INSTITUTIONAL EQUITY RESEARCH Consumer: On the Roadbackoffice.phillipcapital.in/Backoffice/Researchfiles/Researchfiles... · Boroplus is seeing a strong rebound across MP and Chhattisgarh

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Consumer: On the Road

MP and Chhattisgarh - Vol. 1

INDIA | CONSUMER & RETAIL | Update

17 December 2018

We travelled across MP and Chhattisgarh (600km) ahead of state elections results to gauge the underlying consumer demand. In this trip, we interacted with many FMCG distributors, paint dealers, and visited QSR and jewellery outlets. Due to better agri policies, over the past few years, Central India (particularly MP and Chhattisgarh) has been clocking 6%+ GDP CAGR, which is much better than its historical run rate. The region has emerged as a key geography for driving incremental growth for FMCG companies.

Key takeaways from channel checks in Central India

Traditional mode of distribution set for a makeover

Most FMCG distributors seemed perturbed about business coming under pressure due to increased competition/discounting from cash & carry chains (Wal-Mart’s Best Price, Metro), modern trade, and also higher dumping from other states – by wholesalers using illegitimate means.

Cash & carry chains are tying up with banks to make channel financing available to retailers. Typically, retailers have to make spot payments to cash & carry companies while they get 15-30 days credit from traditional distributors.

Distributors’ profitability has started taking a hit with increased manpower and other operating costs and sales remaining stagnant. Their call for higher margins from FMCG companies has become stronger. Single-brand FMCG companies (Bajaj Corp, Colgate) have seen significant distributor churn in the past few years due to higher cost of servicing and increased category-related competition.

Unlisted FMCG companies

Unibic: Launched a Rs 10 SKU 7-8 months ago; worked wonders for the company.

Ghari (RSPL): Planning to enter machine detergent powder in the near term due to increasing penetration of washing machines in tier 3 / 4 cities.

Capital Foods (Ching’s): Schezwan Chutney and Fried Rice Masala on a strong wicket. Given up gains in noodles after Maggi’s comeback and ITC’s aggression. However, core noodles (Manchurian, Schezwan) continue to do well.

Patanjali: Supply-chain-related issues impacting sales, but it has initiated the process of taking returns/giving refunds to trade channels in the foods segment.

Listed FMCG companies

Emami: Kesh King has seen sharp recovery after its re-launch. Boroplus lotion has received solid traction due to its BOGO (Buy One Get One) offer. Zandu growth remains subdued due to strong local competition.

Bajaj Corp: Bajaj Almond Hair oil (ADHO) remains subdued due frequent churn in distribution, higher attrition of sales force on unrealistic sales targets, and increased menace of counterfeit products. New packaging has not materially improved demand.

Zydus Wellness: Sugarlite (product competing with raw sugar) has started on a good note as distributors have decided to pass on their margins to retailers to drive sales.

Colgate: It has become aggressive and is giving higher variable incentives to push sales. Recently, has started trade offers on its core product – CDC.

Consumer discretionary, retail

Jubilant (Domino’s Satna store): (1) EDV, improvement in product quality driving sales. (2) Making 15-20 train deliveries per day since the store is about 2km from the station.

Jewellery (TBZ Raipur store)

Sales growth has been much better during the festival season due to promotional activities (offer of flat making charges at Rs 225/ per gram during Oct-Nov, irrespective of the complexity of the jewellery).

Paint dealer

Festive season has been good, but partially marred by elections.

Economy emulsion segment is growing the fastest.

The sample size of our channel checks is a

small part of the overall picture, and our

observations may not hold true at the

national level.

Nevertheless, we believe such exercises

enable us to acquire a better feel on the

ground.

Vishal Gutka (+ 9122 6246 4118) [email protected] Preeyam Tolia (+ 9122 6246 4129) [email protected]


KEY TAKEAWAYS FROM NHAI MEETING SECTOR UPDATE

Secretary of FMCG Distributor Association, Raipur (capital city of Chhattisgarh) The secretary told us that distributors are facing an ‘existence’ crisis due to increased discounting from cash & carry players and wholesalers within that region are playing spoilsport by dumping goods procured through illegitimate means from other states as the E-way Bill is not being effectively implemented. Point Distributor Cash & Carry

Threshold limit In cash, can sells goods up to Rs

10,000 only to retailers. Above Rs

10,000 will require payments

through only banking means.

