Dabur goes back to basics to take on Patanjali
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For the past two decades, every time the management of Dabur India Ltd met to finalize a new product, it ended up also debating whether to stick to Ayurveda or to focus on non-Ayurvedic products.
The decision to launch non-Ayurvedic products came 113 years after S.K. Burman set up Dabur in 1884 in Kolkata. In 1997, the home-grown Ayurvedic products maker launched Project STARS (Strive to Achieve Record Successes) to accelerate growth through diversification. It launched Real, a fruit-based beverage.
Ayurveda cannot take Dabur far, the Burmans were convinced. So, the family that popularized Ayurveda in India moved away from its core strength.
Over the next 19 years, the company’s focus intensified so much on non-Ayurveda products that just the food business accounted for about 11% of its Rs8,436 crore revenue in the year to March 2016 and 18% of domestic sales came from foods. Not just food, it launched a number of non-Ayurvedic products in segments like personal care and home care as well. Overall, about 40% of its sales came from non-Ayurvedic products in the year to March 2016. The wheel of change was set for a spin.
But then came yoga-guru-turned-businessman Baba Ramdev. Under his company Patanjali Ayurveda Ltd, he launched a range of fast-moving consumer goods (FMCG) based on Ayurveda. In recent months, ever since Patanjali started aggressive advertising on television, it has challenged companies such as Hindustan Unilever Ltd (HUL), Colgate-Palmolive (India) Ltd, Nestlé India Ltd that compete in India’s Rs3.2 trillion-a-year consumer packaged goods market.
There’s more. Going by Ramdev’s projections, Patanjali will cross Rs10,000 crore in revenue in fiscal year 2017—from Rs5,000 crore in FY16. This is more than what brokerage firm Morgan Stanley India Co. Pvt Ltd projected as Dabur India’s revenue in FY17—Rs 9,630 crore.
Besides, Dabur started feeling the pinch as sales of its honey (a product that is estimated to have more than 65% market share) started declining earlier this year as people bought Patanjali’s cheaper variety.
The Burmans realized that Dabur needs to get back to basics and return to its core—Ayurveda.
The future, says Dabur India chief executive officer (CEO) Sunil Duggal, will be driven by Ayurvedic products. “With this validation (success of Patanjali), we are more committed to staying and growing the natural equities and not string into other domains. So it provides a lot more focus to the company’s activities and a lot more opportunities to grow within spaces that we are familiar with rather than to get into unfamiliar spaces which obviously would be much riskier,” he adds.
There were reasons why Dabur was unsure about sticking to only Ayurvedic products.
The Burmans wanted to build an empire outside India—across the Middle East, Africa, Europe, North America and South Asia, which together accounts for 32% of Dabur’s consolidated sales at present. Across all these countries, Ayurveda was never a popular or saleable concept. So the shift was only natural.
Although Dabur was probably the only Indian company that was selling products made of Ayurvedic formulations nationwide, it was unsure about how far it could take Ayurveda.
“Till recently, the ability of Ayurvedic products to go deeper was under some question. Ayurveda can go deep in certain areas, not all. Like skin care, it may not go that deep. But we are now beginning to question that paradigm. Now we are far more convinced that Ayurveda can go far deeper in many areas than what we thought earlier,” says Duggal.
Faith vs evidence
A couple of months ago, the company revamped its marketing communications with a new tagline—Science-based Ayurveda. So far, it was “celebrate life”. “All our advertisements and other communications are now based on one theme—Science of Ayurveda. There have been changes in packaging and marketing communications as well. We need to be relevant to the youth,” says K.K. Chutani, executive director (marketing) at Dabur India. Besides, in February this year it tied up with e-commerce marketplace Snapdeal to set up an e-store for its Ayurveda products called LiveVEDA. Chutani believes, e-commerce was an imperative for Dabur’s future.
The rationale behind Dabur’s new communication is its history. The Burmans have been marketing Ayurveda for more than 130 years. But it can’t just bank on its “history or legacy”. “The platform that we are going to leverage is the science-based Ayurveda, backed by research, validation and hard evidences. It will appeal to a lot of people who may not believe in faith-based Ayurveda (unlike Ramdev’s followers),” adds Chutani.
