Analyst Insight: Indian-organized retail trade in fast-moving consumer goods (FMCG) has been rapidly expanding over the past decade, drawing much attention from both domestic and foreign investors. With a growing domestic market demand and government policy under development to improve the tax and regulatory environment, most FMCG segments are poised for further growth. In the face of stiff competition, superior supply chain capabilities will be among the defining success factors for FMCG retailers in India.

- Viktoriya Sadlovska, managing director of Prameya Research

Indian retail trade in most FMCG categories has seen a growth boom over the past decade. One common challenge for all of these segments, however, remains the supply chain.

Much has been said about the flaws of the infrastructure in India, including roads, electricity and water supply, etc. Local authorities are already investing heavily in infrastructure development to solve these problems. This, however, is unlikely to address all of the short-to-medium term supply chain needs of the expanding FMCG and retail sector. To achieve success, these companies need to be able to compete within the existing infrastructure constraints, which often means additional expenses for back-up facilities, such as power and water supply, among other needs.

Companies looking to expand in the Indian FMCG retail sector will also face a daunting challenge of building their end-to-end supply chain capabilities, such as finding or building adequate warehousing and distribution facilities and selecting reliable transportation agents. Agility is the key to success in any FMCG distribution strategy, but in the Indian context it is especially important to balance agility with risk mitigation strategies aimed at reducing the impact of frequent disruptions. Such strategies may entail keeping higher inventory buffers at various stages of the supply chain or being ready to use alternative transportation means on short notice.

These challenges are exacerbated when it comes to the food supply chain, leading to a high percentage of produce spoilage. With investment in organized food retailing growing at a rapid pace, the Indian retail supply chain is on the brink of an overhaul, aimed at improving quality and reducing waste and costs throughout the chain. Changes are looming in the ways food is processed, packaged, stored, transported and presented to the consumer. One major area of investment is the cold chain, which -- once strengthened -- is expected to significantly improve both the quality and the shelf life of produce.

The opportunity of sustainability

With much of the supply chain capacity still in need of development, companies in the Indian FMCG/retail sector have an opportunity to incorporate ecologically and socio-friendly best practices right from the start. Two vast areas of opportunity (among many) are sustainable packaging and waste utilization. Incorporating sustainable principles throughout the end-to-end supply chain can not only provide significant cost savings but also have a positive impact on the environment and local communities, positioning a company as a responsible market leader.

The Outlook

With the Indian economy poised for strong growth, FMCG retail sector provides lucrative opportunities for investors. As this sector expands, the supply chain will be a determining factor of business success. By adapting supply chain management best practices to the local context, FMCG companies in India can grow market share and meet changing customer demands. Incorporating sustainable approaches to supply chain management is a must for companies looking for long-term viability and competitive differentiation in this market.