Daymond Garfield John, American businessman, CEO of FUBU and an investor in the Shark Tank – an American reality TV series, says “I consider each investment based on the concept and revenue.” While there are numerous business concepts investors can be interested in, there is one particular business concept investors can’t let go – Fast-Moving Consumer Goods Industry Business concept. But what exactly is the whole concept of FMCG Business? We shall discuss it in this article.
What is FMCG?
Fast-moving Consumer Goods (FMCG), in spite of being regularly used, doesn’t have a standard definition. While in India, FMCG term is used for the products of everyday use, conceptually the term refers to goods that are relatively fast-moving and are directly used by the consumer. In other words, FMCG are the essential products which have a quick turnover, yet relatively low cost. These products range from toiletries, soap, cosmetics, shaving products, to non-durables such as glassware, bulb, batteries, etc. Fast-moving Consumer Goods may also include pharmaceuticals, consumer electronics, etc. Read our article what is FMCG and some practical examples to know in detail about FMCG.
Typical characteristics of FMCG are as follows:
- Individual FMCG is of small value although when considered all the FMCG products a consumer uses in a month takes a significant part of the consumer’s budget.
- Consumer purchase decisions happen quickly.
- Consumers purchase these goods frequently because most of these products are perishable.
- Brand switching or trying a new product is very common among consumers.
- FMCG caters to the necessities, wants, comforts, and luxuries of its customers.
Read here to know about other essential qualities of FMCG
But what is the concept behind any FMCG industry? Let us dig in!
Elements of FMCG Industry concepts
According to Research And Markets, the global FMCG market size was valued at $10,020.0 billion in 2017 and is projected to reach $ 15,361.8 billion by 2025. The reason behind such exponential growth of this industry sector is the uniqueness of every feature that comprehensively forms the FMCG business concept. Here are the details to help you understand.
FMCG Product Life:
As the name itself suggests and explained in its definition, the Fast-Moving Consumer Goods are the products with low shelf life, either because it is perishable or because it is in high demand. This affects the turnaround time of the consumers.
One of the important aspects of the FMCG business concept is the companies sell the products with low-profit margin but they are sold in large quantities. Hence the cumulative profit on bulk selling of such products can be substantial. In other words, FMCG business is a high volume business while generating low margin profit from individual products.
One of the critical factors that influence the turnaround in the FMCG sector is the purchase cycle. However, it is highly likely that the purchase cycle for any individual product can vary across different population segments. While low-income households prefer to purchase certain products frequently, households with high-income buy the same products in bulk and save it.
Nature of Competition:
A few years ago, the competition between the companies and its access to the market was measured by their productive capacity and the characteristics of the produced goods. However, things have quite changed now. The element that influences the competition among the companies is the firm’s ability to establish connection between their business idea with customers’ needs, desires and values.
Target Market Sector:
FMCGs are in high demand and extremely important for the market. This is primarily due to the fact that FMCGs are essential products for the consumers and there is a constant need for supply. Hence, the target sector of the market for FMCG is mostly the retail sector and the wholesale sector.
Design and Manufacturing:
Most of the FMCG product manufacturing requires relatively minor investments in planning, machinery, and other fixed assets. Basic technologies involved in the manufacturing of the fast-moving goods are robust and easily available. The technology has been fairly stable with modifications rarely changing the basic process. Even third-party manufacturing is fairly common in FMCGs.
One of the elements that is prominent in the FMCG concept is packaging. The packaging often requires extra care. Most of the FMCGs need secondary and tertiary packaging to maximise the efficiency of the product. This kind of packaging is critical for product protection and effective shelf life. The proper packaging also provides information about the products.
Although the initial capital investment for the manufacturing of FMCGs is low, the initial launch of any new products require large front-ended investment in market research, product development, test marketing and launch. Along with that, launch advertisements, free samples and product promotion can burn a hole in the investors’ pockets.
While for a new brand, the launch costs can be as high as 50-100% of revenue in the first year, for established brands, it may vary between 5-12% depending on the categories.
The distribution network in India for FMCG is huge. It contains around six million retail outlets. The understanding of this distribution model requires the understanding of the connection between the company and shopper. Distributor is the middle man who takes care of distribution through holding inventory, distributing the bulk orders, and servicing the trade. The most commonly implemented model across FMCG distribution channel is as follows:
As mentioned before, the basic technology involved in the manufacturing of the products is fairly simple and easily available. And in India, FMCG companies enjoy exemption or lower rates of excise duty and other governmental charges. This makes the sector more competitive. However, the versatility of the market, poor infrastructure limits the entry of MNCs and national players to reach every nook and corner of the country.
All the above components holistically form the FMCG business concept. While many of the industry sectors have the same components, what makes this business concept exclusive is the unprecedented characteristics of each components.
- Corporate Finance Institute
- A report of McKinsey & company
- “FMCG Industry in India” by India Brand Equity Funding