In cash, any amount of goods can

be sold. Retailers just need a

business license to register with

cash & carry chains. They don’t

even need to show GST

registration certificate.

Payment means Retailers generally receive credit

period of 15-30 days from

distributors.

Retailers are required to pay on

the spot to cash & carry chains.

However, lately, Cash and Carry

chains are also tying with banks

that can provide credit to retailers

thorough credit cards.

Bad debt risk Risk exists since 1) some rental

stores close without intimation and

2) delivery boys fail to take

signatures for goods delivered.

NIL

New product development Mandate of new product launches /

development lies with distributors

and they also bear an additional

burden of serving the remotest

outlet.

Interested in selling high thorough-

put items, which can give quick

rotation and better returns.

Source: PhillipCapital India Research



Unlisted FMCG Companies

Unibic Biscuits: Small towns driving the next leg of growth Despite strong consumer acceptance for its offerings, Unibic intends to restrict

its focus to premium products. Fruit nuts and chocolate chips are its highest selling variants.

It has seen substantial pickup in sales after it launched the Rs 10 pack 7-8 months ago. Earlier, it was available only in the Rs 30 price point.

Unibic cookies have seen strong response vs. competition as it contains crunchier nuts. Also, Unibic ‘inserts’ its nuts rather than crushing them like competition does.

No major problem of return goods due to breakage: Unibic biscuits are formed using a special technique and appropriate raw material mix, which makes cookies less vulnerable to breakage and thereby ensures lower returns vs. peers.

GHARI (Rohit Surfactants Private Limited): Plans to foray into ‘matics’ Ghari has been recording solid growth since the past few years, despite HUL

increasing its presence through its WIMI (Winning In Many Indias) strategy in Central India. This is because RSPL provides excellent quality (in line with Surf Excel’s Easy-Wash which is priced at Rs 115/kg) at an affordable price of Rs 53/kg.

Consumers perceive Ghari to be a better product than Rin / Wheel as Ghari dissolves much faster, which in turn leads to significant time saving for consumers.

RSPL is planning to launch a ‘Matic’ version of Ghari detergent in December to capitalise on higher washing machine penetration in tier 3 / 4 cities and rural areas.

Mera Sargam detergent is its key competitor as it provides one bucket free and an additional 500 grams of premium powder free for washing greasy clothes if the consumer buys 7kg of powder priced at Rs 350 (Rs 50/kg).

Capital Foods – core doing well (except ginger garlic paste + chutney) Capital Foods is India’s fastest growing foods company offering food products and food ingredients, which include well-known names such as Ching’s (noodles, chutney, soups, sauces) and Smith & Jones (ginger garlic paste, tomato ketchup and pasta masala).

Distributors are facing severe issues in terms of higher returns from retailers as products have lower shelf life (generally three months) and face higher leakages (especially in chutneys and ginger-garlic paste). The problem is aggravated because distributors receive reimbursement from Capital Foods only after a period of 2-3 months after they return the goods while they have to settle with their retailers immediately – this depresses their ROIs.

Schezwan Chutney and Fried Rice Masala are doing exceptionally well, mainly due to lack of competition.

Within noodles, Chinese variants such as Manchurian and Schezwan continue to see strong growth due to hardly any competition from incumbents. However, the growth of the Hakka Noodles variant has been slower despite being in the core category as consumers find it difficult to chop and add vegetables and toppings. Capital Foods, which had gained market share after the Maggi controversy in traditional noodles, has given up all its gains as Yippee and Maggi have made sharp inroads into the category.

Ginger-garlic paste is not finding many takers due to strong local competition from Nilons, which has solid consumer acceptance and offers higher margins to its trade channels (2x of Capital Foods).



Patanjali: Things have not started getting better Patanjali is facing quality and distribution challenges across categories and

exclusive storeowners are unhappy with the company, as it has aggressively expanded into other trade channels.

In order to drive sales, Patanjali had appointed category-wise distributors (more distributors give higher investment capability), which has also started hurting sales of existing distributors.

Patanjali did not accept returns from distributors, but with constant opposition from its trade partners, since last 2-3 months, the company has started accepting returns in food categories (not yet in non-food).



