Just to go back in time, ITC, about a decade ago, said its vision was to be an FMCG company with a turnover of Rs 1 lakh crore by 2030. That is some distance away but in his usual understated manner, Puri says they will get there. Meanwhile, the share of non-cigarette FMCG and agri business combined is now touching 50 per cent of ITC’s consolidated revenues, while the share of cigarettes has fallen from 49 per cent in FY18 to 39 per cent in FY22. (See graphic ‘The Big Shift’.) Obviously, Puri is looking to sustain the growth momentum that took off from nothing since its foray in 2001 to where it is today.

At the core of ITC’s FMCG business are its strategic pillars. Over a long meeting, Puri outlines why those make his business model unique (see interview). Be it the thrust on insights, innovation and quality or the synergy that exists within businesses, the M&A story or an efficient supply chain, ITC has managed to get to the top position in product categories such as branded atta (by creating a new, organised market) and cream biscuits (replacing Britannia), apart from being a serious No. 2 in noodles, agarbattis and floor cleaners; the leaders happen to be Maggi (from Nestlé) in noodles, Cycle (from the NR Group) in agarbattis and Lizol (from Reckitt Benckiser) in floor cleaners.

The market has taken cognisance of this strategy working for ITC, with the stock gaining 46 per cent over the past one year, when the benchmark S&P BSE Sensex rose 8 per cent. “If you set yourself a vision the way we did through ambitious targets, it forces you to think in a certain manner,” says Hemant Malik, Divisional CEO of the foods business. He says the company invested well in advance in building its own factories and then figured out a way to use the capacity. “It was in some ways a reverse mindset.” With that, it was able to look at multiple product categories, with the company’s strong wheat value chain being the anchor. “Then, businesses like atta, biscuits and noodles started to look a lot more attractive and meaningful. Now, it is like a playbook,” he explains. Much as the company was (and still is) dominant in the tobacco business, in FMCG, “we were still starting from zero”.

The bulk of the FMCG play is from foods and not without reason. At the time of drawing up the business plan, the total FMCG business in India was Rs 2.5 lakh crore, of which foods accounted for Rs 1 lakh crore, or 40 per cent. Take the case of the biscuits industry, whose turnover was Rs 8,000 crore and is now at Rs 40,000 crore. Here, ITC’s Sunfeast (the management wanted a brand name starting with “sun”) decided to focus on cream biscuits, a segment that threw open many opportunities. The choco-fills foray has been a runaway success and as Malik explains, “it was a bridge product with the liquid inside a biscuit”. Competition led by Britannia did follow but an array of flavours and the creation of the Dark Fantasy brand worked out well—so much so that adding it to the Sunfeast name on its bourbon biscuits (apart from some tinkering on price and grammage) helped the brand take off. “The whole idea of Dark Fantasy is to connote indulgence,” he adds.  

Looking for the slots

In the case of noodles, a market overwhelmingly dominated by Maggi, which has been around since 1983, consumer research threw up an interesting finding—the product did get a little lumpy and sticky. Building on that, ITC’s Yippee noodles launched a non-sticky version. The agri business sourcing advantage helped bring in wheat and the challenger, which hit the market in 2010, now has a 21-22 per cent share with Maggi at around 55-60 per cent; at the time of Yippee’s launch, Maggi had over 85 per cent market share.

According to Shubhajit Sen, Founding Partner, A Priori Consultants, ITC seeks out large categories such as biscuits, snacking, spices and dairy, with preferably a large unorganised/local segment. “They use their inherent sourcing strength to develop good value products and then apply significant pressure both in marketing and distribution to gain share. In more mature categories, they innovate with the intention of driving upgrades to more premium offerings. Overall, this playbook has served them well in many categories.”

With all that is a sound understanding of what the consumer wants. B. Sumant, ITC’s Executive Director, is succinct when he says: “Our relationship with the consumer is the Holy Grail”. That will inevitably depend on the ability to possess first-party data. “Our own D2C store platform, ITC e-store, enables us to engage with the customer directly. Through this, we sell over 700 products,” he says.

The entire process of identifying consumer insights has changed and digital allows you to get very focussed insights and make our communication even more effective.

B.Sumant
Executive Director
ITC

E-commerce, now an indispensable part of any FMCG company’s toolkit, has seen ITC’s revenue from this segment move from 2-3 per cent to 7-8 per cent today, with Sumant, also a Director on ITC’s board, pointing out how it is in the double digits for personal care. “The entire process of identifying consumer insights has changed and digital allows you to get very focussed insights and make our communication even more effective,” he says.

