Paper Boat sails ahead on Indian drinks18 min read . Updated: 13 Dec 2016, 06:41 AM IST
Paper Boat now has to overcome limited reach and penetration, along with premium pricing, as it seeks to scale up operations
New Delhi: Neeraj Kakkar and Neeraj Biyani have lots in common besides their first name. The co-founders of Hector Beverages Pvt. Ltd, the company that makes traditional drinks under the Paper Boat brand, studied at Management Development Institute in Gurgaon. Both come from small towns, worked for Coca-Cola India and share a passion for poker. Ironically, both even caught the vector-borne Chikungunya in Delhi together earlier this year when the debilitating fever was raging in the national capital.“But there’s a difference in our age. Biyani is 37-38 and I am 42 now," says Hector Beverages’ chief executive officer Kakkar, sitting in his informal office at Finchley Castle in Whitefield, Bengaluru.
Finchley Castle is a bungalow that serves as Paper Boat’s laid-back office, done in bright colours, with lively graffiti on the walls. In the courtyard, a couple of portly pet dogs laze around under the shade of the trees. A mini swimming pool, which is mainly used to dunk all new employees in accordance with Paper Boat’s tradition, completes the picture. The atmosphere at Finchley Castle is totally complementary to the beverage brand’s coolness quotient—evident in its smart packaging and design, and the distinctive idea of selling ready-made traditional drinks.
The idea of launching traditional drinks such as aamras, jaljeera and aam panna was not the brainchild of any one person. It emanated from the collective wisdom of the four original founders of Hector Beverages—three of whom were colleagues at Coca-Cola in India. The company was founded by Kakkar, Biyani, Suhas Misra and James Nuttall. Nuttall, an American citizen, studied with Kakkar at Wharton School of the University of Pennsylvania and came to India to be part of the functional drinks business which first launched an energy drink, Tzinga, in 2011. (Misra and Nuttal have since left the company, having sold their shares to the two remaining shareholders.)
“After almost one year of doing Tzinga, we realized that we were keen to drink aam panna more than anything else," says Kakkar. The idea struck them during the leisurely office lunches the four partners used to share when they were in town together. In fact, it was the delicious aam panna which came along with Misra’s home-made lunch every day during the summer months that gave them the idea of packaging and selling the beverage. “We thought we should launch the drink that we enjoy every day… In 2012 for the first time we started thinking about launching traditional drinks. We were in Gurgaon at that time," recalls Kakkar.
The need for such a product was reinforced when Nuttall went around the city looking for packaged aam panna to treat his American guests and returned disappointed. The four partners then pooled in resources—Rs2.5 crore in all—to launch packaged traditional drinks under the Paper Boat label.
Incidentally, the founders could not introduce Paper Boat with their favourite aam panna as, by the time the company decided to launch it, the green mango season was over. So Hector embarked on its Indian ethnic drinks journey with aamras and jaljeera. Surprisingly, the two typically north Indian products were test marketed in Bengaluru as the promoters didn’t want to disturb their sales and marketing team in the north that was busy selling Tzinga.
Building brand buzz
After six-eight months of the launch of Paper Boat, they were told that sales of the product had improved and there was a buzz around the brand. Promptly, Paper Boat was launched in the north, a market which soon saw it becoming bigger than Tzinga. Encouraged by the response to Paper Boat, Kakkar started dreaming of seeing his brand take over all the beverage consumption occasions.
Currently, the company has a total of nine year-round products including flavours such as jamun kala khatta, aamras, aam panna, anar and chilli guava. The seasonal products introduced by the company include Thandai, Serbet-e-khaas, Rose Tamarind and Panakam, among others.
The idea behind Paper Boat was to launch traditional home-made drinks which are slowly vanishing from the consumer’s life. “We didn’t do any surveys before the launch. If we did any, perhaps, people may not have said that they missed aam panna. But when it was offered, they lapped it up," says Kakkar.
Biyani, chief operating officer at Hector Beverages, adds: “We are trying to preserve recipes for the next generation." To do that, Paper Boat packages ethnic Indian drinks in a convenient, hygienic form in a contemporary and youthful fashion.
Paper Boat created a buzz in the market thanks to its distinctive branding and advertising. “The company has been innovative in terms of product, packaging and marketing to create the consumer wow factor. It can certainly take credit for that," says Arvind Singhal, chairman at retail consultancy Technopak Advisors Pvt. Ltd. The hip design, packaging and brand name has been the result of collaboration with strategic design and brand consultancy Elephant Design, which originally suggested Good Ol’, Lost and Found, and Paper Boat as brand name options.