Listed FMCG Companies

Emami – Kesh King and Boroplus have done well; Zandu continues to disappoint Kesh King: Has seen strong pick up after re-launch

Kesh King is seeing strong revival in Madhya Pradesh (MP) as: (1) competitive intensity from Patanjali’s Kesh Kanti (which is seeing slowdown due to quality and supply-related issues) is falling, (2) Kesh King sales representatives are being given higher incentives to push the brand, (3) it is paying considerable amount of display fees to key outlets, and (4) newly relaunched packs with applicators are seeing consumer acceptance.

Emami Agrotech (promoter group company) is giving a 160ml Kesh King bottle free to consumers if they purchase 5 liters of Emami Healthy & Tasty edible oil.

However, consumer traction is still lower than expected as consumers perceive Indulekha (despite its exorbitant price) to be a superior product, given that it is backed by a science research institute. Also, Indulekha’s retailers receive higher margins than Kesh King’s.

Kesh King shampoo has started gaining consumer acceptance due to a change in packaging (it has been aligned with other shampoo brands). The company is focusing on product placement within retail outlets.

Key risks / challenges for sustainable pick up in demand: (1) Historically, Emami’s policy of selling Kesh King at varied price points to different channels in different states/cities had led to lot of instability in purchasing patterns.

Boroplus – Lotion sales have gone through the roof due to the BOGO offer

Boroplus is seeing a strong rebound across MP and Chhattisgarh due to: (1) the management’s strategy of focusing on lotions; consumers are shifting from creams to lotions as the latter can be applied on the entire body vs. only the face. (2) Emami has been able to capture significant market share as it was the first to offer BOGO for its 300ml bottle (priced at Rs 230) in the current winter season.

Boroline cream (G.D.Pharmaceuticals), which had strong sales growth until last year due to introduction of the Rs 10 SKU jar format, has started seeing a decline after Emami introduced the Rs 10 SKU jar format.

Boroplus Rs 10 has seen strong response, as consumers perceive the jar format to be more convenient with low risk of leakage.

Zandu – No light at the end of the tunnel

Zandu Balm’s growth continues to remain subdued because of strong competition from AP LAL Balm (a local competitor) as consumers perceive it to be a better product because it gives faster relief and offers higher grammage vs. Zandu. Moreover, higher trade margins given by AP Lal Balm are hitting Zandu’s market share. Also, NPDs (new product developments) - Zandu spray, gel, and roll-on - have not received any meaningful traction due to strong presence of pharma incumbents.

Zandu Pancharishta is very far from seeing any meaningful recovery in growth, despite appointment of Mr. Amitabh Bachchan as its new brand ambassador.

Fair & Handsome (winter season) – slowly and steadily gaining consumer acceptance

Emami F&H winter fairness cream (lighter version) has done better than the normal F&H, as it avoid need of applying any other cream. This is because when consumers apply the normal F&H in winter, it causes white spots, they said. Consumers have to apply Boroplus to remove these white spots and dryness, which just makes things complicated.



Value-added hair oil: 7 oils in 1 has been doing exceptionally well

Emami’s 7 Oils in One is doing exceptionally well due to its superior product formulation and packaging. The management is also focusing on ensuring product availability in rural areas, particularly in retail vans.

Navratna sales have been slower due to the off-season.

Bajaj Corp – Frequent churn of distributors / sales force, unrealistic sales targets hurting sales Bajaj Almond Hair oil (ADHO) growth continues to remain subdued due to the following reasons: (1) Frequent churn in distributors, as they are finding cost of servicing to retail

outlets pretty high given that it is a single-brand company. This is leading to supply-related instability at the retail level due to unrealistic targets for the sales force and consumers shifting to other LHO brands that are available on the shelf.

(2) Bajaj Corp has decided to stop giving higher incentives to stockists / super stockists. Earlier company used to give 200-300bps higher margin than market standards. This is also affecting off take.

(3) Increased menace of counterfeit products – our ground checks suggest this was the main reason that management decided to switch from glass to PET bottles in higher ML SKUs. However, despite the recent change in packaging, there has been no meaningful increase in sales

(4) The ‘No-marks’ brand’s growth remains subdued due to its weak communication strategy. It is marketed as a pimple cure product only, while other players market their products as a combination of pimple and beauty care.

