Sunday, August 15, 2010
Rise of the Indian FMCG Company
Adithya Nagarajan, Esha Arora, Kaushik Subramaian & Varshik Nimmagadda | IIM Shillong
The Rise of the Indian FMCG Company
Nearly twenty years ago the Indian government undertook a series of policies that would change the face of the country. The government opened up a tottering socialist economy to the greater world and liberalized its policies for industry. The critics to this step were numerous and one point in particular always figured in the arguments that they made. The critics were nearly unanimous that the insular Indian industry, nurtured on licences and trade quotas would soon be overwhelmed by the advent of the free market. And one industry in particular was big on this list i.e. the Indian FMCG industry. It was widely expected that the advent of global FMCG majors with their expertise, international brands and experience of competing in the world markets would sound the death knell for the nascent Indian FMCG industry.
But the Indian FMCG players seem intent on proving all these predictions wrong. For twenty years they held on even as the major markets were taken over by the likes of P&G & Coca-cola. They took the time to understand the dynamics of competition in this new era and changed their strategies and processes to be more relevant to the Indian consumer and now they seem to be intent on taking back their lost turf. From processed foods to milk products to soaps the Indian players seem to be on a comeback trail. This cover story attempts to chronicle the rise of this new brave breed of Indian FMCGs from the viewpoint of three companies that seem to be on the forefront of this revolution.
The interesting part of this entire story is that these companies have followed entirely different strategies to counter the bigger players. Players like Marico have successfully utilized the blue ocean strategy to establish a first mover advantage in fields like skin care via the Kaya skin clinics while Godrej has successfully leveraged its brand name and distribution strength to play itself into a position of strength in the rural market for soaps. One thing in common seems to be a new found understanding of the Indian consumer. The Indian companies are putting great emphasis on understanding the needs of the Indian consumers and tailoring their products to those needs. This has helped some of them to discover niches in the market that have been untapped by the MNCs and have helped them to avoid competition. For example Emami’s ayurvedic formulations for its products like Fair and Handsome have helped to stand out in the marketplace and differentiate itself.
If the avoidance of completion by finding new differentiation strategies seems to be the forte of some of the players others like GCPL and Dabur are competing with the global majors head-on. Dabur particularly is in a difficult industry with its oral care products with the market leader i.e. Colgate commanding a huge market share of 53 percent compared to Dabur’s 13 percent. It has managed to capture a significant percentage of the fast growing rural market by basing its positioning on herbal strategy.
These are exciting times in the FMCG industry. The Indian players seem to have stolen a march over their bigger rivals with their unique understanding of the Indian consumer and different positioning but it will not be long before the bigger players react to this challenge. The next four years can prove to be a trial by fire for these Indian majors as they fight to sustain the gains they have made and capture markets that have been fortresses of the multinationals.
The uncommon sense that Marico believes in, has brought about radical results for the company. Led by Harish Mariwala, the Company enjoys leadership positions in most of the markets it is present in- viz. Coconut Oil, Hair Oils, Anti-lice Treatment, Premium Refined Edible Oils, Fabric Care etc.
Be it the convenient packaging for Parachute from the erstwhile tin cans of coconut oil, the introduction of heart care with Saffola in the edible oil market, or the starching process branded and eased by Revive, Marico’s innovation has helped it be the pioneer, stay consumer centric and sustain a firm hold in the market space.
Hair Oil market:
With Parachute and Nihar, Marico holds more than 50% market share in the branded hair oil segment. It enjoys over 21% share of the 3000 crore hair oil segment (composed of coconut hair oil, amla, light, cooling and tonics and gels). In the coconut oil market, Parachute itself controls about 50% share of the market.
In the coconut hair oil market they have capitalised on the fact that consumers test quality based on the oil’s aroma. From showing the concept of handpicking coconuts from Kerala, to their ‘gorgeous hamesha’ concept of celebrating womanhood, the brand has taken numerous leaps. The innovative packaging helps the brand address changing consumer needs.
