Mumbai: The three Indian arms of Procter and Gamble Co. (P&G) are looking to add 500 million new customers in India in the next five years, a top company official said.
That’s a little more than the number of Indian consumers the three companies currently reach out to and will be equal to 75% of the country’s estimated 1.26 billion population in 2014.
“We will add half a billion new consumers by 2014,” said Sumeet Vohra, marketing director, P&G India.
Base effect: P&G India marketing director Sumeet Vohra.
If it succeeds, P&G could close the lead that arch rival Unilever Plc has over it in India, a rare market where the American company lags the Anglo-Dutch consumer multinational.
To be sure, P&G’s ambitions will require it to expand its reach to rural areas—its current consumer base is largely urban—and not everyone is convinced the company can do that.
“It is a tall order for P&G to make inroads into rural (areas),” said Dwarika Prasad Uniyal, adviser with Jindal Global Business School, OP Jindal Global University, Sonepat. To do so, the company needs to augment its presence in smaller towns and also work on charging the perception that it is a “premium products” firm.
Still, P&G seems determined to try.
Earlier this month, the Cincinnati-headquartered company’s new president and chief executive, Robert McDonald, said at the annual general meeting of shareholders that P&G would add a billion new consumers over the next five years in emerging markets, and that the company’s Chinese and Indian operations would lead this effort.
P&G wants to increase the per capita consumption of its products from $3 (Rs141) in China and less than $1 in India to Mexico’s level of $20, a move that will add around $40 billion to its sales. At $20, the consumption in these markets would still be a fifth of the $100 it is currently in the US, said a recent AP report.
The result of this focus is a buzz of activity in the three Indian subsidiaries of P&G that continue to remain low-profile and media shy.
The three companies share a common management and distribution structure. Procter and Gamble Hygiene and Health Care Ltd (PGHH) ended the year to June with revenue of Rs774 crore and net profit of Rs179 crore. Gillette India Ltd ended the same year with revenue of Rs661.5 crore and net profit of Rs113 crore. Both companies are listed on the Bombay Stock Exchange and P&G Inc. holds a majority stake (in excess of 50%) in both companies. The third P&G company in India, Procter and Gamble Home Products Ltd (PGHP), is a 100% subsidiary of P&G Inc. It sells detergents (Tide and Ariel), shampoos (Head and Shoulders and Pantene), skincare products under the Olay brand and baby care (Pampers). While it doesn’t report its numbers, the three companies together are estimated to have a revenue of around Rs3,000 crore, according to Vohra.
Globally, P&G Inc. is the world’s largest personal and home care products company with revenues of $83 billion as of June and a consumer base of four billion people. In India, it has 450 million consumers who have used at least one of its products at least once in the past 12 months and its products are available in around 3.75 million stores.
Building a base
P&G is well placed to try and build its consumer base in India. According to Vohra, the firm has seen seven consecutive years of double-digit growth. This growth is reflected in the performance of the stocks of the two listed P&G entities. Shares of PGHH have risen around 121% over the past year and those of Gillette India, 60%. In the same period, the Bombay Stock Exchange’s sectoral index for consumer products firms has risen 38% and the exchange’s benchmark Sensex index, 67.25%.
Vohra added that over the past three years, P&G has entered seven new businesses in India through launches and acquisition: skincare (Olay), diapers (Pampers), professional hair care (Wella), shave care (Gillette, 7 0’Clock), deodorants (Gillette), batteries (Duracell), and oral care (Oral-B).
“P&G is leading in many categories like healthcare (Vicks), blades and razors (Gillette), baby care and femcare (Whisper). Whilst in the others we are a strong second,” said Vohra.
