Trade restrictions

Last Updated: Sun, Feb 10, 2013 21:01 hrs


At times, shortcuts work. While the current tightening of lending policy and uncertain economic environment have affected companies appetite for risk, they continue to take the route of mergers and acquisitions of struggling but fundamentally sound rivals to enter new markets, increase market share and lower the cost of operation and production.


But if the intention is crystal clear, why is the failure rate of mergers and acquisitions so high? What is the common bottleneck?

Many companies find that their key business initiatives hit the same hurdle: supply chain and distribution integration. This constrains efforts relating to product introduction, customer acquisition and service and sales effectiveness the very reasons for acquiring a new brand or company. We discuss the experiences of two companies Marico and Jyothy Laboratories that acquired new brands in the last couple of years but had to spend considerable time and effort to streamline the entire chain before they could milk the acquisitions.

To begin with, the acquired brands looked to fit perfectly with the growth plans of Jyothy Laboratories and Marico. In Henkels detergent and dish wash range Jyothy Labs found products that complemented its own fabric care brands while Henkels personal care portfolio provided it a springboard to dive into new markets. For Marico, the Paras brands bought from Reckitt Benckiser represented popular Indian brands on which its own international range of mens care products could hitch a ride.

But as it turned out, both the companies had to make serious adjustments to their plans.

Channel mismatch

When Jyothy shelled out Rs 20 per share for 50.97 per cent in Henkel India in 2011, it was staring at a Rs 454-crore debt. Analysts had pointed out the difference in Henkels premium portfolio and Jyothys mass brands. Nonetheless, Jyothy Laboratories chairman and MD MP Ramachandran and joint-MD Ullas Kamath had their eyes trained on the new markets that Henkel promised to open up. But before Jyothy could script a turnaround strategy for the acquired brands, it had to first revive the almost defunct Henkel distribution network as well as rationalise its own model of distribution to reduce costs.

Henkel brands such as Henko, Pril and Fa had been languishing in a system that was riddled with high attrition in the sales force, numerous trade promotions and a patchy general stores footprint.

But Kamath hoped for Henkels woes to get ameliorated in the drive to modernise its own distribution and, in fact, the entire company.

There comes a time in the life of a company when it assesses whether it has the management bandwidth to grow for the next 25 years or not. When we acquired Henkel, it was clear we had to overhaul our processes and teams to handle the 10 brands that we have now, says Kamath. It started with bringing in the CEO, S Raghunandan from Reckitt. Next followed a string of senior-level appointments to head functions from R&D to manufacturing. But the biggest shake-up was in the distribution system.

We had a low-cost model in the past. We asked ourselves if we could manage the 10 brands using the same model or not. The answer was a no. Earlier, people were very hands-on but happy to grow at 20-25 per cent. But we now needed a team that would take responsibility for 100 per cent growth by being focused on the best practices, explains Kamath.

Jyothy had three products and their many variations before it acquired seven more from Henkel. The Jyothy products were low-ticket items such as fabric whitener, mosquito coil and dish wash bar unlike the premium washing powder, dishwashing liquid and deodourants that Henkel boasted of. Distribution was a rustic, gut-driven system so far. Jyothy had its task cut out: it had to gear up to deal with more stock-keeping units (SKUs) and the new growth objectives of the company.

Kamath explains the new reality before the company: Till now our sales force did not have to wear a tie or meet with modern trade. There would be one person to go to a clutch of stores, take the order and then deliver it then and there. We had just three products and none were bulky enough to require a separate delivery. As our focus had been semi-urban and rural areas so far, it was enough to handle distribution at a state level. We did not expect our sales teams to think beyond the state assigned to them. The highest aspiration a sales executive would have was to be state in-charge.

Jyothy has now divided its India market into seven zones, each headed by a different zonal manager. Kerala is Zone 1, Karnataka, Tamil Nadu and Andhra Pradesh as Zone 2, West Bengal and Bihar as Zone 3, Orissa and NorthEast as Zone 4, Delhi and Uttar Pradesh as Zone 5, Punjab, Haryana, Rajasthan and other northern states as Zone 6 and Maharashtra, Madhya Pradesh and Gujarat as Zone 7. The managers are the ones who will now determine how much we need to spend to get our target sales, which product, which SKU to be distributed where, based on income, population etc, explains Kamath.

Jyothy had been content with pushing Ujala, Exo and Maxo at the 1 million outlets it reached. The rest of the demand was driven by consumer-pull fuelled largely by its high-decibel advertising some years Jyothy spent more than half of its sales revenues on advertising. With the Henkel products came the need to service modern trade as well, because these seven brands saw 20 per cent of their sales coming from these outlets. For almost a year before we bought it, there was no life in Henkels distribution, no one interacted with distributors or settled claims, points out Kamath.

