Anand JC, Economic Times
13 October 2023
Once the butt of jokes in Dalal Street circles, 113-year-old ITC has turned a new leaf in recent years, as its strategy to derive higher revenue from its consumer business is bearing fruit, bit by bit.
Registered in Calcutta as the Imperial Tobacco Company, the FMCG major has always relied on its cigarettes and leaf tobacco business for a major chunk of its revenues. ITC’s true diversification move might have begun with the launch of its hotel in Chennai in 1975, including a failed attempt at the financial services business, but it wasn’t until August 2001 that the tale of the FMCG behemoth came to be.
Having relied on its cigarette business since 1910, ITC has increasingly sought to earn more from its ‘cleaner’ consumer goods products. In a 2018 interview, CEO Sanjiv Puri admitted that while the journey to diversify the company started a long time ago, it only got traction around 2008. Under Puri’s first term as the ITC chairman, the company embarked on the ‘ITC Next’ strategy. The first decade was focused on preparing the company for the transition, he said. ITC now can innovate products, create brands and allow “pro-neurs” or professional entrepreneurs to build businesses in FMCG.
The plan has worked
ITC, a darling of dividend-led investing lovers, has always been a long-term growth story in the making. Nearly two decades after entering the food business, the company holds a leadership position across categories.
As per the company’s latest annual report, it holds the leadership spot in the branded Atta market through Aashirvaad, cream biscuits segment via Sunfeast, bridges segment of snack foods via Bingo!, notebooks via Classmate and dhoop segment via Mangaldeep. Its Yippee noodles trails Nestle’s Maggi, as the latter continues to lead in a highly consolidated market. However, Yippee has managed to gobble up Maggi’s share at an enviable pace. Capturing these positions, this quickly is no easy feat either.
One of the things that worked for ITC is their understanding of the distribution of products, stemming from their strength in the tobacco business. ITC started exploring aggressively diversifying away from the tobacco business around the 90s, says Devangshu Dutta, head of retail consultancy Third Eyesight.
ITC’s foray into the food business was supported by its presence in the hotel business. “Some of the marquee products that used to be served in their hotel restaurants, packaged dal and so on, they packaged and sold but it was not a humungous success. It was marginal at best.”
“But they started understanding the distribution aspect because those were sold through traditional distribution channels,” Dutta says.
ITC also put in a lot of financial muscle behind the brand building, given no dearth of resources, Dutta says. This helped them grow rapidly in product categories in which they didn’t have a presence earlier on.
“Starting from scratch, particularly on the foods side, ITC has been one of the most successful companies in the last 15-20 years. Their overall revenue this year has been roughly Rs 19,000 crore, out of which Rs 15,000-16,000 is purely from foods segment,” Amnish Aggarwal, Head of Research, Prabhudas Lilladher told ET Online.
“For a company which started this business, maybe, say, two decades back, this is a very big achievement,” he says.
Unlike its commanding position in its cigarette business, ITC’s ‘other-FMCG’ ambitions faced stiff competition from local and national companies in categories including soaps, shampoos, atta, snacks, biscuits, noodles and confectioneries.
Supporting ITC’s ‘other-FMCG’ ambitions is its core competency, the cigarette business. ITC’s consumer business’ growth has weathered storms, in part, thanks to the cash flows generated by its cigarette business which has helped it create stronger brands, an essential part of any consumer-centric business. Through its cigarette business, ITC also gets unparalleled access to a network of brick-and-mortar stores that have a diverse presence across India.
Also complimenting its growth is ITC’s agri-business, a segment which has also grown in strength over the years. From 10 per cent in FY14, the agri-business in FY23 contributed around 24 per cent to the company’s revenue from operations, as per ET Online’s calculations. ITC over the years has invested in building a competitive agri-commodity sourcing expertise. Some of these structural advantages have facilitated the company’s sourcing of agri raw materials for ITC’s branded packaged foods businesses, be it towards its atta, dairy or spices.
Like its peers, ITC too has given a fair deal of importance to its digital push, with more and more companies launching their D2C platforms. These platforms help customers buy products directly from the company website without the hassle of dealing with channel partners, and at the same time, the companies get their hands on first-party data. Such access can help the company market its offerings better. ITC, like some of its other peers, has also been investing in start-ups to diversify its product portfolio. It recently invested in Yoga Bar and Mother Sparsh.
The numbers behind ITC’s consumer business behemoth
Built to engage in the tobacco business, ITC got into cigarette packaging nearly 100 years ago. Another intent in recent decades has been to focus more on the non-cigarette business.
Puri saw it coming.
