2. THE NEED FOR STRATEGIC ANALYSIS
• Financial analysis gives a top down picture – from which we infer things like brand
performance and expected stability.
• Lack of transparency by firms when their brands are not performing well – noticed in
quarterly reports
• AC Nielsen (industry research statistics) requires companies to keep knowledge of
market shares proprietary – therefore, less incentive for firms to give a clearer picture.
Aim: To combine grassroots analysis of product positioning in it’s market place with
financial analysis so develop richer understanding of brands and by extension their
parent companies.
3. BACKGROUND INFORMATION ON THE FMCG MARKET
• Current Market Size - $49bn – expected to grow at 20.6% CAGR till 2020 ($104bn
Growth Sources
1. Favorable demographics – Increasing consumer base with higher population
2. Rising per capita incomes –Strong economic growth expected to increase volume
purchased and drive premiumization
3.Tapping into a bigger consumer base –Dabur, Emami upped rural distributon
networks to improve reach; HUL and ITC already had such investments in place
4. Modern trade expansion – Expected consumption increase from ecommerce
channels opening up (Amazon $4bn investment)
• Policy support – Liberalization of FDI policy and initiatives like ‘Food Security Bill’ are
going to increase activity in the FMCG space
4. INDUSTRY FIVE FORCES ANALYSIS
Threat of New Entrants
(medium)
-Advertising and distribution
network expense
Substitute Products
(high)
-Differentiation is difficult,
price wars, many brands
Bargaining Power of
Customers (high)
-Low switching costs
between brands
Bargaining Power of
Suppliers (low)
-Large parents companies
controlling multiple brands
Competitive
Rivalry
(medium)
5. IMPORTANT STRATEGIC CONSIDERATIONS
From Michael Porter’s “Competitive Strategy”:
• Price wars hurt industry profitability in the long run though some companies
might benefit temporarily if they initiate the war
• It’s hard to co-ordinate industry expectations in an oligopoly, and strategic
interdependence is high; therefore, competitive moves are expected to persist –
all the more reason to analyze strategic positioning.
• FMCG in India has the advantage of banking on population growth to boost volumes
– do not expect industry to come to ‘maturity’ in the foreseeable future – where
the industry is associated with little to no growth.
7. TOOTHPASTE MARKET OVERVIEW
Key Facts:
• Last 3 Years - Average Sales growth – 8% ; Margins - 63%
• Rural growth has been 1.5x Urban growth
• Advertising plays a key role – people want to be aware as dental needs can be
specific – Whitening, Freshness, Medicated etc.
Players and Market Share:
1. HUL – Close up and Pepsodent
2. P&G – Diverse product line
3. Dabur – Red, Meswak, Babool
4. Patanjali – Dant Kanti
5. Others – Small brands
HUL,
23%
P&G,
56%
Dabur,
15%
Patanjali,
5.40%
Others,
0.60%
8. METHODOLOGY: INTRODUCTION TO PORTER’S GENERIC STRATEGIES
1. Cost Leadership – Lowest cost position in product segment – think Patanjali
2. Differentiation – Product uniqueness and brand loyalty from “switching costs”
3. Focus: Very specific target market – assumption that by spending more time in this
market they can become experts and premiumize (Kaya Skin Clinic)
• We wanted to evaluate efficacy of strategies within product segments – cannot
generalize to industry level (Differentiation in Chavanprash v/s Marie Biscuits)
• To analyze how well a strategy was working we needed a metric for brand
performance and the product’s cost position (Insight to strategy employed)
9. METHODOLOGY – DATA COLLECTION AND ANALYSIS
1. Collected Data from Quarterly Reports up to 5/10 (where available) years ago - about
brand performance (volume growth). Used a binary rating system where;
1 = Growth > 5%
0 = Growth between 0 and 5%
-1 = Growth < 0%
2. Computed a growth score by averaging binary score for each quarter
3. Growth score weighted with focus on recent data– didn’t make sense to equally
weigh product performance from 5 years ago with recent data. Half the weightage
was assigned to the first year of data. Decay factor used was 0.87.
4. To gauge strategic positioning we standardized brand prices on a per gram basis
– and then used price position and qualitative analysis to map each brand to one (or
more) of Porter’s generic strategies.
