The FMCG market in India is expected to grow at a CAGR of 20.6 per cent and is expected to reach US$ 103.7 billion by 2020.The growth in sales of major FMCG companies like Dabur, HUL, Marico, is signaling the revival of consumer demand in India. As the market continues to grow at a rapid pace, Indian Retailer takes a look at Porter’s five force threats that may affect the FMCG industry.
Threat of substitutes
With high presence of multiple brands in the market, it is not a challenge for consumers to switch from one product to another. Strategic decisions like price point and quality play key roles in attracting consumers. With narrow product differentiation under many brands, it’s rather easy for a consumer to switch to another brand. The threat of substitutes is informed by switching costs, both immediate and long-term, as well as a buyer's inclination to change.
Many players are expanding into new geographies and categories and modern retail share is expected to be valued $180 billion in 2020. The FMCG industry has been a highly fragmented industry as more companies enter the market. If Wipro is diversifying and expanding its product range in energy drinks, detergents and fabric conditioners, Patanjali will spend US$743.72 million in various food parks across the country. Also, launch of private label brands by big retailers, which are competitively priced with offers and discounts, will limitcompetition for weak brands.
Bargaining power of buyers
While rising incomes and growing youth population have been key growth drivers of the sector, brand consciousness has also aided demand.With low switching cost inducing customers to shift to other products, there will only be more demand for new products. Also, the availability of same or similar alternatives, backed by strong influence of marketing strategies will help the sector. India’s consumer spending is expected to increase to US$ 3.6 trillion by 2020.
Threat of new entrants
Any new competition in the market poses threat to the existing players in the industry. With investment approvals of up to 100 per cent foreign equity in single brand retail and 51 per cent in multi-brand retail, the market is expected to be crowded. Also, companies will be forced to spend aggressively on advertisement, which will only hurt the business in the long run.
Bargaining power of suppliers
Big FMCG companies are often in a position to dictate prices through local sourcing from a fragmented group or key commodity suppliers. Suppliers can exert pressure on businesses and even buyers by raising prices, lowering quality or reducing product availability. Such decisions mostly affect the buyers.