Secret sauce

Capital Foods is aspiring to play a bigger role in the organised FMCG arena with its soup and noodle brands

God was running this business for five years,” Ajay Gupta declares after a moment’s startled pause on being asked who was running Capital Foods before he took over in 2000. It’s a question the 47-year-old adman-turned-entrepreneur should have expected. He started the Mumbai-based company in 1996 with ₹2.5 crore from investor-friends but didn’t take over as managing director until 2000, by when the lack of owner involvement had left its mark: investors started backing out, revenue was just ₹3 crore, there were no clear financial statements to show where resources were allocated and no marketing and distribution strategies were in place for the company. “The company’s really started from 2001,” says Gupta. 

That’s when Capital Foods became a serious player in the Indian processed foods market and since then, there’s been no looking back. It is now a ₹150-crore company with ambitions of doubling in size in the next three years. It has three brands in the Indian market and is also a significant private label supplier in the export market. Ask Gupta, though, and he lists his biggest challenge as something a little less tangible than numbers in the balance sheet. “Changing the mindset of Indian women in the kitchen, getting them to accept processed foods and ready meals has been the toughest part.” But, as he admits, the effort has been worth it.

Chindia rules

For many urban households now, preparing Chinese food at home means stocking up on sauces and noodles from Ching’s Secret. But perhaps “Chinese” is a bit of a misnomer: no native of China makes food that tastes like this, but “Chindian” is hugely popular in India, from street vendors to fine dining restaurants. “In a country like India, the ethnic cuisine changes every 300 km. But not Chinese — people in all parts of the country eat it,” agrees Gupta. “And they do not like authentic Chinese, they like Indian Chinese. That is Hakka Chinese.” 

In keeping with that, Ching’s Secret, which sells Hakka Chinese sauces, noodles, seasonings and soups, accounts for 70% of Capital Foods’ domestic turnover; the remainder comes from Smith & Jones instant noodles and ginger-garlic paste and Raji chutneys and frozen food. Getting to this position wasn’t easy. Demonstrations at retail outlets, in offices and at different exhibitions helped familiarise the company’s products and the growth in the topline (thanks to the company’s export initiative) encouraged Gupta and his team to try new things. “Once the money started coming in, we were able to focus on our core business as well. We started innovating and our products’ presence was visible now,” says Gupta. 

By 2006, the company had added instant noodles to its portfolio and was raking in ₹30 crore a year, which is when it caught the eye of Future Group. In 2006, Future Group’s investment arm, Future Ventures, picked up 33% stake in Capital Foods for ₹13 crore. “We saw it as a company with a lot of potential and innovative brands. We like the processed food space and we have liked the way Capital Foods has developed its brand,” says KK Rathi, executive director and CEO, Future Ventures. Capital Foods has also been able to impress its investor in more than just quality terms. “It had a domestic turnover of just ₹10 crore in 2006; but today it has a turnover 10 times that number. It has grown more than what was expected.”

Much of that growth is due to Capital Foods’ association with modern trade, which also laid down roots in India over the same period. While Gupta began with Future Group — at the peak, close to 20% of the company’s domestic sales were through Big Bazaar — now,  about 8-9% comes from the Kishore Biyani-backed stores, while substantial sales happen through other players — Reliance Retail, Hypercity and Spencer’s. In all, modern trade accounts for 40% of Capital’s domestic turnover. “Distribution is the biggest black hole for any food manufacturer in India. We used modern trade to build our business,” says Gupta. 

Ramaprasad Chatterjee, AGM, Reliance Retail, explains why Ching’s has clicked in the modern trade format. “Women don’t usually ask for processed food at general trade stores. But in modern trade, they end up buying more things, primarily processed foods, that they desire as well. Modern trade has given Capital Foods and other processed food brands a face of their own,” he says. The chain has been selling Capital Foods’ products for over seven years and is now the single-largest retailer for the company. 

Hits and misses

While there are no numbers available, most retailers agree that Ching’s Secret leads the market in Chinese soy and chilli sauce. As Rachit Mathur, principal, Boston Consulting Group, points out, it’s a very niche market, but “some of the sauces are quite authentic and different from what conventional restaurants have to offer.” Capital Foods’ other big brand, Smith & Jones, is one among many in the categories in which it is present: instant noodles and ginger-garlic paste. For the latter, Gupta concedes that Dabur is the No.1 player, but claims Smith & Jones is the leader in modern trade sales. 

The story isn’t that tasty for the instant noodles range, either. The noodles market in India is close to ₹4,500 crore, with Nestlé’s Maggie as the clear winner with more than 60% market share, followed by ITC with close to 11%; Capital Foods’ Ching’s Secret and Smith & Jones, in contrast, have a minuscule 1.7% share (see: Tangled affair). Boston Consulting Group’s Mathur says, “Nestle’s Maggi took 14-15 years to create and establish itself in the noodles category but, ITC’s Yipee! has made a decent dent in the market in quick time.” Capital Foods, too, had grand plans, but market reality forced Gupta to look the other way. “We took a terrible beating in the noodles segment. We said to ourselves we can’t fight against the giants, let us not even try to do it.” 

