ITC tries to find its feet in personal care

Cigarettes to hotel major ITC entered the consumer products business in 2007. In three years, it has managed to corner a two per cent market share.

But ITC feels that's no mean achievement for a late entrant. The consumer and personal care products market is highly competitive, dominated by well-entrenched brands from companies such as Hindustan Unilever (HUL), Procter and Gamble, L’Oreal India, Dabur India and Cavinkare. The lion's share is with HUL, whose brands — Lux, Dove, Sunsilk and Clinic Plus — have about half the market.

Some analysts agree with ITC’s view. Anand Shah of Angel Broking, says it takes about five years for a brand to break even. If ITC gains 5 to 10 per cent market share in 10 years, that should start earning the company profits, Shah adds.

In absolute terms, two per cent of the personal care market is not a small share. According to Nielsen, the personal care market between March 2009 and February 2010 touched Rs 16,313 crore, which is a growth of 10 per cent over the same period in the previous year. While the men’s personal care market is estimated at Rs 1,429 crore and growing at 10 per cent, that for women is worth Rs 6,678 crore and growing at nearly 21 per cent.

ITC knows it’s a tough fight and is willing to give time. Innovation and extensive marketing are the company’s mantra to strengthen its footprint in the personal care domain.

“We intend to build on innovations to find a foothold in the already cluttered personal care market,” says Sandeep Kaul, chief executive of ITC’s personal care business. The Fiama Di Wills transparent gel bathing bar is an example of product innovation which is developed with liquid crystal freezing technology that intends to combine a shower gel in a bathing bar format. ITC’s current personal-care portfolio includes soaps, shampoos and fragrances. These products are marketed under the Fiama Di Wills, Superia and Vivel brands. Superia caters to the mass consumer segment, Vivel targets the premium and Fiama the so-called super-premium market.

According to Kaul, the personal care sector holds immense appeal for ITC due to the category’s size and growth potential.

But the personal care segment in India is immensely competitive. Anand Ramanathan, analyst with KPMG, says, “In categories like soaps, the competition is quite intense. But ITC is likely to combat it with its distribution muscle. However, because of intense competition, ITC would be under margin pressure and so the personal care business for the company would not be as profitable as its other businesses.”

“ITC, however, can recover from the margin pressure to some extent with the help of premium products in niche categories,” Ramanathan points out.

Devangshu Dutta, chief executive of specialist management consultancy firm, Third Eyesight, feels that market leaders like HUL still feels it reaches only 60 per cent of the market. So, even a new entrant like ITC can find potential in the personal care segment.

“ITC has diversified over the last 10 years as part of its strategy to expand into non-cigarette categories. The real challenge will be effective communication and marketing”,Dutta adds.

Ramanujam Sridhar, CEO, Brand-Comm, says: “There is a reasonable amount of loyalty among consumers for personal care products, especially in skincare, which can pose a challenge for any new entrant, including ITC.

However, ITC enjoys a strong brand recall and its strongest qualifier is its distribution muscle, which should help the company establish itself in newer categories as well.”

Fast-moving food business

In August 2001, ITC made a modest entry into the food business with its Kitchens of India ready-to-eat preparations. The company ran popular restaurants, Bukhara and Dum Pukht, in its hotels. These restaurants, the company felt, were successful because it understood the Indian palate well. Hence, the new line of business. A more serious effort was made a year later when ITC launched its flour under the Aashirvaad brand. This was followed by candies, biscuits, snacks, salt, pasta and spices. The size of the food market was just too tempting. Within fast-moving consumer goods, food has always been the largest category. A large part of that is still sold loose; so the upside for packaged foods remains sizeable.
The news is that ITC has crossed the first hump in terms of volume, market share and profits. Its food business is over Rs 2,500 crore in size. If beverages are excluded, investment analysts reckon, this should put ITC amongst the top three food companies in the country after Nestlé and Hindustan Unilever. ITC Foods Chief Executive Chitranjan Dar runs 40 food factories across the country and a product development centre in Bangalore. It is the market leader in one category — flour —, and is second in confectionery, salt and packaged snack, and third in biscuits. It has in its portfolio six brands (Aashirvaad, Sunfeast, Bingo, Kitchens of India, Minto and Candyman).

And it has turned profitable. Till recently, profitability of this division was a huge concern for ITC. Not any longer. Investment analysts say the profit margins are below 5 per cent, and the company’s next task should be to raise it to the industry norm of 5 to 10 per cent.

