Although it now seems like a steal
When Kotak offered him the deal,
There was no time for diligence
With courage and intelligence
He very quickly clinched the deal,
Relying on his good gut feel.
Not that he threw away all caution
He took the brilliant precaution
Of ensuring he bought good wares
By selling a small chunk of shares
To Kotak and the firm’s MD.
Ah! What a clever strategy!
And with this move so swift and bold
The company came in our fold.
Excerpt from a poem by Nadir Godrej, MD, Godrej Industries, written in honour of Godrej group chairman Adi Godrej being conferred the Padma Bhushan, in April 2013
In 1994, Arumugham Mahendran asked his friend Uday Kotak to help find a buyer for Transelektra Domestic, the household insecticides company where he was executive director. While the company’s brand, Good Knight, had become already become synonymous with electrical mosquito repellent, the promoter was keen to sell out and explore other businesses. Kotak spoke with Adi Godrej, who said he would like to visit the factory at Pondicherry before coming to a decision. At the site, Mahendran walked Godrej round, carrying on a running commentary about the processes and how the insecticide was made, but “I could see his mind was only half there. Suddenly, he wandered off on his own.” Godrej left the factory tour, asked a worker to show him the excise records and company books, and was busy going through them when Mahendran finally tracked him down. “He was checking the despatches of the previous month, seeing whether they were in the ₹ 5 crore range or not,” Mahendran recalls with a smile. The deal with Transelektra was for ₹ 60 crore and Godrej wanted proof that the company was really doing that much business. On the way back from Pondicherry, Godrej just said, “Fine. We can proceed.” “It was as simple as that — we more or less closed the deal in a week. No private equity or venture capitalist in India — indeed, no one else — can do that,” declares Mahendran.
Closing a deal quickly didn’t mean Godrej was being impulsive or jumping the gun. As Nadir Godrej’s poem points out, the Godrej group head made sure his bases were covered. “He laid down two conditions before signing the deal — that I should become managing director and stay on with the company for at least one year and that I should buy 5% of the stock,” says Mahendran, who is stepping down as MD, Godrej Consumer Products (GCPL), in end-June after nearly 19 years with the group. “Even back in 1994, he recognised the importance of having skin in the game and ensured it was there before he bought Transelektra.”
The deal with Transelektra took place just a couple of years after India’s liberalisation and it heralded a new Godrej — one that was no longer interested in business as usual. The man in charge then was 52-year-old Adi B Godrej. Two decades later, ABG (as he is referred to within the group) still has his hand firmly on the rudder and he’s guiding the ₹ 22,000-crore group into even faster waters. “Already, 500 million Indians use our products every day. That’s more consumers than any other Indian group — even Airtel doesn’t reach out to as many people,” he declares. “Going forward, we want to increase that number to a billion.”
The early years
The Godrej group didn’t have a very auspicious beginning. Ardeshir Burjorji Godrej started off as a lawyer in Zanzibar but wasn’t too successful; he returned to India in 1894 and became a pharmacy assistant. The following year, with a loan of ₹ 3,000 from his father’s friend, he set out to make surgical equipment but that business was stillborn when Ardeshir insisted on putting a “Made in India” stamp on the scalpels and forceps he made. Finally, in 1897, after reading a newspaper article on rising crime in the city, he set about making locks from a 20-sq m room at Parel in central Bombay. That took off and Godrej Brothers, as Ardeshir and his brother Pirojsha named their venture, was in business. (Incidentally, the Godrej logo is based on Pirojsha’s signature.)
By the time Adi Godrej — Pirojsha’s grandson (Ardeshir died childless in 1936) — joined the business in 1963, the group had a turnover of ₹ 10 crore with two main lines of business. The ₹ 8-crore Godrej & Boyce (the name was a holdover from a very brief partnership in 1910) successfully made locks, safes, refrigerators and steel cupboards, while Godrej Soaps (which had pioneered soaps made from vegetable fat in 1920) was a loss-making enterprise. The 21-year-old ABG had just returned from the Massachusetts Institute of Technology where he’d finished his graduation and also earned a management degree. As the first MBA to join the group, he had his task cut out for him: introduce management practices, bring in cost accounting practices and turn around the soaps business. “The ideas I introduced yielded results pretty fast and the first year I joined the company, it made a profit,” says ABG.