Edible Oil market:
In the premium refined edible oil market, Marico’s Saffola faces fierce competition from Sundrop in terms of volume, with the former holding close to 50% share.
Safolla’s message has been clear. By showcasing mild fear, its commercials aim to introduce heart care through the edible oil. Its approach is preventive. The ‘kal se’ campaign brought a quantum leap in sales while the ‘thief’ ad, and ‘dil ka haal’ reinforced the same idea to slightly varying targets- ranging from heart patients to the 30 year old man, who is likely to face heart problems with the kind of lifestyle he is leading. The ‘Prayaschit’/repent ad (guilt after indulgence in food) directly targets the housewife who is, most often, the buyer in this case.
Having established Saffola as a healthcare product, Marico continues to leverage its positioning into segments like packaged wheat flour, rice, and breakfast cereals with a strong health quotient.
The spirit of innovation coupled with the ‘uncommon sense’ in Marico is evident in its unique product designs. This covers the product idea, the packaging as well as the product delivery. Innovation and uniqueness encompasses Saffola’s range of functional foods, Parachute Therapie (hair fall reduction through hair oil), their Kaya product range, Parachute Advansed Night Repair Crème, a bottle heater for Parachute Hot Champi, Parachute massager for the working woman.
In addition to its presence in the domestic market, Marico has been strategic in acquiring some international brands and leveraging its presence in foreign countries in two ways- it not only taps newer markets but also strengthens its existing portfolios.
For instance, in January 2010, the Malaysian unit of Marico bought the hair styling brand ‘Code 10’ from Colgate Palmolive Company marking Marico’s entry in Malaysian hair styling market, at the same time growing its strengths in hair creams and hair gels market.
In May 2010, Kaya acquired the aesthetics business of the Singapore based Derma Rx. The deal, while stitching together an additional turnover of about 50 crores and 37000 customers, brings with itself access to an advanced range of skin care products for Kaya. This is complemented by access a network of suppliers of beauty products from the developed nations.
In a similar case, the South Africa subsidiary of Marico acquired the healthcare brand Ingwe in August 2010. First, the brand goes well with Marico SA portfolio. Second, the acquisition strengthens the company's distribution reach, particularly with independent trade and step up its growth momentum.
Marico’s international business has shown healthy contribution to its revenues- 23% of the group's turnover in 2009-10. Moreover, thanks to such smart buys, the international business witnessed a 29% sales growth during the June’10 quarter, when its Indian sales posted a relatively meagre 6.8% rise over the same period a year ago.
While a brand like Saffola may be priced for slightly higher income groups, Parachute cuts across different income groups and yet has a premium appeal. In the hair oil segment, the company has attempted to tackle the unorganized segment through low-cost and small-unit packs.
It also plans to make it bigger in the cool oil segment (over 500 crore market) through its recent launches- Parachute Advanced Cooling Oil and Nihar Naturals Cooling Oil.
In near future, Marico plans to enter rural markets to tap their potential in a much bigger way. It has already started adding to its distribution in areas of Madhya Pradesh, Maharashtra and Karnataka. It continues to foray beyond the prominent towns and districts, not only in terms of its distribution but also to understand the rural needs and tune its portfolio to the same.
On the international front, considering the recent developments in terms of acquisitions, it can be noted that the company is attempting to streamline its manufacturing base and at the same time market its Indian brands through the newly acquired distribution system. Marico is likely to continue with similar strategic acquisitions adding to its revenue base simultaneously.
In terms of revenues, Marico aims to clock in Rs 2500 crore turnover for the financial year 2010. This shall be a 9% rise on its last year’s returns, inspite of food inflation and weak monsoons.
Picture this: Just about a decade earlier you set aside your hard earned money to invest in FMCG stocks. After examining the nitty gritties on the Dalal street, you decide to stay clear of the High fliers, Hindustan Unilever(HUL) and Procter and Gamble(P&G) and decide to bet on GCPL(Godrej Consumer Products Limited). A decade later; you laugh all the way to the bank. What was ` 10 in 2001 amounts to ` 378 today. GCPL , the consumer products wing of the $2.1 billion Godrej group is well and truly making it big in the FMCG space. The Adi Godrej headed company operates primarily in the Home care and personal hygiene categories.
