The Nirma Story -V S Pai and Vivek KaulHLL in 1959, through its blue powder Surf pioneered the bucket wash concept in India. But itwas a wily Gujarati entrepreneur, Karsanbhai Patel, with the detergent Nirma, who rewrotethe rules of the game. Patel with Nirma offered a value for money detergent, which theconsumers simply could not ignore. For nearly 20 years (after the launch in 1969) Nirma wasa one-product company. Lately, it has diversified into more FMCG products offering the samevalue for money proposition, which it originally did. This case tries to trace and explain theNirma phenomenon.Executive SummaryKarsanbhai Patel was a chemist with the Gujarat governments Department of Mining andGeology, in 1969, when he created his wonder powder and started selling it locally. Nirma waslaunched at Rs.3.50 per kg, when surf was Rs.15 per kg, and the lowest price detergent wasRs.13.50 per kg. His home town Kishanpur (Gujarat) was brimming over with demand, and hewas soon mixing and packing the formulation in a 10x12 foot room at his Kishanpur home.Karsanbhai Patel figured out that if a firm managed to get prices really low, more people couldafford to buy; and if it found a way to get costs really low, then it could make profits as well.And the arithmetic of small margins multiplied by huge volumes could create a huge grossmargin pool, which could pay for overheads comfortably and leave behind a handsome profit.This is the principle around which the entire business of the erstwhile Nirma Chemical Worksand now Nirma Ltd., has been built.In order to get the costs really low the company went about carrying out a huge backwardintegration exercise into Linear Alkyl Benzene (LAB) and soda ash both key materials for thegroups main product, detergents. This led to the establishment of factories at Alindra andBhavnagar in Gujarat.In 1969, the Nirma washing powder was introduced for the first time and for the next 18years, Nirma Chemical Works remained a one-product company. In 1987, the Nirma detergentcake was formally introduced. And the late 80s and 90s saw a slew of product launches as wesaw Nirma introducing more detergent products and also getting successfully into the soapsmarket.Nirma is banking a lot on these new businesses as growth in the exiting business of primarilydetergents is plateauing out. At a stagnant 2%, the situation in the detergent market is grim.The urban market is saturated and so is the rural one. The only way Nirma can grow in urbanIndia is by going up the value chain. This would raise volumes incrementally but marginswould be huge.Nirma still remains a very closely held company, with most of the top posts being with closerelatives of Karsanbhai Patel. Karsanbhai has had a huge role to play in Nirmas success.Nirma was one of the first cases of an Indian David taking on an MNC Goliath successfully. Thesuccess of Nirma showed HLL that there is a huge demand at the lower end of the market. The
strategies that HLL used to tackle Nirma over the years have been successfully reused by it, inother parts of the world as well.In whatever Nirma does, the goal is to produce "high value products at the lowest possibleprice", which in simple words means to cut costs and pass on the price benefit to theconsumer.IntroductionKarsanbhai Khodidas Patel, CMD, Nirma Ltd., is a man who can disappear in the crowd. It isprecisely this commonness that probably accounts for his uncommon success. An incisiveunderstanding of the needs and sensibilities of the common man on the street. This eye forvalue as commonly understood, coupled with aggressive cost containment has made Nirma 1the legend it is today.HLL in 1959, through its blue powder Surf pioneered the bucket wash concept in India, torelieve housewives from the drudgery of laundry soap scrubbing. But it was Nirma that tookaway the detergents market by providing the benefit at an affordable price. Karsanbhai Patelwas a chemist with the Gujarat governments Department of Mining and Geology, in 1969,when he created his wonder powder and started selling it locally. Nirma was launched atRs.3.50 per kg when surf was Rs.15 per kg, and the lowest priced detergent then wasRs.13.50 per kg. His home town Kishanpur (Gujarat) was brimming over with demand, and hewas soon mixing and packing the formulation in a 10 x 12 foot room at his Kishanpur home.He sold 15-20 packets of the detergent a day on his way to the office, on bicycle, some 15 kmaway2. Thus started the great journey. It all started to earn a side income.Within a short span of three decades, Nirma has completely rewritten the rules of the game.Offering quality products at unbeatably low prices. In the process, Nirma has helped expandthe entire soaps and detergents market to a level ofRs. 82 bn. Today, Nirma has a Rs.17 bnshare in this market and has been acknowledged as a marketing miracle. This has beenpossible through focus on cost effectiveness by integrating latest manufacturing technologyfacilities with innovative marketing strategies to create world-class brands.The Industry BackgroundThe Soaps & Detergents Industry is characterized by a number of small-scale manufacturersat one end of the spectrum and large companies (including MNCs) at the other end. Nirmaand Hindustan Lever dominate