_Warehousing potential in fast-moving consumer goods industry
The key growth drivers for the FMCG industry are the changing lifestyles, ease of access and rapidly changing consumer habits. Of the total revenue generated by FMCG, the urban market comprises for 60% market share.
On the other hand, the rural market has a lot of untapped market potential for FMCG categories. Due to increasing internet connectivity in rural areas and improvements in transport infrastructure, the rural market for FMCG products is set to witness fast-paced growth.
The recent e-commerce boom has also been a blessing for the FMCG industry, as online marketplaces such as Amazon Pantry, Flipkart, Big Basket, Grofers and Zopnow have enhanced the organised FMCG industry’s reach and visibility manifold.
With the evolving consumption patterns of Indian consumers, the demand for packaged products is also rising. Coupled with the vast market size and growth in consumption, a lot of global MNCs have set up manufacturing facilities for packaged products in India.
FMCG products typically involve higher volumes and low profit margins. As the distribution channels catering to FMCG products are complex and broad, the role of supply chain is a key distinguishing factor in an FMCG company’s profitability.
From traditional store keeping, purchasing, materials management and integrated materials management, the industry is entering a new era of supply chain management. The logistics operations in FMCG business are typically operated on a hub-and-spoke model where distribution hubs in major cities and towns serve both the wholesalers and retailers.
Both the organised and emerging warehouse clusters across the top 7 cities cater to multiple industries. Hence, it is difficult to demarcate a particular cluster as FMCG exclusive.
However, given the proliferation of FMCG players on certain belts, some clusters such as Bhiwandi in Mumbai and Aslali in Ahmedabad are popular with occupiers from this industry. Haryana is also an upcoming location for FMCG occupiers post GST implementation, as it caters to multiple consumption markets of Delhi, Ghaziabad, Faridabad and Punjab amongst others.
Logistics challenges in FMCG industry
Unorganised logistics industry – The logistics industry itself is getting organised only now due to the recent government initiatives. Hence, most of the impact on costs and efficiency are yet to be realised.
The recent implementation of GST was expected to enable a wave of consolidation of operations across businesses, but its impact on the ground is being felt at a very slow pace.
Due to infrastructure bottlenecks, the cost reductions in total logistics cost have not shrunk below 7–8%. As per our interactions with FMCG industry experts, consolidation of warehouses in this industry is significantly low compared to other industries and may well remain so as the FMCG players need to continue operations closer to consumption centres just like in the pre-GST era.
Inadequate infrastructure – The road and rail infrastructure lack dedicated freight corridors and logistics players with good quality transportation fleet and warehousing stock.
These are some serious challenges on the supply side. While primary transport which constitutes transport of goods from the manufacturer to the mother warehouses is smooth, as these warehouses are often situated on national highways, it is the secondary transport in the later stages in movement of goods to distributors and retailers that is a pain point.
Other logistics challenges that plague the FMCG industry are some industry specific issues such as low turnaround time and the need for on-shelf availability as well as other issues like fragmented markets and demand uncertainty.
All these factors taken together impact the profitability of the industry and restrain the FMCG players’ investment in modern warehouses. Hence, the awareness about the benefits of large-scale investment in modern warehouse stock is yet to trickle in.
The way forward
As per early estimates, quarterly updates for Q1 FY 2018–19 by some large FMCG companies suggest a revival in demand in urban areas as well as rural areas which is pushing high volume growth2. With rising rural consumption, brand consciousness in rural India is also increasing which will help the organised FMCG sector’s growth.
The rural FMCG market in India is expected to reach US$ 220 billion by 2025 from US$ 29.4 billion in 20163. With FMCG demand coming back, we can expect supply chain disruptions in FMCG companies.
FMCG players are expected to rely more and more on logistics service providers (LSPs), as this will be the need of the hour to meet demand from new consumption hubs in both rural and urban areas across the country. Investment in supply chain automation, expansion of manufacturing facilities and emergence of warehouse hubs in metropolitan cities are the key trends to watch out for going forward.
1 India Brand Equity Foundation (IBEF), Media reports
2 Media reports
3 Media reports, IBEF
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