FMCG@XLRI

“Growth is Life” is not just the punch line of Reliance, but it is what every business, sector and company strives for. The FMCG sector is no exception.

The sector saw a slump between ’02 and ’04 but has made a quick recovery. The percentage growth of the FMCG sector has progressed from single digit to double digit. This is definitely a signal that good times lie ahead. Consider some statistics.

1. According to a recent HSBC Report, FMCG is projected to grow by over 60 per cent till 2010.
2. Total size of the FMCG sector will rise from around Rs565bn in ’05 to Rs921bn in ’10.

What has driven this sector for the past few years? There are only two growth paths– Organic (Innovation) or Inorganic.

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

However, there is a different view point. 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.

After citing the different viewpoints from the CEOs of FMCG majors, one wonders if there can be one unique strategy, that FMCG companies can adopt. The answer is ‘no’.

In the recent past, a skewed trend towards acquisition of companies and brands by FMCG companies has been observed. This paper explores the reasons companies choose this path substantiating the reasons with several case studies.

Rationale behind FMCG companies choosing the inorganic path

1. Feasible option: Building a brand from the grass root level requires lump-sum investment. Small FMCG players cannot survive before giants like HLL because they lack the financial capacity to build a new brand and get a decent market share. Also, riper product categories make it very difficult for other FMCG players to enter that space because of huge competition and the firm foot-hold older brands have.

Acquiring brands from other companies will not only help cross the crucial hurdle of exorbitant investment on brand building, but also serve as a cost saving methodology.

P&G’s acquisition of Gillette proved gainful: P&G expected revenue gains and cost savings of $14-16bn from the merger with Gillette due to elimination of overlapping functions and a planned 6,000 job cuts.

2. Time constraints: Launching a brand from the grass root level takes consumes exorbitant amount of time. It also requires in-depth market research, explicit understanding of consumer behaviour, pilot testing at selected places, etc. One must keep in mind the dynamic disposition of consumer markets. The needs of the consumers keep changing. The longer organic route is perilous in the sense that fresh innovative brands may become obsolete by the time they hit the shelves.

3. Product enhancement: Diversification of existing product portfolio and complementing current product portfolio tends to ensure sales. It is also the quickest way to increase a company’s basket of goods, giving 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. GCPL is no more just soap and hair colour. Its products have now come to include Erasmic shaving products, Cuticura talcum powder, Adorn & Nulon. They have been eying Nihar’s hair oil, as it fits into Godrej's portfolio. However, Nihar, which belongs to HLL’s stable was picked up by Marico.

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's 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 space 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 advantages: Various parameters that lead to an increase in size/ scale of an organization by adopting the inorganic route are:

Ø Increase Turnover/ Profits

Ø Increase Market Capitalization

Ø Increase Market Share

Ø Presence on the world map

4.1 Increase Turnover/ Profits: Coming out with good results, especially healthy top/ bottom line pre-occupies the top officials of every company. Acquisitions definitely reassure the management.

GCPL's CMD, Adi Godrej feels that through Keyline’s buyout, their sales turnover should go up 20 per cent and profits should increase 10 per cent. GCPL’s 35 per cent revenue comes from hair color brands. Considering that the hair colour market in UK is five times that of India, sales and profits are bound to take leaps.

Dabur after acquiring Balsara saw an immediate growth of 10 % 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%

These figures clearly shows a positive correlation between acquisitions and share value. Marico witnessed a marvelous 35 per cent growth in just 3 months.

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

Ø The above companies have been rewarded with premium valuations, which was previously enjoyed by multinationals alone.

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 Rs8bn CNO market. This also led to an increase from 35% to 75% in the perfumed coconut oil segment.

4.4 Presence on the 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 welcomed new and innovative offerings in tea.

Companies are going global not only with the expansion motive. The other reasons 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 Market availability and brand sharing:

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 Foreign brands to enter domestic markets: Godrej is planning to introduce few of its popular Keyline brands i.e. Erasmic and Cuticura in India, as customers are 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 gain from the current craze for "ethnic Indian" by introducing sandalwood and ayurvedic variants of Godrej No. 1 in British supermarkets.

Godrej’s products are customized to Indians and UK has a large Indian population, as a result, Godrej stands make more gains.

4.4.4 Increased Learning Curve: Entry into any new geographical retail arena offers a lot to learn.

Ø Different retail formats prevailing there

Ø Insights on planning and meeting global delivery schedules

Ø Doing business in a different land

Ø Dealing with different cultural and traditional backgrounds of consumers

Ø Understanding offer schemes to attract more customers in the new place

Ø Learning about the variations in margins and discounts across geographies

Ø Right shelf space attract customers

Learning the retail trends and applying them in domestic markets can only do more good than harm. There also exists the possibility of importing new skill-sets to tackle the nuances of manufacturers and retailers in the domestic market. Unlike in India, distribution is not fragmented overseas (US, UK etc.) Manufacturers deal with fewer retailers, hence calling for different skill sets.

Godrej, is likely to bring to India, the best practices of organized retail. As retail chains in India are growing rapidly, its application will give Godrej a competitive edge against multinationals in India, who are not new to these practices. Godrej will also enhance its skills in managing modern trade channels.

5. Enhanced Distribution

FMCG is a market of the masses and the key to success is held by distribution.. 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 3,40,000 and 1.5mn indirect reach. The acquisition will enable Dabur to distribute its products in Southern markets as well.

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 a better access to the UK market. Before the acquisition, GCPL relied on merely one distributor to put brands on UK shop shelves. The company says, "Supermarkets have long-term relationships with local companies. Without which, 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 former’s 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 reports, GCPL's manufacturing costs are 30 to 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. Brand Cannibalization: The companies must ensure no overlap between the needs of the consumers of existing and the acquired brands (if they serve as substitutes), to avoid one brand killing the share of other.

Marico must market Parachute and Nihar in such a manner that each has its share of sales and at the same time Nihar’s sales can be increased.

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 challenging task of P&G was to integrate operations, manufacturing facilities and work culture of two companies, that had functioned independently for many years.

5. More brands, less power: No specialization and a 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. Unilever in India has learnt from this and hence focused on 30 power brands.

Future

This endeavor of acquiring more brands and entering into new product categories will be rampant 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 their existing portfolio.

FMCGs are vigilant to grab any opportunity to grow as fast as possible, by acquiring companies. But some have not followed suit and have chosen the other route of organic growth.

The views expressed above are those of the author. India Infoline may or may not subscribe to the same.

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