the detergents market in India (see Chart 1). The market fortoilet soaps which is ruled by HLL (See Chart 2) has increased manifold with changinglifestyles, growing purchasing power, increased awareness about personal hygiene,responsiveness of the consumers to brands offering superior value and the spread of audio-visual media.Fabric wash industry in India is characterized by low per capita consumption and substantialpotential in rural markets (in terms of category penetration and per capita consumption). Percapita consumption of fabric wash products in India is just 3.2 Kg 3, which is very lowcompared to developed nations as well as some developing countries. The fabric wash industryis divided into laundry soaps, synthetic detergent cakes & powder. The toilet soaps industry is
segmented into economy, popular and premium segments. The market is witnessing fiercecompetition from MNC firms and requires substantial efforts for market penetration and branddevelopment. Even though, the company entered this market only as late as 1990 with NirmaBatha carbolic soap, it has today garnered a 15% share in volumes, making Nirma the secondlargest player. It has products in all the segments of the soaps market.Company BackgroundBefore CK Prahlad4 described the `poor as an opportunity in the Harvard Business Review andcoined the elegant phrase `the bottom of the pyramid 5, to describe the large mass of poorpeople in the world, companies and their consultants used to spend lots of time and efforttrying to define the size of the Indian market. Consulting firms used to say that theinternational experience shows that markets take off when per capita income of about $2000 6at Purchasing Power Parity is achieved. Today the line seems to be " there is a lot of pent updemand in the lower income, and if you find the right strategy to tap the bottom of thepyramid, then the market in India could explode" 7. This new untested wisdom KarsanbhaiPatel and Nirma figured this out around three decades back. They figured out that if a firmmanaged to get prices really low, more people could afford to buy; and if it found a way to getcosts really low, then it could make profits as well. And the arithmetic of small marginsmultiplied by huge volumes could create a huge gross margin pool, which could pay foroverheads comfortably and leave behind a handsome profit 8. This is the principle around whichthe entire business of the erstwhile Nirma Chemical Works and now Nirma Ltd., has been built.Continuing with this principle, Nirma decided to backward integrate into Linear Alkyl Benzene(LAB) and soda ash, both key materials for the groups main product, detergents. This was onthe cards since 1988 and led to the establishment of factories at Alindra and Bhavnagar inGujarat. There were two main attractions for Nirma getting into soda ash: The market wasgrowing as fast as 10% per annum and the price of the commodity kept increasingfrequently9.At Bhavnagar, Nirma has also built a plant to produce vacuum iodized salt. Nirma has thecapacity of producing three lakh tons of pure salt. No one, other than Tata Salt has a similarplant in the country. The plant was completed in a record time of two years and at a cost ofRs.985 cr against an estimated of Rs.2036 cr 10.Karsanbhai Patel knew no marketing, had no management qualifications and no collaborator,Indian or foreign, when he created the first Indian brand to humble the best multinationals.The Nirma Story began in 1969, but it was only 13 years later, that the entrepreneur firstwent to bank for finance. When Nirma went public for the first time in 1994, Karsanbhaisadvisors had a hard time convincing him that if he did not bring in external shareholders hisgroup would be unable to grow in the future. But even after the maiden issue of Rs.44.7 cr,75% of the equity is still with Karsanbhai, his relatives and his friends. Nirma has a lowPrice/Earnings ratio when compared to other companies in the FMCG market.In 1969, the Nirma washing powder was introduced for the first time, and for the next 18years, Nirma Chemical Works remained a one-product company. In 1987 the Nirma detergentcake was formally introduced. And the late 80s and 90s saw a slew of product launches as wesaw Nirma introducing more detergent products and also getting successfully into the soapsmarket. The Nirma beauty soap was launched in the year 1991 and was positioned against
Lux. In 1998 Nirma launched the Nima brand (See Table 1) with the lime variant. Unlikedetergents, the soaps market is more fragmented and it is necessary for any serious playersto be present in most, if not all the segments in the soaps market. In the words of Karsanbhaihimself, "You have to necessarily cover all the segments in the soap market. Otherwise it willnot be possible for you to achieve optimum tonnage" 11. Nirma is banking a lot on these newbusinesses as growth in the exiting business of primarily detergents is plateauing out. At astagnant 2%, the situation in the detergent market is grim. The urban market is saturated andso is the rural one. The only way Nirma can grow in urban India is by going up the valuechain. This would raise volumes incrementally but margins would be huge.Over the years, Nirma has built a distribution