Companies
Best of the week | Can Sitapati’s HUL playbook turn around Godrej Consumer?
Summary
- In the last three years, GCPL, the maker of Goodknight mosquito repellents, has underperformed the Nifty FMCG Index. CEO Sudhir Sitapati is working on a turnaround plan but it is taking longer than expected—he has a mountain of complexities to conquer.
New Delhi: In the 1970s, R. Chinnikrishnan, a farmer turned entrepreneur from Cuddalore, found something odd with the way talcum powder and epsom salts were sold in India—in large tin containers and glass bottles. They were unaffordable to blue-collar workers in factories as well as farmers. And thus, the idea of small sachets was born.
Initially marketed by C.K. Ranganathan, Chinnikrishnan’s son and the current chairman of CavinKare, the idea was quickly aped by multinationals to sell a vast swathe of fast-moving consumer goods (FMCG), from shampoos to biscuits. In the decades that followed, the market, at the bottom of India’s consumption pyramid, exploded.
Now, can thinking small tame the big mosquito menace? And importantly, can it propel the fortunes of Godrej Consumer Products Ltd (GCPL)?
Goodknight, the company’s flagship brand, has long been available in various formats such as coils, liquid vaporizers, and flash cards. In 2023, GCPL introduced a ‘Goodknight Mini Liquid Vaporizer’ machine, pricing it at ₹50, from the previous entry price of ₹100. The company claimed it was “the cheapest liquid vaporizer and instant kill spray solution in the world". Additionally, it launched a 40ml version of HIT, a mosquito and cockroach spray brand, at ₹50, halving the price—the previous entry price was ₹100.
These moves are part of a grand plan to make aerosol products more accessible to Indian consumers and expand the company’s customer base by millions of households. This also fits into a larger image makeover narrative. The company, for long, was under-indexed on rural areas and heavily focused on urban markets. The time is ripe to change that premium image.
The ‘sachetization’ strategy, though, is just one of many tricks Sudhir Sitapati, the company’s managing director and chief executive officer (CEO), has in his bag. And many of the tricks are similar to the playbook of Hindustan Unilever (HUL), India’s largest consumer goods company. Sitapati joined GCPL in October 2021, after working in HUL for over two decades.
HUL has practised and perfected the low-price point strategy, selling brands such as Sunsilk shampoo and Surf Excel detergents in sachets. This strategy helped build these categories. At the same time, they drove repeat purchases.
While GCPL has outperformed HUL in stock market returns in the last three years, the company has underperformed the Nifty FMCG Index. The benchmark gained nearly 65% since August 2021; GCPL’s stock, in contrast, grew 39%.
Analysts said that competition has picked up and markets such as Africa continue to be a drag. Even before Sitapati joined, the company’s return on capital employed—a ratio that measures the efficiency with which capital is employed—had been adversely impacted by a spate of foreign acquisitions.
“There is no new excitement to factor in. In Africa, they continue to see hiccups in the top line," said an analyst who didn’t want to be identified.
To make investors happy, Sitapati has to accelerate growth and make the business simpler. He has been working towards it. Apart from pressing ahead with the sachetization strategy, the company has partially exited some markets in Africa, boosted advertising spending, trimmed the number of stock-keeping units (SKUs) it sells, reduced overheads and expanded to newer categories.
The market is certainly hoping all these efforts will bear fruit soon. “CEO Sudhir Sitapati led turnaround has taken longer than expected, but we see 2024 as the final lap where efforts should come to fruition," Jefferies, a capital markets firm, stated in a report in January this year. In another report, dated 7 August, Jefferies stated that “excessive growth focus is evident. While share price may be volatile in the short term, we find GCPL a strong medium-term play."
No time for Africa
Founded in 1897 as part of the Godrej Group, the company initially focused on manufacturing locks. Over the years, GCPL diversified its portfolio, venturing into consumer goods like soaps (Cinthol), hair care products (Godrej Creme colour, Nupur henna), fabric cleaners (Ezee) and air care (aer) among others. It also expanded internationally, to Africa, Indonesia, Latin America, and the US.
In mid-2000, the company charted out on a ‘3 by 3’ strategy, targeting regional assets in three emerging markets (Asia, Africa, Latin America) across three categories (home care, personal wash and hair care). An acquisition spree followed—GCPL snapped up companies and brands in Indonesia, South Africa, Kenya, Argentina, Chile, the UK, and even the US.
All this led to a mountain of complexities. Consumer needs across large regions are quite diverse and simply put, for GCPL, it was too much to handle.
While the international markets accounted for 41% of the company’s revenue of ₹14,096 crore in 2023-24, Sitapati wanted to simplify this business, exiting loss-making ventures or businesses that weren’t adding enough value.
In February this year, GCPL divested its entire stake in Godrej East Africa Holdings Ltd, Mauritius. It also partially exited the Kenya business, a market it entered in 2016 with the acquisition of a majority stake in home and personal care company Canon Chemicals. While it still holds rights for the brand, it has moved to a royalty model where another company runs the operations. “It was a loss-making venture. So, the question we had to ask is whether it is worth the effort. When you simplify, you put time into things that really matter," Sitapati told Mint.
In Nigeria, the company has outsourced sales and distribution while holding on to manufacturing, research and development and marketing.
That simplification journey isn’t done yet. “It’ll take another year or two to simplify international operations further," the CEO said.
