Do you remember the matka filled with kaali gaajar and rai (mustard) that would be placed on a three-legged stand in the neighbourhood? It would be left like that for a few days, and we’d all wait eagerly for the drink to be ready,” says Neeraj Kakkar, reminiscing about his childhood. Those who grew up in the northwestern part of the country have already guessed — the potion in question is kaanji, a spicy-tangy drink that made many a child’s springtime. “When was the last time your mother made kaanji?” he asks, and that leaves us thinking.
Kakkar, CEO at Hector Beverages, answers his own question: “The fact is, no one has the time to make that anymore, and it isn’t easily available in the market. Our traditional home beverages are becoming extinct,” he says in his next breath. And he is just the saviour we need.
“I am trying to get kaanji in a doypack for you guys soon,” he says. Kaanji (along with neer mor, sol kadi, panakkam and coconut water) is set to join the many regional drinks he has already revived — aamras, aam panna, jamun kala khatta, kokum, jaljeera, sattu, chilled rasam, tulsi tea, ginger lemon tea and golgappe ka paani. The drinks — some of which were at risk of fading from our collective memory — have been rescued by Paper Boat — a fitting name for Kakkar’s beverage brand.
Making its way
Paper Boat is navigating a market
dominated by bottled water and cola
Kakkar, along with Suhas Misra, Neeraj Biyani and James Nuttall founded Hector in Gurgaon in 2009. Kakkar, Misra and Biyani were Coca-Cola executives and so, knew the beverage market in and out. Kakkar left Coca-Cola to pursue his MBA from Wharton in 2008, where he met Nuttall, who joined Dow Chemicals after college. Of the four, Nuttall and Biyani are no longer with Hector.
Third time lucky?
Kakkar and his company Hector have put all their energy into Paper Boat. However, this isn’t their first beverage venture. Hector made its debut into functional drinks (a ₹1,000-crore category, as against carbonated drinks which is worth ₹10,000 crore) in 2009 with Frissia, a protein powder, which was available at health chains and gyms.
But the company realised that this category was for big players and soon, Frissia made way for a new drink, Tzinga, in March 2011. It was an affordable energy drink, priced at ₹25 as against Red Bull at ₹95. When Outlook Business spoke to the management in 2013, Tzinga was seen as a key growth driver, reportedly selling 1.5 million packs a month, while Paper Boat was just a new launch. But now, Paper Boat, which constitutes 90% of the company’s total sales, is where Hector is placing its bets.
The frequent shifts raise some questions. Has the Indian market of energy drinks (and overall functional drinks) fizzled out? And aren’t investors, who backed Hector because of Tzinga’s success, displeased over the shifts?
Kakkar answers the questions one by one. “I don’t think the market for functional drinks is slowing down. In fact, we strongly believe in its growth. But we are a startup with limited resources and have to define our priorities. Ever since Paper Boat was launched, it has done extremely well and has exceeded all expectations. We are currently more focused on Paper Boat, and want to grow the business as much as we can,” he says.
FMCG experts also try to decode Hector’s decision to put Tzinga on the backburner. “The energy drink is a little ahead of its time and it restricts you to a certain age and occasion,” says Pinaki Ranjan Mishra of Ernst and Young. But Kakkar clarifies, “Most of our strategic decisions are taken with the investors’ concurrence. In Paper Boat, all of us see a once-in-a-lifetime kind of opportunity.”
Interestingly, the first glimpse of this opportunity was quite accidental. Misra, one of the co-founders, used to bring aam panna to work during the summer, and Nuttall liked it. When James’s parents came from the US, his friends wanted to treat them with aam panna, but didn’t find it in the market. That’s when the idea — to make and commercialise the otherwise-household drink — struck them, and Paper Boat was born. The test marketing was done for the first time in February 2013 and the product was launched in August 2013 in Delhi and Bengaluru.