system with 400 all India Nirma distributors and2 million retailers. This simple 2-tier distribution system helps it keep its cost low. Apart fromgiving them good business over the years, Nirma gave the distributors financial supportwhenever they needed it. This earned Nirma their loyalty and trust.On December 20, 2002 the stock price of Nirma Ltd., reached Rs.227.50 12, an eighty-onemonth low since April 96. In order to arrest the trend, Nirma announced a scheme in whichbrands Nirma and Nima would be transferred from a promoter owned company `NirmaIndustries to the listed company `Nirma Ltd 13. Usually the reason given for promoter owningbrands was that, having created the brand, they are entitled to continue owning them.However, the counter argument is that minority shareholders are deprived of the brands,while promoter benefits by charging a royalty from the listed company, (in most cases 14) frombrand sales. The desire to improve market capitalization seems to have forced Nirma to bringtheir brands under the listed company giving investors more comfort.When brands are in their infancy, they need to be nurtured. Such nurturing is best done in theenvirons of family ownership, where there is usually more direct involvement as well as afierce sense of pride in the brand. But once a brand reaches maturity, it can be spun off to apublicly listed company.In whatever Nirma does, the goal is to produce "high value products at the lowest possibleprice", which in simple words means to cut costs and pass on the price benefit to theconsumer.Karsanbhai Patel: The VisionaryThe CMD Karsanbhai Patel is a visionary who is engaged in fulfilling the mission 15 of thecompany. Some of his qualities, that stand out are listed below.Get on the BalconyWhen Karsanbhai Patel started manufacturing Nirma in 1969 in a 10x12 room in his house atKishanpur (Gujarat), there was no company in existence, neither had he any employeesworking under him. It was what we call a ONE MAN SHOW. He saw a pattern that there wasno cheap detergent powder available that catered to the lower end of the market. Even whiletaking Nirma into the soap market, Karsanbhai Patel realized that since majority of the marketwas dominated by HLL, there was enough space in the market for one other major player. SoNirma had a big opportunity.
"We treat him as a visionary" says VN Desai, vice president, Nirma Ltd16. " He helps in thegeneration of new ideas", says DG Jakhade, general manager, processes, Nirma Ltd 17.Regulate Distress • Karsanbhai Patel has been able to create a happening environment by 18: • Having a very flat structure as flat as possible- with few layers. For all the size that Nirma has acquired, at the factory level, there is only one factory manager and supervisor. • Karsanbhai Patel has got great faith in youngsters. The average age of the employees in the newly built Alindra Complex in Baroda is just 26 years. These people, he believes, are capable of managing key parameters of quality, cost and production level. • He gives direction to the company through his quest for betterment. He thinks in terms of the next 10 years. He wants improvements at every stage. He also maintains a keen eye on the shop floor. • He has a very good memory and remembers sentences to the last word, so later no one can say, " I meant something else." • He likes to get to the root of the matter and is open to ideas. • He is frugal and takes stock of every paisa. • His emotional capacity is great. He stoically rallied the family together, in 1987, after the tragic accident of his daughter Nirupama, after whom Nirma is named. This is very important as most of the top brass at Nirma belong to the Patel family.Empower PeopleThere is a great deal of empowerment at Nirma. Karsanbhai has great faith in the capabilitiesof his employees. The level of operational freedom is evident. In the five years, the time takenfor the Bhavnagar plant to be built, Karsanbhai visited Bhavnagar only five times. Butwhenever he went to Bhavnagar, it was never a mere look-see. Says DG Jakharde, GeneralManager, Processes Nirma, "He helps in the generation of new ideas" 19. The sheer scale of theBhavnagar project can boggle the mind. The plant is spread over 25,000 acres of land. Theplants intake is roughly 2,000 tonnes of limestone clay, 2000 tonnes of salt, approximately1000 tonnes of fuel (coal, lignite) and 100 tonnes of coke daily. The coal is procured fromAustralia and Indonesia and lignite from Kutch 20. The latest example is that of the creation ofthe distribution network of Nima. The work for this was handed over to his son Hiren. Hirencame up with a distribution network as good as that of Nirma.What the Company has been doing?Backward IntegrationNirma decided to backward integrate in the year 1988. The logic is that captive productionplants for raw materials are the best way to keep production costs under check. The objectivewas twofold; one to cut cost and second to pass on the price benefit to the customer. TheNirma brand does not have any aspirational value and consumers trade up as soon as incomelevels allow.21 Besides, when brand loyalty is almost non-existent at the lower end, aconsumer will opt for any unorganized sector brand, if its even a rupee cheaper.