GCPL’s efficient penetration of the Indian Market, especially the rural consumer base deserves special mention. Hair dyes and Hennas which were once considered luxuries in rural households are everyday products now. And GCPL has been instrumental in bringing about this metamorphosis through its ambitious rural expansion project Dharti, which was launched in early 2009. Beefing up an enviable distribution network that spans 50,000 plus villages and 8000 small towns, the company has ensured that almost half its revenues come from the rural areas of the country.
GCPL is second only to Hindustan Unilever (HUL) in manufacturing bath soaps. Its Godrej No:1 brand is the best selling soap in the Grade-1 category. Apart from this, it’s impressive array of Brands also include Cinthol and a host of exciting Hair care products. The Core competency of Godrej has been its ability to successfully create, communicate and deliver a portfolio of value brands to the huge segment of cost conscious customers. Even in times of recession the company decided not to raise prices and successfully managed rising commodity prices through efficient cost management and squeezing out efficiencies from its supply chain. It tailored the size of the offering and not the product as such, and introduced them at price points that the customers could afford.
GCPL innovated and customized its Communication and promotional strategies in accordance with its goal. Shunning satellite channels, GCPL decided to promote its offerings on Doordarshan, All India Radio, local publications and regional TV channels. For its hair colour products, GCPL depended more on word of mouth publicity. It engaged around 50,000 barbers spread across 9 states in a Co-branding exercise. GCPL provided them with grooming kits in exchange for prominent display of its logos in the saloons. Since most people turn to their hair dresser for advice, it made perfect sense to influence the influencer.
Another striking aspect of GCPL’s success story has been its aggressive acquisition drive. In the past few months, GCPL has announced 5 acquisitions: Indonesia-based Megasari Makmur group and its subsidiary, the remaining shares of Godrej Sara Lee, Nigeria-based Tura Group, and the Latin American based groups Issue and Argencos. It has envisioned a three-by-three strategy for its international operations: targeting the three continents of the developing world - Africa, Asia and Latin America - and in three categories - personal wash, home care and hair care. The decision to target emerging markets stems from the fact that they have demographic and behavioural profiles that are similar to that of India.
These three continents are now on a growth trajectory and the opportunities that they provide for the consumer products business are too lucrative to be missed. An additional incentive to invest in these markets can also be traced down to the fact that multinationals like Unilever, L’Oreal and Procter & Gamble don’t have a domineering presence which provides ample scope for the regional brands to grow. Also the acquisitions provide GCPL an opportunity to indulge in cross pollination of brands; bringing some brands into India and taking some brands to these markets.
The Road Ahead
The emerging market centric acquisition focus has strengthened GCPL’s brand portfolio by roping in strong brands like Good Knight and HIT which are among the fastest growing FMCG categories. Also by bringing in GCPL, Godrej Hershey and Godrej Sara Lee operationally into a single fold they can expect to achieve distribution synergies and develop pioneering supply chain solutions.
The increased scale of operations would fuel the pace of innovation in the existing portfolio and help leverage branding opportunities. The strong commitment that GCPL has to the Godrej Group's core values, ethics, employees and consumers will be instrumental for its success. Even though concerns may arise with regards to GCPL’s exposure to currency risk and its ability to ensure an appropriate cultural fit of acquired brands, it is well positioned to ride the growth wave. GCPL’s decision to venture into emerging markets may be a small step for the company, but it may well provide the fodder for Indian FMCG companies to take a giant leap in the near future.
Wipro Consumer Care Lighting Ltd.
Wipro Consumer Care and Lighting (WCCLG), a business unit of Wipro Limited, started with vegetable oil production in 1947 and has since then come a long way and established a profitable presence in the branded retail market. With a vast variety of products spanning soaps, baby care products, health and wellness, Wipro's products have bettered the lives of millions of consumers across India and global markets. It has been one of the fastest growing FMCG companies, both organically and through acquisitions.
