EXECUTIVE SUMMARY The report enumerates a research that was undertaken on the logistics industry in the FMCG market

and commodities [vegetables and fruits] to elucidate how large cost savings can be incorporated by adopting the new comprehensive model that has been proposed by the research team. The new model tries to tackle the issue of cumbersome multi- step supply process in the FMCG sector also the huge wastages and unreasonable prices of the commodities. The research team undertook a survey where many retailers in the organised and the unorganised sector were interviewed. Primary data was collected regarding the margins lapped up by the intermediaries in the supply chain. The report elaborates how the new proposed model will reduce cost of distribution of FMCG and hence benefitting the consumers. Also it will enable the fair priced fresh vegetable (without wastage) to people located in different areas. 1.1 INDIAN LOGISTICS INDUSTRY: The logistics industry in India is evolving rapidly and it is the interplay of infrastructure, technology and new types of service providers that will define whether the industry is able to help its customers reduce their logistics costs and provide effective services (which are also growing). The annual logistics cost in India is estimated to be 14% of the GDP, which translates into USD 140 billion assuming the GDP of India to be slightly over USD 1 trillion. Out of this USD 140 billion logistics cost, almost 99% is accounted for by the unorganized sector (such as owners of less than 5 trucks, affiliated to a broker or a transport company, small warehouse operators, customs brokers, freight forwarders, etc.), and slightly more than 1%, i.e. approximately USD 1.5 billion, is contributed by the organized sector. So, one can see that the logistics industry in India is in a nascent stage. However, the industry is growing at a fast pace and if India can bring down its logistics cost from 14% to 9% of the GDP (level in the US), savings to the tune of USD 50 billion will be realized at the current GDP level, making Indian goods more competitive in the global market. The Indian logistics industry is growing at 20% vis--vis the average world logistics industry growth of 10%. Since the organized sector accounts for merely 1% of the annual logistics
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cost, there is immense potential for growth of the sector. The major opportunities are highlighted below. For domestic transportation and warehousing, they have tie-ups with Indian companies. As the Indian logistics scenario looks promising, these MNCs are expected to play a bigger role, probably forming wholly-owned subsidiaries or taking the acquisition route. 1.2 TOP Logistics Companies of India: The land which opens up wide array of opportunities for the logistics service providers across the world is India. The high demand for the logistics services is due to the significant growth of economy. A few years back the value of the India logistics market was is $14 billion and will grow at a rate of 7-8 per cent. The logistics companies in India cater to millions of retailers and meet the requirements of about a billion people. The list below gives the name of the best logistics companies in India.

S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Companies TNT Express AFL DHL & blue Dart GCMMF (AMUL) Gati Safexepress Ashok Leyland Agrawal Packers and Movers DTDC First Flight

1.3 INDIAN FMCG INTRODUCTION: Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars.

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Indias FMCG sector is the fourth largest sector in the economy and creates employment for more than three million people in downstream activities. Its principal constituents are Household Care, Personal Care and Food & Beverages. The total FMCG market is in excess of Rs. 110,000 crores as per CNBC TV18 December. It is currently growing at double digit growth rate and is expected to maintain a high growth rate. FMCG Industry is characterized by a well established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments. The Rs 85,000-crore Indian FMCG industry is expected to register a healthy growth in the third quarter of 2008-09 despite the economic downturn. The industry is expected to register a 15% growth in Q3 2008-09 as compared to the corresponding period last year. The Indian FMCG market has been divided for a long time between the organized sector and the unorganized sector. While the latter has been crowded by a large number of local players, competing on margins, the former has varied between a two-player-scenario to a multi-player one. Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a handful of global players, India's Rs.460 billion FMCG market remains highly fragmented with roughly half the market going to unbranded, unpackaged home made products. This presents a tremendous opportunity for makers of branded products who can convert consumers to branded products. However, successfully launching and growing market share around a branded product in India presents tremendous challenges. Take distribution as an example. India is home to six million retail outlets and super markets virtually do not exist. This makes logistics particularly for new players extremely difficult. Other challenges of similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a structurally unattractive industry in which to participate. Even so, the opportunity keeps FMCG makers trying.

