'We want to be FMCG's No.1'
It’s still called “cigarette factory” by the locals, but ITC’s old factory in the Pulikeshinagar locality of Bangalore no longer rolls cigarettes. Instead, the campus can easily be mistaken for a country club or a resort—winding pathways set amidst 34 acres of lush greenery, dotted with ancient high-roofed factory sheds that no longer roast tobacco or roll cigarettes.
Each of these quaint single-storey structures has been re-purposed, and now houses the offices of ITC Infotech. Each building has a name drawn from Sanskrit literature—the food court is called Aashirvaad, the development centre for Danske Bank is called Nidhi, the one for Finnair is called Athithi, and the ITC Infotech Managing Director’s Office Kriti— probably to underline ITC’s identity as an Indian company.
There is a building at one edge of the complex, that, is, in a way, the odd man out. It is the only building in the complex that does not have an ITC Infotech office. Instead, it is home to ITC Foods, and its Divisional Chief Executive Ravi Naware sits here. Naware is a key player in ITC Chairman Y.C. “Yogi” Deveshwar’s grand gameplan to turn his tobacco-to-hotels-to-FMCG-to paper conglomerate into India’s numero uno FMCG company
The numbers game
ITC, in fact, has already travelled some distance down that path. For the first time in history, the share of its non-tobacco portfolio crossed the 50 per cent of net turnover mark in 2006-07. And the FMCG business, which is growing at 68.17 per cent, accounted for about 14 per cent of its net revenues of Rs 12,705.79 crore. Its Aashirvaad brand of atta, launched in 2002, dominates the market for the staple with a share of 52 per cent. Hindustan Unilever’s Annapurna is a distant second with an 18 per cent share.
Then, Mint-o Fresh, ITC Food’s cough lozenge, has edged past erstwhile market leader Perfetti to the #1 position with a market share of 17 per cent. Having gained segment leadership in some niches and significant shares in others, ITC is setting its sights higher. “We hope to emerge as the #1 player in the packaged foods segment in India in four years,” says Naware.
That’s not all. In 2000, ITC entered the readymade garments (lifestyle) market with its first Wills Lifestyle store in Delhi’s tony South Extension area. Today, its three brands in the segment—Wills, John Players and Miss Players—place it among the top 5, well, players in India.
Chitranjan Dar, Divisional Chief Executive, Lifestyle Retailing Business Division, ITC, like all other Divisional CEOs BT spoke to, declines to reveal exact segment turnovers, but says: “We should double our sales over the next 3-4 years and be among the top 2 players in the branded apparel market by then.”
It’s more of the same in the greeting cards and stationery segment, in incense sticks and in matches. ITC is very clearly the market leader in these segments and, happily for the company and its shareholders, faces very little competition on a pan-India basis.
It has also recently launched a line of personal care products like soaps, shampoos and fragrances under the Wills brand. New consumers are entering the market every day; they like to experiment, but want the best. Then, per capita consumption is among the lowest in the world.
“Given this background, I think the time is just right to enter the market and grow with it,” says Sandeep Kaul, Divisional Chief Executive, Personal Care Products, ITC.
Finding synergies
The synergies |
| ITC tapped its expertise in the tobacco, hospitality and IT sectors to build apparently unrelated businesses. |
Tobacco
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Agri Business
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Hotels
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ITC Infotech
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Says Deveshwar: “Over the years, we had built diverse sets of skills that could be used in several other businesses. It only needed someone to think it through.” In retrospect, the plan looks simple. ITC’s “diverse sets of skills” were fungible and could be leveraged in any number of industries. (See The Synergies).
Deveshwar gave his team a simple brief: “We would like to diversify into new businesses. Can you study which areas we can enter?” Given ITC’s experience in agri-procurement, distribution, fine foods and packaging & printing, it wasn’t difficult to zero in on packaged foods, but it had to pass one final test.