For the next few decades, it was more or less business as usual at the Godrej group — ABG’s brother Nadir and cousin Jamshyd also joined the group and it expanded into other lines of business. Interesting business propositions aside, there was another important reason for the diversification — restrictive economic policies. “Government distrusted business in those days. A business of more than ₹ 20 crore was considered a monopoly and you needed licences for nearly everything,” Godrej points out. It was very difficult to get permission for mere business expansion, whereas approvals for entirely new businesses were easier to come by. In the late 1940s, Pirojsha Godrej had already acquired the land at Vikhroli where the group is currently based — construction of some factories had started in the 1950s and the main office building where ABG still has his office came up a year after he entered the business. The Monopolies and Restrictive Trade Practices Act, though, mandated that all expansion had to happen only in backward districts, so entering new businesses was one way of ensuring the group could utilise its real estate assets.
“All our diversifications have been logical,” Godrej hastens to add. “Our first product was locks, from where we moved to security equipment [safes], then to steel cupboards and then refrigerators. Then came typewriters — manual, electric and then electronic — and machine tools. Now we make plant and equipment for oil refineries, and even work with the Indian space and nuclear programmes.”
There’s a similar progression at work in the soaps business as well. ABG’s father Burjorji was a chemical engineer who was a pioneer in India in separating vegetable oil into fatty acids and glycerine — soap made from fatty acids is of superior quality compared with soap made with vegetable oils. The group set up its first oleochemicals plant at Vikhroli in 1963 and began to sell fatty acids to other commercial users. To cope with the increasing demand, it began extracting vegetable oil from oil cakes using the then-new solvent extraction technology — the extractions (the residue) were exported to animal feed manufacturers outside India. “That set us thinking. We saw the potential to make compounded animal feed ourselves,” says Godrej. Today, the group is the largest oleochemicals and animal feed manufacturer in India. From animal feeds to other agricultural inputs was a natural step, which was followed by oil palm cultivation and edible oil manufacture. From there, the group moved into poultry and packaged poultry products.
Even if doing business in the Licence Raj was, as Godrej puts it, “very tedious and very, very difficult,” the Godrej group continued to thrive with its diversification strategy. The ₹ 10-crore entity ABG joined in 1963 had grown to over ₹ 1,000 crore by 1991. And then came liberalisation.
“The big push for the Godrej group happened post 1991,” agrees ABG. For a group that was just a few years short of its centenary, was still privately held and run by family members, Godrej proved remarkably fleet of foot. It quickly moved into joint ventures with leading multinationals such as GE for appliances and Procter & Gamble (P&G) for soaps and toiletries and then aimed even higher — entering an entirely new line of business (household insecticides) through the inorganic route.
Right Price, Right Place
The Godrej group’s growth has been bolstered
by its prudent acquisitions
The Transelektra buy in 1994 was not only the first acquisition for the Godrej group, it is also believed to be the first buyout by an Indian FMCG company (Hindustan Lever had been busy snapping up Tata Oil Mills, Kissan and others, but it’s not Indian). The buyout was an inspired choice, believes Keki Dadiseth, former chairman of Hindustan Lever. “Purchasing Transelektra was a game-changing move. People can do without dishwashing products — they may use ash or whatever. But when you’re being bitten by mosquitoes, you need a specific solution,” he says. Indeed, Godrej group companies are leaders in the household insecticides category not just in India, but also Sri Lanka, Bangladesh and Indonesia; the group has also recently launched Good Knight coils and aerosols in Nigeria.
The domestic acquisitions whetted Godrej’s appetite and in 2005, it stepped outside India for the first time, buying Britain’s Keyline Brands. ABG explains the shopping spree, especially in the past four-five years. The group was one of the first to introduce IT usage, more than two decades ago, connecting companies with vendors and customers. “At some stage, we had negative working capital as the businesses started throwing up cash because of these improved efficiencies. Rather than continue to pay dividends or do more share buybacks as we had done in the past [the first listing took place in 1994], we decided it was better to acquire and add to our earnings instead,” he says.
