Friday, July 6, 2007

Indian FMCG industry

Acquisitions of companies and brands FMCG Sector

Saurabh Doshi

Acknowledgement:fmcgmarketers.com
INTRODUCTION

Growth is Life” is not just a punch line of Reliance, but it’s what every business/ sector/ company strive for. And FMCG sector/ companies are no exception to this.

The sector saw a slump between ’02 and ’04 but has made a quick recovery. We have seen a transformation in the percentage growth of FMCG sector from single to double digit growth. This definitely shows us signs of good times. Let me give you some statistics.

  1. According to latest HSBC Report (ET – March 10, 2006), FMCG is projected to grow by over 60 per cent till 2010
  2. Total size of the FMCG sector will rise from around Rs 56,500 crore in ’05 to Rs 92,100 crore in ’10.

What is running this sector in the past few years? There exist only two growth paths– Organic (Innovation) or Inorganic.

We have seen FMCG behemoths like P&G to be proponent of organic growth. Recently (April 27, 2006), global CEO of P&G AG Lafley said “Organic growth is more valuable because it comes from your core competencies. Organic growth exercises your innovation muscle. It is a muscle. If you use it, it gets stronger.”

On the other hand, in 2005 Dabur India announced the acquisition of Balsara Hygeine and Home Care businesses. The CEO, Sunil Duggal mentioned that Balsara's acquisition is certainly not the last one and there may be more strategic takeovers in future. And now after one year, I see a new article in economic times on April 26, 2006 – “Dabur India eyes acquisitions”.

So after briefly hearing the different viewpoints from the CEOs of FMCG majors, can there be a unique strategy for FMCG companies to grow. Obviously, the answer is No. But in recent past we have seen a skewed trend towards acquisition of companies and brands by FMCG companies and opting for the inorganic route. In this paper I will give reasons with several case studies to why these companies are following this path.

Reasons for Inorganic growth by FMCG companies

1. Cheap Exercise: Building a brand from grass-root level asks a lot. Just think of small FMCG player who can dare to give a fight or even stand still in front of Home and Personal Care juggernaut, HLL. Do these small players have the financial capacity to build a new brand and get a decent market share? It really asks a lot. Also, riper is the product category, more it is difficult for other FMCG players to enter that space, because of huge competition.

Acquiring brands from other companies will not require them to spend exorbitant money on brand building to get the space in the mind of the consumer.

It’s not only saving money on brand building but cost savings as well. P&G expected revenue gains and cost savings of $14-16 billion from the merger with Gillette, due to elimination of overlapping functions and a planned 6,000 job cuts.

2. Time Constraints: Do you know how much time it takes to launch a new brand from scratch? Are the FMCG companies ready to afford time to do the inevitable market research, understanding the consumer behavior, pilot testing at selected places etc? Also the market is very dynamic and the needs of the consumers keep changing. Taking a longer organic route, the fresh innovative brands initially may get outdated with market needs.

3. Product Related: Diversification of existing product portfolio and complementing current product portfolio are the two reasons to go for inorganic route. It is the quickest way to increase a company’s basket. It gives a straight license to step into new product categories.

3.1 Dabur’s acquisition of 7 brands from Balsara: DIL's acquisition of the three Balsara group companies has given them access to seven established brands — toothpastes Promise (unique clove oil positioning), Babool (value segment) and Meswak (premium segment), Odonil air freshener, Odopic utensil cleaner, Sanifresh toilet cleaner and Odomos insect repellent. Balsara’s herbal oral care range is a good strategic fit for Dabur, as their products are also positioned on the herbal benefits.

3.2 Godrej bought Keyline’s Brands: The deal gave GCPL an easier route to enter the skincare segment through Keyline brands such as Endocil, Inecto, Skyhydra and Aapri. So now GCPL is not just soap and hair colour. Its kitty include Erasmic shaving products, Cuticura talcum powder, Adorn & Nulon. They had been looking at the Nihar brand of hair oil as it fits into Godrej's portfolio since it is has been marketing the Anoop brand.

3.3 Marico acquired skincare company Sundari LLC, two aromatic soap brands in Bangladesh and Nihar coconut oil from Hindustan Lever.