Upon being asked about the FMCG business overtaking cigarettes, Puri had said “We do not give guidance. But it will certainly happen because the other businesses are growing faster.”
After contributing nearly 62 per cent to the overall revenue in FY14, the cigarettes business in FY23 contributed only around 37 per cent.
ET Online calculations show that the other-FMCG business contributed 17 per cent to the overall revenue in FY14, which grew to 25 per cent in FY23.
Data confirms the claims made in the above segment. ITC’s non-cigarettes businesses have grown over 31-fold and currently form over two-thirds of its net segmental revenues. The company’s other-FMCG business didn’t start turning consistent profits up until FY14. Since then, it has gone from strength to strength.
ITC’s Other FMCG segment (the second largest contributor to sales) is also witnessing strong earnings and growth momentum, unlike most consumer staples peers.
The segment clocked a revenue of 19 per cent YoY while Nestle and Britannia saw 21 and 11 per cent growth each. FMCG EBITDA performance was even better, with the margin expanding by 430 bps YoY to 13.3 per cent & EBITDA growing 2.1x YoY.
Laughing stock no more
For years, the cigarette business has funded the growth of ITC’s other businesses like non-cigarette FMCG products, sometimes to the ire of shareholders who weren’t happy with the slow growth in financials and scrip value.
A slower growth in scrip value meant that for years ITC was also the laughing stock among social media circles. The stock often remained elusive during market rallies in the previous decade, offering poor returns in comparison to FMCG peers. Between 2014 and July 2022, ITC rose with dividends rose 53 per cent while Nifty50 rose 200 per cent, as per moneydhan.com, a SEBI RIA. ITC’s shares trailed the Sensex for five out of eight years through 2020.
“In the last ten years, HUL has done far, far better than ITC. And if you look at other companies in the same universe, say Dabur, it has also given superior performance. ITC has actually underperformed many of the large consumer names,” Aggarwal said.
But fast forward to 2023, not only is it among the best performers within the benchmark index, ITC has even trumped it. While Nifty50 has gained around 17 per cent in the last year, ITC has grown nearly 40 per cent. The ITC scrip in July crossed a market capitalization of Rs 6 lakh crore, beating HUL to become the largest FMCG company.
Prompting a move away to other segments is the nature of the cigarettes business. Tobacco is toxic, and investors are increasingly recognising it as such. Sin stocks are shares of companies engaged in a business or industry that is considered unethical or immoral.
While Environment, Social, and Governance (ESG) investing may be at a nascent stage in India, it is a serious parameter for global investors. Asia’s largest cigarette maker ITC cannot ignore it.
“The company sustained its ‘AA’ rating by MSCI-ESG –the highest amongst global tobacco companies– and was also included in the Dow Jones Sustainability Emerging Markets Index,” Puri noted in the company’s 2022 sustainability report.
Cigarettes, a bitter but essential overhang
For all the accolades for its gains in its other-FMCG business, ITC is nowhere close to ending its love for cigarettes, not that we are claiming it wants to. The Gold Flake-maker currently controls nearly 80% of the cigarette market.
The numbers in recent years suggest that the segment is flourishing more than ever before.
On an annualized basis, the return on depreciated cigarette assets is approaching a staggering 240%, three times the level two decades ago, as per a Bloomberg report. The entire legal cigarette industry was bleeding in the recent past due to punitive and discriminatory taxation on cigarettes. Taxes on cigarettes in India are multiple times higher than in developed countries viz. 17x of USA, 10x of Japan, 7x of Germany and so on, data shows.
But, companies are now recovering due to stable taxation. ITC’s three four-year cigarette sales CAGR are at their best levels since FY15 despite the company not taking material price increases over the last 13-14 months, as per a Motilal Oswal report.
ITC, which accounts for three out of every four cigarettes sold in the white market in the country, is currently seeing its best growth levels in over a decade, and is far superior to the flattish volumes of the past ten and twenty years.
(Published in Economic Times)
Akanksha Nagar, Financial Express
September 25, 2023
Adding to the fizz in the energy drink market, NourishCo, a division of Tata Consumer Products (TCP), has unveiled Say Never — a caffeine-based energy drink priced at Rs 10 for a 200 ml cup — in two variants of red (berries) and blue (tropical flavours). In its initial phase of launch, the brand will be available largely through general trade outlets in Karnataka and some key markets of the north, including Delhi, NCR, Uttar Pradesh and Bihar. Vikram Grover, MD, NourishCo Beverages, TCP, says, “With Say Never we are celebrating the heroes who carve their own path.”