10. FIGURE 1 – PRICE STANDARDIZATION AND STRATEGY BUCKETING
• Potential for error in strategy bucketing; though, wherever their was doubt between
which strategy bucket to chose we included the brand in both buckets as hybrid
strategies which are possible conditional on effective execution.
11. FIGURE 2: RESULTS FROM PRICE V/S GROWTH ANALYSIS
• Growth scores(<-1,<1) have been scaled to assume Brand with max growth score = 1
and then scaled.
• Price units: -1 = Lowest cost (Red) and 1 = Highest cost (Sensodyne) – rest scaled
• Low cost toothpastes are driving growth on the back of Dabur Red and
Patanjali
• Colgate displays healthy growth (0.46) and premiumization (0.71)
12. HOW THIS SUPPLEMENTS FINANCIAL ANALYSIS
• Our analysis is consistent with financials in that both show growth and premiumization
845 896 884 921 951 994 989 1,022
924
1,032 1,006
1,091
1,006
-
300
600
900
1,200
Net Sales (2013-2016)
59.80%
61.20%
60.54%
62.67%
62.72%
63.48%
63.66%
60.89%
64.09%
64.68%
64.00%
62.27%
57.00% 58.00% 59.00% 60.00% 61.00% 62.00% 63.00% 64.00% 65.00% 66.00%
6/30/13
10/31/13
2/28/14
6/30/14
10/31/14
2/28/15
6/30/15
10/31/15
2/29/16
6/30/16
Gross Margins (2013 - 2016)
13. COLGATE HAS BEEN FIGHTING HARD TO DEFEND MARKET SHARE
• While sales and margins have grown well – EBIDTA margins have not due to
expenditure on Advertising to maintain market share – intense competition from
Dabur Red and Patanjali
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
19.23%
16.25% 16.88%
21.11%
20.24%
18.64%
19.54%
24.06%
21.89%
24.55%
22.89%
21.95%
20.85%
EBITDA Margins (2013 - 2016)
14. DEVELOPING INSIGHT WITH THE VRIO FRAMEWORK
• The VRIO (Valuable, Rare, Imitability, Organization) views brands as being able– to
sustain a competitive advantage only if it’s processes are valuable, rare, inimitable
and organized.
How rare are is the
strategic
implementation?
Can they be imitated?
-Causal Ambiguity
-Social Complexity
-Path Dependence
Is the firm organized to
exploit the competitive
advantage?
How do they
add value to the
customer?
15. VRIO ANALYSIS FOR COLGATE
Value Rarity Imitability Organization
Extremely diverse
product line
Innovation driven
by consumer
insights
10% CAGR in
rural areas for
previous 5 years
v/s under 6% in
urban areas
Indian Margins
lower than global
counterparts-
adapting to high
price sensitivity
Multiple Dental
experts in product
development
pipeline –
differentiation
Generates an aura
of trust with the
consumer base –
“doctor –
approved”
Vast R&D is rare
Toothpaste accounts
for 79% of Colgate’s
revenue – show’s
company focus on
just toothpaste – very
risky for others to
imitate
High expenditure
required to advertise
with same intensity
Hardest to imitate is
the socially
complex trust
generated with
consumer base
Advertising is
targeted to
boost loyalty
through
campaigning –
re-inforce
differentiation
factor.
Reinvestment
likely to be
internally
funded – have
not tapped into
corporate
parent
resources (high
scope of
retaliation to
“competitive
moves”)
16. IMPLICATIONS OF VRIO
• Colgate has a competitive advantage in the market from its Product range/quality and
“Trust” factor” – evident in high market share without pure low cost position. Colgate’s
strategy is a hybrid of focus and differentiation – where focus results from 79% of
revenue and differentiation from medical authenticity resulting in a trusting
consumer base – presence of “switching costs”
• We believe Colgate is likely to sustain a competitive advantage – While
advertising with the same intensity is imitable by HUL like companies, generating that
trust with the consumer base might require significant change in strategy, and may
not even work – making that decision very risky for competitors
• Colgate has made it clear that it intends to maintain market share – and has
enough resources (corporate parent, healthy cash flow) to fight off Patanjali and
Dabur Red by making low cost variants like “Cibaca” cheaper – especially to high
growth rural markets
