Many consumer product firms, at some time in their lifetime, are bitten by the bug of starting a services venture. The latest is Jyothy Laboratories Ltd, the company that took a pole position in the fabric whitener segment with its iconic Ujala brand. After adding categories such as detergents, mosquito coils and scourer bars to its portfolio, Jyothy is starting a premium laundry service “Fabric Spa”. It owns a 75% stake in Jyothy Fabricare Services Ltd which will run this operation, in Bangalore. It will invest Rs35 crore initially in the business, which will provide laundry services for busy working professionals.
Why do companies venture down this path, entering uncharted territory? The simplest answer is that they spot this as an opportunity to diversify revenue streams. Also, in the consumer product business, the last mile belongs to the retailer. Companies do not physically interact with customers. These service outlets are supposed to create a “connect” with the customer.
Most large companies have walked down this road. Hindustan Unilever Ltd has attempted many versions, some of them pilots only: a launderette, beverage parlours, ice-cream parlours, Ayush Therapy Centres and Lakme Beauty Salons. Tata Tea Ltd tried it with a tea parlour in Bangalore but decided to pull the plug on it recently. IFB, the washing machine company, too has set up a launderette facility, similar to what Jyothy is attempting. None of these businesses achieved the kind of success that was expected of them.
Why do these businesses not live up to their expectations? The main reason is that expectations are perhaps not realistic. Services take time to build; consumers cannot be won over quickly. Some of these concepts are very new. Infrastructure costs and working capital requirements are high. Consumer companies are used to distributors handing over cheques and then taking delivery of goods. The initial losses can be high and even when profitable, the return on capital is low, again something that consumer companies are unused to. And, just when you have got the model right and the initial stores make money, you need to scale up. It is like starting over from scratch, returns go down when investments are made and improve when the business consolidates.
The only company that has come close to understanding this business is Marico Ltd, with 99 Kaya Skin Clinics. The business turned in revenues of Rs49 crore but incurred a loss of Rs2.1 crore in the September quarter, mainly due to new clinics taking time to break even.
Years ago, analysts used to get excited about these diversions, as they could see the synergies work on paper. With time has come the realization that the products business has better “visibility” compared with the service business, which requires years of investments before the returns come. It need not be a blind end for every company. Some of these concepts may have been ahead of their time. And the best way of finding that out is by trying. Maybe when one of these ventures makes it big and occupies a position alongside the main brands, firms will have a successful model for making it work in India.
Till then, investors are likely to remain wary. Jyothy’s share price is up by 12% over a month ago, but closed down 3% on Thursday.
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