Godrej Consumer Products Ltd

Surakshaa, a local competitor in the Satna region, has almost copied all products of GCPL. These include Fast Card and Low Smoke Coil - see the encircled parts of the picture to the left



Zydus Wellness – Going from strength to strength

Sugar Free (Silver and Stevia) continues on a strong wicket due to increased health awareness among consumers.

Zydus Wellness launched Sugar Free Lite (processed sugar) in the first week of December backed by a ‘360 degree’ marketing campaign. It has priced it at c.Rs 200/kg (pouch) – which is 5x of loose sugar, as a marketing plank and contains 50% less calories vs. loose sugar. The initial response to this product has been good because the distributor decided to pass on his margins to retailers, provided that the product receives right placement inside retailers’ stores.

The distributor seems a bit perturbed that the company will also give him Complan and Glucon-D, and believes that the management will have to make significant investments in A&P to strengthen brand equity for these two products.

Colgate (Satna – MP): On the verge of recovery Colgate sales had declined 25-30% in the last 3-4 years in Satna. However, they

are likely to bounce back as – (1) Patanjali Dant Kanti has started facing quality related issues (in line with other Patanjali products), (2) Colgate is running trade schemes to aggressively promote its core offering (retailers receive one free pack of 50 grams priced at Rs 20 if they buy 12 packs of Colgate Dental Cream, and (3) Colgate has increased variable incentives given to the sales-force if it achieves monthly sales target allocated for a specific product range.

Colgate dental cream and Cibaca are major selling products in Satna; Rs 10 SKUs is the highest selling.

Surakshaa, a local competitor in Satna, has been very aggressive in marketing mosquito incense sticks and has been seeing solid growth in this segment due to familiarity and this being a relatively inexpensive format



Jubilant Foodworks: Domino’s store in Satna, northern Madhya Pradesh – EDV, improvement in quality has done wonders

Domino’s Pizza has been seeing decent improvement (20%+ growth) over the past year due to improvement in product quality and because no other major QSR player is present in the Satna region (lack of competition).

Vegetarian to non-vegetarian ratio stands at 70:30. Delivery and dining in ratio is almost 50:50 despite being in a tier-3 city. People prefer to order at home since delivery is free of charge and lot of people come in for dining in only during weekends.

Among new launches within side dishes, potato cheese shots is doing very well.

Railway deliveries: It has been making 15-20 deliveries daily since the railway station is only 2km away from the store.

Beverages: Coke is completely out. In the Pepsico range, only Pepsi was available. Notably, it was still using the Coke refrigerator (Domino’s has recently tied up with Pepsi as beverage partner).

Maximum contribution comes from EDV, and within that, the regular-sized pizza has higher acceptance.

Online food aggregators were not present in Satna.

TBZ (Raipur): Formalisation theme playing out TBZ opened its 3,000 sq. ft. store in Raipur in 2013; it is one the largest stores in

Malviya Road area in Raipur.

Unique thing is its customer profile – most of its customers are Sindhi businesspersons, who prefer studded and diamond jewellery. Diamond jewels contributes 40% of this store’s sales and the average customer bill is Rs 100,000+. It currently sells 1,800 diamond carats per year vs. 600 carat in 2013.

Yearly sale of gold jewellery stands at 125kg in 2018 vs. 80kg in 2013.

Contribution of Gold Exchange Scheme / debit and credit cards / cash in FY18 sales was 10% /15% / 75%. However, in last two months, gold exchange scheme has picked up substantially – it has contributed 31% of sales because of reduction in making charges.

Festive season has been strong; it grew 33% in Diwali.



Paints dealer – Festive demand has been strong although partially marred by state elections Festival season has seen strong growth, but demand to some extent was

impacted by impending elections. Paint demand is impacted due to reduced labour availability; in rural/semi-urban areas, the entire household tends to be engaged with election campaigning.

Emulsions continue to do well vs. distemper; but off take of distemper was also steady due to reduced price differential vs. the unorganized sector because of reduction in the GST rate.

Berger Paints has not been able to make significant inroads into Asian Paints’ territory in super-premium category products despite offering quality products (Berger Easy Clean) at a significant discount (20%) to the leader (Royale Atmos).



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INSTITUTIONAL EQUITY RESEARCH Consumer: On the Roadbackoffice.phillipcapital.in/Backoffice/Researchfiles/Researchfiles... · Boroplus is seeing a strong rebound across MP and Chhattisgarh