Not all is well

There’s a carefully preserved old magazine, circa 1995, on a shelf in Pankaj Patel’s Ahmedabad office. It features an interview of him and Patel looks remarkably different in it. He’s younger, of course, his hair darker and his smile more reserved. Patel looks at this picture with some amusement. “A lot has changed since then,” he says.

That’s not an understatement. Now a dollar billionaire, Patel owns the Cadila Group that houses companies such as Cadila Healthcare and Zydus Wellness. While his flagship clocked revenues of Rs.4,464 crore in FY11 and has compounded sales at 23% for the last five years, sales at its 72% wellness subsidiary, have grown from Rs.43 crore five years ago to Rs.336 crore in FY11.

The company acquired its present name after its parent Cadila Healthcare de-merged two of its products, EverYuth and Sugar Free into Carnation Nutra Analog Foods, a company it had acquired in 2007. You could say Zydus Wellness is a play on the rising affluence in the country. As people get richer, they tend to do less and spend more to keep fit.

Zydus’ portfolio includes three key products that cater to these needs — Sugar Free, a low calorie sweetener, Nutralite, a substitute for butter, and EverYuth, a range of skin care products. All three products cater to the evolving needs brought about by a change in lifestyle, and it is politely called the business of wellness.

Patel’s positioning of Zydus’ products was clearly thought through. “Let’s face it,” Patel says of the deep pocket multinationals who dominate the FMCG segment. “I cannot compete against someone who reaches a million outlets.” Instead, he decided to be a niche player. “We figured there was a need in the market that was not met,” Patel says of Sugar Free and Nutralite, all brands that Zydus has nurtured to astonishing success.

“We consciously did not want to wear the pharmaceutical hat in the FMCG business. Products get sold in the pharma business precisely because there is an existing demand for them. In the FMCG business, by contrast, one has to create demand.” While Zydus did manage to create a niche for itself, intense competition has taken the wind out of its sails in the last year as revenues fall steadily. Can Zydus make a comeback? 

Yesterday was good 

Patel’s choice of products in the consumer space worked like magic until late. Sugar Free, which has fewer calories than regular sugar, gained popularity not only because people are increasingly conscious about their calorie intake, but also because of the rising number of diabetic patients in the country. The diabetic market is pretty big and its penetration is low compared with other developed markets such as the US. Take a look at the figures — the market for artificial sweeteners stands at $2 billion in the US whereas 10% of their population is diabetic.

In comparison, the $21 million Indian market is small but holds growth potential, more so because about 40 million Indians have type-2 diabetes (where glucose or sugar builds up in the blood instead of being broken down) and the World Health Organisation expects their numbers to rise to 70 million by 2025.

Patel’s meticulousness resulted in Zydus’ ‘Sugar Free Gold’ and ‘Sugar Free Nutra’ commanding nearly 85% share of the market for artificial sweeteners. Sugar Free’s brand extensions include a low-cal soft drink and a powdered soft drink concentrate. During its heyday, Sugar Free was seen as invincible.

Sample this analyst quote: “The brand recall is so strong that even if competition comes in from stronger players, the company will gain because the new entrants will educate the market but customers will most likely go and end up buying Sugar Free — it’s become like Xerox in the photocopier space,” explained Ravi Mehta of Indsec Securities and Finance, in his research report in 2009. At that time Zydus did not have to worry about distribution too because it had the backing of its established parent,
Cadila Healthcare.

 Nutralite, a brand of margarine, an alternative to butter, again is a niche Zydus found for itself. Margarine is made of vegetable fats, which are free from trans and hydrogenated fats — the stuff that causes heart attacks. It is consumed in equal quantity as butter in the US, but its penetration in India is negligible — less than 1%. The other advantage of offering a butter alternative was that it avoided going head to head with Amul which controls 70% of bulk sales and hence the market.

Over the years, Zydus has been pushing up its retail reach too, especially as modern retail stores offer the much needed visibility for such products. Now, about a quarter of its sales come from retail, where the margins are higher, but institutional sales continue to be the dominant revenue driver. 

