Thursday, July 23, 2009

Mid-sized FMCG cos' big swipe at MNCs

Analysts say they have more product ideas, nimbler market responses than the giants.

Harsh Mariwala’s face lights up while recounting his favorite story. In the late 90s, Keki Dadiseth, the then Hindustan Lever (now Hindustan Unilever) chairman, wanted to buy his company, Marico. Many of his friends advised him to cash out when the going was good, but Mariwala dug in his heels. “Marico is a dream for me and I was in no mood to sell my dream,” he says. So, one of the high points in his life was when Marico bought the multinational giant’s hair oil brand, Nihar, for Rs 240 crore in 2006.

The dream run of Mariwala and his counterparts at other mid-sized FMCG companies is continuing, and much of the robust growth they are enjoying is at the expense of the FMCG behemoths. Companies such as Marico, Dabur and Godrej Consumer Products (GCPL) have been growing at a compounded annual growth rate of over 20 per cent over the past three years, compared to HUL’s 14 per cent. The respective sales volume growth are 10-15 per cent and 5 per cent.

Analysts say their relatively smaller size is one reason why the mid-tier companies found it easier to respond to the market. For example, towards the end of 2008, raw material and packaging material prices started sliding as oil prices dipped, and these companies were quick in passing on the benefit to consumers by paring product prices. HUL also cut prices but took its own time to do so. Result: HUL’s volumes dipped four per cent in the quarter ended March 2008-09, while the mid-sized FMCG firms clocked a volume growth of over 20 per cent in the same quarter.

Innovative strategies are another reason. For example, Marico’s mantra is to find niches where MNCs are not present, making it easier for the company to dominate that space. The leadership position in products like Saffola and Parachute (over 48 per cent marketshare) is evidence of that. Last year, Marico launched ‘hot oil’, which does away with the need to heat the oil. Likewise, it forayed into services with Kaya clinics (a space vacated by HUL). Kaya clocked close to 60 per cent growth year-on-year in the last financial year.

"We are continuously prototyping and at any given time, have at least five to six products in the test market," said Sameer Satpathy, chief marketing officer, Marico. In the last financial year, the company saw its revenues grow by 25 per cent, to Rs 2,388 crore.

Sunil Duggal, chief executive officer, Dabur, attributes the winning away of market share from established MNCs to the company’s new products and variant launches, and inorganic growth strategy (acquisition of Balsara and Fem). "We saw the fastest organic growth in a decade last year,” Duggal said.

A large part of this growth was volume-driven; Dabur had the highest volume growth in the FMCG industry. In the shampoo market, for instance, Vatika has been the fastest selling brand for three years in a row. Dabur Red Toothpaste has become a Rs 100-crore brand within just five years of its launch. Its skin care portfolio, with Dabur Gulabari, saw a 40 per cent growth in the last financial year.

So, too, for the Rs 1,450 crore GCPL, the soaps and hair colours major, which has been pursuing both organic and inorganic growth. Its international operations now account for Rs 300 crore of its overall revenues, post the acquisitions of Rapidol, Kinky and Keyline. Soaps account for Rs 800 crore of its Rs 1,150 crore domestic revenues. In the last financial year, Nielsen says the company saw its marketshare grow from 9.1 per cent to 9.9 per cent in this category.

Most agree that price is not the only reason why the mid-sized firms have gained marketshare. For example, GCPL Managing Director Deepak Sehgal says Godrej No 1 soap has been gaining marketshare in the downturn even though several rival brands like Breeze, Nirma and Diana were at lower price points. “Others such as Santoor, Rexona and Lux have also dropped their prices and are now in the same price band as us. But we are still gaining traction and are market leaders in five states, which shows there is a preference for the brand," Sehgal said.

Profits of mid-sized FMCG companies also grew at a faster clip than big competitors, due to their better rural focus. GCPL , for example, is planning to increase its marketshare in rural areas to 50 per cent from 38 per cent now, through better pricing and focus on regional advertising. "We have plans to increase our small-town distribution reach from 3,000 to 6,000 and village reach from 17,500 to 50,000 over the next two to three years,” Sehgal said.

