Home >Companies >Why retail success eludes FMCG firms

Mumbai: Some of India’s best packaged consumer goods companies such as Hindustan Unilever Ltd (HUL), Marico Ltd, Dabur India Ltd and ITC Ltd have for long dreamt of building strong retail businesses—only to stumble.

Marico, known for its Parachute and Saffola oil brands, has not seen its Kaya Skin Clinics make a profit even after a decade. Dabur India’s New U, a beauty products retail chain, is not profitable either.

HUL, which ventured into retail at the end of chairman K.B. Dadiseth’s tenure in 2000, with the launch of Project Millennium, exited Surf Laundry Service, a retail laundry initiative, and Sangam Direct, an Internet-based shopping service that offered home delivery. Its Lakme beauty salons, even after 10 years, are still a negligible part of the overall beauty services market. ITC’s apparel retail chain Wills Lifestyle has barely broken even after 12 years of operations.

Other examples include Tata Global Beverages Ltd’s (TBG) Chai Unchai, a tea retail venture that failed to scale up, and Marico’s Kaya Life, a fitness centre.

Some benefits: Retail stores provide consumer companies with a new source of revenues for brands and allows them to extend their association with consumers. Photo: Ramesh Pathania/Mint

“Wills Lifestyle has less than 0.5% market share in the $20 billion (Rs 1.1 trillion) apparel market after 12 years of operations. Moreover, the chain has barely broken even," said IDFC’s Nikhil Vora, Swati Nangalia and Harit Kapoor in their report and added that “FMCG companies cannot do ‘services’!!!..."

FMCG or fast-moving consumer goods companies sell home and personal care products.

However, these early failures have not deterred the companies.

Kaya is exploring the launch of a new format next year to “to make the brand far more accessible and relevant to our clients," said Ajay Pahwa, chief executive officer, Kaya Ltd.

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Dabur’s New U, which has 50 stores largely in the North and in Hyderabad and Bangalore, plans to add 30-40 stores during this fiscal. And ITC, which has over 100 Wills Lifestyle stores and 425 John Players stores, is further “expanding its presence in metros and tier II and III markets," said Atul Chand, divisional chief executive, ITC’s Lifestyle Retailing.

Yet others such as TBG, makers of Tata Tea and Tetley, are taking the joint venture route. In January TBG and Starbucks Coffee Co. announced a 50:50 joint venture named Tata Starbucks to own and operate Starbucks cafés in India.

“We will make profit at the organization level in two years," said P.D. Narang, group director, Dabur, and added “the chain is expanding in a calibrated manner".

Retail stores not only provide consumer companies with a new source of revenues for brands, but also allows them to extend their association with consumers. “We get to know taste preferences immediately, which helps us in future menu innovations as well as in using these into the in-home product portfolio as well," said an HUL spokesperson. HUL’s retail ventures—Bru Cafes and Lakme Salons—are named after its coffee and cosmetic brands.

For ITC, retail also helps as surrogate advertising, since the company cannot advertise its cigarettes, and is also an avenue for retailing its personal care products under the Fiama Di Wills range. ITC’s move into apparel lifestyle retail is “in line with its strategy to create multiple drivers of growth", said Chand.

Likewise, Marico launched Kaya in 2002 after it identified a gap in the skin care market. Kaya is an extension of Marico’s wellness and beauty portfolio to address consumer needs in the Indian skin care market, said Pahwa.

Yet, these synergies are being overpowered by specific challenges.

“The nature of both the businesses (consumer goods production and retail), their challenges, business models, needs are quite different, the scope of synergy is limited," said Pahwa, while explaining that retail has its own challenges such as the lack of suitable real estate and infrastructure, and a talent crunch.

“Packaged consumer goods manufacturers should stick to their area of expertise as retail requires dedication, a different set of skills and lots of money to succeed," said Mohan Mahajan, partner, Mahajan and Aibara, a retail sector management consultancy, while explaining that to become profitable in retail scale is needed to offset the high costs of operations and expensive real estate.

According to the IDFC analysts, personal and home care products companies are better off investing money in their core businesses as there is still plenty of opportunity in the underpenetrated packaged goods market in India. For instance, they said, if HUL exits Lakme Salons, transforms its Pureit water filter business into packaged out-of-home water and exploits the emerging opportunities in packaged food, it can grow its business from $4 billion today to over $13 billion by 2020.

To be sure, even large conglomerates which have retail ventures, such as Reliance Retail Ltd, an arm of India’s most valuable company Reliance Industries Ltd, or the $28 billion Aditya Birla Group’s retail enterprise Aditya Birla Retail Ltd, are still not profitable.

The capital-intensive nature of the business has seen retailers get weighed down by large debts, which are difficult to service in a slowing economy. In May, India’s largest retail company by revenue, the Kishore Biyani-led Pantaloon Retail (India) Ltd, announced the sale of a majority stake in its apparel department retail chain Pantaloons to Aditya Birla Nuvo Ltd, in a bid to reduce its debts.

In August Fitch Ratings, a credit ratings agency, downgraded the nascent retail sector to negative from stable due to worsening business conditions.

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