Acquisitions hold the key to the next phase of growth

A Satish Kumar, managing director of Henkel SPIC India Ltd, is possibly the most low profile turnaround artist in corporate India. From a loss-making company he has actually made the market sit up and take notice of Henkel SPIC and his retinue of 'focus' brands since the year 2000. Under his stewardship, the fabric wash and housecare brands in the Henkel SPIC stable recorded a growth of 13 per cent against a market decline of 4 per cent. In this exclusive interview with Shamni Pande of agencyfaqs!, he spells out his agenda for growth, which would be led mainly through acquisitions.

Edited Excerpts

I have been heading this company for the last 10 years and yes, the joint venture between SPIC and Henkel was signed way back in 1987, but the actual work started only around 1991. Actually you must also look at the business environment that prevailed at that time. It was a closed economy, and due to FERA regulations foreign companies were not allowed to hold more than 24 per cent stake in Indian companies. What I am trying to say is that we were virtually the last entrant in the market in 1994 when our plant got commissioned. The business, however, started only in 1995, which was the first full year of operation.

When I came into the picture and looked at the business model, I found that very little thinking had gone into taking this business forward - neither by the Indian partners nor by Henkel - at that point of time.

The most critical factor that I identified that time was the weakness of our sales and distribution network. The retail system of this huge country is highly fragmented. You have 1.5 million outlets of various sizes all over the place. Henkel's experience in this area came from Europe where you have five chains controlling 10,000 super markets. If you negotiate with these then you have near-full coverage of one entire region.

So I articulated my concern that we did not have a delivery system to back our strength - which was our state-of-the art production facility and our good products. We made various attempts at that point to acquire TOMCO, which was of course, acquired by HLL. We, therefore, started from scratch and concentrated only in the south, to begin with. The capacity utilisation was also very low - at 10 per cent. So we had to look at toll manufacturing for market leaders for some time. This took the capacity utilisation of the plant up to 80 per cent.

Then in 1995 we looked at a tie up with Union Carbide to increase our distribution and penetration. Again, that experiment did not go beyond one year. This posed problems, as there was no synergy between selling batteries and flashlights and selling soap. By 1996 we were fairly strong in the four southern states, and we started looking at the top cities in the north.

But we realised this would take time, which is why we looked at acquisitions to speed up our rollout in the north, west and east. That is why we looked at the consumer products division of Shaw Wallace, which had two subsidiaries, Calcutta Chemicals and Detergents India Ltd. The process started in 1995/96 but due to some litigation - as the sellers faced some problems at their end - the process got delayed and we closed it in 1998.

The turning point for the organisation was the acquisition of Calcutta Chemicals and Detergents India Ltd. It was, to put it humbly, a small success on our part. They had reasonable distribution in the east and, to some extent, in the south; but they were also weak in the west and the north. They had a couple of brands that were traveling a long way into the retail network of the country. For instance, Margo has a distribution that is close to one million outlets. To that strength, we added the equity of our own brands such as Henko and Mr White, which had started doing well around that time.

From 1999, we have been growing reasonably well, though I am not satisfied. But yes, my brands are certainly making an impact. As long as we grow faster than the market, we gain market share. And fortunately, all these categories in which we operate in this country, have the potential to grow. But if you look at per capita consumption we are nowhere near many other countries.

In 1999, 2000 and 2001 the growth has been good. In the detergent category, we grew by 5 per cent in value and in soaps by nearly 6 per cent. Coming to the last three quarters, all these categories have recorded 10 per cent de-growth. But this is only a temporary blip. It is not as if Indians are cleaning themselves less, but it is just that the per capita consumption reduced due to economic slowdown and also in the best year, that is, in 1999, 2000 and 2001, consumers upgraded from lower-end soaps to more premium soaps. But in times of recession, people tend to move down the value chain. Again volumes slipped due to the abatement in cross-promotions that sought to give soaps free with almost anything. But I only see a very bright future for this segment.

There are two things here. First, when you acquire an organisation there is also the issue of integration of that organisation. This process has been carried out very well. Now we have to grow in an organic manner. Second, despite the acquisition and our own attempts, we are still not strong in terms of distribution in the north and the west - we are present only in the major towns there - which means a loss of opportunity.

If you look at the country, it is split four-way. Not being present in two regions means one is missing out on 40 per cent of the market. Hence, our focus is to foray deeper. Currently, we directly reach 3.5 lakh outlets.

Meanwhile, we will continue to strengthen our brands and introduce line extensions for products that will bring in volumes and value. We are looking at more acquisitions. Acquisitions hold the key to move on to the next phase of growth. If we identify a brand that fits our ideology we would like to acquire it. I feel we have to take this step by step.

