Sunday, September 30, 2007

Getting personal - ITC (ET-30/9/07)

The firm can leverage its distribution network as it takes on well entrenched players in the personal care space.

There are already about half a dozen players in there. But that hasn’t deterred ITC from entering the Rs 2,000 crore plus shampoo market. The Rs 16,510 crore cigarette major has forayed into the personal care segment with three variants of a shampoo branded Fiama Di Wills.

Notwithstanding the fact that market leader Hindustan Unilever controls an enviable 48 per cent share, the Kolkata-based company is ready to give it a shot. Industry watchers say soaps, shower gels and skin care products are next on the cards.

Priced at Rs 99 for a 200ml bottle and Rs 54 for a 100ml bottle (six Stock Keeping Units in all), the product is positioned at the premium end and will compete with brands such as Garnier’s Ultra Doux, Procter & Gamble’s Pantene and Hindustan Unilever’s Dove.

Says Sandeep Kaul, general manager, new businesses, ITC, “We believe there’s purchasing power for premium offerings and are targeting the SEC A and SEC B1 segments.”

It’s not just the premium end, the overall market for personal care appears to be seeing good growth with most categories clocking 15 per cent plus except for soaps. The shampoo space has seen a compounded growth rate of about 20 per cent over the last five years, says Kaul.

Moreover, the penetration as he points out, is not very high especially in the hinterland. But it’s not going to be easy for ITC because the competition is keen.

The relatively small share of just about three per cent that Garnier has managed after so many years is an indication of the kind of challenge that ITC is up against.

Says Unmesh Sharma, who tracks the FMCG space at Macquarie Securities, “Given that two-thirds of the market is controlled by two players, it’s not going to be easy for ITC to create some kind of niche for itself.”

What ITC has going for it though is a strong balance sheet. Says Arvind Mahajan, executive director, KPMG, “Personal products is not an easy category to be in and requires staying power. Players like ITC have the ability to invest, stay there and give the business five to six years to make money. The investment will be made from a long-term perspective.”

The other asset that ITC can leverage is its distribution reach, given that it already sells packaged foods. Says Macquarie’s Sharma, “ ITC is far better positioned than a foreign player or a new entrant because it already has a distribution network.”

Sharma explains that that ITC’s web of distributors will allow it to access even remote areas, even if the firm doesn’t have too many retail outlets. Adds Yasmin Shah, analyst at Alchemy Securities,” ITC is building a rural distribution network through its Choupal Sagars which they can use to sell personal care items.”

In fact, the rural network (of both distributors and retail outlets) will be put to good use when ITC launches sachets which it needs to do because they comprise 60 per cent of the market (in value terms).

Says Kaul, “You will see the sachets very soon because there is a very large franchise for them and we need to give consumers as many options as possible.”

Kaul, however, is reluctant to discuss whether the company will have a presence in the economy segment. Nonetheless, say analysts, the new business is a good way for ITC to de-risk its business model.

Today, cigarettes account for 68 per cent of gross revenues and about 84 per cent of the PBIT (profit before interest and tax). Others such as hotels, paper, food and other FMCG products are growing but are not too profitable. Losses from the FMCG businesses were close to Rs 60 crore in the June quarter.

Says Alchemy’s Shah, “More new launches mean that the division will stay in the red for a while. But the investment is worth it because, at the end of the day, India is a consumption story.” All ITC needs to do is give it a personal touch.

1 comment:

Desi Joe said...

Must admit, a very good analysis of the sector and ITC's strategy. Good job mate.