As a functional beverage, the energy drinks segment has grown by leaps and bounds in recent years to stand at Rs 3,500 crore in 2022. Experts reckon the market will touch Rs 10,000 crore by 2027. Red Bull is the category leader with a 61% market share of the market.
PepsiCo’s debut of Sting a few years ago at an inviting Rs 50 for 250 ml (as opposed to Red Bull’s Rs 125 for 250 ml can) had shaken up the category. With a 7% market share Sting has surpassed PepsiCo’s older products like Mountain Dew to become the company’s fastest-growing brand. Charged by Thums Up kept up the buzz for Coca-Cola during the 2023 edition of the Indian Premier League on Star Sports. Grover says Say Never will stand out for two reasons — the attractive price point and the cup delivery format, which the company has used with Gluco+. “The rapid growth in this energy segment in the recent past has come on the back of price disruption, and we feel that we can take that disruption forward,” he adds.
As energy drinks still operate in a niche segment with a premium play, an affordable price point can be a game-changer, say experts. “Affordability is a significant driver in India, especially for pre-teens, teens and college students,” says Devangshu Dutta, CEO, Third Eyesight. For many years energy drinks were treated as a niche premium opportunity, but the availability of lower price options has opened up the mass market as demonstrated by PepsiCo’s Sting in PET bottles with a much lower price point.
While the cola giants have an obvious advantage in terms of shelf space accessibility, given the market’s trajectory even smaller players stand a good chance to create a space for themselves. “Clarity in positioning, techniques to make the brand stand out, and ensuring availability with strong distribution and replenishment is imperative to get ahead,” Dutta suggests.
TCP plays in the energy space with Tata Gluco+, a glucose-based energy drink targeting a young consumer set; for Say Never the target is the youth between the ages of 18 and 35.
Besides pricing, what will be make or break is marketing muscle and a differentiated appeal, says Samit Sinha, managing partner, Alchemist Brand Consulting. “Say Never can position itself as a party-drink — akin to how Red Bull is equated with active lifestyles. There are enough opportunities to create nuanced differences in attributes, functional benefits and most of all, emotional benefits.”
NourishCo contributes 4% to the TCP overall business and in Q1 of FY23, its recorded a strong revenue growth of 60%. TCP’s flagship drink Tata Gluco+ registered a growth of 61% in the same period.
(Published in Financial Express)
Remember the year 2000? After Y2K passed safely, that year some optimistic analysts predicted that India’s modern retail chains would reach 20 per cent market share by 2015. Two years after that supposed watershed, another firm declared that modern retail will be at around that level in 2020 – but wait! – only in the top 9 cities in the country. Don’t hold your breath: India surprises; constantly. As many have noted, “predictions are tough, especially about the future!” What we can do is reflect on some of this year’s developments that could play out over the coming year.
In many minds 2019 may be the Year of the Recession, plagued by discounting, but that demand slowdown has brewing for some time now. However, there’s another under-appreciated factor that has been playing out: while small, independent retailers can flex their business investments with variations in demand, modern retail chains need to spread the business throughout the year in order to meet fixed expenses and to manage margins more consistently.
To reduce dependence on festive demand, retailers like Big Bazaar and Reliance have been inventing shopping events like Sabse Sasta Din (Cheapest Day), Sabse Sachi Sale (Most Authentic Sale), Republic Day / 3-Day sale, Independence Day shopping and more for the last few years. In ecommerce, there’s the Amazon’s Freedom Sale, Prime Day, and Great India Festival, and Flipkart’s Big Billion Day Sale. This year retailers and brands went overboard with Black Friday sale, a shopping-event concept from the 1950s in the USA linked to a harvest celebration marked by European colonisers of North America. (The fact that Black Friday has a totally different connotation in India since the terrorist bombings in Bombay in 1993 seems to have completely escaped the attention of brands, retailers and advertising agencies.) Be that as it may, we can only expect more such invented and imported events to pepper the retail calendar, to drive footfall and sales. The consumer has been successfully converted to a value-seeking man-eater fed on a diet of deals and discounts. With no big-bang economic stimuli domestically and a sputtering global economy, we should just get used to the idea of not fireworks but slow-burning oil lamps and sprinklings of flowers and colour through the year. Retailers will just have to work that much harder to keep the lamps from sputtering.