Nirma had undertaken two major backward integration projects for manufacture of Soda Ashand Linear Alkyl Benzene (LAB). The backward integration projects form an integral part ofNirmas corporate policy which are based on the following rationale: • Soda Ash and LAB are basic raw materials for Detergents. • Entire capacities will be captively consumed leading to substantial reduction in raw material costs. • Ensures assured supply of desired quality raw material at controlled costs • Cost Advantage.The Alindra detergent complex in Baroda has a capacity to churn out 65,000 tpa of N-Paraffin.The integrated project to manufacture Linear Alkyl Benzene and synthetic detergents hastechnology sourced from UOP Inter America, USA. Canada based SNC_Lavalin Group Inc., isthe project consultant. The first phase of the plant at Baroda having begun in 1996 wascompleted in December 1997. The cost was, Rs.380 cr. The second phase was completed inJanuary 2000 (six months ahead of schedule). It was completed at a cost of Rs.250 cr, againstan earlier estimate of Rs.280 cr.The more ambitious of the two projects is the one at Bhavnagar. This plant intends to make anawesome 420,000 tonnes of soda ash every year. These are volumes that global managersgawk at. The company has sourced Akzo Dry Lime Technology from Akzo Noble engineering,Holland, which runs the largest soda ash plant in the world. Bhavnagars inhospitable terrainmade building the plant an uphill challenge. Lack of water, roads and power added to theproblem. Nirma had to build an 18 km road to the location. As the soil was treacherous, theplant had to be constructed on 15000 piles. A force of 8,000 laborers, 60,000 tonnes of steeland 100,000 tonnes of cement have gone into the plant, which also has 108 km of salt bunds22 .Distribution NetworkNirma has a two-pronged distribution system. It has a network of 400 distributors coveringmore than 2 million retailers. As Nirmas operational area for the distributors is the district,about 80% of Nirmas distributors are exclusive. Most of these transact huge volumes andhave between 50 and 80 people working under them. Nirma has curtailed the cost ofdistribution by doing away with intermediaries. In some places, such as Andhra Pradesh, TamilNadu and Southern Karnataka, Nirma has started maintaining depots, as getting stocks tothese places becomes difficult at times. The distribution was built more out of necessity thanout of choice. Initially the volumes were so low that, people who tried to trade in smallerterritories just failed. Only those in the bigger territories survived. Based in the major districts,these distributors managed such huge volumes that duplication of the same was not possible.Typical of the family style of Indian businesses, they are all invitees to the social dosorganized by the Patels. Credit has been extended when required and dud products are neverdumped on them. A culture of accessibility right from the early days is paying off now. Thedistributors are free to contact top management directly for any problem they might face.Mass Media AdvertisingNirmas advertising journey began in 1973 when it launched its now famous jingle 23,. Whatpreceded this were wall paintings that used a model resembling Hema Malini. The mass media
advertising has been handled by Ahemdabad based Purnima Advertising since the verybeginning. The company does not coincide product launches with campaign breaks. It firstplaces the product on the shop shelves, gets feedback and fixes glitches, and then createsenduring ad campaigns that could run and run. The advertising has always been simple andbenefit oriented. For this, it has used such starlets as Sangeeta Bijlani, Sonali Bendre, ShilpaShetty, and Riya Sen etc., to endorse their products. All these stars were relatively unknownbefore appearing in the Nirma advertisements. It believes in ever lasting commercials, and hasnever had to withdraw a campaign. Moreover, the company has always managed to keep itsadvertising expenditure as a percentage of sales at around 2% 24, barely heard of in the FMCGsector, where 6% to 10 % is the norm. To quote Karsanbhai Patel, "Advertising can onlyinform about the product. Thereafter, its the success of the product alone" 25.Putting punch in packagingIn the early days of Nirma, the theory was that, Nirmas pedestrian packaging had a marketappeal mainly because of its ordinariness, just as the average Indian voter would not be verycomfortable with a politician who is dressed in the latest western clothing, the common man isnot comfortable with very modern packaging 26. And therein lay the secret to Nirma detergentssuccess. The color printing was bad and a loose sealing that could not hold the power inside orkeep the moisture outside. Unlike others, it did not have any frills, which again was a strongselling point with the average consumer careful about saving money.To improve its packaging and also to further the cost reduction exercise, Nirma recentlyventured into in-house printing and packaging with the acquisition of Kisan Industries atMoriya, near Ahemdabad in March 2000. The new complex will add that much needed finesseto its packaging. The company decided not to sell shabby looking products, no matter how lowpriced they are. Earlier the printing was on chrome art paper, but now the printing is onBiaaxially Oriented Poly Proplelene (BOPP) and polyester, while dry lamination is on maplitho.This is how Nirma products get a high gloss look.Company Weaknesses or Failures?The Image among