Dabur, whose rural sales are now almost half of its overall sales, covers villages with a population of under 3,000 across seven states.

FMCG cos to see robust volume growth

Fast moving consumer goods (FMCG) companies, say analysts, may register a lower year-on-year (YoY) sales growth but higher volume growth for the quarter ending June 30. The full benefits of falling commodity prices and lower input costs should also increase the gross margins of these companies, they said.

A survey by five brokerage houses — SBICap Securities, Angel Broking, ICICI Securities, Motilal Oswal and HSBC Securities — reveals that after a volatile calendar year which saw input costs rise to record levels in the first half and then fall dramatically in the second half, FMCG companies will now see the benefit, as it usually takes a quarter for falling costs to show in the results.

“The FMCG universe is likely to register lower sales growth of 10.9 per cent year-on-year (y-o-y) due to muted sales growth in Hindustan Unilever (HUL) and ITC, and lower price growth for most other companies. However, volume growth is expected to be strong for most categories. Lower input costs and excise benefits will result in margin expansion and, hence, we expect operating profits for the sector to grow 21.5 per cent y-o-y,” say ICICI Securities’ analysts.

“The volume-led growth will be led by led by companies like GlaxoSmithKline Consumer Healthcare, Nestle and Dabur,” forecasts Anand Shah, FMCG sector analyst with Angel Broking, who expects the sector to record a 12 per cent net sales growth.

With most companies either effecting a direct rollback in prices (HUL, Marico) or offering various trade and consumer promotions, growth in sales will be mainly volume driven. “FMCG companies will post 8.7 per cent growth in sales, 15.2 per cent in Ebitda and 13.6 per cent in net profit. Excluding HUL, the growth would be much better at 15.4 per cent in sales, 20.2 per cent in Ebitda and 24.3 per cent in net profit,” says Pritee Panchal, FMCG sector analyst with SBICap Securities.

However, going ahead, while the makers of personal and packaged goods should benefit with no letdown in consumer demand, especially with the benefits of the National Rural Employment Gurantee Scheme and farm loan waivers causing rural demand to hold strong, weak macro-economic conditions, coupled with falling income levels, could lead to moderation in consumer spending in the ensuing quarters.

“If the monsoon is poor, it will affect consumer purchasing power. There could be a risk to revenues for the next three quarters, but this will be at least partially mitigated by social sector spending, as laid out in the Union Budget,” cautions an HSBC Securities results forecast.

ST-MOVER ADVANTAGE
CompanyNet Profit Range

Net Sales Range

HUL6.2-152.9-8.6
ITC14.7-23.93-8.7
Nestle9.5-30.712.5-18.8
Dabur8.6-29.118-20
Marico20.2-37.313.3-16
GCPL49.7-66.410-19.5
Britannia15.3-29.710-18
GSK Consumer14.4-31.722-27.5
(Figures in per cent) Source: Analyst reports

Horlicks stretches out

GlaxoSmithKline Consumer Healthcare is leveraging on Horlicks' brand equity to get into new categories. Will the move pay off? Walk in to any small eatery in the southern and eastern parts of the country and you will find it hard to miss the bottle of Horlicks at the cash counter. Horlicks is not a young brand — it has been around for decades. After imports were disallowed in 1955, Hindustan Milkfood Manufacturers started making the drink in the country in 1960 and now it’s owned by GlaxoSmithKline Consumer Healthcare. But there are no evident signs of ageing. Horlicks’ market share of the Rs 2,305-crore milk beverages market is above 50 per cent (source: The Nielsen Company). Rivals know beating Horlicks in the market place is a tough act. NestlĂ© has stopped making Milo and new entrant Dabur India has decided to stay clear of Horlicks and pitch its Chyawan Junior against GSK Consumer Healthcare’s other beverage brand, Boost.

It would be foolish not to leverage the equity of such a brand. Thus, GSK Consumer Healthcare has decided to use the brand to get into new categories. In the last few months, it has launched biscuits for children, a nutrition drink for women, an energy bar and chilled milk. More could follow in the days to come.