Capital Foods has now turned its attention to growing the instant soup segment, where it was a late entrant in 2012 but is already the No.3 player. According to Euromonitor, Hindustan Unilever’s Knorr leads the ₹264-crore market with a 63.5% share, followed by Maggi at 22.8% and Ching’s Secret’s Chinese soups with 11% (see: Hot & spicy). “Soup isn’t part of Indian eating habits, but Chinese soups are very popular here,” Gupta says. What’s helped the company make it to the consumers table is price: at ₹10 a pack, it is just a third of what Knorr charges. “Knorr is more flavourful, but playing the price point is gradually giving Ching’s Secret the edge,” points out Reliance Retail’s Chatterjee. Going forward, further adoption will be the category driver, says Mathur. “While price points are important, changing eating habits will be key,” he adds. That’s where Gupta’s marketing expertise will come in handy.

Personal touch

With fierce competition in all the categories that Capital Foods operates in, advertising, promotion, distribution and innovation for the company’s products are always top of mind for Gupta. More than plain vanilla advertising, he is a votary of promotions. A cooking enthusiast himself — although, ironically, his forte is Mediterranean cuisine, not Chinese — Gupta used to accompany the demo team to events in the early days of the company. There’s no time for that now, but the company’s marketing and promotion budget eats up a third of its turnover. “I believe it is the personal touch that speaks for cooking. Watching advertisements about how good a product is will not help as much as experiencing it would,” he declares. 

Right now, the focus is on selling soup and breaking the notion that soup is a winter food. The summer of 2013 saw Capital Foods invest heavily in billboards and bus-shelter frontage advertising, all promoting soup. “I am fighting for the category,” says Gupta. 

He is also rejigging distribution. Where earlier, the focus was only on modern trade, general trade was brought into the picture in 2008-2009 and has since been picking up steam. The company is now present at all major modern trade outlets as well as 125,000 general trade stores across four states — Maharashtra, Gujarat, Punjab and Karnataka. “I have no shame in saying that I am not a national player. When you know that the majority of revenue will come from few pockets in these particular states, you save on distribution cost [currently 14%] by not foraying elsewhere,” says Gupta.

Capital Foods now has three manufacturing plants that focus on domestic operations, up from just one a decade ago. The company’s three brands are also exported to some 10-12 international markets from these units. 

Exports calling

Capital Foods turned to exports to bring in much-needed revenue in the first couple of years, when the market was still to warm up to Ching’s Secret. Gupta set up the company’s second manufacturing unit (the first is at Nashik), in the Kandla Special Economic Zone (SEZ), dedicated to exports. One of the largest ready-meal plants in India, this 100,000 sq ft facility manufactures private label foods for brands such as Swad of the US-based Raja Foods, Pattu of Sabi Foods in Australia and Natco Foods in the UK. 

British supermarket chain Tesco signed on as one of the initial clients for three years — an achievement Gupta credits to his marketing skills. Similarly, the Chicago-based Raja Foods, which has 51-odd Indian grocery stores across the US, has been associated with the company for a decade now and has even taken a 1.5% stake in Gupta’s venture. “All our products under the Swad brand are manufactured by Capital Foods,” says Swetal Patel, senior vice-president, Raja Foods. “We share a friendship more than a business association.” It’s a profitable friendship: 50% of Capital Foods’ private label business comes from Raja Foods.

The second-biggest customer is Sabi Foods, which came on board as a customer in 2005; its brand Pattu now brings in business of over ₹4 crore a year. “We wanted to foray into the processed foods market here in Australia and we found Capital Foods online. We researched about the company and spoke to Gupta a few times. After a couple of meetings, we knew we wanted them to manufacture our products,” says Uvaraja Hariramakrishnan, managing director, Sabi Foods. “The company’s plant meets food safety standards and it keeps on innovating along with its customers,” he adds.

About 3% of Capital’s turnover is currently devoted to research and development and the company has a nine-member team of flavourists, chefs and food technologists. The latest innovation is in Gupta’s pet project — soups — where the company has created a new flavour, schezchow, blending manchow and schezwan. For its private label customers, the R&D team has combined flavours of three Gujarati communities — Surti, Charotar and Kathiawadi — into heat-and-eat patra. “And Indian community loves it here,” says Patel.

When the company first started the export unit, exports accounted for 70% of Capital’s revenue. That proportion has been steadily dropping over the years. “Getting into exports was a strategic decision to bring in cash into the company. It does not affect our core business in India,” Gupta explains. Indeed, over the past five years, exports has remained stable at around 25-30% of revenue.  

Future plans

Where does Capital Foods go from here? For starters, it’s all about soup. From the current ₹35 crore, Gupta wants Ching’s Secret soups to be a ₹100-crore brand by 2015, even as its domestic business grows and exports continue at current levels. Gupta admits that it is easier and far more profitable to concentrate on the private label business. While the company’s overall Ebitda margin is 18%, the export Ebitda margin is significantly higher at 28%, with domestic margins at just 15%. Gupta says the domestic operations are saddled with additonal distribution and marketing expenses. But, he adds, “I built a brand and now I am going to make it bigger.”

He may have to do that without the support of the Future Group. There have been media reports about Future Ventures seeking an exit from Capital Foods. Rathi neither confirms nor denies the rumour, though he points to a recent development: Capital Foods no longer gets the bulk of its modern trade business from Future Group. The market buzz is that Future is exiting the business soon and the same stake will be bought by New York-based Invus Group. Only time will tell if that happens or not but, for now, Gupta agrees that finding the right new partner will be a challenge. “We want a partner who buys the stake that Biyani holds, but gives us as much freedom as he granted us. Unless that happens, things will be difficult for us,” says Gupta. “You cannot force a new food culture on a food-culture strong country like India.”