1.4 THE TOP 10 COMPANIES IN FMCG SECTOR:

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S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Companies Hindustan Unilever Ltd. ITC (Indian Tobacco Company) Nestl India GCMMF (AMUL) Dabur India Asian Paints (India) Cadbury India Britannia Industries

Procter & Gamble Hygiene and Health Care 1.5 INDIAN VEGETABLE AND FRUITS INDUSTRY 10. Marico Industries

India is 2nd largest producer of Fruits & Vegetable in the world. India is the 2nd largest vegetable Exporter. It is notable to see that there is great amount of wastage happening post Harvest. This wastage is being estimated at 25% of total produce or approx Rs.50000 Cr US $ 10 Billion. Indian Agriculture sector accounts for 17% of countrys GDP, produces 64% employment and 18% of country's export.
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 Indias share is only 1% of World trade. It is also observed that Vegetables and fruits are the highly unevenly priced goods whereas price can vary upto 400% or even more between different cities1. Hence this shows mismanagement in perishable vegetables which degrades the quality and increase price variation. 1.6 Objective: To study the role of logistics and its effectiveness in FMCG and commodities (perishable vegetables and fruits). 1.7 Scope of the study: Based on the study done on retailers and wholesalers of Bangalore (5-6 in number), a super stockist of Dabur and Unilever in Begusarai, Bihar. Commodity prices (vegetables and fruits collected from people interviewed on phone as on 5th January of

Sources 1: Times of India 17th December, prices from farm to mandi up by 400% Lucknow, Agra, Delhi. 1.8 Significance of the study: Of high importance to study all the sector and how a managed logistics can better off manufacturers and consumers in FMCG and farmers and consumers in commodities market. 1.9 Research Methodology: Study is based on primary as well as secondary data. 1.10. Sources of primary data: 5 retailers and a wholesaler interviewed in Kormangla area. Interviewed a super stockist of Dabur and Unilever in Begusarai, Bihar. Consumers interviewed on phone reporting the prices of vegetables in Lucknow, Agra and Delhi. 1.11 Sources of Secondary data: Sites of FMCG companies and logistics companies. Reports on FMCG and logistics sector Prices of vegetables from web sites.

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1.12 Data Collection: The retailers in Kormangala were interviewed personally by our team on 8 th Jan in the evening. Information of the percentage division and other details were given by super stockist in Begusarai, Bihar through a phonic interview. Rates of vegetables were given by two consumers from each city on phone. All the other secondary data was collected through internet from various companies sites.

2.1 Channel Structure (HUL as an example):

Typically, the goods produced in each of the HUL's 40 factories are sent to a depot with the help of a carrying and forwarding agent (C&FA). The company has its depot in every state of the country. The C&FA is a third party and gets servicing fee for stock and delivery of the products. In each town, there is at least a redistribution stockist (RS) who takes the goods from the C&FA and sells them to retail outlets. 2.2 Super stockist or Redistribution Stockists: This is going to be reduced to only one with effect from next month of this year. Sales Margin: 4.76% which includes cash discount, unloading expenses from depot, distribution expenses to retailers, incentive schemes & other incidental expenses (3% if company covers the cost of transport). Modes of transport used: Rickshaw, tempo. Areas of Operations: Marked for each of the RS. Selling Operations: RSs sells the goods to: Wholesaler (gets 1.5 % max. discount from RS) Retailers (gets 1.0% max. discount from RS) 2.3 Wholesaler: Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme). 2.4 Retailers: Total retailer base in Jamshedpur: Approximately 1070. Sales Margin: Depends on the product Soap, detergents 8% on MRP Cosmetics 10% on MR Table1: Distribution of profit shared by the channel members in Dabur products:
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Product name