Not surprisingly, foods drives ITC’s FMCG business, contributing 83 per cent of the FMCG turnover and in line with how the overall industry is moving—the total FMCG pie in India is over Rs 7.5 lakh crore with at least 40 per cent being the share of foods even now. Across players, innovation in foods is an obsession since that brings in disproportionate consumer mindshare and eventually higher margins. ITC’s Farmlite range of biscuits is sold in little packets inside a large one. “You can eat it when you want to. Also, we realised the slightly older consumer may prefer it in limited quantities,” says Malik, who is quick to add that in foods, the product experience is critical. “Yet, that is difficult for the consumer to articulate and as a challenger, it is an opportunity if we get it right.” Bingo, a key player in branded snacks, launched a ‘Hashtags’ version in 2019 (where the snacks are designed as hashtags) and it turned out to be a big draw among the youth. The agri value chain brings in the potato for Bingo as also fruit pulp, spices and milk for ITC’s other brands. Sumant speaks of how farmers grow wheat close to where ITC has its factories. “In a business like ours, every element of the cost structure needs to be optimised and improved on a continuous basis. It is a relentless exercise.” In that context, the efficiency of the supply chain is a big piece. “Scale is important to get the best out of it. By putting in place integrated consumer goods manufacturing and logistics (ICML) hubs, (there are 10 such across India), our supply chain gets only more agile and robust.”  

Shirish Pardeshi, who tracks FMCG at Centrum Broking, points out that ITC began pushing the backend story from 2012. “In FMCG, the quality of raw materials is important since it leads to product consistency. If you get it right there, you will not lose the consumer.” He gives credit to the company’s premiumisation strategy, especially in the ability to give value-added products. “The organised atta market is less than Rs 20,000 crore in size. It [ITC]has a premium offering like Aashirvaad Sharbati atta [positioned as made from 100 per cent MP Sharbati wheat]. Premiumisation gives you a superior brand perception and also high levels of consumer pull.”

In all this, getting it spot on with communication is also critical. Nitin Karkare, Vice Chairman of FCB Ulka Advertising, the agency that handles a significant chunk of ITC’s FMCG business, picks out Sunfeast (launched in 2003) to outline the strategy. “We were up against established national players like Britannia and Parle, not to forget the multitude of regional names. Given that we were nascent, we took the decision to follow the master brand strategy during the early years to maximise the impact of our limited budgets. Glucose, Marie Light, Dream Cream, etc., were treated as product identifiers and not sub brands,” he says.

Nitin Karkare
CEO
FCB Ulka Advertising

Making The Shift

To get to a leadership position in atta, ITC was helped in no small measure by a shift to the organised segment. At a consumer spend level, Aashirvaad is a Rs 7,000-crore brand and the way India is structured, most of the atta market is still unorganised in nature. In many ways, the Aashirvaad brand, which sells salt, vermicelli, spices, ghee and instant meals, is trying to replicate that success in dairy, always a tough segment to crack.

We want to play the entire value chain in the dairy [segment], and the opportunity lies in low penetration of packaged products. Besides, that is the only way to be profitable.

Hemant Malik
Divisional CEO
Foods Business, ITC

With a thrust on quality, it has launched its milk in Bihar and in Kolkata, ITC’s headquarters. Malik says Aashirvaad milk is more expensive than competition by around Rs 4 and he claims leadership in some of Bihar’s smaller centres. “We want to play the entire value chain in dairy, and the opportunity lies in low penetration of packaged products. Besides, that is the only way to be profitable.” Today, Aashirvaad has a play in areas such as paneer, curd and lassi.

There have been a host of international players such as Danone, apart from domestic companies, which faced a gruelling experience in dairy. Even now, many companies choose to have a minimal presence by selling only value-added products such as fruit yoghurt and specialised cheese through third-party manufacturing arrangements. ITC, clearly, has a battle on its hands when it comes to competing with the feisty milk co-operatives and, in that sense, a measured state-by-state approach is easy to understand. R.S. Sodhi, MD, Gujarat Cooperative Milk Marketing Federation (Amul), says the big attraction is that the organised milk market grows at 12-13 per cent per annum and that too on a base of Rs 2.6 lakh crore. “Around half of that comes from just an increase in consumption and the other part comes from a very visible shift from unorganised to organised,” he explains. The other insight is how dairy products are now consumed in more centres. Sodhi points to how a large proportion of the offtake would earlier come from the large centres. “Now, the pandemic is seeing a huge demand from semi-urban to rural areas as well. More players coming in only means the procurement price for farmers will increase, with consumers gaining access to more affordable products.”

