When news and performance both run thin, themes grab attention on the Street. The packaged products sector ticks both boxes. Sales growth is crawling and companies have dug their heels in, waiting for the tide to turn. It is in this lull that Patanjali Ayurved Ltd’s fast growth and ambitious plans are featuring in one research report after another.

The last time a new entrant caused so many ripples was, perhaps, ITC Ltd’s equally ambitious foray into the consumer segment, with rapid-fire launches in several categories such as apparel retail, packaged foods, personal care and stationery. Decades ago, Nirma Ltd’s audacious challenge with a low-cost detergent powder to Hindustan Lever Ltd’s (HUL) dominance in the category made waves.

Patanjali’s aggression is being viewed in similar light. A recent report’s title says Patanjali may be injurious to listed fast-moving consumer goods (FMCG) companies’ health. An IIFL Institutional Equities report says the company is targeting a 2.5 times rise in sales in FY16 over a year ago. The situation in the listed universe is such that sales touching double-digit levels will be cause for celebration.

The report estimates that Patanjali’s sales will increase to 20,000 crore by FY20. In contrast, ITC’s FMCG business sales was 9,028 crore in revenue in FY15, compared with 1,014 crore in FY06.

Whether Patanjali is able to meet these estimates or not is not the issue here. The company has been successful so far, but has used a direct distribution approach with an exclusive store network. It will now move to the general trade where it will jostle with other companies for shelf space. It has already entered the modern trade network but local stores have a lion’s share of sales.

Setting up a national distribution network, managing a complex supply chain and moving from a word-of-mouth approach to a conventional advertising-led approach are on the table. That also signals a shift in its cost structure and investments.

Does Patanjali’s growth signal the decline of others? That need not happen. There are several moving parts to this story. One is the market’s growth itself. A stagnant market could see share loss but that is at odds with the long-term consumer market growth story. For instance, ITC’s FMCG business grew at a compound growth rate of 27.5% between FY06-FY15, while HUL’s domestic FMCG business grew by 13.7% in that period. Their growth rates are starkly different but HUL’s sales did grow and are 3.3 times that of ITC. Also, domestic sales of most large and mid-sized companies reported healthy growth rates in this period.

Also, companies are not going to sit quietly, doing nothing. Patanjali’s entry may create a bigger market for products with an Ayurvedic/natural positioning. Some companies already have similar products while those who don’t will jump in, either to compete or if they see a large enough opportunity.

Product managers in foreign-owned companies may also find it easier to convince their management to support a new launch. The general tendency is to protect global flagship brands from getting cannibalized by local innovations. That hesitation will melt if Patanjali becomes a serious threat to a category or brand. Hindustan Lever’s Wheel was launched solely to tackle Nirma.

Also, who is Patanjali’s target market? The first line in the company’s application form for signing up distributors asks them to support its movement to “get rid of the foreign MNCs’ loot". Many of its products target foreign-owned brands, but they target Indian-owned ones too, such as those of Marico Ltd and Dabur India. Its ghee brand is a threat to dairies in the cooperative and private sector. It may even bring in new consumers into the market, such as those using local brands or unbranded products, thereby growing the market.

Whatever be the conclusion of this story, Patanjali is surely an exciting development in the national FMCG market. The size of India’s consumer market, population growth and existing headroom for the organized sector to grow means there is room for more.

Patanjali does not yet represent an existential threat to incumbents, although it may become one for specific categories or brands. Patanjali’s ambition and aggression are clearly evident. In conference calls, companies are not dismissive of the threat. That is a positive sign compared with ignoring it as an insignificant threat. This is a developing story that will attract attention for some time to come. Consider this: sales growth in the December quarter for FMCG companies is expected to be in single digits. In dull times such as these, Patanjali makes for a much more interesting story to chase.

The writer does not have positions in the companies discussed here.

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