This move is expected to help the company free up resources to tap consumption growth in more exciting markets such as India and Indonesia.“India is by far our largest and most profitable market and a market that we understand well. In terms of capital and focus, India is number one," Sitapati said. Indonesia is a large market, too, and is growing fast. “We’ve got a presence in Africa. There will be a time for Africa," he said.
The company does not disclose the contribution of its Africa business. Africa, US and Middle East as a region generated ₹3,179 crore in revenue in 2023-24.
Kaustubh Pawaskar, deputy vice president of fundamental research at brokerage firm Sharekhan believes that reorganization of the international business will help the company’s profitability in the long-term. “Though in the near-term revenues from these regions will be lesser, the profitability from this region will be much higher," he said.
Mosquito pie
What is the “excessive growth focus" Jefferies noted?
One, Sitapati rolled out several low-priced stock keeping units for existing categories such as fabric cleaners, household products and hair creams, effectively opening up the market to a new set of consumers.
We mentioned insecticides earlier. The company launched Godrej Fab, a ₹99 liquid detergent that also comes in a 100 ml sachet priced at ₹10. Two years back, GCPL launched a ₹15 one-time use pack for its hair colour brand, Godrej Expert Rich Crème. The product was initially launched at ₹30 in 2012.
A former employee at GCPL said that such price-points were earlier unimaginable at the company because typically prices of products move up. This strategy, he concluded, mirrors HUL’s playbook wherein the company floods the market with products across various price points, pushing consumers to try a new product.
“People who come from HUL come with the same mindset, i.e. category creation and category development. Earlier, in GCPL, the category development mindset was missing—it was focused on quarter-to-quarter profitability," the executive, who didn’t want to be identified, said. “Sudhir brought in the long-term thinking. He was also given a free hand by the family," he added.
Nisaba Godrej is the executive chairperson of GCPL. She is the daughter of Adi Godrej, the former chairperson of the Godrej Group.
While GCPL’s share is dominant in the household insecticide market, it has remained stagnant, both because of domestic competition and illegally imported incense sticks.
Last month, GCPL also introduced a new ‘renofluthrin formulation’ in its Goodknight vaporizer, hoping to claw back some share from illegal imports. The company claims that the formulation is twice as effective against mosquitoes.
Sitapati said the renofluthrin innovation, a decade in the making, could push the company to clock double-digit growth in the house insecticide category. “This is a tall order because for the last 7-8 years, it hasn't grown anywhere close to that," he said.
Smelling good
The second growth focus stems from newer categories. Last year, GCPL announced the acquisition of Raymond Consumer Care Ltd for ₹2,825 crore, giving it rights to brands such as Park Avenue deodorants and wellness brands such as KamaSutra condoms.
Sitapati believes that both these categories are under-developed in India and GCPL can drive penetration.
“There are plenty of health and beauty categories, which many Indians don't have access to. We felt that both sexual wellness and deodorants are under-penetrated, under-consumed categories in India. That’s why we did the Raymond’s acquisition," the CEO said.
Last month, the company also announced its entry into the pet food business.
“The biggest obsession in India is growth," Sitapati said. “In Indonesia, our job is to raise the capability of the business at par with India."
Show and tell
Long before taking over the top post at GCPL, Sitapati harboured admiration for the Mumbai-based company.In GCPL, Sitapati saw a company that had excelled at innovation but lagged in marketing muscle. He wanted to right the wrong.
Till a few years ago, the company used to spend ₹350- ₹400 crore annually on advertising in India. Sitapati has now more than doubled the ad allocation to ₹1,000 crore.In 2023-24, GCPL effectively spent 9.5% of its revenue on advertising, a shade lower than HUL, who spent 10.5% of its revenue ( ₹6,380 crore) on promotions, as per the company’s annual report.
In 2023, GCPL also moved to an in-house advertising agency, Lightbox.The agency leads creative campaigns for regions such as India, Indonesia, Africa, and Latin America. Sitapati underlined closeness to consumers as the key benefit of an in-house agency.“It’s a big strategic shift in terms of media spending. The main benefit is that the advertising folks are very close to consumers," he said.
Shedding weight
Meanwhile, the CEO has pruned the management structure, removing multiple layers of reporting.Between 2021-22 and 2023-24, the company has trimmed its corporate manager count by 10%, as per analysts at Sharekhan.
“We realized that many of the categories we operate in (for instance, home and personal care) have similar needs across the world. We earlier had a divisional head, a zonal head and an area head. We delayered the zonal head and now just have divisional heads and area heads. The principle is the same—simplify," Sitapati explained.
The former employee quoted earlier said that the company “merged roles". “The CEO questioned why a category, say hair colours, needed separate brand managers and category managers. Instead, he expanded resources in sales, getting more area sales managers on ground," the former employee said.Sales executives are key for distribution growth, a priority for GCPL.
“There’s a second wave of rural distribution that’s required," the CEO told Mint. That could be the next big driver for growth.
Another operational measure has been to trim the company’s SKUs. In the last two years,GCPL has reduced SKUs by 30%.Raymond Consumer Care, when acquired, had 300-400 SKUs. GCPL has already trimmed it to 80-90.
Lesser number of SKUs reduces both overheads as well as the manpower needed. Simply put, it helps the company in a smarter distribution of capital.
Considering the company still has some distance to go to make investors happy, Sitapati has his hands full. Analysts will keenly watch the next two quarters.
“He took over during the pandemic and during various global uncertainties. Now things are improving. So, we expect volume growth to come back on track," Pawaskar from Sharekhan said.