The Keyline buy has been GCPL’s only acquisition in the developed world (see: Right price, right place). Instead, it follows a 3x3 strategy — focus on three markets (Asia, Africa and Latin America) and three categories (hair colour, household insecticides and personal care). “Growth aside, the idea is to implement our business processes, leverage our products and technology,” says Godrej. “For instance, we have powder hair colours for a tenth of what L’Oreal products costs. Today, we export powder hair colour to over 50 countries in these three markets.”
All together, the group has spent over $1 billion on its acquisitions in India and overseas in the past eight or so years. “The market cap of GCPL was about ₹ 3,000-4,000 crore before we ventured abroad. It is now nearly ₹30,000 crore [₹ 27,000 crore, as on June 17, 2013]. All our acquisitions have delivered value for us,” says ABG.
Dadiseth agrees. “Adi has been very clever at acquisitions: he has selected territories and categories that are very good to operate in and that play to his business strengths,” he points out. Certainly, about a quarter of the group’s revenues now come from outside India and per capita FMCG sales in Indonesia, South Africa, Argentina, Uruguay and the UK are higher than per capita sales in India. That is not to say everything Godrej has touched has turned to gold. While the hits are numerous, there have been a significant number of misses as well.
Buy, don’t partner
Perhaps one important lesson from ABG’s track record is to head for buyouts and acquisitions and give joint ventures the go by. Barring the 15-year association with Sara Lee and an ongoing one with Tyson Foods in its poultry business, the Godrej group has broken up with every foreign partner in India (see: Partners in time). Mahendran flares up at the observation. “Each of our joint ventures served its purpose. There is no question of failure on our part. Nor is there any issue over culture. MNCs look for reputation, ethics, governance and belief in talent development — and you won’t find anyone better than Godrej when it comes to these attributes,” he declares.
The group signed its first JV in 1992 with American white goods giant GE. It continued for nearly a decade and was called off when GE decided to exit all markets where it wasn’t No.1 or No.2. “We were leaders in India, but the geography they were considering was all of Asia, so they wanted to exit and we bought them out,” says Godrej.
That’s a problem with almost all JVs — mismatch of objectives between the partners. “I’ve never been enamoured of joint ventures,” says Marico founder Harsh Mariwala, who is also a friend of ABG. “There is always a conflict of interest and MNCs, especially, don’t want to promote Indian brands.” That was also the case with the P&G JV, where in 1993, Godrej transferred its soaps and distribution business. Four years later, P&G decided to focus on laundry, hair-care, paper products and pharmaceuticals across the world. Personal care was off the list and so Godrej sold its shares in the JV to P&G. “We made good profits getting in and out of the JV,” says ABG now. But that’s only part of the story. Brands such as Ganga had been marginalised in the JV and in the split that followed, the Indian company lost several key sales and marketing people. Meanwhile, Godrej had already entered the domestic insecticides category through its acquisitions and Transelektra had grown nearly four-fold to become a ₹ 200-crore company. Now, an organisation that was really equipped to handle about ₹ 50 crore was expected to market Rs 500 crore worth of consumer products. Not surprisingly, distribution suffered. “In retrospect, I think that was one of my biggest errors in judgement: I expected too much from the network,” says ABG. Other JVs, too, were restructured over the years.
ABG agrees the JVs have all ended after some years but says JVs are meant to be medium-term arrangements, in India and outside. Besides, he adds, “We partnered with some of the greatest companies in the world. We were insiders and learnt a lot from these companies, in HR practices, marketing and logistics.”
One crucial lesson learnt from MNCs is knowing when to cut loose. Over the years, the group has gotten into — and out of — several unrelated businesses, such as business process outsourcing, pest control services and medical diagnostics and rural retail. “We haven’t been at our best in services,” ABG admits, “We don’t want to continue with businesses that don’t add value.” (see: Alive and kicking) Is that what’s kept the Godrej group going strong for 116 years or are there more ingredients in its secret sauce?