Today, Jyothy uses a huge chunk of its communication spends on above-the-line promotions in a complete contrast to Henkels strategy. Henko, despite being a premium brand, was pushed through trade with offers and freebies like buckets etc, which did the brand no good, says Kamath. It is now looking at large distributors, those who buy around Rs 1.5 crore worth of stocks each. This will mean less number of distributors but they will be pushing a larger share of the portfolio. These large distributors, whether they were Jyothys or Henkels, would then pass the products to super-stockists and stockists.

Earlier, we were servicing many small distributors in towns and villages who would pick up Rs 50,000-Rs 1 lakh worth of stocks. Now we can focus better the portfolio is bigger, the turnover is higher and so we have better negotiating power against the distributor, says Kamath. Older partners have been given the choice to either cover more areas or turn super-stockists who take products further down the chain.

This has freed up Jyothys own sales team to focus on urban markets, which wasnt tapped too well by the company earlier. Jyothy was getting only 2 per cent of its sales from modern trade whereas Henkel was earning 20 per cent because that was the only channel it focused on. However, our margins were higher.

The new zonal managers will concentrate on placement of brands rather than the volumes sold. Their whole focus will be on being available in more retail outlets. More trucks to the distributor do not matter if the products dont reach more stores. More stores will translate into more sales at the end of the pipeline, explains Kamath.

All this has also brought down the distribution cost. During consolidation, we brought down the distributor margins from 8 per cent to 6 per cent, informs Kamath. While the smaller players would automatically find a small turnover unviable, the larger players would see their absolute margins go up on a larger bouquet of products. Outsourcing their deliveries to a carrying and forwarding agent has meant a fixed fee from Rs 20,00,000-50,00,000 instead of piecemeal payments to numerous dedicated wholesale agents in the hinterland. Now, we have only dedicated employees, says Kamath. Revising margins to ride the new-found bargaining power has slashed its distribution costs overall by 6-7 per cent (distributor, retailer and wholesaler margins together).

Cost overlap

Maricos goal when acquiring Paras brands such as Livon, Set Wet, Zatak etc, in February 2012 was clear. While it had changed the rules of the game in two categories coconut and edible oils, which were largely commoditised before Marico threw its hat in the ring over the years, the company had worked to reduce its dependence on these two by shifting the onus of growth to newer categories. Paras mens grooming and after-wash hair care products offered it an ideal vehicle to carry the knowhow it gained in the overseas markets with acquisitions such as HairCode and X-Men. However, despite an enviable presence in general and modern trade, until the buy-out from Reckitt, Marico did not have a strong foothold in the chemist and cosmetic outlets, sales outposts that are indispensable for personal care categories.

Marico did not inherit Paras distribution chain since it picked up only its brands. We shared 80 per cent of the distribution footprint with Paras, says Saugata Gupta, CEO of the unified consumer products business and international business at Marico (now in the FMCG category). The 20 per cent that was not common was where Marico had to go to work. It was one of the synergies it had hoped for from the acquisition. Chemists and cosmetics would play a greater role not just for its new basket of Paras grooming products but also for Maricos own Parachute Advansed skincare range launched last year. It drew up a list of the outlets that Maricos distribution did not cover but which stocked the acquired products. Wherever there were gaps in the channel, Marico roped in its existing distributors to service those.

The new range of products comes in smaller pack sizes and moves off the shelves fast, ensuring faster turnaround time. Marico is also working to increase the servicing frequency to its distributors. By replenishing more often, Marico can ensure that the distributor does not have to hold too much stock. The distributor will get to hold just enough of fresh stocks for any fluctuations, says B Sridhar, executive vice-president and head, sales and supply chain, consumer products business at Marico.

Marico has been traditionally strong in general stores and grocers, a channel where Paras product basket was not usually found. So the new infusion into this channel meant that the sales teams had to be educated on new categories, their sales and replenishment cycles. These products, unlike hair or edible oil, are not sold by the litre; so even the sales pitch for the trade customer had to be different.

Marico is also segmenting its sales forces according to the channels they would now have to service. So, it already has pharma graduates with the more detailed knowledge about the products calling on chemists as there had been no prior interactions with this channel.

Focusing on certain brands has prevented Maricos new portfolio from getting unwieldy. We chose to focus on 30 SKUs of Livon, Zatak and Set Wet which contribute most of the revenues of the Paras portfolio, says Gupta. You may have many SKUs but there is a limit to how much the distribution system can handle. Hence, we have segmented the SKUs to target various segments of the market, he adds. For Marico, with its 4 million-outlet reach, covering the new 20 per cent distribution footprint might not make a huge mark on its revenue just yet, but it will smoothen the process for future releases.

As we write this story, both these companies are working on their distribution strategy and how to make it more efficient. For one (Marico) it would mean a powerful network to carry future product launches, for the other (Jyothy), a new-found negotiating power.

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