Paper Boat—with its tagline drinks and memories—fitted the bill as the company intended to recreate traditional drinks from old recipes. The communications target was to evoke childhood memories through packaged ethnic Indian drinks. “And the name Paper Boat instantly connects you to your childhood. In fact it connects global kids to their childhood as all children make paper boats and paper planes," says Biyani. The name was refreshing and it cut the clutter.
Clicking with consumers
The packaging was ground-breaking too. The Doypack used in Paper Boat is something which was originally developed to carry beverage in space. “It is a futuristic pack. This is what Nasa uses when it sends people to space. It is light, convenient and doesn’t occupy much space," says Biyani.
Besides, the product clicked with the consumers. “Paper Boat founders had solid consumer insight that traditional beverages will work, especially when they come without preservatives. There is strong consumer support because of the authenticity of the products," says Kannan Sitaram, operating partner at private equity firm Indian Equity Partners. Sitaram is also the chief executive of Innovative Foods Ltd which markets the Sumeru brand of frozen foods.
Kakkar says that the company’s brief to the agency comprised two words—alive and authentic. “Alive for us meant modern, contemporary, fashionable and cool. And authentic meant natural and traditional. Our product is a combination of these two qualities. While the packaging is alive in terms of colour and design, the recipes are authentic," he adds.
Hector Beverages, which has been active in online media right from the start, turned to mainstream advertising only last year. For its television commercials it has partnered with advertising agency Lowe Lintas. Its widely viewed digital film Rizwan–Keeper of the Gates of Heaven was made by the boutique ad agency Humour Me Pvt. Ltd. For the year, the company has earmarked Rs15 crore for advertising.
As the popularity of the brand and the business grew, Hector Beverages attracted a clutch of investors. To be sure, the company’s first investment came even before it entered the traditional drinks market with Paper Boat. Right at the beginning, in 2011, it raised Rs15 crore from Infosys Ltd founder-chairman N.R. Narayana Murthy’s venture capital fund Catamaran Investment Pvt. Ltd as well as from venture capital firm Footprint Ventures.
In 2013, the year the company introduced Paper Boat, it closed an $8 million investment round led by Sequoia Capital with participation by existing investors Catamaran and Footprint Ventures. Last year, the company raised another round of $30 million led by investment firm Sofina and Hillhouse Capital. Existing investors Sequoia and Catamaran also participated in this round.
Declining to share its investment details in Hector Beverages, V.T. Bharadwaj, managing director at Sequoia Capital India Advisors, says: “Sequoia does not disclose its investment size. We are excited that we have had a chance to partner with Neeraj (Kakkar) since 2012." On Paper Boat’s business, he says that non-cola beverages are emerging as an exciting alternative as consumers explore more options to fizzy drinks. “Hector has been a pioneer in this space and has created an ‘Indian ethnic alternative’ for every consumer. This is the biggest source of excitement," adds Bharadwaj.
Both Kakkar and Biyani reflect their investors’ confidence. They agree that the fizzy drinks market is not growing as expected as consumers are making healthier choices. Globally, leading beverage companies like PepsiCo and Coca-Cola are turning their attention to healthier options such as juices and other functional drinks. “Carbonated drinks are going down. There is a shift happening from carbonated to non-carbonated drinks," says Kakkar. In 2015, the total volume of carbonated beverages in India was 4.5 billion litres, according to a report by research firm Euromonitor International.
Rapid growth in a slow market
Although a downturn in sentiment has been affecting sales in the packaged consumer products market, the slump doesn’t ruffle the Paper Boat partners. “A few consumer goods companies may not have done well in some quarters—or may be one odd year—because of their exposure to rural markets. But people who have exposure to urban markets continue to do well," says Kakkar. Agrees Sequoia’s Bharadwaj: “Consumer sentiment is always a roller coaster. There are times when it’s up and times when it’s down. The advantage of a category like beverages is that it’s a basic category less affected by the vicissitudes of consumer sentiment."
Little surprise then that Hector Beverages has seen rapid growth. According to filings with the Registrar of Companies, for fiscal year 2014 Hector Beverages earned revenue of Rs15.9 crore. For FY15, it was closer to Rs25 crore (estimated post-adjustments). The numbers for the year to March 2016 are not available. The company expects to grow to Rs100 crore this year.
What makes Paper Boat’s packaged drinks business attractive is also the fact that India is moving from being an unbranded to a branded goods market. “There is a shift from commodities to brand play. It happened in many countries and it is happening in India right now," says Kakkar.
Biyani feels that investors have shown confidence in their company as it has a lot going for it, especially from a consumer habits’ point of view. He says that young consumers today are especially confident of themselves. They are comfortable using Indian brands. “They do not need to consume an American brand to project they are cool. They can be cool being themselves and hence consume whatever they want," he says.