CNF(2%)+transportation reimbursed invoice+2% stockist invoice

Wholesaler Retailer or sub +7stockist =super His billing + 15%=consumer 3% +3%=retailer =wholesaler 10.56 10.92+vat 12.5% 35.1+vat 12.5% 168.59 12.71

Super stockist

Mrp

Dabur-lal dant manjan Vatika 150 ml

10.34

14

oil 33.28 160.40

33.96 163.68

40.84 173.65

45 200

Dabur chawanprash

Source: Super stockist Dabur Begusarai, Bihar (Sanjay Kumar Roy)

Exhibit 1: Distribution Expenses as percentage of Sales Distribution Expenses as % to

7 6 5 4 3 2 1 0 HUL Dab u r Reckit Ben ckiser God rej P & G Hyg ien e ITC % of sales in d istrib u tion

Source: PWC report on Indian FMCG. It is noticeable that a huge amount of companies sales is gone as expenses in logistics for distribution. In India logistic expense is 14% as compared to 9% in foreign countries (developed nations) and here we see even after manufacturing on average 5% of sales are incurred in transportation.

2.4 Motive behind having so many channel partners: Just to reach out to the customers in a better way.
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Let us see what the cost is and profit share distribution of a FMCG product. Exhibit 2:split up components of MRP of an average FMCG product
Com pa niesCost a ndProfit 6 5 % D istribution Cost 5 % CNF+S uper S tock is t+ Wholes a ler 8 % R eta iler 1 0 %

VAT1 2 .5 %

Almost one third of the total effort is wasted in making the products available to the customer. Hence a better and more effective distribution channel is required so as to facilitate the under privileges section of the society who are yet not in a position to use these products and to better off the current users. Focussing Agra and Delhi (vegetable and fruits)present model: 3.1 Commodities logistics 1st day: Fresh vegetables from farms reaches the nearby town and cities where the farmers sell their vegetables through auctions. 1st day continued: Hence first day vegetables from the nearby villages, Runukta, Achnera will reach Agra in the morning and may reach second day if coming through some small town. In Agra vegetables will be divided into two parts one which will be sold in the city and others which will fill up the demand of the nearby bigger cities, hence they leave for that city. Major demand comes from Delhi which is situated 200 km away from Agra and connected by NH-2.Almost taking 6 hours to reach. Hence is available for sale in Delhi on second day evening or morning. How a price multiplies because of channel members and transportation cost: Table 2: prices varying in places close to each other(6.5+53% of 6.5=10 and so on) Vegetable name Potato Tomato Farmers price 6.5 7 Agra price 10 12 Delhi price 20 21 Percentage split(increase) 53%+153%=206% 71%+128%=199%

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Spinach Onion

2 3.75

4 6

9 10

100%+250%=350% 73%+106%=179%

Sources: Two people from each cities giving rates and person interviewed at Agra sabzi mandi. This may look startling but it is true prices shoot up in just two hundred kilometres. What can be the probable reason? Transportation cost of potato for two hundred kilometres is on average for a truck carrying 15 ton (Rs10,500 fare1) is Re.1 per kg but it doubles and increases by almost Rs.9. Vegetables like spinach which are highly perishable almost becomes life less but sells for more than 250 percent. Hence this price disparity and logistics should be look into in order to enable more and more
#

Sources: Maruti transport, Firozabad.