“We had to see if, in time, the new business would be worthy of a company the size of ITC,” says Naware. The answer to this query was also a decisive yes. ITC calculated that Indians spend about $130-150 billion (Rs 5,20,000-6,00,000 crore) annually on food. In developed markets, packaged branded foods comprise 80-85 per cent of this consumption. In 2001, the figure for India was about 5.5-6 per cent.
“Even if the country doesn’t achieve the penetration levels of the developed world, there is still scope for a 10-fold increase, given the growth of the economy. That’s what convinced us to take the plunge,” he says.
The success formula
In May 2002, it launched Aashirvaad atta. Hindustan Lever’s (now Hindustan Unilever) Annapurna was then the market leader. Here, ITC leveraged its e-choupal initiative to source 18 different grades of atta.
“Then, we blended them—based on feedback on regional tastes from our chefs—using our tobacco blending skills. Result: what we sell in the west is not what we sell in the north. We created mass customisation in a commodity,” says Deveshwar. Explans S. Sivakumar, Chief Executive, Agri Business, ITC: “The e-choupal network gives us two distinct advantages. We can buy identity-preserved products directly from farmers.
This allows us to blend various grades of atta to suit regional tastes and preferences. Then, our transaction costs are lower than those of others who buy from the mandis.” Typically, various grades of wheat are mixed up and stacked at mandis, making it impossible to identify individual types.
Therefore, companies that buy their wheat from there cannot, even if they want to, create the kind of blends that ITC does.
Segmenting the atta market, ITC zeroed in on the taste preferences of consumers in the north, west and east and created customised blends to cater to these markets. “We launched Aashirvaad Select for the northern market, Aashirvaad MP Chakki for the west and Aashirvaad for the east,” he adds.
The big bite |
ITC has six brands in packaged foods and several of them are segment leaders Aashirvaad: Aashirvaad Atta is the largest national atta brand, with over 52 per cent market share; also present in spices and instant mixes. Mint-o: Mint-o Fresh has a market share of 17 per cent, making it the largest cough lozenges brand in the country. ITC’s other brand in the confectionery space is Candyman. Bingo!: This range of finger snacks has clocked up an 11 per cent all-India market share within 6 months of launch Kitchens of India: ITC’s first brand in this segment, it leverages the recipes of the master chefs at ITC Hotels Sunfeast: Has a market share in excess of 10 per cent in the biscuits segment and also has a presence in the instant pasta market. |
In less than five years since launch, Aashirvaad has emerged as a Rs 500-crore-plus brand. It followed the same formula with Mint-o Fresh, which is a blend of mint, spearmint and fresh mint in Uttar Pradesh, Bihar and West Bengal and eucalyptus in the rest of the country.
The brand, which it bought from Candico in 2003 for an undisclosed amount, has emerged as the market leader in the cough lozenge segment with a market share of 17 per cent.
But the biggest among the six brands in the ITC Foods portfolio is Sunfeast, which is expected to generate more than half the division’s estimated 2007-08 revenues of close to Rs 2,000 crore.
This brand straddles the biscuit market with Orange Marie, butterscotch cream, chilli flakes, honey flavour and cookies and pasta markets.
It has roped in celebrities like Shah Rukh Khan, Sachin Tendulkar and Sania Mirza to create a buzz around the brand. “Shah Rukh and Sachin can get consumers to try out my brands, and they’re doing a great job of that. But the brand’s success is due to its inherent qualities,” says Naware. The most important among these, he says, is quality.
“Barring one or two companies, there is a huge variation in the quality of products (from the same brand). And this is where ITC’s reputation as a quality food producer has made it a credible player,” he adds.
The Bingo magic
Its most high profile success story, however, comes from one of the smaller brands in its portfolio, Bingo, which has clocked up an 11 per cent market share in six months. “Actually, the correct figure is 16 per cent share of the ‘relevant’ market, since it isn’t yet available in all markets,” says Naware.
While developing Bingo, the product development team fanned out across India, zeroed in on more than 200 snacks that are popular in various regions, including murukku, samosas, khakra and potato chips, and listed the dominant flavours.