Emergence of Patanjali, believes CEO Duggal, is a blessing in disguise for Dabur. Patanjali products are sold primarily based on people’s faith in Ramdev. His marketing and Patanjali’s well-spread retail presence has already, and probably would, convert a lot of non-Ayurdevic product users into regular users of Ayurvedic or herbal products.
“There has been some learning from Ramdev. To my mind, he has given a big impetus to Ayurveda and his large number of followers are driving it. The desire for Ayurvedic solutions runs very deep in Indian psychology. It would be very silly of us not to take advantage of that,” says Duggal, who joined Dabur in 1995 and became CEO in 2002.
By 2020, Dabur targets Ayurvedic products to constitute more than 75% of its sales in India, from around 60% now.
To focus more on Ayurvedic formulations, the company is doubling its herb cultivation. By March 2017, Dabur will have 3,800 acres for medicinal herb farming, up from about 2,000 acres at present that it has developed during past two decades. It also has a greenhouse at Pantnagar in Uttarakhand. The company will be spending Rs600 crore in back-end supply chain. The medicinal farming will be spread across eight states in India and Nepal, and engage about 2,500 farmers, up from 1,200 at present.
“We have been marrying the age-old Ayurvedic heritage and traditions with cutting-edge scientific prowess. We have a strong in-house research wing that follows a ‘bush-to-brand’ approach. We have our in-house nursery, which grows several rare herbs that go into various products. Dabur is probably the only company which is involved in both classical or ethical as well as OTC (over-the-counter) formulation research for close to 40 years now,” says J.L.N. Sastry, head (research and development, Ayurveda) at Dabur India.
In a note on 21 September, Citi Research, a division of Citigroup Global Markets Inc., said, “Dabur claims to focus on science-based high quality Ayurveda products with an emphasis on R&D, which makes it well positioned to ride this wave.”
In May, Dabur launched an advertisement for its honey which said it was approved by the Food Safety and Standards Authority of India (FSSAI) that ensures safety. Patanjali’s honey does not have FSSAI approval.
The ad came on the back of a drop in sales of Dabur honey at the beginning of the year. The company has been selling honey since 1994 and dominates the market with close to a two-thirds share.
However, Patanjali honey directly hit Dabur primarily because of the price difference. Dabur’s honey was priced about 40% higher than Patanjali’s. “We got things corrected through offers and other things. We find people who switched are returning. But there is a section of people, financially stressed, who may not come back. But we have to deal with that. We can’t have all things for all people,” says Duggal. The company also launched brand extensions like honey fruit spreads.
Interestingly, in an earlier Mint interview, Ramdev said his rivalry was with multinational companies (MNCs) not the home-grown ones like Dabur. But a Patanjali spokesperson said that even if Dabur is an Indian company, it has no right to “loot” people. “Products are overpriced. Be it an Indian company or MNC, it should operate ethically, and products should be economical. With Patanjali, backed by Baba Ramdev’s marketing, the market for Ayurvedic and herbal or natural products has expanded, which certainly is an opportunity for everyone,” he added.
Commenting on FSSAI certification, or the lack of it, the spokesperson said that Patanjali’s honey had passed all required tests and is “safe”. “As honey is a products that is consumed both as a medicine and a food item, FSSAI approval is not mandatory,” he added.
Besides honey, even Dabur’s toothpaste sales were impacted but Duggal dismisses concerns about it by saying the category has not been growing. In fact, Dabur Chyawanprash, the market leader with an estimated 65% share, also faced stiff competition after Patanjali started mass marketing Chyawanprash at a much lower price last year. But it’s impact was not severe, maintains Duggal.
However, Dabur narrowed the price gap with Patanjali and tried establishing Chyawanprash, a predominantly winter product, as a product relevant for others seasons like monsoon through intense promotional activities. “With Patanjali coming in, the category might grow better. He (Ramdev) will convert a lot of non-users into Chyawanprash users. He could be a good ambassador for Chyawanprash,” adds Duggal.
In a note on 21 September, Citi Research said, “Dabur has been managing competitive intensity well through brand building (strong digital push), value-added variants or formats and by reducing price premiums in segments like honey with price-offs and promotions... Reducing the pricing premium with extra weight (such as 1.25 kg for the price of 1 kg) and / or price-offs, upping the ante on honey brand building and the extension to value-added variants and formats are examples of a well-rounded approach to tackle the aggressive competition from Patanjali.”