ITC’s competitive advantage from day one has been procurement of commodities. The agri-business division of ITC connects with 5 million farmers in 170 districts of 16 states. The company leverages this to good advantage for all the commodities it requires for the food business: Wheat, sugar, edible oil, potatoes et al. Such commodities account for almost 60 per cent of the costs of the business. This is the reason why Dar is not too bothered about the private food labels of large retailers. Most of them buy commodities from the spot market. So, when prices rise, like wheat from September to December, they find themselves in a jam. “The sharbati variety of wheat this year is not available. It’s fully sold out. That’s where our strength lies,” says Dar. ITC uses sharbati wheat for its premium flour called Aashirvaad Select. The other advantage has been ITC’s retail network for cigarettes. About a third of the company’s food products apart from flour (snacks, biscuits and candies) are retailed through these shops.

Local preferences
The company was also quick to realise that the foods business in India requires sound knowledge of local tastes and preferences. Food habits in the country change after every hundred miles. So, this is a business in which local companies stand a better chance of success. It is an entry barrier for multinational corporations, though the two largest food companies in the country are foreign-owned. “Food is a very personalised category. It’s not like soap. You can get some space if you can create differentiation,” says Dar, a veteran of 25 years at ITC. “Brands will need to be fragmented to cater to local tastes and preferences. So there can be no omnibus product which can be a national hit.”

ITC’s biggest brand is Sunfeast — biscuits and now pasta. In biscuits, ITC is ranked third after Britannia and Parle. (See table.) The journey so far may have been easy because ITC has grown at the cost of local brands. The days ahead could be tough. “In biscuits,” says Dar, “you can take on formidable rivals with formidable products. The most successful products are 30 to 40 years old. Cookies or glucose biscuits belong to the 1980s and before.” In the mid to premium category, Dar feels there are several taste buckets and categories available on the health & nutrition, indulgence and convenience platforms. “In these three platforms there is still a lot to be exploited. It is possible to innovate around that. One who does it the best will walk away with the market.”

Some time back, ITC came out with Sunfeast pasta. This remains a small category. Market estimates suggest that it was till six months ago just 2.5 per cent of the Rs 1,100-crore market for instant noodles, which may have doubled with Nestlé’s entry into the segment. This has fuelled the buzz that the next stop for Sunfeast will be instant noodles. Dar denies there’s any plan for instant noodles, “at least not in the next quarter”. The problem here will be to create a product that stands out from Nestlé’s Maggi. Over the years, Nestlé has come out with so many variants of the product that there isn’t much left to add. Dar admits that ITC’s product development team has worked on instant noodles but could not come out with a killer recipe. There has also been speculation that ITC will take Sunfeast to newer categories like packaged water, tea and bread. Dar denies all such talk.

Flourishing with flour
Aashirvaad is ITC’s brand for staples. Branded flour sales in the country are around Rs 4,000 crore, which is just 4 per cent of the market — rest is all sold loose. (Conversion to packaged flour is happening at about 8 per cent per annum.) Out of this, national brands like Aashirvaad, Shaktibhog, Annapurna and Pilsbury sell around Rs 1,700 crore. Aashirvaad’s share of the market is above 50 per cent, market analysts say. This perhaps is the reason why the brand is not heavily advertised in mass media. “Somebody has to pay for it. In the South we do advertise, because it a nascent concept there. In the North, we work at the points of purchase,” says Dar. Aashirvaad is available in outlets that sell 80 per cent of the packaged flour in the country. The product is tweaked, claims Dar, for different markets. The one sold in Delhi, for instance, is a blend of four flours. The mix is changed right through the year to give the same quality to consumers, says he.

ITC first extended the brand to salt. Its market share is 10 per cent, next only to Tata Chemicals’ Tata Salt (over 30 per cent). Here, ITC’s focus is on the rural markets. Unlike flour, rural households have converted swiftly to packaged salt. So, its retail network is not the same as packaged flour. ITC, says Dar, has therefore appointed a whole army of traditional wholesalers to reach these remote markets. Since this market is not scientifically tracked, Dar says he doesn’t know how deep he has penetrated.