Skin care was also a segment that Zydus ventured into with face wash, scrubs and peels. These categories were not as aggressively addressed by mncs then and offered high margins. In the absence of cut-throat competition Zydus asserted itself in these categories with its EverYuth brand, which brought in roughly a third of its revenues. 

Peeling off

In the past year however, things have gone terribly awry for all its segments. Zydus was in a sweet spot in the past few years because its chose business segments carefully — segments with little competition but offered huge potential for growth. But now, that landscape has changed.

Firstly, growth rates in the low calorie sweetener category have slowed down considerably from over 20% to single digits. “Neither the management nor experts seems to have a valid reason but Sugar Free sales have dwindled in the past year or so,” says an analyst who did not wish to be quoted. 

And then, in the face wash and scrubs segment, five years back there was hardly any competition. But now EverYuth is facing heat both from MNCs such as Johnson & Johnson (Clean n Clear), L’Oreal (Garnier), Hindustan Unilever (Lakme, Pears, Ponds, Fair & Lovely) Beiersdorf (Nivea) and Procter & Gamble (Olay) and local rivals Wipro Consumer (Santoor), Ozone (Nomarks), Chandrika, Himalaya and VLCC. 

Besides, the company’s decision to remain conservative with ad spends only fuelled the decline in sales. That let competition snatch away market share from EverYuth by resorting to high-pitch advertising. Though Zydus has started aggressively advertising from the fourth quarter of FY12, it seems a bit too late. In fact, a combination of weak sales and higher advertising spend will only squeeze margins, feels the earlier mentioned unnamed analyst.

To compound Zydus’ woes, even Nutralite, which contributes nearly a third of revenues, has seen its sales plunge. For Nutralite, three-fourth of its sales comes from institutional players such as hotels and restaurants. Here Zydus competes with unorganised players. Now, due to an increase in palm oil prices, the company lost business to unorganised players as the latter refrained from increasing prices unlike Zydus. Not surprising that against such a backdrop revenues plummeted from Rs.91 crore in Q1FY12 to Rs.76 crore in the December quarter. 

Giant leap

But Patel is not losing hope. Though he is reticent about future strategy or new launches, he has roped in a new managing director Elkana Ezekiel, an ex-J&J hand with vast experience in marketing and branding, to fix the slide. But given the wherewithal of competition across Zydus’ key business segments, the possibility of a quick turnaround seems unlikely.

The only plus for Zydus Wellness is its zero debt balance sheet, but then that is hardly any consolation for investors who have dumped the once-fancied high-growth stock. From its closing high of Rs.736 in July 2011, the stock price has more than halved to its current level of Rs.363. 

Patel is also not letting go of the big picture and wants to grow Zydus Wellness into a Rs.550 crore company by FY15. Though the pace is not that scorching as in the past, sales will have to compound 20% for the next three years. Patel is unperturbed and his formula remains the same.

“FMCG, as we have discovered, is about consumer research and specific product development,” Patel insists. He’s betting big on nutraceuticals, where his Actilife brand brings in miniscule revenue currently. Margins can be as high as 30% but Actilife, which has ‘prebiotic fibres’ as its USP will compete directly with giants such as Horlicks, Complan and Bournvita. “Actilife is aimed at a specific adult need for ‘add ons’ to their beverages,” says Sunil Alagh, chairman, SKA Advisors, a brand consultancy.

“Sure, the benefits of prebiotic fibres are known, but I don’t think it is perceived yet as a ‘lifestyle need’, which is why success will be a long haul.” Not surprising that analysts feel Actilife will take three to four years before it starts making a significant contribution to the topline.

Patel has a Herculean task at hand — to bring back on track what was once his fastest growing business. But he has come out trumps before, going from a group turnover of Rs.200 crore in 1995 to Rs.1,000 crore by 2000. Once that was done, he wanted to get to $400 million in 2006. The $1 billion target was hit in  2011 and now he is looking to grow his flagship three times as much by 2015. “Yes, it is a significant challenge,” he sums up. That it surely is, not to mention a story for another day.