“It’s a running joke amongst us that we have more businesses than family members and that is why we don’t get into squabbles,” ABG says with a grin. “On a more serious note, we are very clear that ownership is based on democracy and management on meritocracy.” What that means simply is that all five members of the third generation of the Godrej family — ABG, his brother and three cousins — own equal shares in the group. Unlike many business families, here women have an equal share.
Partners in time
All joint ventures of the Godrej group, barring the
one with Tyson Foods, have ended
There’s also a formal, structured way of interacting with the family when it comes to business. Every Thursday, all working family members meet for lunch, a practice started by Pirojsha Godrej back in the 1950s. There’s also an online discussion board where family members post all important news. And a family council that includes all family shareholders above 18 years meets at least once a year. “The meeting is usually held in April or May every year and is an intensive, two-day affair where good, vegetarian food is served and the top management of the entire group interacts with the family,” says Dadiseth, who is one of three independent directors on the Godrej family council. The annual results of group companies are declared to the family, all issues and new ideas are discussed and thrashed out and “nobody is afraid to show how well or how badly they’ve done over the year”. “It’s a great initiation into the business for the children,” he adds.
Not that the next generation gets an automatic entry into the business. Any family member who wants to join a group company must be at least as well qualified as the most suitable non-family candidate for the role. The emphasis on professionalism and good management practices started with ABG’s entry into the business and has only become stronger over the years.
The professional touch
As an MBA himself, ABG was quick to realise the need for more professionally qualified people — management graduates and chartered accountants — in the Godrej group. After the Indian Institute of Management started in Ahmedabad and Calcutta, he would visit the campuses himself to recruit management trainees. “There was no investment banking or consultancies in those days, so FMCG jobs were in demand,” he recalls. The Godrej group also treated its MTs well — in the 1980s, when the first Maruti cars rolled out, the group ordered 100 Maruti 800 cars. Given the high demand, it wasn’t allotted the entire 100 but when the cars came, they were given to MTs. “Word spread and we were able to attract good talent into the group,” says Godrej.
Alive and kicking
Till the 1990s, the Godrej group focused only on diversification. Since then, it has also systematically divested businesses to derive greater value
It also helps that he leads by example. Dadiseth recalls his early interactions with ABG in the 1970s when he headed the detergents business at Hindustan Lever. “We would meet frequently to talk about oils and prices. Adi would know every nickel and dime — the rates ex-Jakarta, ex-Malaysia, the insurance rates… everything. While I always prepared well for meetings, with Adi I would have to be super-prepared.”
According to people who have travelled with him, you also have to be super-energetic. During his tenure as CII president (2012-13), a delegate was taken aback to see ABG had shaved on the plane and planned to head directly to the meeting. That’s par for the course, says Mahendran. “He’s a man who understands the money value of time. His practice is usually to shower at the airport, move to the meeting and take the return flight in the evening. Having travelled widely with him, I have also adopted that habit.”
Indeed, Mahendran considers himself “one of the luckiest men around” for having been closely associated with ABG for the past two decades. “The prime time to become a mentor is between the ages of 50 and 70. In 1994, Mr Godrej was 52 and he selected me to run Godrej Sara Lee. I was like his No.2 and considered everything he said as gospel. No one else — perhaps not even his children — can claim to have learnt as much from him as I have.”
Perhaps not, but mentorship has been institutionalised at the Godrej group. Practices such as Chairman’s Tea, where 10-12 young managers meet ABG every week for a brainstorming session; the Young Executives’ Board, where junior managers give suggestions on strategy, governance, HR etc.; and reverse mentoring of senior managers have all been implemented in the past several years to ensure this family business moves with the times and becomes professionally managed. Currently, most group companies are headed by non-family professionals. “We are not a family house driven by the need to accommodate the personal ambitions of each family member. It’s all about growth possibilities, strategy and how much risk we want to take,” says ABG.
One way in which the group has ensured employee goals are aligned with shareholder interests is by adopting the economic value added (EVA) approach in 2001, which allows companies to calculate the amount of real wealth generated by each employee and link that to incentives. “That has worked very well,” says Godrej. Since April 2001, when GCPL was hived off from Godrej Industries, the share prices of the two companies have grown at a CAGR of 40% and 46%, respectively.