the EliteNirmas image among the elite has not changed. The elite still feel that it is a poor mansbrand. In the past it had to face serious allegations about the detergent affecting clothes andalso the users hands. Nirma has tried to get into upper segments of the market but with littlesuccess. "Premiumness" defends Hiren Patel "has always been misinterpreted as a function ofprice"27. Nirma is trying to redefine the concept by associating it with a quality at an affordableprice. Getting into the premium segment is essential for Nirma, if it wants to grow further. Theurban market is saturated and so is the rural one. The way Nirma can grow is going up thevalue chain, making Ariel like products. That would raise volumes only incrementally and themargins would be good.In a truly path-breaking move in the prevalent fast-moving consumer goods climate, Nirmahas announced the exclusive marketing and manufacturing arrangement by which Nirma willbring Camay (brand of P & G, one of the worlds leading beauty soap brands), to the Indianconsumer [earlier manufactured by Godrej Soaps]. It also helps Nirma to help it move up in
the value chain. Nirma Consumer Care, the wholly owned subsidiary of Nirma, obtained thelicense of the trademark Camay from Procter and Gamble Home Products (PGHP), for anundisclosed license fee with effect from October 8, 2002. The arrangement is valid for a rollingperiod of five years and covers toilet soaps.Soaps MarketThe other point of doubt is whether Nirma can ever hope to alter the rules of the soaps game.Unlike detergents, soap is a personal use product. Some customers form deep psychologicalassociations with their brands. Whats more, it is a market where HLL has etched thesegmentation patterns in stone (by price, by scent, appeal and by brand personality). CanNirma win by playing by HLLs rules? Worldwide floral beauty, health, freshness platforms,account for most of the soaps sold. What Nirma has done is to produce high fatty mattersoaps but with the right scents, but priced a rung below, thus creating a sub-premiumsegment. The rest of the game is in managing the geographical diversity of consumerpreferences. If the North prefers pink colored soaps, in the south its green that sells.An Outfit Still run by Family and FriendsMost of the top management at Nirma are the relatives of Karsanbhai Patel. The Patel familyowns more than 70% equity in Nirma Ltd. The Patel family believes that its a folly on the partof the market to believe that promoters cannot be professionals.A Part of the Backward Integration Exercise has turned out to be IneffectiveNirma had diversified into the production of soda ash as backward integration strategy. Thecompany has an installed capacity of 4.2 lakh TPA for Soda ash. However, the company couldutilize only 49% capacity during the FY01. Backward integration in Linear Alkyl Benzene (LAB)and Soda Ash has improved the margins of the company. The installed capacity of soda ash inIndia is in excess of domestic demand. Even though the imported soda ash is cheaper, theimports are limited due to the nature of the product being hygroscopic and bulky andbottlenecks in transportation. The reduction in import duty on soda ash from 35% to 20% inthe budget 2001 has adversely affected the performance of the company.Issues: Opportunities Before NirmaSmall-scale Detergent SectorAccording to Hiren Patel, MD, Nirma Consumer Care Ltd, " About 30% of the market lies withthe small-scale sectors and we see this as a big opportunity" 28. Nirma has launched the Nirmapopular detergent to cater to this segment.PenetrationThe definition of penetration as per National Council for Applied Economic Research is theaverage number of households who have bought the product during the reference year in apopulation of 1000 people. Even a one-time buy is recorded in overall penetration. So, theactual figures for the regular use must be substantially low. The per capita detergent
consumption of about 500 gram per Indian when compared to USA where the per capitadetergent consumption is around 2000 grams. (See Charts 5 and 6), is very low. If this goesup even by 20%, volumes will go up by more than half the current market by 1.48 milliontonnes.29Other FMCG CategoriesTo quote Hiren Patel30, "We are thoroughly convinced that the future of our company largelydepends on diversification into other FMCG categories". Nirma took over a small company inBangalore called MP confectioneries and used its distribution network to launch Nima rose. TheNima distribution network unlike the main one is a three tier one with C&F agents. It has 35-40 depots, some stock points and 1700 distributors, who are supplied from the depots. Thishas helped them to tap chemists, paanwaalas and other retailers in addition to the two millionretailers it already had. This in turn will help them make inroads into Personal Care products.Nirma already has a shampoo introduced in the market, which has been quietly introducedinto the market, in the traditional Nirma way, without any hype and hoopla. Nirma also haslaunched Nirma Shudh Namak, and was till recently the third largest player in the market,when Dandi Namak beat it, to the fourth place.31Toilet Soap SegmentThere is a huge gap between the market share HLL has in the toilet soap market and Nirmathat is second. Nirma can play catch-up with HLL in this segment of the FMCG industry.OutsourcingOn June 26, 2002, at the HLL Annual General meeting, Chairman MS Banga said, "HLLs visionis to build a billion dollar (close