“Our business was doing well as was the economy. So both from our point of view as also from the consumers’ perspective, it was a good time to shift gears,” says GSK Consumer Healthcare Managing Director Zubair Ahmed. Ahmed believes the new products will make a meaningful contribution to the company’s top line in the next few years. “These categories are relevant and our research shows that consumers need these products. We are not creating needs, we’re simply fulfilling them.”

Those who know Ahmed well will hardly be surprised by the fast pace of product launches. As the chief executive of Gillette, his previous assignment, he tried to grow the business rapidly with a slew of new shaving products. He left the grooming products company two years ago after it was acquired by Procter & Gamble to run GSK Consumer Healthcare.

Something for everyone

Ahmed is aware that new products do sometimes end up as casualties but he has taken confidence from the strength of the Horlicks brand. “We’re riding the equity of Horlicks and supplementing it with consumer insights,” says he. Horlicks may be the country’s sixth most-trusted brand but GSK Consumer Healthcare is playing in a market where consumers can be demanding. And rival brands are no rabbits: Cadbury’s Bournvita and Heinz’s Complan each with a 15 per cent share.

So far though, GSK Consumer Healthcare has succeeded in segmenting the customer base by catering for specific needs of women at the same time cashing in on the increasing population of children with Horlicks. Ogilvy & Mather Country Head (planning) Madhukar Sabnavis feels “the brand today talks to every member of the family rather than the entire family.”

With Junior Horlicks, launched in 1995, GSK Consumer Healthcare had positioned a product exclusively for children between the ages of two and five. That, Anand Ramanathan, who advises companies in the FMCG space at consulting firm KPMG, points out is a crucial segment given that India is a young country — a clever ploy to engage consumers at a very young age. The Junior Horlicks brand has grown to become a Rs 150-crore brand now, says GSK Consumer Healthcare head of marketing Shubhajit Sen. Taking advantage, the company launched Junior Horlicks biscuits last month. Again, five years ago, GSK Consumer Healthcare had reached out to pregnant and lactating mothers with Mother’s Horlicks; last year it came up with Women’s Horlicks catering for women across age groups.

“The idea is to address all age groups. There’s Horlicks Lite for the elderly who often have a sugar problem and for the youth we have Horlicks Nutribar which we launched in February this year,” says Ahmed.

With Horlicks Nutribar, positioned on the twin planks of health and convenience, GSK Consumer Healthcare has leveraged the brand to venture into an entirely new product category — energy cereal bars. Says Ernst & Young Partner Ashish Nanda: “When you’ve created a strong brand, it opens up doors to new variants and even new categories. Unless you enter a completely unrelated area, there’s little risk in extending the brand to other products.”

While the company hopes that Horlicks Nutribar will chip in with about Rs 100-150 crore of revenues in five years, it hasn’t stopped there. In April this year, it invited consumers to taste its summer drink called Horlicks Chilled Doodh (milk), available in four flavours. Sen concedes that the product will be up against some keen competition in the Rs 45-crore chilled milk category from Amul Kool and strong regional players like MAFCO in Mumbai, but he hopes the brand can pull in revenues of Rs 50-100 crore in about five years — more than the current market size.

Of course, GSK Consumer Healthcare will promote other brands too — it does need to hedge its risks, after all. Thus, in April, Glaxo ActiGrow, a protein supplement for children, was unveiled. Ahmed explains that the company is cashing in on the brand equity that Glaxo still has with mothers and will leverage that for specialist products like ActiGrow. “We’re looking at new products across food and beverages, like healthy snack foods because the opportunities aren’t taken care of simply by Horlicks,” says Ahmed.

Full of beans
At the moment, Horlicks takes care of GSK Consumer Healthcare’s top line. The brand, which was worth around Rs 800 crore in the early parts of the decade, is today 50 per cent bigger at close to Rs 1,200 core, bringing in the bulk of the company’s annual turnover of Rs 1,580 crore.

If Indians drink more than five million cups of Horlicks everyday it’s because GSK Consumer Healthcare has worked on the product. At one time, in the late 1990s, market research showed that Horlicks was seen “as a nourishing, but boring drink” and was beginning to lose significance. What’s more, consumers were beginning to prefer flavours over nutrients.