3.4 Wipro Ltd acquired the Chandrika soap brand with long-term lease rights for marketing the product in India and the SAARC region. Chandrika is the second largest selling brand in south India after Medimix. Also this would align with Wipro’s strengths in markets like Andhra Pradesh, where Santoor soap brand is already the market leader with a market share of 17 per cent.

3.5 P&G's acquisition has given it access to Gillette's portfolio comprising shaving products, Oral-B toothbrushes and Duracell batteries, among others. This has helped P&G to upgrade from household products like soaps, detergents and cleaners, to a company that is into "lifestyle" products in the personal care and grooming segments. Gillette's basket of hi-tech shaving systems for men and women, powered tooth-brushes and male grooming products will complement P&G' set of brands in the beauty, personal care and feminine hygiene segments. Gillette will also add more high-margin products to the P&G portfolio, making for more robust profit margins than its rivals.

3.6 Tata Group's tea business acquired Good Earth to leverage potential for growth in the specialty tea sector of the US market and elsewhere in the world. The experience and skills of Good Earth and Tetley complement each other well and will combine to have a strong position in the US tea industry.

4. Size/ Scale related: There are different parameters which lead to increase in size/ scale of an organization with inorganic route. They are:

Ø Increase Turnover/ Profits

Ø Increase Market Capitalization

Ø Increase Market Share

Ø Presence on world map

4.1 Increase Turnover/ Profits: Every CEO is worried about the top/ bottom line and acquisition is definitely an option to boost them.

GCPL's CMD, Adi Godrej said that through Keyline’s buyout, their sales turnover will go up 20 per cent and profits should increase 10 per cent. GCPL’s 35% revenue coming from hair color brands and five times bigger hair color market in UK than India will definitely give a pump to sales and profits.

Dabur saw a growth of 10%growth immediately in revenues.

4.2 Increase Market Capitalization

Organization

Date of Acquisition

Share Value (Prev Close) on the day of acquisition

Share Value as on 2nd May, 2006

% growth in share value

Dabur - Balsara

27/01/2005

99.05

157.75

59.2%

Godrej -Keyline

30/11/2005

498.9

728.05

45.9%

Marico -Nihar

27/01/2006

401.75

540.8

34.6%

The above figures clearly shows a positive impact on the share prices after the above three acquisitions. Especially it’s interesting to see 35% growth in the case of Marico in just 3 months.

Ø The market cap of GCPL raised by 10 per cent post the Keyline acquisition

Ø The above companies have been rewarded with premium valuations, which earlier use to be enjoyed only by multinationals

4.3 Increase Market Share

Dabur’s market share in oral care market has increased by 6%.

Nihar’s 8% market share along with old market share has made Marico the undoubted leaders in coconut oil market with a share of 60% in Rs. 800 crore CNO market. This also led to an increase from 35% to 75% in the perfumed coconut oil segment.

4.4 Presence on world map

TATA Tea Ltd acquired Good Earth Corporation few years back. Managing Director, Tata Tea, pointed out that the traditional strength of Tetley in the US market, had been in areas such as New Hampshire and Boston. Good Earth offered the company presence in the attractive California market, which has been open to new and innovative offerings in tea.

To expand further, companies are going global. But that’s not the only one. The other reasons for going global are:

4.4.1 Ready made global brands: The move to acquire Keyline Brands marks GCPL's foray into the global market with ready made brands.

4.4.2 Sharing of brands between 2 different markets:

Ø Domestic to new markets: GCPL has decided to take its hair powder dyes and Fairglow soap to the UK, where there is a substantial Indian population.

Ø Entry of foreign brands to enter domestic markets: Godrej is planning to introduce few of its Keyline brands i.e. Erasmic and Cuticura in India, as customers are already aware of them.

4.4.3 Targeting Ethnic population: Brand in domestic market will definitely attract the ethnic population residing in the target countries. According to Godrej its huge brand equity in India will spill over to create brand pull among the British Afro-Asian population. GCPL is hoping to cash in on the current craze for "ethnic Indian" by introducing sandalwood and ayurvedic variants of Godrej No. 1 in British supermarkets.

Due to large Indian population in the UK, Godrej’s should customized its products to suit the Indians in UK.

