement in incomes steadily drives increased consumption in packaged foods,
personal care and household products.

The FMCG industry is volume driven & is characterized by low margins. The products are
branded & backed by marketing, heavy advertising, slick packaging & strong distribution
networks. The FMCG segment can be classified under the premium segment & popular
segment; the premium segment caters mostly to the higher/upper middle class which is not
much price sensitive apart from being brand conscious. The price sensitive popular or mass
segment consists of consumers belonging to the semi-urban or rural areas who are not
particularly brand conscious. Products sold in the popular segment have considerably lower
prices than their premium counterparts.

Pakistan publishes four different price indices, namely: the consumer price index (CPI), the
wholesale price index (WPI), the sensitive price index (SPI) and the GDP deflator. The CPI is the
main measure of price changes at the retail level. It indicates the cost of purchasing a
representative fixed basket of goods and services consumed by private households. In Pakistan,
the CPI covers the retail prices of 374 items in 35 major cities and reflects roughly the changes
in the cost of living of urban areas. The WPI is designed for those items which are mostly
consumable in daily life on the primary and secondary level; these prices are collected from
wholesale markets as well as from mills at organized wholesale market level. It covers the
wholesale price of 106 commodities prevailing in 18 major cities of Pakistan. SPI is computed on
weekly basis to assess the price movements of essential commodities at short intervals so as to
review the price situation in the country.

Category Development Trends

The market need is highly volatile in the FMCG sector. In order to cope up with the changing
demand companies have developed advanced combination of qualitative & quantitative
forecasting techniques to determine the demand level. The size of the Pakistani fast-moving
consumer goods (FMCG) sector is close to Rs 200 bn. Punjab & Sindh provinces of the country
account for more than 70% of the market for consumer goods. Barring the fastest-growing
personal care segment, no other product segment has seen the entry of so many players. In the
past decade, the personal care industry has witnessed a consumer boom. This has been due to
liberalization, globalization and an increase in the disposable incomes, and altered lifestyles,
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March 2, 2011

especially a heightened level of awareness among the rural community, consequent to the
onslaught of satellite television.

Also, competition between local companies & MNCs has intensified, leading to shrinkage of
margins. The personal and home care segment has very low entry barriers of technology and
capital requirements. This attracts new players and has resulted in intensifying competition.
Despite this, the strong distribution networks and heavy investments needed for brand building
remain key deterrents to new players. Low margins and high volumes characterize the industry.
While the level of disposable incomes determines the overall sector growth, the market has
already been segmented and sub-segmented. Companies have launched products at a number
of price points to drive up volumes. New products are being launched in niche segments, and
old products re-launched.

Strengthening health consciousness across Pakistan is strengthening demand for low calorie
carbonate substitutes and bottled water. With concerns about the safety of tap  water
extensive, demand for bottled water is growing strongly off the back of modest gains in per
capita incomes and more importantly, more widespread product investment by leading
players. Most products are manufactured by simple manufacturing processes that require fairly
low capital investments. This has made the proliferation of localized brands and products being
offered in loose form possible in small towns and rural Pakistan where brand awareness is low.

Distribution Development
Most large FMCG companies like P&G, Unilever, RB etc have established nationwide
distribution networks comprising company's C&F agents, distributors, wholesalers and retailers.
These intermediaries ensure widespread presence for the brand so that products are available
to consumers where they want them. The influx of the modern retail formats (organized retail)
in the country is likely to catalyze acceleration of growth in FMCG categories where consumer
interaction with products has gone up a notch.
With the increasing consumerism and competition among the organizations to attract more and
more customers, customer has become more demanding and uncompromising. Companies are
customizing products more and more to retain old customers and attract new customers, to
fulfill increasing customer demand and gain competitive advantage over rival firms. This has led
to the introduction of large number of new products with multiple SKUs which have very short
life cycle. All these factors have led to increased complexity in supply chain which needs to be
managed carefully. With the advent of large number of new products and SKUs, company’s
demand for new raw materials is increasing continuously. This increasing demand for different
raw materials has led to the large number of suppliers supplying to one company. Managing
increasing numbers of suppliers in a supply chain is a complex task.  
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March 2, 2011

Industry Statistics (Source: Federal Bureau Statistics)

 2010 per capita food consumption = +4.85%
 2010 soft drink sales = +8.46% 
 2010 mass grocery retail sales = +8.50%

Key Macroeconomic Data 

 2010 Real GDP growth = +2.40% 

 2010 Consumer Price Index = +12.6% (period average)
 2010 Unemployment Rate = 7.3% (period average)