Kakkar, from Karnal, Haryana, belongs to a middle-class family. His father, who worked with the state electricity board, had the most successful career in the entire extended family — until Kakkar joined the carbonated-beverage giant. “When I decided to quit Coke after seven years and go to Wharton, and then started my own business, my dad didn’t talk to me for a year,” recalls Kakkar.
His father thought he was taking too much of a risk, but when Narayana Murthy invested in the business, the confidence was back. Kakkar was working with a venture fund for some time, where he was introduced to Murthy. “I interacted with him and he quietly inspired me,” says Kakkar. Murthy’s fund Catamaran and Bengaluru-based Footprint Ventures invested ₹15 crore in Hector. But this wasn’t their first round of funding. The four had invested ₹2.5 crore from their savings to start the business and had received ₹1 crore from an angel investor as well. Joshua Bornstein, MD, Footprint Ventures, explains the fund’s rationale.
“When I conducted due diligence on the beverage market in 2010, I reached a few conclusions. First, only two beverage categories existed in the Indian market — carbonated (for which global sales are struggling due to health concerns) and juice. I thought significant market demand existed for new products. Second, creating a distribution network is a valuable asset. Third, a mass premium price point was becoming a larger percentage of the overall market,” he says.
Murthy hasn’t been involved in the operations of the beverage company but he is certainly a fountainhead of inspiration. “He is very excited about Paper Boat and continuously challenges us to become big,” says Kakkar. The day-to-day hassles of operations can easily take away the long-term vision from an entrepreneur. And that is where Murthy’s guidance comes in handy. “He always forces us out of complacency and asks us to think big and make five-year plans for the brand,” says Kakkar, without revealing any details of the plan.
On a speedboat
For a brand that sells nostalgia, Paper Boat was a great name — almost everyone in the country has, in their childhood, folded paper to make a boat and thrown it to sail through rainwater. And nostalgia is the filter through which they judge their drink flavours.
“The criterion is that the drink should have a history of more than hundred years,” says Kakkar. Hector’s boat has taken to water like a fish and sailed at a good speed. At the beginning, in 2011, a plant with a capacity of 80 packs per minute was put up in Manesar, Haryana. At that time, they launched Paper Boat in two flavours, jaljeera and aamras, in Delhi and Bengaluru. “Delhi we expected, but we were surprised at the demand in Bengaluru for both the flavours,” says Kakkar. Their expectations from their business were soon going to be outrun by demand. So much so, that this month (i.e., in less than two years since the launch), a second plant has commenced operations in Mysuru, with a capacity of 220 packs per minute.
Kakkar puts a number to this success: “A year ago, we were selling 2 million units of Paper Boat per month and today, we are selling double of that. We have been registering a three-digit growth rate.” This, with a presence in only six cities — Delhi, Mumbai, Chennai, Pune, Bengaluru and Hyderabad.
Nitin Gupta, founder and MD of Mumbai-based KG Functional Beverages, which makes the energy drink Restless Action, thinks building distribution is the biggest challenge before someone creating a beverage brand from scratch in India. “If you build your own brand, you need a lot of money to have a sales force across the country and then more money to market the product,” he says.
Kakkar seems to have learnt that. He understands he can’t take the brand to the next level by himself. “We have tied up with Indo Nissin for the rest of the country. We will try to go much wider in distribution,” he says. Indo Nissin, the makers of Top Ramen, has a reach of 200,000 outlets across 200 cities. Analysts say that while Nissin may not be the best distributor, there is something good about this tie-up. “It doesn’t sell beverages. So, noodles and drink become complementary. I think Hector can do much more by riding on Nissin’s distribution than what it could have done on its own,” says Mishra from EY.
Investors, too, believe that distribution is make or break in this trade. “Paper Boat reaches a fraction of the outlets of Coke or Tropicana. Paper Boat’s products are great, but we need to increase distribution in order to grow the reach of the brand,” says Bornstein.
But Kakkar doesn’t have a fixed number of outlets to crack in the next one year. “There is no outlets target as such. We are looking at a sustainable long-term relationship and at some stage, we want to reach all outlets and cities where Indo Nissin’s products are currently being distributed,” he explains.
