The Outperformers 2013

Natural instinct

FMCG major Dabur is looking to dig deep in existing categories, both in india and overseas. Will the move pay off?

Remember chyawanprash? It was the thick, greasy paste from a distinctive white and red plastic jar that your mother and grandmom shoved down your throat when you were in school. Now, it’s available in orange, mixed fruit and mango flavours (there’s even a sugar-free variant) and comes in slick, ergonomic colourful plastic containers. “We have to present Ayurveda to people in modern formats,” says Krishan Kumar Chutani earnestly. And the executive vice-president of Dabur India isn’t talking only of chyawanprash.

He asks an assistant to fetch old packs of Honitus and Stresscom and places the cough syrup and strip of stress-relieving tablets next to the latest packaging. “See? Now, don’t these new packs look premium,” he asks, comparing Dabur’s efforts with garment and home decor chain, Fabindia. “It sells the same traditional stuff, just like others, but presents it in a modern format. That’s what we have to do as well.”

New packaging, new products and new geographies may not seem like a drastic change in strategy, but this is Dabur, a 129-year-old family business that started professionalising less than 20 years ago. Things happen slowly here. “Our strategy is not about opportunistic growth,” confirms Sunil Duggal, the man at the helm of Dabur India. “We have focused on certain portfolios and geographies and are aggressively seeking growth there.” The 56-year-old Duggal joined Dabur in 1995 as a general manager, at a time when it was an internal-looking, promoter-run company that barely scraped together ₹100 crore in revenue.

Over the years, he climbed up the ranks and as the promoters stepped aside for professionals, became the CEO in 2002. But it’s really in the past five years that the consumer goods company has come into its own. Between FY09 and FY13, sales have more than doubled, from ₹2,805 crore to ₹6,176 crore. Ebitda reached ₹1,120 crore from ₹520 crore, while profit after tax nearly doubled from ₹391 crore to ₹766 crore. Investors, too, seem to approve of the Delhi-based company’s efforts — market capitalisation tripled in the past five years, from ₹8,540 crore to ₹28,450 crore. Here’s what Dabur did right. 

A managed portfolio

Perhaps the biggest plus for Dabur is its diversified portfolio. Apart from the 300-odd Ayurvedic medicines and products that are sold over the counter and by prescription, the domestic business (accounting for 69% of sales) is divided between four verticals — health care (chyawanprash, honey, glucose, etc.), personal care (hair, skin and oral care), food (mostly packed fruit juice) and home care (Odonil, etc.). (see: Charting a different course) “Within these verticals, we have scaled up successfully and built capabilities, platforms and levers of growth, organically and through acquisitions,” says Duggal.

Certainly, Dabur has 14 brands that are worth over ₹100 crore each, including Fem and Odonil, which were acquisitions, as well as homegrown brands such as Real, Hajmola, Dabur Amla and Dabur Chyawanprash. “It takes time to build brands in FMCG. But in just the past two years, Fem, Glucose-D and Odonil became ₹100-crore brands,” adds Chutani. “Dabur has a robust strategy. It believes in segmentation and reach, and is not afraid of using celebrities. So, it has high brand salience,” says Jagdeep Kapoor, chairman and managing director, Samsika Marketing. 

At the same time, while Dabur is No.1 in packed juice and niche areas such as digestives (Hajmola) and cosmetic bleach (Fem), none of its products is the category leader in mainstream FMCG categories such as skincare, haircare and oral care — which cannot be a positive for the country’s fourth-largest FMCG company. “Dabur should look at newer categories and add growth. It is sticking to categories that do not have much growth in volume terms,” says A Mahendran, former MD, Godrej Consumer Products (GCPL).

Still, analysts give Dabur points for focusing on a few categories and offering staple products within these. Chutani also points to the changed thinking within the firm, which is to offer better packaging and make traditional Ayurvedic products appealing to a wider customer base. “Ten years ago, we would stress the purity of our honey. Now, we say honey is better than sugar and position it as a replacement for sugar,” he proffers an example. Chyawanprash, too, is now promoted as building immunity and something that makes you “andar se strong” rather than a general health tonic. “Health needs have multiplied and we have aligned ourselves with such trends, which has led to constant growth,” he adds.  