Unlike many of our competitors we have a limited budget for promotions. You are justified in pointing out that market share can also be created by the pull-effect. But we are following the push method in terms of really going and making our presence felt in one outlet after another. The other strategy, which is more visible of course, is advertising one particular brand and then create a pull-effect to make the product flow. But this cannot be sustained for long. Here the goal is to make an initial breakthrough, but we don't follow that model. We are very careful, as we don't have deep pockets.

The pull-effect would have worked wonders even with our kind of budget in the pre-nineties when there was only Doordarshan and one could have poured all the money there. Today, with the fragmentation of media, it is not enough to bank on the pull-effect. Only tons of money can ensure that result, which we obviously do not have.

Since we are still in the brand investment stage we spend up to 20 per cent of our turnover on marketing communication. Ideally, in our kind of industry, it should settle around 10 per cent. Three years from now, this should happen for us as well.

Detergents contribute around 65 per cent to our turnover. The balance 35 per cent comes from cosmetics and toiletries. Yes, we have identified our focus brands and we have done it for the simple reason that we have very little money to spend on advertising. So we have decided to focus on certain brands in certain regions. We are not as spread out as we would want to be; so we would be wasting money on reaching areas where our brand is not present yet.

Our approach has been focus brand, focus region. This has paid off. In detergents, for instance, we focused on Henko bar and detergent at the premium end. The other two key brands are Margo and Fa. Among the focus brands, Margo, has a share of 7.9 per cent (according to ORG-Marg) in the premium soap market. Henko has 19 per cent share, and Mr White 17 per cent.

We give very limited support to all the other brands. Pril is a very good example. We cannot spend money on this brand; even if we did, it would simply not give any volumes. It is an expensive product with limited use and most housewives use it only when they do the cleaning themselves. Most households buy cheaper powders and bars. It is, however, a leader in its category with 70 per cent share! The reach of Neem toothpaste is again very limited - highly skewed towards West Bengal - and sells 600 tonnes a year. But if I tweak that, I stand to lose the existing consumers.

This is because our distribution caters largely to urban areas. Some experimental work is on in Andhra Pradesh and Maharashtra called Hariyali Safar, but these take time. We have yet to saturate the urban markets and cover only 80 per cent of the population in these areas.

This is not true at all. We have never done this and in Mr White's case, the price has gone up by less than 10 per cent in the last two years. In the case of Henko we were on par with Surf and we are now a rupee more, that's all. Hence, your observation is not true.

I think the key to our success in India, even though it is limited, is that we do not compromise on quality. We do not cut corners. The biggest example of this is that one of the products we acquired from Calcutta Chemicals was Phenoclean, a floor cleaner with phenyl in it. According to the Henkel International guideline, we cannot sell a product with this component as it is supposed to be carcinogenic. We lost nearly Rs 2 crore by not selling it. But we stuck to our standard. We give the best quality for a price; but one cannot also have a Rolls-Royce for the price of Maruti.

Margo is still a niche. There is a core category of neem-Margo users and the volumes, after we took over the brand, have gone up from 5,500 tonnes to 7,000 tonnes in just three years. So, it is growing. Now, there are a set of users who do not like the original fragrance or the look of the product. That is the group we want to bring into our fold. We have the reservoir of knowledge in neem technology. The other problem is that it tended to dry your skin in winter. We have addressed these two problems through a line extension of the product - which has two variants now, neem and glycerin - and we also have improved the look, fragrance etc. The brand is doing reasonably well; last year we did about 1,200 tones. We intend to put a very heavy thrust on this variant, to further drive volumes.

We started off by talking a lot about the fact that our detergents were not phosphate-based and used an eco-friendly ingredient Zeolite, but the housewife turned around and said, "So what?". It did not make sense to them. Detergent powders are supposed to talk about cleaning merits and not the environment, they said, because the awareness is very low. Also, detergents contribute only a miniscule bit to the overall pollution level. So we stopped talking about all that.

I do not think we are miming the communication strategy of other brands. So far as Henko and Mr White are concerned we follow the international format. Of course, there would be some similarities; we are after all talking about wife-mother, husband-wife interactions. You will not find dramatic changes as our budgets are limited and unlike some others we cannot change our ads before they have run at least four months.

Not really, except of course, with the brand Schwarzkopf. We have set up a training academy for hair dressers and have introduced products like Igora hair colour and other haircare products. We are present in 500 salons through this. Once again this has been a slow process.

This year has been critical. Growth in the first quarter of this year has been flat and we are still working on the second quarter results. We expect to grow in the second-half of this year. We have set a target of Rs 350-Rs 370 crore in turnover this year. We follow the January to December calendar and last year our turnover stood at Rs 340 crore.