The decision by GlaxoSmithKline Consumer Healthcare Ltd (GSKCH) to diversify from malt-based food drinks into other segments is partly driven by the need to diversify and also align with the parent’s goal of driving growth in emerging markets.
GSKCH’s dependence on Horlicks was once considered a liability. What the firm has done successfully though, is to launch sub-brands under the Horlicks brand targeted at different market segments; it has also branched out into products such as biscuits and nutritional bars, again under the Horlicks brand.
Aggressive marketing efforts are evident in this space, with all leading players vying to be the healthiest drink. In calendar 2009, GSKCH’s advertising and promotional expenditure rose by 56% to Rs302 crore while its sales rose by 24.7% to Rs1,984 crore.
Graphic: Naveen Kumar Saini / Mint
Its parent’s strategy is focused on emerging markets, which are growing faster than developed markets. It is investing in Bric (Brazil, Russia, India and China) and satellite markets, launching its global portfolio in these markets and fine-tuning its strategy to suit these markets—offering products at various price points and improving availability. The alignment of strategy between GSKCH and its parent is good as it enables the company to have a more diversified portfolio.
In 2008, nearly 96% of the company’s sales were from malt-based foods, with biscuits contributing 3.5%. Horlicks alone accounts for nearly 75% of sales.
The journey into a multi-product company will not be an easy one. GSKCH’s established presence gives its business a high level of profitability. In recent years, a more aggressive stance has seen sales growth expand too. Investing in marketing new products will strain profitability in the near to medium term. In the longer run, however, the company could benefit from a better sales mix, lower dependence on one category and faster growth.
On Thursday, GSKCH’s share price fell by 2.7%, against a 0.3% drop in the BSE FMCG index, which could be because of fears of the near-term impact of entering new categories, coming on top of aggressive marketing spends required in its core category.