consumer to have reached to fresh vegetables at moderate prices so that we can have a healthy India.This is not just the problem in Delhi other big cities like metros Hyderabad, Bangalore, Ahmedabad, Lucknow face similar situations. Hence there is a strong need of a managed logistics focussed on this 40billion dollar industry. 4 Recommendations 4.1Who says logistics expenses are worry some? This new model can revolutionise the distribution of FMCG products: HUL's products are distributed through a network of 4,000 redistribution stockists, covering 6.3 million retail outlets reaching the entire urban population, and about 250 million rural consumers. There are 35 C&FAs in the country who feed these redistribution stockists regularly.2000 supplier and associate supply material for its 40 plants. Dabur supplies through a channel of 25 CNF. What is interesting to see is that companies which are smaller cannot afford to have hefty infrastructure like 35 CNF. Even 4000 redistribution stockist are not able to make sure that every city has a redistribution stockist. This new model will remove the entire intermediary channel between company and retailer. There shall be only on distributor who will work for several companies simultaneously. The distribution company will have a large warehouse in all the states and small warehouse in all the smaller cities. They will collect products from different companies and then can transfer it to their city warehouse as and when required. For very small town where there is no city
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warehouse the company can transport all the demanded products of different companies. Hence full payload capacity of the truck will be used, as of now different companies will reach their retailer through different independent source thus increasing the total expense in transportation. From the city warehouse all the demand of the local city will be met and transportation will be done with the help of Tempos and Lorries. 4.2Sales force of the company: They will be efficiently used and will now answer just to the distributor. 4.3Profit to Companies: Total of thirteen percent cost of the total cost was spent on transportation and channel members margin(2+3+5+3). If company is able to make extra 2% of profit that there performance will increase drastically. For example net sales of HUL were 870379 lakhs and profit was 971721 lakhs hence profit comes to 11% of the total sales. Extra
1

HUL balance sheet NSE-india.com (first half April to Sept 09)

two percent will increase the profits by 20 percent. 4.4 Profit to consumers: FMCG sector is a highly competitive sector and hence companies will eventually pass on the added benefit to the consumers and hence they will also get better off.

4.5 Vegetables can they be more nutritious and fresh and yet cheap? Yes, it can be.

Table 2 exhibits: How vegetables go costly by over 200% in just 200km where in actually the transport cost is just 15 to 25 percent. 200 kilometres can be covered in 6-7 hours but yet it almost takes 24-36 hours to reach to the big cities. Where the wastage in developed nation is 2-4% in India it is as much as 25% (international firm concurs report ) Food inflation in India reached to stunning levels of 20% hence if wastages avoided we can be the biggest exporters of vegetables in the world.

4.6 How will it be achieved?

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The model which has already been discussed can work as the infrastructure for vegetable distribution model. This model will be effectively solve all the problems which are faced by the current system. Transportation cost on the extreme higher side can be 25% but then also the price rises by 200%. Solution:Hence to solve this problem the local warehouse will collect the vegetables (perishable and others) in the morning when they are brought from the farms and there by loaded into the trucks and they will reach the destination in average 6-7 hours and hence available for the distribution in the destination city by the evening (this is the time when most of the people go to collect the vegetables from the market. Second problem was of the extensive middleman margins which inflates the price to 200%. Solution:Hence probably with the managed supply of vegetables fresher vegetables can be packed and priced. Hence branding the commodity like vegetables will inculcate the trust among the consumers and hence it will be very profitable for the company which is distributing all the products. The major reason for the wastages in this particular industry is that they perish very quickly with time hence once they are supplied in time a considerable amount of wastages will be saved.

Now the biggest question that can come to anyone mind is that why anyone would prefer to sale vegetables to us (farmers) and then sell our vegetables(distribute) and consumers to consume our product. Hence to answer all this if a vegetable are being sold for three times the price which farmers get hence we have got a huge margin to distribute and make them sell our products.When consumers will get a better value for money they will surely buy that packed vegetable(commodity branding) 4.7 Financial aspect of the model: The whole model is very lucrative as if we just distribute products of three companies than also the total product distributed through our channel will be almost 30,000 crore (70 percent of what is sold by top 3 companies in an year-70 percent is traded through modern trade mechanism) and removing the expenses, distributing company can easily save 5-6 percent. Hence total potential for a company to earn through distribution of FMCG is close to about 1500 crores almost equal to the profit earned by the Hindustan Unilever in the financial year 2008-09.

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Now the contribution by distributing vegetables and fruits: This industry will command a margin of close to 30-40% and turnover of this sector is bound to be high as total industry is worth 40 billion dollars and 98% of it is unorganised and very unevenly priced.

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