That’s not all. Consumers today have started to pay for convenience, which wasn’t the case earlier. Biyani says that his grandmother, for instance, wouldn’t pay for packaged jaljeera even if she could afford it. “She would be appalled at the thought of ready-made jaljeera. But the 25-35 year olds now attach value to convenience. They understand their time is more valuable. Paying for convenience will open up a lot of categories which we earlier thought didn’t make sense to open," he adds.
Hector Beverages’ conviction about the future of Paper Boat also stems from the fact that drinks will never go out of fashion. “We are talking of basic food and beverage. I like this business because once you have a relationship with the brand, your kid will take it from you and take it further. Unless we mess things up big time on quality or brand promise, Paper Boat can only grow," says Biyani.
Reaching more markets
With confidence in the future of demand, Paper Boat has been expanding its capacity. Currently the company has two manufacturing facilities—one at Manesar near Gurgaon and the other at Mysuru near Bengaluru. When it started out, the Manesar facility churned out 80 Doypacks per minute. However when the Mysuru plant came up in 2015, it added more capacity. With addition of more capacity over a period of time, the two units today collectively produce 400 Doypacks per minute.
Having ramped up its production capacity significantly, Paper Boat is now concentrating on improving distribution. “We can double our numbers everywhere if we could focus on and improve our distribution," says Biyani. But that is easier said than done. Currently, Paper Boat is available in 70,000-100,000 outlets compared to, say, the leading soft drinks brands which are present in more than 1.2 million outlets. For now, the brand enjoys a significant presence in metro cities such as Delhi, Mumbai, Bengaluru, Hyderabad, Pune and Chennai.
Although Kakkar still sees room for improvement in Paper Boat’s reach at the sales outlets it is present in, including in modern trade stores, he agrees there is scope to expand in smaller towns. His contention is that currently probably only 20% of the people who visit modern trade outlets may have tried Paper Boat. “70-80% of the people who shop there are yet to buy our brand. So we have a long way to go. The first five years will be used in going out and telling our story to more people," he says.
However, he is also eyeing the mom-and-pop stores in tier II towns. “Our current challenge is how to go deeper with a product which has a shelf life of four-six months," says Kakkar.
Limited distribution is, perhaps, one of the biggest challenges for Paper Boat. According to Abneesh Roy, analyst at Edelweiss Securities Ltd, the business for Paper Boat is likely to be centred around the metro markets and top towns. “Establishing strong distribution beyond that would not be easy with just one set of products. That’s one of the reasons why Paper Boat has launched a host of fruit-based beverages recently," he says. Unless a company has a full range of products, expanding retail reach becomes an issue, says Roy. “Retailers are not prone to promoting one product for a company. If that’s the case, a lot depends on consumer pull which Paper Boat has, to some extent, in the metros and top towns," he adds.
To increase its reach, Hector Beverages has tied up with Indo Nissin Foods Pvt. Ltd, the Japanese company which makes Top Ramen noodles. It hopes to piggyback on Indo Nissin’s distribution network to expand into the tier II markets and some rural pockets. Right now, only a small percentage of its business comes from this tie-up. Going forward, Kakkar expects 60% of Paper Boat’s business to come from Indo Nissin’s distribution network.
However, the company has done well for itself through institutional tie-ups. It sells its products to airlines, and is now trying to get into the Indian Railways network.
Balancing pricing, volumes
Deeper penetration and reach is only one of the challenges for the company. Experts say the premium pricing of its products is another challenge which may limit its scale. Currently, Paper Boat is the most expensive drinks brand per single serve. It is at an approximate 20% premium over the other brands. “Success of any company is its size and scale rather than consumer wow. We need to look at the top line and bottom line," says Technopak’s Singhal. “The point to be seen here is not just the shelf space it is occupying but how quickly the product is moving." He adds that Paper Boat’s product pricing could come in the way of growth. “How do you balance pricing so that you do not sacrifice volume," says Singhal.
Agrees India Equity Partners’ Sitaram: “There is a taste imperative and there is a price imperative. If you need to expand demand, you need to figure that out. In case you want to expand to the masses, you need to rethink as you are competing with fresh juices from a juice-wallah at Rs15 and Rs20 a glass."
Although Biyani agrees that his brand comes with premium pricing, he insists that Paper Boat offers more value to the consumer. “For Rs30 you get more than double the pulp that you get from Slice or Maaza. You get naturally ripened pulp and you get no preservative or colour," he says. He’s also proud of the “clean label" Paper Boat offers versus the label that other companies have. “People who actually read the label and understand it, value us. They don’t move from the brand. So am I serving the five rupee consumer? No. But we can become a part of the upper-middle-class and middle-class families," he says.