Being Acquisitive

“We want to be in high-growth- and high-margin categories. The logic is if you win here, you win big,” avers Sameer Satpathy. As ITC’s Divisional CEO of the personal care products business, he has overseen the success of Savlon, a brand the company acquired in early 2015 along with Shower to Shower from Johnson & Johnson (J&J). With a turnover of just Rs 50 crore, Savlon had already changed hands. HUL had an agreement in the late 1990s with J&J to use the brand to sell antiseptic soaps on a royalty basis, before it was called off in early 2000. The consensus among industry trackers was that it was not an area of focus for J&J and there was a need to divest it quickly.

ITC’s approach has been to identify a category and a platform to build a strong bulwark. “Opportunities are always large and our ability lies in expanding any category,” says Satpathy. At the time of the buyout, Savlon had a presence in soaps, antiseptic liquid and hand washes, with the brand now extending itself in each of them apart from providing a big push in sanitisers. “Hygiene as a platform was hugely attractive and the need for it will only increase.” The peak of the pandemic saw the brand hit a turnover of Rs 1,000 crore, with the primary competitors being Dettol and Lifebuoy.

Vinit Bolinjkar, Head (Research), Ventura Securities, points towards multinationals such as Nestlé and Unilever that have massive portfolios of brands globally. “For over 200 brands they have, Nestlé has launched barely 10 in India. ITC does not have that kind of luxury and needs to launch brands across categories and price points,” he explains. However, he says the cash flow from cigarettes can easily support the FMCG strategy. “There is a certain shrewdness they have demonstrated both on organic and inorganic growth.”

He says what makes ITC unique is that it did not go with a product-wise approach and instead, launched many categories simultaneously. “Nestlé, for instance, will launch one from its international portfolio, wait for it to grow and then bring another. Britannia is more focussed on a few things and getting them right.” The background in cigarettes is, to his mind, invaluable. “They already have the understanding of building big brands and the intricacies of a supply chain [acquiring tobacco leaves] and creating a high-quality distribution network. It also means they were always a part of the consumer’s wallet, and it was only a question of continuing that strategy.”

We want to be in highgrowth- and high-margin categories. The logic is if you win here, you win big... Opportunities are always large and our ability lies in expanding any category.

Sameer Satpathy
Divisional CEO
Personal Care, ITC

The buyout of Nimyle in mid-2018 from Kolkata-based Arpita Agro is another interesting example. A huge player in east India’s floor cleaner market, Nimyle (a neem-based product), says Satpathy, was unique and neem could be easily extended. He points out that there is no natural homecare brand in India and that means, “I own the platform.” Since the acquisition, Nimyle has launched a vegetable and fruit wash. The personal care portfolio, of course, cuts across other brands such as Charmis, Engage, Fiama and Vivel. Again, in soaps, a highly penetrated segment, the Vivel brand has a 12-13 per cent market share in eastern India. Even the largest player, Lifebuoy, has a share of just over 20 per cent at a national level. “It is possible to have leadership in a region and Vivel is an example of that. Large product categories always offer these interesting options.” According to Satpathy, the scope for innovation in his business is unlimited and it is clearly a long-term game.

Puri says the inorganic strategy is a critical growth driver and has to be “value-accretive”. In May 2020, ITC acquired Sunrise Foods, a Kolkata-based spices maker, for Rs 2,150 crore. With Aashirvaad already strong in Telangana and Andhra Pradesh, this opened up a new geography. From a strategic point of view, it sits well with ITC’s knowledge of cuisine, agri sourcing and the rural linkages.

Centrum’s Pardeshi points out that ITC will primarily be a foods company. As he sees it, at a gross margin level, there is not much of a difference compared to its rivals. “Its Ebitda margins from the 9-9.5 per cent range can hit 12-13 per cent by FY24. We expect them to have premiumisation across more categories, increase efficiencies and up it on distribution,” he says. Now, the likes of Britannia and Nestlé “have an advertising-to-sales ratio of 2-3 per cent, while ITC is at 6-7 per cent. A higher Ebitda margin will reduce that percentage for ITC”.

From Puri’s point of view, there is a lot to do in FMCG. “We are already there in the areas that look interesting and now need to look at adjacencies. Since we do rotis, it could be parathas. We just need to look at more ways to grow the business,” he says with a smile. The folks at ITC are surely in no mood to get even remotely complacent.