Chew on this

How Godfrey Philips succeded in creating a new business proposition with its niche mouth freshener brand

I used to say that this is the Kurkure of Godfrey Phillips,” says a beaming Nita Kapoor, alluding to her pan masala brand, Pan Vilas. And the reason for the analogy is as savoury as the legendary snack brand by Pepsico. Pan Vilas became a hundred-crore brand in its first three years, quite like Kurkure. Post the initial dream run, COO Kapoor claims, Pan Vilas is a ₹200 crore-plus brand today. 

Godfrey Phillips India (GPI), a cigarette company with brands such as Red and White, Cavenders and Marlboro (as a licensee) under its umbrella, is second only to tobacco giant ITC in the Indian market. The company is part of the KK Modi Group, which has interests in chemicals, education, fashion, FMCG, hospitality, etc. At the end of FY14, GPI clocked revenues of around ₹4,200 crore, mostly selling cigarettes. 

Taking a cue from its mammoth rival ITC, GPI has already added other consumer businesses — such as tea, 24x7 retail, and candy — to its basket. However, its foray into the premium pan masala category in 2010 has been its most strategically interesting move, because it is an attempt to fill up 90% of a pan shop’s shelves (cigarettes and chewing products make for almost the entire set of offerings in a typical pan shop). As of now, no other Indian company has both products in its portfolio: ITC dominates the cigarette space, while DS Group’s Rajnigandha dominates the premium pan masala market. 

But how successful have they been? The pan masala market in India is estimated at ₹25,000 crore, and 10% of this is the premium segment. “We are hovering around 10 to 12% of market share in the premium segment,” says Kapoor. Rajnigandha is the winner here, with 80% market share, according to CK Sharma, business head, mouth fresheners, DS Group. 

When compared with the market leader, Pan Vilas might appear to be just a rookie. But this is a comparison between an established core business and a diversification attempt. Kapoor defends their standing. “We are still the youngest, only four-five years old. They [DS Group] have been there for generations. See the knowledge they have. Coming up to that level will take another five years.” Given that DS Group has been in the tobacco business for 82 years, Godfrey Phillips’ market share is remarkable. 

No jumping the gun

KK Modi, the MD of the conglomerate, has had pan masala on his mind since the early 2000s. This is not surprising, though. As a company that sells cigarettes through 8 lakh retailers in 10 states (mostly north and west India), the distribution synergy was just too obvious (See: Piggybacking). But GPI decided to wait and plan meticulously instead of jumping straight into an already crowded market. 

It all started in 2004. A seven-member R&D team, comprising flavourists, a market researcher, an analyst and other technicians, was put in place. “Initially, GPI saw this as a project, not as a business. If the project passes through the multiple gates, and there is a significant pool of profit after it has passed those gates, then you will consider it ready for business. Then, manufacturing and other expenditures will be planned around it,” says Kapoor.

Before its launch in 2010, the product was rejected internally about seven times, prolonging the product development cycle by 3-4 months each time. But did the company chew on its pan masala plans for too long?

Kapoor doesn’t think so. “If your differentiation is not successful, there is no business. And to launch and have differentiation in communication is not sustainable. Sustainability comes from a differentiated product.” 

So, what is it that differentiates Pan Vilas from the others? Kapoor says they spent a long time looking for alternatives to harmful ingredients like magnesium carbonate. But does an average consumer of pan masala really care about a potentially harmful ingredient?

“Ten years ago, did people really care if the cigarette was injurious to health? You don’t build a business for the here and now. I can do marketing here and now — this year IPL, next year a specific flavour, but I cannot anchor my business on that,” says Kapoor. 

DS Group’s Sharma agrees with her. Their market research has also shown that consumers of pan masala are aware of its ingredients.

However, Sharma doesn’t believe that Pan Vilas is purely anchored on product differentiation. “Today, no good pan masala will have magnesium carbonate. Counting this as a differentiator is not correct. But it is a good strategy as far as communication is concerned.” 

The product differentiation might not have impressed her competitors, but Kapoor definitely harbours a wish to take a bigger bite of the market share pie. She says, “We would like to gain at least 20% to 25% of the market in the next five years.” 

Being the country’s second-largest cigarette seller, GPI utilised its influence and clout with its sellers across the country. Kapoor says that it was their strategic synergy that played a great role. “It’s not easy to set up distribution if you start afresh. Here, we at least had one part of the value chain taken care of. Our task was to build market-facing teams and train them on how to service the market.” 

This is clearly an advantage that not many companies enjoy, but it’s still just in 10 states. The brand has not seen other markets yet, and Kapoor says that this, too, is a strategic move. “We will be focusing and building on these 8-10 states for at least the next couple of years. Then, we will look for product extension.” GPI says it has a distribution set-up in other states as well, but they haven’t yet tested the waters in these areas. “We will be testing by the second or third quarter,” says Kapoor.

Though one may see danger in remaining confined to those states where they sell cigarettes, Kapoor says it’s not that simple to become a national brand. “Pan Vilas should be a substantial brand in the markets and states where there is a culture of pan masala. Many states don’t have that culture, so why should I be national?” she asks.  

GPI’s foray into the pan masala space is clearly based on the confidence garnered from three decades of selling cigarettes across lakhs of outlets. However, experts say that distribution is a less competitive advantage at this stage. “The shelf space available with the panwala is still finite, unless you create a significant amount of customer pull and aspiration through aggressive advertising,” says Arvind Singhal of Technopak, a management consulting firm.