to Rs.5, 000 cr) sourcing business out of India". HLL sees it asa stable earnings opportunity wherein the Inventory and marketing costs are minimum. P&GsIndia operations have been identified as a key hub in P&Gs global sourcing strategy, whichrevolves around deriving the best-cost efficiencies from within the P&G world. Nirma can alsoact as a sourcing base via tie-ups with detergent makers from the American and Europeanmarkets.Issues: Threats Facing the OrganizationCounterfeit Products and Pass offsThis is one problem that is proving to be a major headache for the company as well as everymajor FMCG Company in India. This is giving a bad name to the brands. To counter this,Nirma has gone in for inhouse printing and packaging. It has done so by acquiring Kisanindustries at Moriya, near Ahemdabad.The question that needs to be answered here is, how can a fake product reach shop shelvesunless someone has infiltrated the distribution chain. Thats precisely the way it works. Thewholesalers themselves manufacture large amount of fakes. For example, if a wholesaler seesa certain product doing well, he quickly sets up a small manufacturing facility to make that
product. The critical element in the chain is the retailer. For him, the advantage of buyingcounterfeits is obviously, higher margins.Counterfeiting of branded products has been an age-old phenomenon in India, not to mentionother Asian countries such as China. The Federation of Indian Chambers of Commerce andIndustry (FICCI) set up the Brand Protection Committee. It will be the apex body that fightsthe fakes. One of the first things that the Brand Protection Committee did was to kick off astudy by market research firm AC Nielsen to put a number to the counterfeit problem. And itcame up with findings that FMCG industry loses around Rs.1700 cr 32 to fake products.Other Companies doing a Nirma on NirmaWhat Nirma did to HLL, it has had to face from other entrepreneurs. The two of the biggestcompetitors to have emerged are Kanpur Trading Corporation and Dandi Namak. KanpurTrading Corporation are the makers of Ghari detergent. It is headed by a 56 year old MurliDhar, who himself is an ardent admirer of Karsanbhai Patel. He is following the footsteps of hisidol- both in sharing a humble beginning marked up by tin shed operations and bicyclemarketing, through fiercely extending flagship detergent brand Ghari to kirana store shelves inUP and adjoining markets. Ghari has crossed the Rs.550 cr 33 sales mark in 2002 and is thelargest single brand in UP and adjoining markets. To give a sense of sizes Ghari is almost asbig as Surf, Cadbury and Fanta, twice the size of Dettol and three times that of Ariel bysales34. Ghari is the fastest growing brand in the detergent sector at around 40 and 10%volume share on an all India basis.Suresh Agarwal makes the Kunwar Ajay brand of sarees. The trouble was people boughtsarees twice a year. There were other irritants like retailers returning stocks unsold. To chivyup the demand he spent Rs.25 cr on a nationwide ad campaign. But sales of the Kunwar Ajaysarees did not perk up. Then he thought of getting into FMCGs. The two reasons of gettinginto the FMCG sector were that buying is much more frequent and goods once sold to thetraders arent taken back. So he decided to enter something as plebian as salt. Since itslaunch in October 2001, it shipped 60,000 tonnes to the trade. 35 Agarwal also launchedFriendly wash, a detergent in April 2002, in a bid to take on Nirma.The Distributors Own BrandsIn European and American markets the distributors in the late 80s and early 90s becamecompetitors by launching what are known as private label or distributors own brands.Distributors carried their brands because without them their ability to attract customers intotheir stores was limited. Conventional wisdom held that as shelf space was limited and futureexpansion was not in sight, brand names already on the shelf would have the power togenerate huge cash flows. With hindsight this optimism was misplaced. In India organizedretailing is growing with Food World in southern India and Viveks in Tamil Nadu. Over thenext few years, these distributors can start stocking products and brands of their own. Foodworld is already doing that, though at present it does not have any products that wouldcompete with Nirmas products.Contract Manufacturers Coming up with their Own Brands
Traditionally, in fast moving consumer goods companies like HLL and P&G, manufacturingnever drives sales and profits. It is marketing that brings in the margins. Consider this. Asmall Mumbai based firm, VVF, contract manufactures soaps for many MNCs in India andabroad. It happens to supply soap to large number of hotels in the US. In late 2002, VVFlaunched a replica of Liril, branded Jo, complete with the unique marble effect on the soapcake. The price is Rs.10 for a 100gram bar, while Liril retails Rs.15 for a 75-gram bar 36. This isthe latest threat that FMCG companies are facing and since most of the contractmanufacturers will play the money game, Nirma, which plays the same game is bound to beaffected, as more such units get into making their own brands.Competition in the IndustryThe competition in this industry is basically between Nirma and Hindustan Lever Limited.There are other players like Godrej soaps, P&G and Henkel Spic. Of late, direct marketerAmway has also been able to corner substantial stake in the market. Other than these players,there are also, local level players (like Ghari and Double Dog in UP and Maharashtra, FriendlyWash in Western India) in every territorial market. At an all India level what makes it a two-way fight is the fact that no other company has the kind of geographic reach that these twocompanies have.When Nirma introduced a laundry detergent targeted at low income Indian families, HLL, theIndian subsidiary of Unilever, reacted in a way typical of many multinationals: they didnothing. "That is not our market," HLL executives rationalized. "We need not be concerned." 