Trying to keep up
With sales doubling in a year, Hector is upping production capacity
In addition to selling through retail outlets, Paper Boat has also got a few institutional clients (sales through which make up 10 per cent of the total), although it wasn’t easy at first. It first got through Indigo (the airline) and later, others have also come on board. “We are there on all airlines — Indigo, SpiceJet, GoAir, AirAsia, etc. Now, we would like to target the railways, CSDs and multiplexes in a big way,” says Kakkar.
Gupta is appreciative of Paper Boat’s strategy. “It’s a different product with different packaging. Their flavours are not available in any other brand, giving them a unique position,” he says. Clearly, Paper Boat as an offering is highly differentiated. No other beverage maker has offered rasam, sattu, or aam panna in a packet. But maintaining the lead hasn’t been easy.
“Sourcing has been the single biggest challenge,” says Kakkar. It is one thing to make jamun kala khatta, kaanji or kokum juice at home but it’s another to do so on an industrial scale. Kakkar and his team have travelled far and wide in the country to farms and processors and even abroad to locate the right suppliers for fruits. “We want to make sol kadi but the coconut milk processing facility is very limited. The entire mango processing capacity is for ripened mangoes, nothing for kaccha aam (raw mango). And these days. farmers don’t grow black carrots,” he says.
This has meant that Hector has to work directly with farmers and processors, and sometimes even invest in building their capacities. The company also works with NGOs in Madhya Pradesh for jamun supply. For black carrots, which were found in a remote part of Turkey, the seeds were imported. In the first year, only 10-20% of the crop survived but by the third year, the yield was 80%. “It takes patience,” says Kakkar. But then, it’s hard to find many companies that put in so much effort to strengthen their supply chains. This pioneering effort is expected to bear fruit.
While the beverages are good differentiators by themselves, the packaging they come in is also quite attractive. The doypacks, designed by Nuttall cost 10% of the MRP, similar to a pet bottle, but are cheaper than a tetrapak. But Hector isn’t just relying on the pretty package.
“For the next level of growth, our brand communication will come into play,” says Kakkar. Paper Boat’s TV commercials, launched during the past two-three months, have leveraged the nostalgia associated with regional flavours. Noted lyricist and poet Gulzar has written and recited the ads, with the timeless theme from Malgudi Days playing in the background. Hector will be spending ₹10 crore on advertising in FY16.
Within the analyst circle, there is appreciation as well as scepticism. Harminder Sahni of Wazir Advisors says that while Paper Boat has done well, “their products are more nostalgia-based. That will work for a certain generation for some time and then it may wear off. Also, for example, kaanji may not have much nostalgic value for a south Indian. The challenge is to catch the young generation.” Sahni has a point.
For instance, Sattu didn’t work in the southern market. But at the same time, there have been examples of cross-pollination too. Jaljeera, which was mistakenly placed at Chennai outlets, became a hit. EY’s Mishra, too, agrees that nostalgia works only for an older generation. “But by having very modern packaging, they have tried to compensate for that,” he says.
Kakkar defends their strategy by saying that the core of Paper Boat is not just nostalgia, but more specifically, innocent memories. “These memories are timeless and not bound by geography. The first time you slept alone and not with your parents is a memory that is common to all eras and will stay the same. Similarly, from time immemorial, kids have wondered about whether eating a watermelon seed will result in a tree growing inside them. So, we do not see the risk of kids growing up in different eras not experiencing similar memories,” he says.
For Kakkar, it is trial and error at work and he has a long way to go. “We can breakeven today if we stop here, but we are investing in growth and expansion,” he explains. And Indian shores are not enough for Paper Boat, which is being tested in the US, UK and Australian markets as well. When asked why, he answers with a question: “If we can fall in love with their Pepsi and Coke, why can’t they fall in love with our beverages?” After finding a niche in regional drinks where there is no serious competition yet, Kakkar and Hector Beverages may just prove that third time’s the charm.