Singhal also says that the category is relatively stagnant because there is no differentiation as such. “There’s DS Group and Pan Parag, then there are half a dozen national brands and many more local brands. It is very difficult to create space for one more brand. And that’s what makes it complicated,” he says.  

And then there’s the market itself. Nilesh Kothari, a pan masala distributor in Ahmedabad, says, “The youth is moving away from pan masala, and buyers regularly switch between various products. Also, an inclination towards premium pan masala is visible now.” 

So, does that mean the category is declining? Kapoor doesn’t think so. “The numbers don’t indicate that. I don’t see any decline. I see modernisation of this category (mouth fresheners), with new forms and shapes coming up. Setting up a plant takes substantial investment and that reflects GPI’s commitment to the category.”

Invest and invest more

GPI has made huge investments to get here. Though the company has not revealed the total quantum of investment, around ₹250 crore has been invested in setting up plants alone. Further, the company understands that it can’t just play on its cigarette reach, and has been generous with its advertising spend. The Pan Vilas campaign was launched in 2010 starring Manoj Vajpayee, with the tagline Shauq badi cheez hai. According to news reports, the company spent ₹25 crore on that campaign alone, and now, GPI has roped in an even pricier star, Shahrukh Khan, to promote Pan Vilas Silver Dewz Elaichi, with the intention of having a long-term partnership to help the brand take off. 

Kothari recounts the impact of the launch. “Sixty boards were put in Ahmedabad alone. There was a conference and a lunch for distributors like me.” However, the companies don’t really push their products by tweaking margins. “I earn ₹150 on a ₹12,000 carton of pan masala, and the retailer makes 60 paisa on a ₹3 packet. That’s pretty much the same for all brands,” he adds.

The advertising blitzkrieg is a tested strategy in a category with established players and undifferentiated products. The result: GPI was able to grab market share pretty early. From barely ₹24 lakh in FY11, its first year, the chewing category grew to ₹121 crore at the end of FY12. Then it rose to ₹142 crore in FY13 and ₹162 crore in FY14 (See: Taste of its own). The growth wasn’t too steep in the latter two years because of two back-to-back legislations in 2012 — when a gutkha ban was imposed, and 2013 — when there was a ban on plastic packaging for pan masala. “That clearly reflects in our growth during the last two years, as we had to clear the air on the difference between gutkha and pan masala, and re-engineer our entire packaging,” says Kapoor. However, the dust has now settled and a new pan masala promotion war is visible on TV sets.

In markets like Gujarat, where GPI enjoys a strong presence, Pan Vilas has maintained second position for the past three years. Kothari says, “Every week, I distribute roughly ₹2 lakh worth of Rajnigandha, ₹80,000 worth of Pan Vilas and ₹75,000 worth of Pan Parag. GPI leverages its 70-people strong cigarette team in Ahmedabad to push Pan Vilas,” says Kothari.

The next round of advertising has already kicked off, but how many more years of loose purse strings are they looking at? “We will be investment-heavy for about three to six years. All businesses demand investment, but this is above the line — with a lot of TV and celebrity-led promotion,” says Kapoor, adding that the company follows the FMCG standard of investing 10-12% of the top line in advertising. 

Sharma of DS Group says that Pan Vilas has done well as a new entrant. “However, the expenditure they have incurred is disproportionate. Apart from hiring celebrities, they have applied a lot of pressure in terms of placement, piggybacking on cigarettes. A lot of money goes into the shop display and they have brand shops, where they tend to compensate distributors by placing these products,” he says. Sharma believes that distribution is only one part of the game, and that a pull has to be created. “It’s difficult to say at this moment as to which way Pan Vilas will go,” he says. 

At the moment, owing to expenditures and investments, GPI’s product is costlier (to the company) than its competition but priced at par. “I would love to break even next year but it is subject to market conditions and pricing power. The day we have pricing power in our hands, we have done our job,” says a hopeful Kapoor. 

 As a competitor, Sharma doesn’t feel threatened by Pan Vilas. He confidently says, “At the end of the day, GPI is a regional player. They are present mostly in the north and west. Only ITC and DS Group can cater to all of India.” 

However, ITC has so far stayed away from this market. Pan masala is tobacco-free, but in the minds of the people, it still falls into the same bracket as cigarettes and tobacco. So, ITC, a company that is actively moving away from tobacco, doesn’t want to associate with such a product.

“The category is relatively small, unless you want to get into the entire gamut, including chewable tobacco. Then, you would have a wide range of products, but it is still a very competitive market. Maybe that is why ITC has chosen to focus on bigger categories for diversification beyond tobacco,” opines Singhal. He also suspects that there is a reasonable amount of duty evasion in this industry, which is hard to handle for a big corporate. 

Mouth fresheners (driven by Rajnigandha) was a ₹2,334 crore business for DS Group in FY14. Rajnigandha was first launched three decades ago and DS group went through a course of premiumisation, brand building, and aggressive expansion, of which it is reaping the rewards now.

Between FY13 and FY14, the mouth freshener category expanded from ₹1,300 crore to ₹2,334 crore, on the back of making a foray into new markets and new products. Rajnigandha alone makes DS group look like a non-tobacco company (accounting for 40% of the ₹4,894 crore turnover in FY14).

GPI, on the other hand, still has around ₹3,263 crore of ₹4,220 crore coming from cigarettes — their core business (See: Smoking hot). Perhaps, the company wishes that the chewing segment does wonders for them, too. But how long can they wait? Kapoor is optimistic. She feels that they are already on their way to build a good business. “It doesn’t happen overnight. Any business will take seven-eight or sometimes even 10 years,” she says. And it would seem that the KK Modi group has the patience — and the cash — to sustain this.