37Nirmas Return on Capital Employed (ROCE) for the project was upwards of 121% 38. Thisconvinced HLL that it needed to take a closer look at the low-income market. Elementarymarket research showed that there was an opportunity to create a detergent of reasonablequality, catering to the traditional washing methods used by women from low-income families.Following Nirmas lead, HLL invested in process, packaging, distribution and pricinginnovations to make that detergent, dubbed "Wheel," a reality. This drove production costs toa minimum. Rickshaws were used to transport finished goods to the thousands of local storesthat would sell them. In villages, murals of colorful appeal were used for advertising the newHLL product. The results were astounding: "Wheel" quickly became HLLs largest seller byvolume. HLLs ROCE on its traditional high-end detergent line was in the neighborhood of22%; ROCE on the low-income line approached 93% 39. Unilever was quick to leverage thisnew insight in Brazil; its "Ala" detergent is currently selling through more than 10,000 outletsin that country. The major lesson HLL learned from the Nirma experience was that no nicheshould be left unplugged. Consequently, Levers had a brand in virtually every segment of thedetergent market. This strategy changed since MS Banga took over and now HLL concentrateson its 30 brands, which have been identified as power brands.In 1993, Nirma tried to put off the merger of the ailing Tata Oil Mills Company Ltd., (TOMCO)that was to be merged with HLL. The strategy was to try and wrest away 20% of TOMCOsshares by offering 50% more (Rs.75 for each share) than what HLL was offering at its swapratio of 2:1540. Acquiring TOMCO would have given Nirma a 10% market share in the toiletsoaps market. The winner among TOMCOs brands was Hamam. The other soaps that did wellin their segments were OK and MOTI. Karsanbhai was not successful as the Tatas decided tosell off the stake to HLL.
In 1999 HLL again underestimated the wily Nirma. Nirma again changed the rules of thegames with the launch of its fighter brand, Nima. All the while HLL had a substantial stake inthe soaps market. Its growth strategy was focused on deriving greater realization byupgrading consumer to higher priced soaps. Things seemed well on course till Nirma startedseverely undercutting key Lever brands. This led to Nirma getting substantial stake in the soapmarket. In 2000, the honors went to Nima. With a penetration price of Rs.5, Nimas rose andsandal variants took away share from Lux and other brands in the popular soap segment,growing rapidly to about 50% of Nirmas volumes in the soap market.HLL responded to the challenge by using Breeze and Jai to counter Nirma. Breeze did well, Jaicame a cropper, and its perfumebased positioning simply didnt cut the mustard withcustomers. Whats more Levers business system could not price soap at Rs.5 to take on Nima.Lean and mean Nirma could do itbecause it did not have the kind of overheads that HLL had.The result was Nirmas total tonnage increased from 80,000 odd tonnes to almost 109,000tonnes41, cornering close to 80% of the market growth.Nirmas heady growth created another problem in the Lever portfolio. The volumes of itsbiggest brand, Lifebuoy began to decline. (The Rs.575 cr plus brand is one of the HLLs biggestcash cows for which it invests about Rs.8 cr on advertising). As a carbolic soap at the lowerend of the market, Lifebuoy had always seen a natural migration of its consumers to beautysoaps. But every year, new users would come into the carbolic segment thereby negating anydrop in volumes. One reason why Lifebuoy attracted new users was its price. But with entry ofNima, a significant chunk of first time users moved away from Lifebuoy. Lux too declined involumes as value conscious buyers gravitated towards Nima.The Nirma experience made HLL more alert than ever and HLL kept launching campaigns tokeep increasing its distribution reach. The latest two projects being Project Shakti 42 andOperation Streamline43. Further, the marketing, process and distribution lessons learned viaHLLs Indian success proved highly transferable. Everything that was done in Brazil wasinvented here in India. Unilever took Indian managers to build their entire system. They[Unilever] are doing exactly the same in Indonesia, in China and Mexico. The interesting thingis, this opportunity is for about 2 billion people around the world. Not a small market by anystretch of imagination.Low Growth Rate of SalesCompanies in this sector for the last half decade are not growing at the same high growthrates that they were used to growing in the past (See Chart 8). To quote CK Prahalad 44, "Andfour dominant themes seemed to appear in the explanations in the industry; failure of themonsoons, negligible increases in rural incomes, customer spending moving away to consumerdurables and fragmentation of the media. Each of these can be easily challenged".Monsoon does have an influence but it cannot be the primary reason for the growth of theindustry. The second and the third reason contradict each other. If salaries arent rising,people would buy fewer motorcycles and TVs-not more. But look at whats happening. Theyare buying TVs, radios, and DVD players. That could be attributed to the easy availability ofconsumer finance. But consumers still put 25% down and then repay the loan everymonthtypically over 24 or 36 months. The fourth explanation is even more surprising. Itsuggests that FMCG business totally depends on media advertising. When Ramayana was