A universal sourcing platform |
| A link between rural India and the world, ITC’S e-choupal initiative is among the most-written about Indian business projects in the world. And it’s not difficult to fathom why. “The e-choupal is a universal platform that forms the link between the rural Indian market and the world,” says S. Sivakumar, Divisional Chief Executive, Agri Businesses, under which the initiative falls. It gives ITC unmatched reach into the heartland and now serves as a two-way link that ITC uses both to source commodities like soyabean, wheat, potatoes, grains and oilseeds from villages as well as to distribute products in its portfolio, financial instruments, and products from other manufacturers. For example, M&M uses this network to distribute tractors, and the Tata Group its fertilisers. In all, there are 110 partner organisations that use the e-choupal network to distribute their products. ITC’s model scores over other rival models for being socially non-disruptive. “We realised that middlemen were an integral part of the rural value chain; so, we included him in our architecture,” says Sivakumar. He was designated the samyojak and became the hub around which individual e-choupals (the spokes) revolved. This did reduce his margins, sometimes by up to 75 per cent, but it was still profitable for him to go with ITC as the e-choupal gave him business round the year, as opposed to 4-5 months a year earlier, and also gave him commissions from all the new products that ITC’s partner organisations sold through the network. |
Along the way, it bought out Technico Pty, an Australia-based company with proprietary technology in the chip-grade potato seeds space. “This takeover, though small in terms of size, will now give us the wherewithal to take on the competition on an equal footing,” says Deveshwar.
It is this rigour, and the success it has spawned, that gives ITC Foods the confidence to aim higher. “My goal is to emerge as the #1 foods company in India by 2011,” says Naware. By then, the Indian packaged foods market is expected to grow to a size of Rs 1,10,000 crore, from Rs 60,000 crore now, and ITC Foods is targeting a 5-6 per cent share of that.
That’s a turnover of Rs 5,500-6,600 crore—or three times its current level in four years. Is he confident of achieving that mark? Naware hesitates just a tad and nods. “Yes.” Feeding his confidence is the low penetration of packaged foods in the Indian market. “So, despite being a late entrant in this market, we’re actually a late entrant into a market with only 5.5-6 per cent penetration. In that sense, we’re getting in on the ground floor. As the market grows, we will grow along with it,” he adds.
Says Sunil Alagh, Chairman, SKA Advisers: “ITC’s strategy flows from its distribution strength. Having got that right, it is wisely seeking to plough the money which its cigarettes are making—which is not the future area to bank on—into other areas.”
ITC entered the lifestyle retailing (fashion) space even before it did the packaged foods segment. In 2000, a year before it launched the Kitchens of India brand, it opened its first Wills Lifestyle store in New Delhi’s South Extension. Since then, it has emerged among the top 5 players in the branded apparel industry in the country. “This business, unlike most of our other FMCG businesses is not distribution-led,” says Chitranjan Dar, Divisional Chief Executive, Lifestyle Retailing Business Division, who moved from ITC’s paper division to his current perch. “It is store- and brand-led.”
Cashing in on the tourism boom |
ITC Hotels is the second-largest hospitality chain in the country after Indian Hotels, and owns or manages 84 properties across the country. The total number of rooms: 5,800. “Following the completion of our $2-billion (Rs 8,000 crore) expansion programme (35 new hotels; 5,000 rooms), it is possible that we will emerge as the largest hospitality group in the country,” says Nakul Anand, Divisional Chief Executive, Hotels Division, ITC. ITC currently has four brands of hotels: The Luxury Collection: This is the super luxury category and comprises hotels like the Maurya in Delhi, Kakatiya in Hyderabad and Grand Maratha in Mumbai. These hotels are branded “The Luxury Collection” in association with the Starwood Group, which is ITC’s partner in the sector. WelcomGroup: This is the regular 5-star chain, and some properties bear Starwood’s Sheraton brand. Fortune by WelcomGroup: This is the mid-level chain run by ITC Hotels. At the top end of this “brand within a brand” is the Fortune Select. At the base, there is Fortune Inn and Fortune Lodge. ITC does not own many of these hotels and manages them on contract. WelcomHeritage: This is a JV with Gaj Singh, former Maharajah of Jodhpur, and manages hotels, all of which are repurposed royal palaces and noble havelis, with 15-100 rooms. ITC’s hotels are known for the quality of food. The “star” restaurants in its portfolio are Bukhara, Dum Pukht, Dakshin, Pan Asia, West View and Pavilion. |
ITC’s formidable brand building skills have obviously done it a world of good. Despite being a very late entrant into this genre, and despite being a relatively small fashion brand, it was still recently ranked by Time in 5th position on a list of best known luxury brands in India. “I was particularly happy with this ranking as luxury brands typically have a long heritage attached to them, and it’s rare for a five-year-old brand to establish itself in this category,” says Dar, adding that the ranking was probably due to a combination of the sustained brand building exercise, good consumer experience and Wills Lifestyle’s sponsorship of the India Fashion Week.