Dabur’s challenge, according to Sunita Sachdev, an analyst with UBS Securities India Pvt. Ltd, is to re-invent its brand and make itself relevant to the current crop of consumers. “Getting back to its roots—Ayurveda—is very appropriate,” said Sachdev.
Dabur India isn’t under pressure from Patanjali alone.
Competition in the domestic market in the last few years has increased as almost every packaged goods company—home-grown and multinational—has rolled out products that are herbal or natural. The trend has been triggered largely by Patanjali’s success and the opportunity the category offers for premiumization of products.
In recent years, HUL and Colgate, local units of MNCs, have ramped up their portfolios with premium Ayurvedic products in key brands. Home-grown Emami Ltd and Himalaya Drug Co., which have been selling herbal or Ayurvedic products for long, have gained from their traditional herbal positioning. These companies are extending brands into new and emerging segments to improve profitability. And all of them are trying to expand. While Emami bought Ayurvedic hair oil and shampoo brand Kesh King from SBS Biotech Ltd in June 2015 for Rs1,651 crore, HUL acquired Kerala-based Indulekha hair oil brand for Rs330 crore earlier this year to boost its presence in Ayurvedic space.
Interestingly, Dabur was the first to tap the hair oil space with a herbal product Dabur Amla hair oil back in 1940 and expanded its hair care portfolio in early 1990s with Vatika brand. But it failed to leverage the advantage of an early entrant.
Admits Duggal, “We never thought products like shampoo can be marketed as an Ayurvedic product. With recent developments in the market, we are now thinking of launching Ayurvedic shampoo. Some of our bets will work, some may not. But Ayurveda can go beyond the imagination of people.”
Herbal or Ayurvedic still constitutes a very small part of personal care market in India. According to a research report (September 2015) by UBS Securities India, herbal products comprise 6-7% of the personal care products market, but the volume is growing at about “twice the segment average”. The report estimated herbal to grow to about 10% of the segment by FY20 as the trend accelerates.
Duggal, however, believes Dabur has the advantage of being a company that has been the “original” marketer of Ayurveda in India. There are differences between Ayurveda and herbal. “Herbal is a step before Ayurveda. Ayurveda is a completely different ball game,” he adds.
Besides increasing competition, slow growth is a serious worry for Dabur too.
In April-June 2016 quarter, the company’s sales grew just 1.2%. In the quarter ended March 2016, it reported a 4% increase in volume in the domestic market compared to a 7% growth in the preceding quarter. Post results, the management had painted a cautious outlook for FY17. It expects things to get better only in the second half of FY17.
“The key challenge that we are facing today is that there’s a radical downward shift in the overall consumption of consumer goods because of tapering of the stimulus that was provided by the earlier government and has not been taken forward by the current government. The current government is following an investment-led growth and not consumption-led growth that has triggered a consumption stress, primarily in rural market, which was the prime driver of growth between 2008 and 2014,” says Duggal.
A double-digit growth is “very unlikely” in the next one-two years for the packaged consumer goods firms. “I am hoping for 6-8%. I never expected this sharp a decline in consumption. I knew it will come down but not from 12% to 3-4%,” says Duggal, adding that consumption will improve in a gradual manner starting 2018.
Two consecutive poor monsoons also hurt consumption. A relatively good monsoon, coupled with the seventh pay commission money in the system, is likely to provide some impetus that would help consumption recover.
However, the picture is not that dismal as packaged goods companies like Dabur are enjoying high margins—thanks to stability in commodity prices resulting in low input costs. “It’s a good thing. But the downside of the combination of high margin and low demand will typically lead to a lot of pricing activities. Reduction of prices in some cases and aggressive promotions are obvious. We’ll have to deal with that aspect. Some of the margins may be passed on to the consumers,” adds Duggal.
About 45% of Dabur India’s domestic revenue comes from rural markets and, as mentioned above, consumption in rural markets has not been growing for the last few years. Naturally, the company not only stopped expanding its distribution network in rural areas, in the last one year it also stepped out of certain markets to minimize its risk.
