27 Nov 2015 19:00 IST

Can Patanjali make an all-India brand?

Yoga Guru Baba Ramdev plans to go national with the FMCG brand, but is it possible?

Yoga guru Baba Ramdev made quite a splash by announcing big plans for his FMCG company Patanjali Ayurved. The fast-growing firm, with estimated revenues of ₹2,000 crore in 2014-15 (the company is unlisted), is said to be targeting sales of ₹5,000 crore this year and ₹10,000 crore in the next few years.

But how does Patanjali hope to achieve this feat, when the Indian FMCG market is growing at only 8-10 per cent a year? Well, after piecing together his interviews to the media, the Baba’s business plans are as follows.

USP

Patanjali plans to use ayurveda as its USP and make a whole range of FMCG products — from honey and liquid detergents to noodles and health drinks — entirely from organic and natural ingredients. In doing so, it plans to eat into the market shares of MNCs who use chemical ingredients.

The firm will price its products at discounts of anywhere between 15 and 50 per cent compared to existing brands in any category. It claims it can afford this because of low advertising spends (it relies mainly on word of mouth now) and administrative costs.

Though the firm presently derives most of its revenues from North India, it plans to go national. To do so, it will supplement its own Patanjali outlets with distribution through Big Bazaar and other retail outlets.

But can Patanjali make it to the ₹10,000 crore league?

Well, it will be no cakewalk. The struggles of other regional FMCG firms shows that to grab market share from national FMCG giants — such as Hindustan Lever or Nestle India — Patanjali will have to surmount three big challenges.

Going national

Carving out a niche for an FMCG brand in a local area or regional market isn’t very difficult, and many regional players from Calcutta Chemicals to Nirma have managed it with aplomb. But brands that click in one region or market in India don’t necessarily work in others. One impediment is the big divergence in consumer tastes and preferences across States.

Regional tastes matter even in products as mundane as toilet soaps. For instance, consumers in the South are said to prefer sandalwood or herbal soaps ( Hamam, Medimix, Santoor) while those up North prefer floral ones (Lux, Breeze, Godrej No 1). Such differences in tastes are prevalent across all product categories — be it shampoos, toothpastes or food products. This is why Godrej Consumer’s attempts to break into the South with its bathing soap, or Nirma’s attempts to diversify out of the West didn’t meet with much success.

Patanjali’s FMCG business is currently focussed on North India. For it to break into the Southern or Eastern market, it may have to launch more variants of not just its soaps, but all other FMCG products that it plans to launch.

This will mean setting up multiple production facilities across India (its facilities are currently in Uttarakhand), managing more stock keeping units and incurring logistics costs to ferry goods across the country.

Going national will also mean negotiating with hundreds of stockists and retail outlets, to ensure that Patanjali’s products do make it to the store shelves. Patanjali is currently said to have an indirect reach of about 3 lakh retail outlets.

That’s a minuscule proportion of the 4 million outlets that Nestle’s products already reach and the over 7 million outlets that Hindustan Unilever straddles. Yes, Patanjali has plans to scale up to about 2 million outlets, but that will entail a tenfold expansion from current levels.

Even if the firm manages to acquire that shelf space, it will need to ramp up staffing and increase sales and distribution spends. The thinner the firm spreads itself across FMCG categories (it already has a 100 product portfolio of soaps, hair oils, shampoos, dyes, detergents, agarbattis, dishwash, atta, breakfast cereals, juices and ketchups, tea, dairy and health supplements), the higher its cost structure on going national will be.

Expensive brand-building

Patanjali has traditionally prided itself on zero advertising and has relied mainly on word of mouth (and references by the Patanjali Yoga teachers). But if the firm would like to scale up to a national presence in short order and diversify from its traditional areas of strength, investing in a national advertising and promotion campaign cannot really be avoided.

Desi FMCG firms such as Dabur India and Marico India managed to scale up to a size of ₹5,000 crore or so from a regional presence only after a nationwide advertising campaign. Such campaigns familiarised consumers in new geographies with their brands and products.

National FMCGs, including MNCs, typically spend 8-12 per cent of sales on advertising and promotion. When rolling out a new product or brand or selling in a sluggish market (like now), those spends can even spike up to 12-14 per cent.

Given this backdrop, it is difficult to imagine Patanjali scaling up to revenues of ₹5,000 crore or ₹10,000 crore without actually incurring ad spend. Going by its financials, published in a CLSA research report (Wish you were listed, Patanjali — August 2015), the FMCG firm made an operating profit margin (OPM) of 20 per cent on its sales in 2013-14, after charging raw material costs of about 52 per cent, staff costs of about 4 per cent and other expenses of about 24 per cent. It incurred negligible spends on advertising and promotion that year.

In the same year, Hindustan Unilever made operating profit margins of just over 16 per cent. Its material costs and staff costs to sales were almost identical to Patanjali’s at 52 per cent and 5 per cent respectively. But it still managed to make an OPM of 16 per cent, after spending 13 per cent of its sales on advertising and promotion.

Clearly, if Patanjali really wants to pit itself against MNCs like Hindustan Unilever and scale up to their size, it will have to maintain a tighter rein on its costs and find enough surplus to foot the bill on ad spend.

Getting the pricing right

The other challenge facing Patanjali is its determination to use discounts and the ayurveda plank to woo consumers away from other brands in the market. Even now, Patanjali’s products across categories such as toothpastes, detergents, soaps and noodles are being marketed at a 15-30 per cent discount to competing brands in the market. This discounted pricing strategy, taken with the herbal/organic/ayurvedic plank, is no doubt responsible for the firm’s scorching growth rates so far.

But given the sizeable investments that Patanjali’s national scale-up will entail, it is hard to see how it will maintain steep product discounts from here on. The fact that the firm claims to use all-natural ingredients, sourced organically, makes this even more of a challenge. Natural ingredients used in herbal FMCG products are bound to be far more difficult to source in large quantities than chemical ingredients, which are largely commoditised and produced at enormous scale by global chemical giants. The expensive ingredients are the reason why products with an eco-friendly, natural or organic tag (think Biotique, Body Shop or Fab India) usually retail at sizeable premiums over conventional products.

Of course, all this will not matter at all if as Baba Ramdev says, Patanjali’s FMCG operations are managed like a charity which makes modest profits and gives them back to society. But then, there’s a disconnect here. No ₹5,000-10,000 crore business can sustain itself on thin air. It will need a regular infusion of capital to grow and for that capital to keep pouring in, the business will have to be run for-profit!

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