So, in 2003, the brand was revamped: It was made tastier and launched in two new flavours — vanilla and honey. The company had earlier launched a chocolate version to try and win over consumers in the North and West who typically prefer chocolate-flavoured drinks. But the success was limited. Nearly half of its sales are still generated from the South, while 35 per cent come from East. But that doesn’t seem to bother investment analysts. IDFC SSKI Managing Director Nikhil Vora points out that GSK Consumer Healthcare has held on to its market share in a space that’s grown at around 20 per cent in the last couple of years. “As the market leader, the brand could yield some share but volumes have grown in double digits for five consecutive quarters.”

Not just higher tonnage, the company does succeed in extracting a price from consumers. In January this year, for instance, prices were upped by about 5 per cent. What has worked in the company’s favour, says KPMG’s Ramanathan, is Horlicks value-for-money positioning. “Horlicks may not be a cheap product but it’s been communicated as a value-for-money product. Parents today are willing to spend more on nutrition for their children and that has helped GSK Consumer Healthcare.”

To that extent, Horlicks may have gained over competitors such as Complan which are perceived to be more expensive, a perception that hasn’t changed over time. Says Ahmed: “Compared to competitors, Horlicks is the best money proposition and, moreover, the consumer gets value for the money spent.” For the new launches too, he has in mind a similar value proposition, though final prices will be fixed keeping in mind the target group. “Women’s Horlicks is far more expensive than the base Horlicks but that’s because the consumer is getting much more and there’s no other product available. Horlicks Nutribars will be primarily a metro phenomenon to start with, so the pricing has been decided accordingly.”

Nourishing the brand
Horlicks does not feel the need for a brand ambassador, though GSK Consumer Healthcare has engaged expensive celebrities like Kapil Dev, Sachin Tendulkar and Mahendra Singh Dhoni to endorse Boost. Still, the several new launches could push up the ad budget of one of the country’s top advertisers, most of which is spent on television. Sen believes that spends could inch up over the Rs 194 crore that GSK Consumer Healthcare spent on advertising and promotions last year. Typically, FMCG companies spent 12 to 13 per cent of their turnover on brand promotion.

The radio, through which Horlicks reached out to mothers even 40 years ago, is still an effective channel in states such as Bihar or Orissa where consumers don’t have access to television or where power cuts are frequent. In the early years, mothers were the sole target audience since the product catered to the entire family. However, once pester power became big in the 1990s, the Horlicks advertisements started talking to children too. The change worked because it was also the time when mothers’ mindset was changing — they had become more indulgent and let children drink what they liked, rather than imposing on them a drink of their own choice.

Today, JWT Client Service Director Debarpita Banerjee believes, the Internet can be a good way to connect with kids. So, there are tips posted on examinations on the website — “Exams ka bhoot bhagao” (Drive the exam demon away). Besides, the company has also reached out to children with Wizkids, a contact programme that provides a platform for schoolchildren across 25 cities to showcase their talent.

Adding rural reach
Under Ahmed, GSK Consumer Healthcare has upped the ante on distribution. In an aggressive ‘Go to Market’ approach earlier this year, it created a second layer of distributors in the smaller towns to supplement the existing chain of around 500 big distributors. Most of these 4,000 sub-distributors were appointed in the eastern and southern parts of the country. The idea, according to Vice-president (sales) Navneet Saluja, is to increase the retail reach by at least 30 per cent. “Right now we reach out to around 25 per cent of the rural market and we hope to extend this reach to about 40 per cent of the hinterland in a couple of years. We’re looking to have a presence in towns that have a population of 5,000 people.”

As for reaching out to customers in the urban markets, Sen has begun to work with retailers to create excitement and awareness. “In some outlets, we even created play areas for children,” he says. Although modern trade remains a relatively small channel currently, fetching just 4.5 per cent of the firm’s sales, Saluja’s aiming for higher shares. Ahmed’s not worried about the expense. “We’ll be leveraging the P&L (profit and loss account) for some time because we need to invest in the business and new products,” he says. Clearly, no effort is being spared to grow Horlicks.