What’s also brought in the numbers in the personal and home care segments is new product launches and investment in existing products. “After Unilever, Dabur is easily one of the most diversified companies,” says Abneesh Rai, associate director of research at Edelweiss Capital. “Diversified companies don’t need to keep launching new categories as long as they innovate within existing categories.” 

Dabur seems to have been working on that model. In the past couple of years, it has launched new variants in Fem skincare and bleach, a gel variant in Odonil insect repellant and Gulabari moisturising lotion. In hair oil, where it already had a presence in amla and coconut oil, last year, the company launched almond hair oil and claims to have already gained close to 10% market share. “In the north, our strategy is to convert loose mustard oil users to amla oil. In the south, we launched localised brands, Dabur Amla Nelli in Tamil Nadu and Dabur Amla Vasuri in Andhra Pradesh,” says George Agnello, executive director, sales, Dabur India.

Medicines and Ayurvedic formulations, though, can’t be sold the way FMCG products are, so three years ago, Dabur adopted what it calls the 3E approach: education of customer, expert opinions from doctors, anganwadi workers etc., and editorial, which is third-party advocacy through medical associations, journals etc. The result: more than 16% growth in the consumer healthcare division in FY13. 

Meanwhile, in foods, the lion’s share of revenues comes from the packed juices business (sold under the Real, Activ and Burrst brands). While Dabur is the market leader here, with a 54% share of a ₹1,100-crore category, “Competition is warming up now with other players getting in,” warns Bhavesh Kumar Jain, analyst at Sushil Finance. Closest rival Tropicana, which has a 30% share, is strong in west India. Jain points out that Pioma Industries’ Rasna, too, has launched packed fruit juice now. Another worry is that Dabur imports about 30-40% of the raw material and packaging for the juices business and import dependence can lead to margin pressures as the rupee depreciates. Chutani doesn’t believe it’s a big threat, saying the company can easily absorb these costs.

As things stand, Dabur is banking on new variants and brand extensions in the juice business to draw in more customers and increase stickiness of existing buyers. In the past year, the company has launched fibre-enriched juices and juice-based drinking yoghurt and now plans to launch coconut water, all under the Activ sub-brand. Real’s weak presence in south India is also likely to get a boost, thanks to improved supply from a recently-commissioned plant in Sri Lanka. But juices are a predominantly urban phenomenon. Like other FMCG players, Dabur, too, is turning its attention to rural India. 

It’s project time

The focus on the hinterland is not only because rivals are making a play for the hinterland; according to NSSO, between 2009 and 2012, increase in monthly per capita expenditure in rural India (19.2%) was higher than in urban India (17.3%). Besides, Nielsen estimates the rural FMCG potential to be as much as $100 billion by 2025. In such a scenario, Dabur’s poor penetration into rural India could be a huge hurdle for future growth (see: Hinterland calling). Accordingly, in FY13, the company rolled out Project Double with the objective of doubling its direct coverage of villages in 10 states that Agnello says represent “72% of the FMCG rural potential in India”. Already, direct village coverage has increased from 17,882 in March 2012 to 30,091 a year later. 

The project isn’t about only expanding reach, but also increasing the depth and effectiveness of the reach. Agnello recalls a recent visit to a village in West Bengal that highlighted the need to take note of local habits and customs. “Our local pointman asked me to be ready at 6 am. This was surprising because FMCG sales people usually make market visits after 10 am. But when I took his advice and turned up at 6 am, I realised that in that village, stores open between 6 and 10, after which the storeowners shut shop and go to their fields,” Agnello recounts. Based on that insight, in the past year, Dabur has hired over 1,000 people in villages across the 10 states to improve local awareness.

Project Double is only one of several projects Dabur has undertaken in the past five years to improve efficiency in processes and distribution. In FY12, the company initiated Project Speed, under which it reorganised distribution to focus on its three main verticals, rationalised distributor count from 4,500 to 3,600 (current strength: 5,000) and also merged Fem’s distribution (which was acquired two years previously) with the existing consumer care division. 

Dabur has also embraced technology in a big way, especially when it comes to operations. Agnello points out that all salespeople have been provided smartphones with which they can upload daily reports, and share live reports and data analysis. “Sales loss due to poor ordering has reduced considerably because of this,” he adds. Teams visiting Ayurvedic doctors now carry 10-inch tablets with product testimonies and archived clinical studies. Some 200 sales personnel at Dabur have already been provided with tablets and the number is likely to increase in the coming years. Meanwhile, its focus on domestic markets doesn’t mean Dabur has lost sight of the world stage.  