Incidentally, Wills, which started out as a cigarette brand (the Navy Cut cigarette, better known as Wills Filter, still has a cult following, and its Made for Each Other campaign attained iconic status during the ’70s and ’80s), now no longer adorns cigarette packets. “We felt that the value of the Wills brand went well beyond cigarettes,” explains Kurush Grant, Divisional Chief Executive, International Tobacco Division, ITC. Hence, its extension into the lifestyle and personal care products space and the subsequent delinking of the brand from tobacco products.
Says Nabankur Gupta, CEO, of brand consultant Nobby Brand Architects: “ITC is one the earliest lifestyle companies in India—many decades ago, a cigarette lit between fingers was a fashion statement. So, its move into the lifestyle space with the Wills brand is not out of sync with its core competence. Retail also makes sense as the company has the widest and deepest distribution, far outpacing even that of HUL.”
Dar, Divisional Chief Executive, Lifestyle Retailing Business Division, who moved from ITC’s paper division to his current perch. “It is store- and brand-led.”
So, what synergies does it draw from ITC? “We leveraged ITC’s brand building capabilities to establish ourselves as a desirable brand and drew service skills from our hotels division to make customers’ in-store experience a memorable one,” says Dar.
Then, it also used ITC’s process skills in managing supply chains and justin-time manufacturing techniques en route to becoming a lean and mean fighting machine in its chosen space where cut-throat competition is the norm.
ITC’s formidable brand building skills have obviously done it a world of good. Despite being a very late entrant into this genre, and despite being a relatively small fashion brand, it was still recently ranked by Time in 5th position on a list of best known luxury brands in India. “I was particularly happy with this ranking as luxury brands typically have a long heritage attached to them, and it’s rare for a five-year-old brand to establish itself in this category,” says Dar, adding that the ranking was probably due to a combination of the sustained brand building exercise, good consumer experience and Wills Lifestyle’s sponsorship of the India Fashion Week.
The core of the growth engine |
It may have made great strides in the non-tobacco FMCG and non-FMCG spaces, but in the public perception, ITC remains a cigarette company. And if one digs deeper, one will even find data to back that perception. Cigarettes now account for only 47 per cent of its turnover, but they still generate about 80 per cent of its profit before tax, and gives it the financial muscle to venture into the potentially lucrative but still unprofitable and cash guzzling non-tobacco FMCG sector. “Tobacco remains the largest FMCG segment in India,” says Kurush Grant, Divisional Chief Executive, International Tobacco Division, ITC. There’s another interesting tidbit: Gold Flake is the largest FMCG brand in the country. ITC is sitting pretty in this sector, with an overall market share of about 70 per cent. “The tax rates are too high,” says Grant. Cigarettes account for only 14 per cent of tobacco consumption in India but generate 86 per cent of taxes from this sector. “Excise duty and VAT increased taxes by 28-29 per cent this year,” says Grant, and this resulted in volumes initially falling by 2-3 per cent compared to last year. But given the nature of the product, demand has bounced back over the last four months. Is he worried that cigarettes may one day no longer form the core of ITC? “No,” he says confidently. “Will there come a time when cigarettes are not even the largest single contributor to ITC’s top and bottom lines?” he preempts this correspondent, and answers the question: “Very likely.” Cigarettes are growing at 13.3 per cent, while non-tobacco FMCG is growing at 68.17 per cent, so it’s possible that his statement is a prescient peek into the future. But he’s proud that he has seeded every single new venture that ITC has floated. “They’re all my babies,” he says. |
Hence, its extension into the lifestyle and personal care products space and the subsequent delinking of the brand from tobacco products.