That’s not all. It also reorganized its sales force in rural markets. The company hired about 1,000 people to sell its products in villages starting this April. Earlier, village sales representatives were under the payrolls of third-party human resource companies. Dabur is shelling out the same amount of money but the village sales representatives are earning more as their salaries are not being shared by third-party firms. “They are the sons of the soil. They understand these markets. With them coming on our rolls, productivity and sales have improved. Rural markets will start growing again. We’ll ramp up distribution and marketing to capture the growth prospects that’s expected in the second half of the year,” adds Duggal. Dabur typically pays Rs2 lakh a year and incentives to the village sales representatives.
Tweaks in distribution and go-to-market efforts, according to the Citi Research note, will help Dabur improve productivity of the enhanced footprint, besides doctor detailing could be a key driver for healthcare offerings.
For urban markets, the company, in June, divided its portfolio in four pieces— home and personal care, healthcare, OTC medicines, and food and beverages. There’s a separate sales team for each of these segments. Earlier there were three segments—OTC, FMCG and food. The change is aimed at bringing a deeper focus on individual segments.
Dabur products now reach around 5.3 million outlets. In comparison, HUL reaches about 6.3 million of the estimated 8 million retail outlets in India. Cigarette-to-shampoo maker ITC Ltd reaches to around 4.3 million retail stores.
Dabur has a unique mix of diverse growth engines—juices, healthcare, skincare, international business and home care. And, it has four cash cows—hair oils, digestives, health supplements and toothpastes. The growth engines, noted Morgan Stanley in a report, can use cash cows to generate consistent, superior growth. “Dabur has the ability to launch highly differentiated product offerings across its product portfolio, catalyzed by the recent success of Patanjali, increase in disposable incomes, lifestyle changes and increasing awareness of Ayurvedic products,” it report added.
OTC products are seen as the “most exciting” growth opportunity for Dabur, backed by the company’s brand strength, knowledge of Ayurveda, doctor advocacy, and product heritage. “We expect a slew of launches over the next few quarters with a focus on daily healthcare and lifestyle ailments. This business also has one of the best gross profit margin profiles. We believe growth will inflect as consumers perceive these products as being efficacious for overall health and wellness and likely balance out the adverse impact of rapid changes in lifestyles currently under way,” said the Morgan Stanley analysis.
Eyes on buys
Acquisition was one of the routes that helped Dabur grow, mainly in markets outside India. The company, which has more than Rs2,200 crore of cash on its balance sheet, is now looking for buyouts in India to ensure faster growth. In the last few years, organic growth has been slow and Dabur has not made a pitch to acquire any firm.
The company’s deals team is already working on a few targets. Despite the fact that the management is open to spending about Rs1,000 crore on acquisitions, Dabur is only looking for small buys. “I like small brands that are scalable, primarily regional brands with national relevance. I hope to close at least one deal by end of this financial year,” says Duggal.
Dabur is looking at Ayurvedic brands and brands in the adjacent areas. It is unlikely to buy any company that is in the generic products space as that could conflict with its existing product offering. “There are a few generic products, but buying a generic product maker would be replication. That’s one of the reasons why we did not buy Zandu (which got sold to Emami in 2008),” he adds.
Likely acquisition targets could be companies that make branded proprietary products in areas such as digestion, cough and cold, fever, lifestyle disease management, among others. However, there are not many targets in the market.
“Acquisitions make sense. Despite high valuations, Emami’s acquisition of Kesh King and HUL’s Indulekha buyout were relatively successful,” says Sachdev of UBS Securities.
Its key acquisitions in India include Balsara Hygiene Products Ltd, maker of Babool toothpaste and Odonil air freshner, in 2005 and female skin care products maker Fem Care Pharma in 2008. Over the years, some of the brands it acquired from these two firms, such as Fem, Babool and Odonil, have crossed the Rs100-crore sales mark.
Even its international business has primarily grown through acquisitions post- 2010.
About 32% of Dabur’s consolidated revenue comes from international markets by selling personal care products across the Middle East, Africa, Europe, North America and South Asia.
The Middle East is the biggest market that accounts for 33% of the company’s international sales, followed by Africa (22%), Americas (17%), Asian markets excluding India (17%) and Europe (11%).