Next was the turn of Aashirvaad spices. This industry has a handful of national bands like Ashok, MDH and Everest which are personally driven by their promoters. This makes them formidable opponents. ITC’s strategy here has been to go for blends, so that the brand can charge a premium over others. The problem is that all rivals have come out with various blends. To create a differentiation, ITC will have to come out with something really new and different. That’s the challenge that the company’s researchers in Bangalore face. To begin with, ITC has decided to sell in the South where consumers are a little particular about the spices they buy. The northern markets will come later.

Would ITC like to come out with other staples under the brand, like rice and sugar? Dar rules out the possibility. For rice, he says that ITC does not have a procurement infrastructure in place. Basmati rice, that is what Aashrivaad could look at, is grown in Punjab, Haryana, Jammu and parts of Uttarakhand — not ITC’s stronghold. “As and when our agri-business division begins to export basmati rice, we will also start to sell in the local market,” says he. Sugar too doesn’t excite him because there is no opportunity to create differentiation.

Bang on with Bingo
ITC’s most audacious move in foods so far has been Bingo, its ready-to-eat snack, which took on the might of Frito Lays (market share: 60 per cent; brands: Lays, Kurkure, Aliva and Uncle Chipps.) Bingo has grown through some innovative products and kickass promotion. Its share of the Rs 3,000-crore market is 10 to 12 per cent. Frito Lays has hit back with its new range of Indian snacks. Parle too has entered the market with aggression. Sector experts point out another challenge: Bingo’s positioning is such that it needs to come out with new flavours and advertisements all the time. “It’s a dangerous game,” says a Mumbai-based analyst. “Customers can lose interest if we do not innovate continuously,” Dar admits, “So you need to look at new textures, flavours and shapes regularly. In terms of flavours, our target is one or two launches a year. In texture and shape, there should be one new product in two years. There are eight to ten flavours always in the pipeline in various stages of development.”

In confectionery, ITC lags behind Perfetti because it doesn’t have a chewing gum in its portfolio, though it has candies, éclairs, toffees, chews, lacto and so on. “There is a lot of proprietory work in gums that needs to be done. You need to develop the gum base, for instance. We don’t want to outstretch our limited means,” says Dar. That leaves in Dar’s portfolio Kitchens of India, which is small. That category may not be more than Rs 30 crore. In fact, export of the brand could be five times more than domestic sale. But the North American markets, which ITC has in its crosshairs, could be tough because of the inability to export meats there. Dar says the company could look at local production to get over the problem. But that can wait: Dar’s hands are full with other brands now.

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Game for more

T his new year began with Marico Ltd, the mid-sized fast moving consumer goods company, announcing a major acquisition. This time it was the hair care brand Code 10 of Malaysia. The trend of smaller FMCG companies such as Wipro, Godrej and Marico steadily building their portfolio of international brands continues, but whether such brands have been adequately leveraged remains an open question. However, it is the ‘healthy balance sheet' of such FMCG majors which makes it possible for them to graduate from organic to inorganic growth.

“Smaller FMCG companies such as Godrej and Marico have had excellent organic growth. But considering the paucity of good-quality Indian brands and their disproportionate brand values, they are unrealistic buys. However, there are international companies with high equity brands available at a good price and there is bound to be more of such cherry picking for international brands among Indian FMCG companies,'' observes M. Unni Krishnan, Country Manager of brand valuation firm Brand Finance.

Last month FMCG major Godrej Consumer Products Ltd (GCPL) decided to raise funds up to a limit of Rs 3,000 crore through a combination of debt and equity instruments to buy out smaller companies. Announcing the decision, Dalip Sehgal, Managing Director, GCPL, said, “The equity dilution would be limited and it would be more of debt which would be raised for onshore and offshore acquisitions.'' Considering there is a possibility of buying out the balance 51 per cent equity in the Godrej Sara Lee joint venture, the funds would also be utilised towards this purpose. As Sehgal said, “We would need upto Rs 800 crore to buy the remaining stake of Sara Lee in the joint venture company. Besides, the rest of the funds would be used for acquisitions in categories such as household insecticides, hair colours and personal wash. We would be acquiring brands in categories in which we already exist and those that are adjacent to it.'' In the past GCPL has acquired hair care brands such as Kinky and Rapidol in South Africa and Keyline Brands in the UK.

Today there is no stopping the owner of brands such as Cinthol and Colour Soft – there are unconfirmed reports suggesting that it is close to acquiring an Indonesian household company (Megasari) next, apart from bidding for the global pesticides business of joint venture partner Sara Lee.