Says Nabankur Gupta, CEO, of brand consultant Nobby Brand Architects: “ITC is one the earliest lifestyle companies in India—many decades ago, a cigarette lit between fingers was a fashion statement.
So, its move into the lifestyle space with the Wills brand is not out of sync with its core competence. Retail also makes sense as the company has the widest and deepest distribution, far outpacing even that of HUL.”
Fully integrated fashion house
ITC has only recently launched its personal care products under the Essenza de Wills, Fioma de Wills and Superia brands, but the products have been in development for more than five years. "We have a few resident competencies in this line that we are leveraging," says Kaul.
For one, the spas in ITC's hotels, and the hotels themselves, are very large users of high-end personal care products. "This gives us access to a vast database of knowledge in this area," he says. Then, of course, there?fs ITC's legendary brand building skills and expertise in packaging and printing, both of which are essential core competencies at the top and middle ends of the personal care products market.
Not yet profitable
ITC has come a long way from the time it started taking baby steps in the non-tobacco FMCG space about 6-7 years ago, but despite the strides it has made in terms of market share and even market leadership in some segments, the business is not yet profitable. That ITC has been posting a healthy growth in PAT year after year is due to the money minting machines it has in its tobacco and hotels divisions.
Maybe because of this, the stock markets have been lukewarm to the ITC stock. Since April 1, 2001, the BSE Sensex has gone from 3,604 to 19,401 points on November 6, 2007, a gain of 438 per cent; during this period, the ITC stock has gained 260 per cent from Rs 48 to Rs 173.
If, however, one considers only the last 18 months, during which the Sensex has gained 72 per cent, from 11,280 to 19,401 points, then the ITC stock has underperformed the bellwether index by a wide margin; it posted a loss of 8 per cent, moving from Rs 188 on April 1, 2006 to Rs 173 on November 6, 2007.
Paper tiger |
ITC’S RS 2,100-crore paperboards and specialty papers Division epitomises how it has internalised CSR into its business model. “We started operations in 1979 in Bhadrachalam primarily because it was a forest area and gave us access to raw materials,” says Pradeep Dhobale, Divisional Chief Executive of the paper division.But soon thereafter, government regulations changed, forcing ITC to look for alternative sources of raw materials. That was when it started its Social Forestry Programme and Farm Forestry Programme whereby it tied up with millions of small farmers to source trees from them. Result: farmers who previously earned Rs 10,000 per hectare from paddy, now earn Rs 25,000 per hectare by growing these trees. It’s farmer-partners now give it access to 75,000 hectares that on which they grow trees for the company. ITC is now the second-largest paper company in India, after BILT, with a capacity of 450,000 tonnes. It is already #1 in the Paperboard & Packaging Paper segment, and with Rs 1,400 crore in capex underway, ITC has set its sights on the #1 position. “We should, hopefully, get there within the next few years,” says Dhobale. |
But stock markets cannot be the last word on the health of a company, focussing as it does, mostly on quarterly results and growth rates. ITC's long-term growth story looks extremely positive. But that's not the only thing Deveshwar takes pride in. "We have managed to create an institution that is making a positive contribution to the uplift of millions of people in rural India.
And we're doing that by weaving this initiative into our overall business plan. At the end of the day that is what really matters," he says. By the looks of it, Deveshwar, who will remain Chairman till 2012, can take pride in the black ink that bathes all the three bottom lines that are so important to ITC.
Additional reporting by Bibek Bhattacharya, Ritwik Mukherjee, Shamni Pande and E. Kumar Sharma