Although premium pricing has improved the company’s gross margins, it hasn’t made Hector Beverages profitable as yet. Biyani and Kakkar say that the company would be profitable if they refrained from spending so much on advertising and marketing. “In terms of unit economics, we are pretty much there. We are profitable. But when you have to invest in manufacturing—that would be Rs40-50 crore and then the second largest expense on P&L (profit and loss) is marketing. If we were to consider marketing as an investment and not charge to P&L, then we are profitable," says Biyani.
“We are doubling our business almost every year," he adds. Interestingly, Roy of Edelweiss points out that a large part of Paper Boat’s growth is coming from its arrangement with IndiGo airline. “Its revenue targets are most likely based on this," he says, adding that the challenge for Paper Boat is probably high advertising cost on a low revenue base.
However, there are other challenges too. The product does not own intellectual property (IP). The recipes for the traditional drinks that the company so lovingly talks about have been taken from people’s homes and temples. So it is not as though these products cannot be copied or manufactured by others. In fact, Dabur India Ltd, maker of Real juices, also launched Hajmola Yoodley brand of ethnic drinks in similar-looking packs and flavours. Queries to Dabur on its ethnic drinks brand went unanswered.
Biyani disagrees that Paper Boat has no IP. “Our IP is our brand and all the qualities associated with the product. Our IP is the processes we follow, which make our drinks very different in their unique way. For examples all our mangoes are naturally processed. No other company is doing it," he says.
Biyani feels that the company creates a lot of IP in the form of sourcing its raw material, designing its packs and the brand experience. “We try and do it in a much better and consistent way so that the customer experience is good. And that I think is a challenge for any new company which wants to just come in one day and decide to make aamras. It will have to go through the grind to match our product," he says.
Supply chain struggle
To be sure, in Biyani and Kakkar’s view, their biggest challenge is the supply chain. For instance, right now the company works with 16 states, and 11-12 countries from where it sources its ingredients. “When you are growing you need all these ingredients at the right place, right price and quality. You have to keep working on at the back end. The supply has to match your growth. It’s a struggle," says Kakkar.
For starters, getting naturally ripened mangoes became a huge challenge; it eventually sourced them from Galla Foods Ltd in Chittoor (Andhra Pradesh). Galla Foods provides Paper Boat with Totapuri mango pulp for aamras, green mango pulp for aam panna and white guava pulp for chilli guava. Galla Foods is a division of Mangal Industries Ltd, which is an Amara Raja Group firm. “The mangoes for Paper Boat are naturally ripened. They have invested time and effort to get the right pulp. They have to be appreciated for the single-minded focus to offer quality products to consumers," says Divakar Sukumaran, business manager at Galla Foods. “From 2013 to 2015 our raw material supply to Paper Boat has grown by 85%," he adds.
Currently, the pomegranates for Paper Boat’s anar drink come from California. The lemons, meanwhile, are sourced from Europe. Kakkar’s favourite drink kanji, for instance, hasn’t seen the light of day even after three years of trying because the right ingredients for the product are not available.
Kakkar has tried to source purple carrots and their seeds from different countries including from Turkey, but hasn’t succeeded. “Besides, it is a fermented drink, so FSSAI (Food Safety and Standards Authority of India) is also confused about what you are offering," he says with a laugh. Kakkar feels that if he is not able to package and sell kanji, it may be soon lost to the world. So he continues looking for the appropriate raw material with the full backing of his team.
And it is a very patient team that he has which willingly works towards achieving whatever he fancies. This year, Kakkar had the brainwave of launching traditional drinks linked to festivals. So it launched Thandai for Holi in the north, Panakam for Ram Navami in the south and Serbet-e-khaas for Ramadaan. Of course, his fixation for these festival-oriented drinks creates a logistical nightmare for the company’s production and distribution teams, but the response to his new experiments has been overwhelming. “In terms of operations it is crazy and chaotic as the volumes for these products were kept low and they were launched just days before the festivals. For Thandai we manufactured 1.2 lakh units. But the product was in short supply and we got abused in various quarters," says Kakkar, adding that the company will be better prepared next year.
Biyani says that the 900 people that Paper Boat currently employs share the promoters’ passion for the brand and are willing to experiment. The informal environment keeps them motivated. Work seems like fun for now as most employees live close to Finchley Castle so that no time is wasted in commuting. Biyani, too, either walks or cycles to work. Whether the company will be able to maintain the same informality at work once it grows to be 5,000-strong, is difficult to predict, he says.
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Where do they see the company in 10 years? “Significantly bigger with an international presence," says Biyani, adding,“Paper Boat continues to surprise me. When we started, we didn’t know that ethnic beverage packaged could be a large market. We identified the need and questioned the fact why it is not there, but we never thought that it is such a large miss in consumer’s mind. That is what continues to surprise me. We can make it really, really big."
Sounak Mitra contributed to this story.
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