Next is what?
Where does the Godrej group go from here? Can the 116-year-old legacy be sustained for another century? ABG doesn’t venture to look that far into the future but he’s certainly got the gameplan sorted out for the next decade. Stepping down is not on the agenda anytime soon, although the next generation has made greater strides in the business. “I am 71, so I guess I will have to step down at some time,” says ABG, adding, “We have strong succession planning at all levels in the organisation.” What those plans are for the family, though, are not disclosed.
Meanwhile, there’s a lot on the plate for the Godrej group, thanks to its ambitious 10x10 plan announced in 2011 — in 10 years, the group wants to grow 10 times. That means becoming a ₹ 1.5 lakh crore entity by 2021, which requires a CAGR of 26%. How achievable is that? For the past 50 years, the group has had a CAGR of 17%, but has been speeding ahead in the past few years at over 30%. “The only challenge I see is the political system,” says ABG. “The economy has slowed down, so it’s tougher, but we are gaining share in most of our businesses. We will have to grow faster in the early years since it will be more difficult to grow fast on a bigger base.”
Others see a few more hurdles, but none unsurmountable. “Driving growth as acquisitions become pricier and fewer opportunities abound is a challenge for all FMCG companies,” points out Marico’s Mariwala. “Risk management in a global scenario where things are often beyond your control is another issue, as is managing interaction between professionals and family members.” Notwithstanding those risks, Godrej is counting on ambitious inorganic growth. He expects 15-20% of the required 26% CAGR to come from organic growth and the remaining from acquisitions. “But we won’t acquire companies just to meet our targets. There will have to be strong strategic reasons and it should be accretive,” he says.
Not surprisingly, the consumer goods business will account for the bulk of the growth. “There are still only three branded packaged consumer goods categories that are fully penetrated in India — soaps, detergents and matchsticks. So, increasing penetration of other categories will mean tremendous growth,” points out Godrej.
But consumer goods won’t be the fastest growing business in the group (perhaps also because it has a much larger base) — that honour is reserved for the real estate arm. The Rs 427-crore Godrej Properties is run by ABG’s son Pirojsha and going forward, ABG sees several advantages to the business. “India is tremendously under-housed and no one company has even 5% marketshare. You don’t need to worry about competition — there is so much scope that no one feels threatened if another developer starts a new project,” he points out. There’s also the fact that Godrej has a huge landbank — even keeping aside the 1,500 acres that’s reserved as mangrove forest, the Vikhroli campus still has hundreds of acres left over that can be developed, even after leaving room for group companies.
Real estate may bring in the big bucks in the years to come, but there is a huge challenge staring at ABG. While not undermining the group’s emphasis on good governance, one reason it has managed to keep a sterling reputation over its long history is because it has consciously stayed away from government business (with some notable exceptions, such as making ballot boxes for the first general elections in 1951 and supplying components for India’s first unmanned lunar probe, Chandrayaan-1) as well as sectors that are over-regulated. With increased exposure to the government through the real estate venture, will things change? “We’ve been in the real estate business for 20 years already and our reputation is very important to us. Moreover, the sector has several large groups with strong reputations, such as the Tatas and the Mahindras,” points out ABG.
Godrej has traversed India’s varied economic and political climate and yet sustained its legacy for more than a century. There’s a saying in the US — “shirtsleeves to shirtsleeves in three generations” — and studies say barely 3% of family businesses make it to a fourth generation. The aphorism has already been proved wrong in the Godrej case (the founder’s grandchildren are the ones who brought the group to its current height).
For his part, ABG clearly has no doubts about the future of the group. “The younger generation is very passionate and even more committed to the ethos of the group than our generation. They are all well educated and well equipped to take on the challenges of the future. I am convinced that by 2050, India will be the largest economy in the world. I tell my children and grandchildren that they live in great times.”
He has set a rapid pace
As he leads us in the race...
And if we stay on the proper way
And never let our values sway,
If all of us fulfil our roles
We will surely reach our goals.
A billion Indians, we can say
Will use our product every day
And every where it will be seen
That we are great, good and green.