Ecommerce companies have been in operating for 20 years now, but the Indian consumer still mostly prefers a hands-on experience. The lack of trust is a huge factor, built on the back of inconsistency of products and services. The one segment that has been receiving a lot of love, attention and money this year (and will grow in 2020) is food and grocery, since it is the largest chunk of the consumption basket. Beyond the incumbents – Grofers, Big Basket, MilkBasket and the likes – now Walmart-Flipkart and Amazon are going hard at it, and Reliance has also jumped in. Remember, though, that selling groceries online is as old as the first dot-com boom in India. E-grocers still struggle to create a habit among their customers that would give them regular and remunerative transactions, and they also need to tackle supply-side challenges. Average transactions remain small, demand remains fragmented, and supply chain issues continue to be troublesome. Most e-grocers are ending up depending on a relatively narrow band of consumers in a handful of cities. The generation that is comfortable with an ever-present screen is not yet large enough to tilt the scales towards non-store shopping and convenience isn’t the biggest driver for the rest, so, for a while it’ll remain a bumpy, painful, unprofitable road.
Where we will see rapid pick-up is social commerce, both in terms of referral networks as well as using social networks to create niche entrepreneurial businesses – 2020 should be a good year for social commerce, including a mix of online platforms, social media apps as well as offline community markets. However, western or East Asia models won’t be replicated as the Indian market is significantly lower in average incomes, and way more fragmented.
As a closing thought, I’ll mention a sector that I’ve been involved with (for far too long): fashion. In the last 8-10 decades, globally fashion has become an industry living off artificially-generated expiry dates. A challenge that I have extended to many in the industry, and this year publicly at a conference: if consumption falls to half in the next five years, and you still have to run a profitable business (obviously!), how would you do it? Plenty of clues lie in India – we epitomise the future consumers; frugal, value-seeking, wanting the latest and the best but not fearful about missing out the newest design, because it will just be there a few weeks later at a discount. If you can crack that customer base and turn a profit, you would be well set for the next decade or so.
(Published as a year-end perspective in the Financial Express.)
In recent decades, the dependence on established medical disciplines has begun to be challenged. There is the oft-quoted dictum that healthcare sector tends to illness rather than health. Another saying goes that some of the food you eat keeps you in good health, but most of what you eat keeps your doctor in good health. With a gap emerging between wellness-seekers and the healthcare sector, so-called “alternative” options are stepping in.
Some of these alternatives actually existed as well-structured and well-documented traditional medical practices for thousands of years before the introduction of more recent Western medical disciplines. This includes India’s Siddha system and Ayurved (literally, “science of life”), which certainly don’t deserve being relegated to an “alternative” footnote. Ayurved is also said to have influenced medicine in China over a millennium ago, through the translation of Indian medical texts into Chinese.
Other than these, there are also more recent inventions riding the “wellness” buzzword. These may draw from the traditional systems and texts, or be built upon new pharmaceutical or nutraceutical formulations. Broader wellness regimens – much like Ayurved and Siddha – blend two or more elements from the following basket: food choices and restrictions, minerals, extracts and supplements, physical exercise and perhaps some form of meditative practices. Wellness, thus, is often characterised by a mix-and-match based on individual choices and conveniences, spiked with celebrity influences.
A key premise driving the wellness sector is that modern medicine depends too heavily on attacking specific issues with single chemicals (drugs) or combinations of single chemicals that are either isolated or synthesised in laboratories, and that it ignores the diversity and complexity of factors contributing to health and well-being. The second major premise for many wellness practitioners (though not all!) is that, provided the right conditions, the body can heal itself. For the consumer the reasons for the surge in demand for traditional wellness solutions include escalating costs of conventional health care, the adverse effects of allopathic drugs, and increasing lifestyle disorders.
After food, wellness has turned into possibly one of the largest consumer industries on the planet. Global pharmaceutical sales are estimated at over US$ 1.1 trillion. In contrast, according to the Global Wellness Institute, the wellness market dwarfs this, estimated at US$ 3.7 trillion (2015). This figure includes a vast range of services such as beauty and anti-ageing, nutrition and weight loss, wellness tourism, fitness and mind-body, preventative and personalized medicine, wellness lifestyle real estate, spa industry, thermal/mineral springs, and workplace wellness. Within this, the so-called “Complementary and Alternative Medicine” is estimated to be about US$200 billion.
There are several reasons why “complementary and alternative medicine” sales are not yet larger. Rooted in economically backward countries such as India, these have been seen as outdated, less effective and even unscientific. In India, the home of Siddha and Ayurved, apart from individual practitioners, several companies such as Baidyanath, Dabur, Himalaya and others were active in the market for decades, but were usually seen as stodgy and products of need, and usually limited to people of the older generations and rural populations. In the West they typically attracted a fringe customer base, or were a last resort for patients who did not find a solution for their specific problem in modern allopathy and hospitals.