4.4.4 Increased Learning Curve: Once you enter into a new country’s retail area, you can learn a lot.

Ø Different retails format prevailing there

Ø Insights on planning and meeting global delivery schedules

Ø Doing business in a alien land

Ø Access to new consumers and understand offer schemes to attract more customers

Ø How do margins, discounts vary across geographies

Ø Right Shelf space to get more customers

So learn the retail trends and apply them in domestic market. Bring back a new set of skills to tackle the nuances of manufacturer and retailers. Unlike in India, distribution is not fragmented overseas like in US, UK etc. Manufacturers deal with fewer retailers. So it requires different skill sets

In case of Godrej, they will bring back the learning of organized retail and will apply that in India as the share of sales through organized retail chains is growing rapidly. They can bring home the best practices. This will give an opportunity to give a tight competition to multinationals in India, as they are familiar with these practices since they have a presence across the world. Also Godrej will enhance its skills in managing modern trade channels.

5. Enhanced Distribution

Distribution is always a key for success in mass markets in FMCG sector. If the acquired company's distribution network is complementary to the company's own, it can easily be leveraged to vend existing brands to new consumers.

5.1 Dabur pursued Balsara for its distribution reach in the West and the South. Dabur’s past distribution network had better penetration in the Northern and Western regions. Balsara has a direct distribution reach of 340,000 and 1.5mn indirect reach. Now, Dabur will be in a better state to distribute its products in southern markets.

5.2 Nihar's strong presence in states such as Bihar and Jharkand will complement Marico’s strong foothold in the west and the south.

5.3 Keyline Brands' relationships with retailers such as Boots and Tesco in the European markets will allow GCPL to better access UK market. Before the acquisition, GCPL had to depend on just one distributor to put brands on UK shop shelves. Points out Godrej, "Supermarkets have long-term relationships with local companies. Without this, it is difficult to penetrate markets such as the UK." GCPL expects that its access to retail chains such as Boots, Asda, Sainsbury's and Tesco in the UK would boost its domestic brands.

5.4 P&G will have a greater say over display and shelf-space with retailing giants such as Wal-Mart, Carrefour etc. They will also get greater bargaining power in its negotiations with raw material suppliers and the advertising media.

5.5 Priya Pickels was acquired by CavinKare to take advantage of the formers local distribution network.

6. Economies of Scale

6.1 Dabur’s combined business with Balsara would provide economies of scale in marketing, sales and distribution. Combined advertisement will reduce costs.

6.2 At present Keyline outsources about half of its manufacturing to various units in the UK. According to press, GCPL's manufacturing costs are 30-40 per cent lower than those in the UK. This has forced GCPL to shift some of Keyline's production to its Vikhroli, Mumbai plant.

Areas of Concern

1. Human Resource: The companies need to retain the talent that they have acquired. For example, Keyline employees need to be there to ensure continuity and to help the GCPL team learn the nuances of the modern trade to move up the learning curve.

2. Overlap/ Sales Cannibalization: The companies have to make sure that there is no overlap between the needs of the consumers of existing and the acquired brands, to avoid one brand killing the share of other.

Marico should make sure to market Parachute and Nihar in a manner that don’t eat into each others sales, and at the same time push up Nihar’s sales.

3. Competition: Entry into new product categories means a wider product basket. Therefore distribution reach may expose these companies to greater competition.

4. Integration: The most important challenges for P&G was to integrate the operations, manufacturing facilities, work culture of two companies, which have functioned independently for past many years.

5. More brands, Less power: Large number of brands may distract the management from nurturing them. Clairol, the hair-care brand that P&G acquired in 2001 has lost market share to L'Oreal. This is the reason why Unilever in India has divested many brands and have focused on 30 power brands.

Future

This endeavor of acquiring more brands to enter into new product categories will not stop in the coming years. FMCG companies have their eyes set to fill in the gaps in the existing brand portfolio by acquiring companies with set of brands complementing the existing portfolio.

But as mentioned in introduction some have followed the other route of organic growth. It will be interesting to see more acquisitions of brands in Indian as well as in global market, especially by those who have not experiment with it.

But one thing is very visible out there – many FMCG companies are definitely not going to leave any opportunity to grow as fast as possible – by acquiring companies/ brands.