popular, everybody was glued to his or her TV sets and we could advertise. But now, it is allfragmented and is so expensive on a per capita basis that we cannot advertise and, thus, wecannot sell. If TV is becoming more expensive, shouldnt we examine the role of regional andlocal media"?45.The question that needs to be answered here is, how do we increase penetration and usagefirst, and then create new categories? Creating new categories is very difficult. And FMCGcompanies already have enough problems facing them. Instead the focus should be onincreasing usage. No product has high usage by international standards. So the interestingquestion is what is the impediment to usage? Partly through education, people dont know theimportance of using the product more frequentlylike the importance of washing hands beforeeating. Part of it is also access to the infrastructure needed for usagelike availability of water.But part of it is just sheer cost. And therefore, a combination of education, access andaffordability should be the basic approach46.To quote Prahalad47, " Why isnt anyone looking at qualitatively important attributes of theIndian consumer? Just because nobody has done that in the US, it doesnt mean we cannot doit. What we are talking about is not marketing, but market development. For example,everybody in the FMCG business has to deal with the availability of waterquality of water,amount of water used, washing clothes cleaning the floor or cooking. It is also a tremendouslyscarce commodity. What if I create a soap or detergent, which will need only one-fifth of thewater that is currently required? Will there be a huge benefit? I think there is. Similarly, takesalt. Forty percent of children in India suffer from goiter despite eating iodized salt. That isbecause Indians add salt during the cooking process. Due to heat, the iodine escapes. To solvethis problem, companies would have to develop encapsulation technology that protects iodineduring the cooking process but releases it when ingested."Low R&D ExpenditureThe R&D expenditure as a percentage of sales for Nirma is very close to zero (see Chart 9).India has a lot of technical talent to drive new product development in the detergents andsoaps industry but the company has not mobilized them.The FutureThe low-cost business model Nirma follows has a chance of going awry. Listen to the man whois giving HLL chairman Vindi Banga sleepless nights in the northern markets with his Gharidetergent powder: "In our case, as our range increases and we move into other markets, ouroverheads go up. Within UP it was fine, but now its telling on our costs. If we dont do itslowly and cautiously, our cost structure could go haywire. Cost, which is our advantage, couldbecome our disadvantage," says Murli Dhar 48. The trinity of low cost, low technology and lowsophistication can become stifling when the bigger players turn on the heat. What is in Nirmasfavor is the fact that over the years it has invested a lot in technology and this has helped thecompany keep the cost of raw materials low."Entrepreneurs can create a brand, but taking it to the next level is a different ball gamealtogether,"49 says Munesh Khanna, head of NM Rothschild. Professionals need to be hired todo that. Members of the Patel family who are majority shareholders continue to manage
Nirma. Now that Nirma is a listed company this is something that analysts like Khanna feelneeds to change.Questions / Issues to be Addressed: • Can the past strategy followed by Nirma in the soaps and detergents business ensure success for it in future now that quite a few new players are waging a low cost war on the company in certain pockets of the world? Justify. • Nirma has long relied on family members but now as the company has grown very large it needs to professionalize its management. How can this be done to ensure future success of the company? • The company has to face it. Should it diversify and grow or should it penetrate the market and expand along the existing line of business? What will be the implications of either courses of action on the company?1 Patel named the powder Nirma after his daughter Nirupama.2 The Legend Continues, A&M, October 15, 2000.3 Source: nirma.co.in.4 CK Prahlad was among the first batch of students who came out of IIM Ahemadabad and iscredited with coming up with the concept of core competency.5 Serving the worlds poor profitably by CK Prahlad and Allen Hammond.6 Convert Indias Problems into Opportunities by CK Prahlad, November 25, 2002, BusinessWorld.7 What should it be-mass or class? By Rama Bijapurkar, The Economic Times March 24, 2003.8 ibid.9 A brave new assault, June 3-16, 1996, Business India.10 The Legend Continues, A&M, October 15, 2000.11 A brave new assault, June 3-16, 1996, Business India.12 CMIEs Prowess Database.13 News Article, April 4, 2003, The Economic Times.14 Godrej Soaps is a case in point.15 `Better Products, Better Value, Better Living.16 The Legend Continues, A&M, October 15, 2000.