However, through the 1970s Ayurved gained in prominence in the West, riding on the New Age movement. Gradually, in recent decades proponents turned to modern production techniques, slick packaging and up-to-date marketing, and even local cultivation in the West of medicinal plants taken from India.
As wellness demonstrated an increasingly profitable vector in the West, Indian entrepreneurs, too, have taken note of this opportunity. Perhaps Shahnaz Husain was one of the earliest movers in the beauty segment, followed by Biotique in the early-1990s that developed a brand driven not just by a specific need but by desire and an approach that was distinctly anti-commodity, the characteristics of any successful brand. Others followed, including FMCG companies such as the multinational giant Unilever. The last decade-and-a-half has also brought the phenomenon called Patanjali, a brand that began with Ayurvedic products and grew into an FMCG and packaged food-empire faster than any other brand before! While a few giants have emerged, the market is still evolving, allowing other brands to develop, whether as standalone names or as extensions of spiritual and holistic healing foundations, such as Sri Sri Tattva, Isha Arogya and others.
An absolutely critical driver of this growth in the Indian market now is the generation that has grown up during the last 25-30 years. It is a class that is driven by choice and modern consumerism, but that also wishes to reconnect with its spiritual and cultural roots. This group is aware of global trends but takes pride in home-grown successes. It is comfortable blending global branded sportswear with yoga or using an Indian ayurvedic treatment alongside an international beauty product.
Of course, there is a faddish dimension to the wellness phenomenon, and it is open to exploitation by poor or ineffective products, non-standard and unscientific treatments, entirely outrageous efficacy claims, and price-gouging.
To remain on course and strengthen, the wellness movement will need structured scientific assessment and development at a larger scale, a move that will need both industry and government to work closely together. Traditional texts would need to be recast in modern scientific frameworks, supported by robust testing and validation. Education needs to be strengthened, as does the use of technology.
However the industry and the government move, from the consumer’s point-of-view the juggernaut is now rolling.
(An edited version of this piece was published in Brand Wagon, Financial Express.)
(Published in the Financial Express, 10 May 2016)
In about 20 years, Café Coffee Day (CCD) has grown from one ‘cyber café’ in Bengaluru to the leading chain of cafés in the country by far.
In its early years, it was a conservative, almost sleepy, business. The launch of Barista in the late 1990s and its rapid growth was the wake-up call for CCD — and wake up it did!
CCD then expanded aggressively. It focussed on the young and more affluent customers. Affordability was a keystone in its strategy and it largely remains the most competitively priced among the national chains.
Its outlets ranged widely in size — and while this caused inconsistency in the brand’s image — it left competitors far behind in terms of market coverage. However, the market hasn’t stayed the same over the years and CCD now has tough competition.
CCD competes today with not only domestic cafés such as Barista or imports such as Costa and Starbucks, but also quick-service restaurants (QSRs) such as McDonald’s and Dunkin’ Donuts. In the last couple of years, in large cities, even the positioning of being a ‘hang-out place’ is threatened by a competitor as unlikely as the alcoholic beverage-focussed chain Beer Café.
CCD is certainly way ahead of other cafés in outlet numbers and visibility in over 200 cities. It has an advantage over QSRs with the focus on beverage and meetings, rather than meals. Food in CCD is mostly pre-prepared rather than in-store (unlike McD’s and Dunkin’) resulting in lower capex and training costs, as well as greater control since it’s not depending on store staff to prepare everything. However, rapid expansion stretches product and service delivery and high attrition of front-end staff is a major operational stress point. Upmarket initiatives Lounge and Square, which could improve its average billing, are still a small part of its business.
Delivery (begun in December 2015) and app-orders seem logical to capture busy consumers, and to sweat the assets invested in outlets. However, for now, I’m questioning the incremental value both for the consumer and the company’s ROI once all costs (including management time and effort) are accounted for. The delivery partner is another variable (and risk) in the customer’s experience of the brand. Increasing the density through kiosks and improving the quality of beverage dispensed could possibly do more for the brand across the board.
The biggest advantage for CCD is that India is a nascent market for cafés. The café culture has not even scratched the surface in the smaller markets and in travel-related locations. The challenge for CCD is to act as an aggressive leader in newer locations, while becoming more sophisticated in its positioning in large cities. It certainly needs to allocate capex on both fronts but larger cities need more frequent refreshment of the menu and retraining of staff.
An anonymous Turkish poet wrote: “Not the coffee, nor the coffeehouse is the longing of the soul. A friend is what the soul longs for, coffee is just the excuse.” There are still many millions of friends in India for whom the coffee-house remains unexplored territory, whom CCD could bring together.