GCPL's management's outlook is positive towards the acquisitions strategy. “Aside from organic growth, acquisitions both in India and globally of brands and businesses that GCPL believes have the potential to deliver EVA (economic value added) positive returns in the medium term will continue to be a growth strategy for the company in its endeavour to enhance its competitive position, drive profitable growth and enhance shareholder value,'' states a report published on the eve of its analyst and investor meet last year.

In fact, the smaller FMCG companies have been becoming more confident making such deals over the years. “Companies such as Godrej and Marico have gone through the value chain and learning curve and now have developed a certain level of comfort. They have now developed enough systems and processes to derive value from some of these undervalued brands,'' says Unni Krishnan.

But there are also risks associated with such acquisitions and FMCG companies do realise that reaping profits may take a while. Commenting on the dangers that go with inorganic growth, a management analysis made by Marico states: “FMCG companies have identified inorganic growth as one of the avenues for growth. They may make acquisitions and enter into strategic relationships in the future as part of their strategy in India and overseas. However, it might be difficult to identify or conclude appropriate or viable acquisitions in a timely manner. Further, the acquisitions may not necessarily contribute to profitability in the short run and divert management attention or require the company to assume a high level of debt or contingent liabilities. In addition, they may experience difficulty in integrating operations and harmonising cultures leading to a non-realisation of anticipated synergies or efficiencies from such acquisitions.''

However, this has not stopped Marico from announcing yet another acquisition this month. After bringing in Egyptian hair care brands such as Fiancée and Hair Code, it decided to add to its international hair care portfolio by buying out P&G-owned hair care brand Code 10 in Malaysia for an estimated Rs 28 crore. With rights to the brand in Malaysia, Singapore and Brunei, Marico is already hoping to bag a 10 per cent share in the Rs 200-crore hair care category in these markets.

Says Vijay Subramaniam, CEO, International Operations, Marico, “This is our fourth acquisition in the past three years. We have identified the emerging markets of Asia and Africa as the growth avenues. We expect our international operations to grow in excess of 20 per cent in the next three years.'' Marico has also got some niche hair brands in South Africa and a couple of soap brands in Bangladesh.

According to Deepti Singh, Research Analyst at Fortune Financial Services India, “During the past few years, some companies in the sector have used the inorganic route to grow at a faster pace. They expect to derive the key benefits of a diversified portfolio – impressive growth rates, larger customer base, to mention a few – and transform themselves from Indian majors to global conglomerates.”

At the same time, most of the international FMCG companies are going through a rough patch given the current economic scenario in some of their respective countries. As Brand Finance's Unni Krishnan says, “FMCG companies in developed countries are facing a tough time in their markets. Given that scenario, it may not be surprising if more targets appear on the horizon for Indian FMCG companies.''

But on the face of it Indian FMCG companies' acquisition spree has not been adequately leveraged. “Indian companies have a tendency to leave the acquisitions alone and do not believe in changing the management team. While they may not want to radically alter the brand they must do specific things in marketing as the optimal value of the brand is not being leveraged, ‘'observes Unni Krishnan. Take the case of Tata's acquisition of the Tetley brand in the UK, where it has almost taken a decade for the Tatas to get some value out of the brand. Considering that the Indian Managing Director of Tata Tea, Percy Siganporia, recently re-located to London to take charge of the Tetley operations, this in itself has set the ball rolling for the Tetley brand, believes Unni Krishnan. “Indian companies are generally risk-averse and thereby lose out on significant opportunities to grow the value of the brand. While none of the acquisitions have been a disaster, neither of them have delivered full value for such brands,'' he adds.

However, now the ‘full value' of such acquisitions will soon get reflected on the balance sheets of companies with the implementation of the IFRS (International Financial Reporting Standards) Act. “IFRS 3, which will become mandatory in all M&A transactions, requires brand and identifiable intangible assets to be recognised on the balance sheet of the acquiring entity. All companies are being called upon to shine a light onto goodwill - the raison d'etre of future economic value which will provide managements a better and more objective understanding of value of these precious intangible assets, which are often least understood in deal-making,'' explains Unni Krishnan.

As the overseas brand acquisition spree continues, both big and small FMCG companies hopefully will now be in a position to leverage the intrinsic value of the acquired brands.