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Why Do You Die Small?

Every year countless number of entrepreneurs are attracted to venture into the (Fast Moving Consumer Goods) FMCG industry, however after around 2-3 years only few of them are able to survive. Majority of them either close down or are working towards closing down.

Some of the reasons, which to my mind attract people, to venture into the FMCG industry are as under:

Low entry barriers. (Atleast as it may be perceived by an amateur in the industry)

Familiarity with the products as most of them are household products.

Desire aroused after learning about success of other entrepreneurs in the FMCG industry.

People who venture into the FMCG industry may be first time entrepreneurs with or without any experience in the industry or may be promoters of existing non FMCG companies looking for diversification or entrepreneurs such as manufacturers of FMCG products for some one else looking for forward integration by launching their own brand in the market or merchants and traders looking for backward integration by launching their own brand.

People who enter into the industry have either some or all of the following resources: idea, desire, money, source of manufacturing, source of distribution, work experience in FMCG industry.

As mentioned earlier majority of companies find it difficult to survive in the market place and eventually close down and with closure ruin future of its stakeholders including the employees and vendors. Having said the above I do not mean to say that it is impossible or extremely difficult to survive in the FMCG industry, time and again history has proved how number of organizations however small they may be, have succeeded in the FMCG industry.

With research and experience in the industry I have been able to analyse the following factors critical for success in the FMCG industry. Some of them are general across all the industries and some of them are specific to the FMCG industry in India. Allow me to explain the same:

A).

Cluster I: Finance

Financial Muscle (Sustaining Power):

More often than not, it takes a little longer than expected for a new brand to take off in the market place. It certainly requires a lot of money to stay in the market place, as expenses are very high, number of companies give up because of inability to fund the business.

A).

Cluster II: - Marketing

Precise Integrated Marketing Strategy:

This would include integration of Choice of brand offering, providing the brand offering and communicating the brand offering, using all the elements of marketing in proper proportion and proper sequence. Failing to do the above may make it very difficult for an organization to survive. However, unfortunately most entrepreneurs do not understand marketing, they think that marketing is selling the product and believe that any product which is good and well distributed would automatically sell. They do not understand that marketing is much more complex and much beyond than what they perceive. Marketing not only includes analyses of the market, discerning opportunities, formulating marketing strategies, developing specific tactics and actions, proposing a budget and establishing a set of controls but is also responsible for driving the entire organization, making it consumer oriented and market driven.

B).

Sales Budgeting:

In a number of cases, companies get hunted because of inability to adhere to the sales plan. Initially during launch with great fanfare and enthusiasm companies are able to build primary sales and also secondary sales by placing the product at retail counters with their relationship with trade and by scores of promises which may not be met in number of cases.

After say about two months of launch, companies realize that distributors have been made and there are no further primary sales, as goods are just not moving from the retail counters. This demotivates the sales force; they are presurrised from both the ends, by the management for more sales as well as by the trade for non-movement of goods. This accentuates their enthusiasm and they start doing two things
a) Making false promises and
b). Start looking for another job and the sales budget goes awry. All this puts things in a mess.

C).

Over or under Advertising and Promotion expenditure or wrong Top advertising strategy (creative as well as media):

Advertising and Promotion along with Sales and Distribution, Product and Pricing is one of the most important elements in the game of consumer product business. When the ad campaign is launched, the management, sales force and other employees of the organization are excited but the consumers are not. Consumers would rarely go out in the market place and buy brands, communication for which has not been hammered into their minds a number of times. The reason being that the buying process is not over after they buy the product from the retailer, they have to resell it to their family members as to why that particular brand was chosen amongst host of other brands available. So most consumers end up buying brands, which are of good repute in the market.

After the initial burst of advertising, the response may not be all that great. This gives birth to blame the sales guys blame the marketing and the marketing guys blame the sales guys. In number of cases advertising continues for some more time inspite of poor show and either the sales or marketing team or both are overhauled atleast once to justify not so much success.

After some time the advertising expenditure starts pinching the promoters and the thought of exiting the business starts to creep in.

Cluster III - People

Top

People:
I do not need to emphasize on the importance of the quality of people in an organization. Some organizations especially start ups are not able to attract and retain the best manpower available in the industry for the following three reasons:

	Reputation of the organization
	Inability of meet salary expectations of good people.
	Not so professional working environment
High manpower turnover or substandard quality (of work) people often let the organization down.

A).

Cluster IV: - Promoters:

Attention and Focus:
Along with time, effort and money one of most important resources required from promoters of the business is attention and focus in business, failing which, it becomes difficult for the organization to survive.

B).

Loss of patience:
As mentioned earlier that it may take a little longer than expected for brand to actually take off. During this period promoters of number of companies lose faith in the business and start to think about exiting.
Cluster

V - Operational Inefficiencies:

Top

A).

Operational Inefficiencies:
A new consumer product business faces a number of operational inefficiencies. I am putting down some of the important ones.

a:	Logistics: This is always a big problem for a startup or a small sized company. New companies end up paying much more for transportation and logistics as compared to their well-settled counterparts.
b:	Margin to trade: Given the low volume, start ups always end up paying higher margins to the trade, thereby reducing profitability.
c:	Cost of production is higher given the low volume.
d:	Production planning is not perfect so higher inventory carrying cost.
e:	Expertise is not available in proper tax planning to reduce the quantum of Government levies such as excise and sales tax.
f:	Cost of finance
g:	Cost of media buying.
h:	Other purchases

Top

B).

Inventory:
High inventory always carries two problems with it.
a). High inventory carrying cost
b). Goods become short dated.

In this industry the goods getting redundant because of change in technology is not so high as the market is mature.

C).

Creditors:

Some companies build primary sales by dumping goods at distributors point. Distributors on their part, with or without the help of the company sales personnel place the goods at retail counters. But things are blocked when goods do not move from the retailer's shelves. Retailers do not pay the distributors and the distributors do not pay the company. This results into killing problems of sales return, outstanding and bad debts.

D).

Spreading too much without consolidating: Top

This would include geographical expansion as well as product portfolio expansion.

Cluster VI - Industry and Entrepreneur Fit:

Today's markets are changing at an incredible pace. With reforms taking place we are witnessing globalization at a rapid pace, also technology is changing sooner than later. This calls for a lot of expertise, specialization and speedy decision-making. A number of entrepreneurs may just not be able to fit in the industry. They may have good experience and might have succeeded in other industry/industries, however because of the following attributes specific to the FMCG industry some people may just not be able to fit in it:

a).	Low per unit cost of goods (as compared to consumer durables or industrial goods)
b).	Managing a distribution network involving a large number of intermediaries (especially distributors and retailers)
c).	Buying behaviour of consumers is based on perception about the product, which in most cases is not rational.
d).	Ever increasing competition.
e).	Efforts, skill and money involved in brand building.

Top

To my mind the above mentioned reasons are the primary causes for failure of companies in the FMCG industry, ruining future of number of people and destroying billions of rupees.

Any entrepreneur venturing into the FMCG industry must keep in mind the above points before venturing and exiting from the industry.

For any clarifications, contact
Vikas Kalani, Chief Operating Officer,
Sharuskie Marketing Consultants (P) Ltd. at vikas@sharuskie.com

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