But companies, including Dabur, have been facing challenges in these markets mainly due to political uncertainties, currency fluctuations and falling oil prices.
“Low oil prices have led to a downward pressure on oil producing economies with governments adopting austerity measures, curbing spending on major projects and reducing subsidies which has eroded disposable incomes. Most of the markets have witnessed sharp depreciation in their currencies which has led to lower value realizations in our business. Geo-political turmoil in MENA (Middle East and North Africa) has, to a large extent, impacted markets such as Syria, Libya, Yemen, Iraq and others where there has been a reduction in consumption due to large scale displacement of human population,” says Mohit Malhotra, CEO of Dabur International Ltd, a wholly owned subsidiary of Dabur India.
Dabur, however, will continue to invest in these markets—in brands, distribution and building local supply chains to ensure better pricing and margin.
In July, Dabur India acquired Discaria Trading, registered in South Africa, for just Rs4,679 (1,000 South African rand). It was a small but important acquisition. With this, the company got an entry to South Africa—a market it has been trying enter for a long time. Dabur already has two manufacturing plants—one each in Nigeria and Egypt.
Africa has been on the radar of Indian packaged goods and personal care firms for the past few years primarily because of projected consumer spending. Consulting firm McKinsey and Co., in a report in 2010, projected consumer spending in Africa to double to $1.8 trillion by 2020.
Dabur made its first foreign acquisition in 2010 by buying Hobi Kozmetik Group, a leading personal care products company in Turkey, for $69 million. It also acquired US-based Namaste Laboratories for $100 million in the same year.
“Our twin acquisitions took place almost a decade after our entry into the overseas markets and these acquisitions have helped us further consolidate our overseas business. We have emerged as the Indian-born FMCG transnational entirely through the organic route,” says Malhotra.
Prior to these acquisitions, the company primarily sold hair oil under Dabur Amla and Vatika brands in the overseas markets. Now, its international portfolio is dominated by products it got from acquisitions. According to Citi Research, hair oil accounted for about 39% of sales from international markets together, followed by shampoo (14%), hair cream (13%), oral care (11%), skin care (7%) and styling products (about 12%) in FY16, contrary to hair oil contributing about 93% to the business in FY06.
“Namaste business has been steady and we believe local manufacturing and distribution in Africa should provide a fillip to the business from 2017 onwards. Local manufacturing would enhance the price competitiveness of Namaste products that are currently imported and thus at a significant price premium. Steps to enhancing sales and distribution for Namaste products in sub-Saharan Africa should help Dabur deepen its presence. For the other overseas operations, management talks of a somewhat lower adverse forex impact vs the previous year. Geopolitical or economic issues in Saudi Arabia and parts of North Africa remain, but the company’s foray into Iran could be a new positive driver from second half of FY17,” Citi Research said in the 21 September report.
Going forward, Dabur will deepen presence in many of the countries in Africa, primarily where it already has presence, and across markets in South Asia. Two markets where it sees a better future are Myanmar and Iran. The company already has a presence in Myanmar, and it is setting up a factory in Iran—probably the last big market that’s left unexplored due to blockade—to start selling products early next year.
“We are open to exploring inorganic opportunities to fill gaps in our existing portfolio and geographic presence,” says Malhotra, adding that the company has not earmarked any amount for buys and can fund acquisitions through internal accruals and debt.
Sachdev of UBS Securities, however, says there is risk in the international business. “There’s also sub-scale which hinders their ability to generate quicker higher returns,” she adds.
Competition may be stiff and growth may be slow but Dabur India is considered an “attractive investment proposition in consumer staples” by equity analysts.
Over FY16-18, noted Morgan Stanley in its report on 25 April, Dabur will become “the most expensive staples stock” from “one of the cheapest now”. It added, “Even as the stock has outperformed the Sensex by 6% over the past six months, it has underperformed peers like Godrej Consumer Products Ltd, HUL and Marico Ltd by 10-30% on concerns of rising competition, especially from Patanjali Ayurved.”
Brokerage firm CLSA, in a report on 29 April, noted that the Dabur stock was up 11% in the past three months and it will continue to “outperform” as growth visibility is improving.