Numbers from market research firm Nielsen’s Indian arm bear that out. In the sanitary napkin (or feminine hygiene) market, P&G has a market share of 56% by value. In diapers, it has a share of at least 50% by value. However, these markets aren’t as large as those for soaps, shampoos and detergents, although this means that they present significant growth opportunities. The feminine hygiene market, for instance, is estimated to register a compounded annual growth rate of 20.8% between 2007 and 2012 and be worth around Rs2,700 crore, according to a report on PGHH by Reliance Equities International Pvt. Ltd analysts Anand Maur and Mihir Shah, published on 15 October.
In larger markets such as detergents and shampoos, P&G trails the market leader. In shampoos, with a 24.1% share by value, it is No. 2 in a market where the leader, Hindustan Unilever Ltd (HUL), has a share of 45.3%. And in washing powders, with a 14.1% share by value, it is No. 2 in a market where the leader, HUL, has a share of 37.3%. The washing powders and shampoos markets are worth Rs6,896.6 crore and Rs2,781.1 crore, respectively, according to Nielsen.
In 1991 and then in 2005, P&G did try to take on HUL in price wars in the detergent market in an effort to gain market share. “As a result of the price cut, P&G recorded an increase in both value and volume shares whereas HUL (then Hindustan Lever Ltd, or HLL) could increase its volume share only. However, HLL’s margins were eroded significantly and it reported a drop in profits,” says a case study written by Dorris John in 2005 for the IBS Case Development Centre at Hyderabad, titled HLL vs P&G: Price Wars—An Effective Business Strategy?
Despite the lower share in larger market segments, P&G’s Indian companies boast better operating metrics than the competition.
PGHH and Gillette India ended June quarter with operating profit margins of 39% and 33%, respectively. These compare with 16.87% and 16.35% for HUL and Marico Ltd, respectively, in the same period. Operating profit margin is the profit before interest, taxes, depreciation and amortization expressed as a proportion of total revenue. It is a measure of a company’s operating efficiency. Efficiency apart, analysts and company executives see its strength in the feminine hygiene segment as an advantage for P&G.
According to the Reliance Equities report, the penetration of feminine hygiene products in urban India is only 20%. At an all India level, it is 5%. The brokerage’s analysts said this presented an opportunity for growth and that they “expect the company to maintain a compounded annual growth rate of 26.7% from financial year 2008 to estimated financial year 2011”.
Acknowledging this at the company’s annual general meeting earlier this month, chairman R.A. Shah also highlighted another possible area for growth: rural markets.
P&G’s rural focus
Although P&G’s Vicks brand has a significant rural presence—40% of its sales come from rural areas—the company’s products have always been perceived as premium and, by extension, meant for urban areas.
That hasn’t stopped P&G from trying to expand its presence in rural India which, according to Vohra, currently accounts for one-fifth of its revenue. Last year, PGHH formed an alliance with the National Rural Health Mission in Rajasthan to sample its sanitary napkins. Around 85% of the samplers converted to the company’s offering. The company is now expanding this alliance to Tamil Nadu. It also launched a mid-priced Whisper variant that helped it push sales by 26% to become a Rs428 crore brand. It also resulted in the highest sales and market share increase in a year in the past 11 years, according to Shah.
P&G’s rural strategy isn’t very different from that of other consumer products companies in India, said R. Seshadri, managing director, Anugrah Madison, an advertising agency with a focus on semi-urban and rural markets. That strategy includes a mix of low prices, tapping niches and launching new packs or product variants for rural markets.
Still, not everyone is convinced about P&G’s ability to tap the rural markets. The company has issues in terms of both products and reach, say experts.
“P&G India also needs to fast expand its product portfolio, enter new categories and launch more brands like Crest besides offering a larger basket of different-sized product packs,” said Abhijeet Kundu, vice-president, research, Antique Stock Broking Ltd.
Strengthening distribution in the rural hinterland may not be worth the effort, said an advertising executive who works with P&G. “There is enough potential in urban India for growth,” said Gaurav Lalwani, regional account director and associate vice-president, Leo Burnett, an advertising agency that works with P&G.
Somewhere between those two points of view, P&G hopes to find 500 million consumers.
Ashwin Ramarathinam contributed to this story.