They have just announced sales revenue of Rs 6410 million, which is 9% of the total revenues of Wipro Ltd. They reported an EBIT of Rs 807 million for the quarter ending 31st M arch 2010, which was an increase of 16% compared to the previous year’s same quarter. In addition to these impressive facts, WCCL plans to invest Rs. 800 million to augment its production capacity for products such as Glucovita, CFL’s, toilet soap etc.
What is WCCL doing right that they are coming off age in a splendid manner and standing their own against the much bigger and well entrenched FMCG companies.
A mentioned earlier WCCL has grown through organic & inorganic ways. In 2007, WCCL acquired Unza Holdings Ltd, South East Asia’s leading Personal Care Company for Rs. 1010 crores. This was the largest acquisition in personal care segment by an Indian company and was expected to double Wipro’s FMCG revenue. Earlier Santoor became the third largest soap brand in India after Lux and Lifebuoy with a value of Rs 500 crores. Wipro had previously acquired Chandrika Soaps for Rs.31 crores and Glucovita for Rs.5 crores to expand its FMCG basket. This deal with Unza gave WCCL the expertise to sell products through big retail chains.
As a next step WCCL wished to leverage Unza’s presence in Nigeria and Egypt and tried to understand & exploit the potential of markets in East & West African countries.
Following the success of the Unza acquisition, in November 2009 acquired the personal care business of Yardley in the Asia, Middle East, Australasia and some African markets from Britain-based Lornamead group. The acquisition was worth Rs. 214 crores approximately. The 239-year-old Yardley provided offerings of personal care products including fragrances, bath and shower products and skin care.
Subsequently in July 2010, Wipro Yardley unveiled luxury soaps in India. They were launched in 5 fragrances namely Red Rose, English Rose, Jasmine, Sandalwood & English Lavender.By doing this WCCL was looking to introduce the world class heritage brand to Indian consumers and build up a brand loyalty.
Domestic Game Plan
Wipro Yardley’s 5 new fragrances performed extremely well and contributed 6% to WCCL’s quarterly revenue. And as a result of this, now WCCL has decided to enter tier-II cities with Wipro Yardley.
WCCL is also planning to expand the portfolio of its ayurvedic brand Chandrika. WCCL President Vineet Agarwal said the brand had done reasonably well during the quarter ended June 2010. “Under the Chandrika portfolio we are looking to introduce a bigger range of face washes which along with deodorants are sunrise categories,” he said.
The company is also planning to expand its skincare range under its flagship brand Santoor. Recently Santoor has launched another brand extension - Santoor Deodorant. Now WCCL already markets deodorants, soaps and talcum powder under the brand. What we can see is that Santoor is gradually becoming a personal care brand rather than just being limited to a soap brand. This 600+ crore brand was on a roll last year becoming one of the largest selling soap brands in India. It uses only modern trade channels to market its skincare range. Also thier glucose powder Glucovita and artificial sweetener Sweet ‘n’ Healthy were rolled out nationally post a test-marketing phase.
Recently WCCL has launched LED rechargeable lanterns in 3 configurations namely, Solar, Rechargeable and Dry cell. The low power consumption of LED ensures that they give a backup of up to 25 hours. They would be initially launched in south India, U.P and Punjab.
From the above stated facts one thing is clear. WCCL are on a roll solely due to the reason that they had a vision and they made sure they stuck to it. They decided to go in for a global strategy by way of a number of international acquisitions which not only granted them to access to international markets but also helped them in learning and gaining expertise.
And at the same time they had sound strategies to face the competition in the domestic market, be it pricing or the distribution or their brand launches and as a result of which we are able to see the success of the Santoor & Yardley brands.
The future definitely looks bright and the top management of WCCL maintain that they would continue to be on the lookout for potential companies they could acquire and benefit from and at the same time they have decided to stay focussed on the emerging markets and give the MNC’s a run for their money.