Going global

Like most Indian FMCG companies, Dabur’s first exports were to the Indian diaspora in West Asia, since there was a ready market there. That was back in the 1980s and the company started a franchise in Dubai in 1989 seeing the heavy demand, which it followed up with manufacturing facilities in Dubai and Egypt in the 1990s. The international business was consolidated under a separate company, Dabur International, in 2003, but the focus on organic growth continued as manufacturing facilities were set up in Nigeria and Bangladesh. “We have defined our core geography as being the Indian subcontinent, greater MENA [Middle East and North Africa] region and all of Africa,” says Duggal.

It was only in 2010-11 that a shift in strategy occurred, and Dabur made two overseas acquisitions: Hobi group in Turkey for $69 million and Namaste Labs in the US for $100 million. The results: a mixed bag. Although international business’ contribution to the topline has grown from 25% in FY09 to 31% in FY13, the Namaste Labs acquisition is still to pay off. Where Hobi grew 42% in FY13, sales at the American company were down 10%. “Growth in Namaste business was disappointing in FY13 as the company exercised a number of strategic initiatives by way of distribution restructuring in the US and rebranding in Africa,” says Navin Kulkarni, vice-president, Phillip Capital. Adds GCPL’s Mahendran, “Post-acquisition integration has to be done properly for FMCG overseas acquisitions to work well.” Duggal defends the inorganic growth plan, though. “The paybacks are quick and they enable us to get into new categories/geographies that would otherwise take very long to build,” he says. And the Namaste deal is for “future growth”, he avers. “It has a strong component of Africa-relevant products, which will be useful in building business there, especially the sub-Saharan region.”

Analysts remain sceptical. Edelweiss’ Rai says that even though Namaste posted 15% growth in the last quarter, it needs to be “seen in the light of the low base due to degrowth”. Further, an Ambit Capital report points out, “[Dabur’s] capital deployment towards M&A, especially for the Namaste business has been disappointing so far, due to: (a) distribution-related disruptions; (b) rebranding of the US portfolio in FY13 due to regulatory constraints; and (c) fairly large management reshuffles in the US business. Hence, Namaste’s growth rates are unlikely to normalise for at least another 12 months.” As it happens, that’s not all analysts are wary of. 

Future tense?

As much as Dabur has outperformed the market in the past half-decade, it has also come in for its share of criticism. For one, the mass appeal of its products itself is cause for concern, say some analysts. Nearly 45% of the company’s revenues come from oral care, hair care and skin care, which face headwinds from a combination of mass-market positioning; intense competition from Colgate, Marico and Hindustan Unilever; and relatively high penetration of these segments, especially in urban India, point out analysts. Another 23% of the portfolio includes health supplements and digestives, which offer no scope for premiumisation. Moreover, products such as Hajmola have achieved more than 80% market penetration in India and Glucose-D faces tough competition from Heinz’s Glucon-D. “These factors limit Dabur’s scope for strong revenue growth, gross margin benefits and better defence against competition. The juices and home care segments (15% of consolidated revenue) remain the only two areas of strength in its portfolio,” says the Ambit report.

However, industry veteran Mahendran has a different take. “Perhaps Dabur’s Ayurvedic imagery comes in the way of its products being perceived as premium. Having an independent brand not associated with the Dabur brand will help.” But then, that’s another mark against the company. Kulkarni of Phillip Capital says Dabur isn’t a consistent outperformer, unlike Marico. “Dabur has numerous brands and is able to invest well in these only in cycles when commodity prices are stable. It will do well for the next year or two, but it isn’t consistent,” he explains.

For his part, Duggal remains unfazed by investors’ worries and believes the current categories offer Dabur enough headroom to grow over the next three years, not just in India, but overseas as well. “In India, domains such as skin care and home care can be scaled up massively. Overseas, while we are a personal care company, 80% of our business is from hair care. So we have to scale up oral care and skin care, which have huge potential,” he says. That being the case, Dabur will need more than one dose of chyawanprash to outperform once again.