Can Cargill cook up a success with its vegetable oil strategy?

Last Updated: Wed, Jan 02, 2013 05:05 hrs

The company has been building its business in India through acquisitions - the latest being that of Sunflower Vanaspati. Its greatest challenge, though, will be one of mindset, say analysts

In July last year, Siraj A Chaudhry, the chairman of Cargill India, the Indian arm of the US-based $134-billion farm commodity major, was in a meeting with senior executives from the company's IT vendor, Wipro, in his Gurgaon office when an offhand remark caught his attention. This was regarding Wipro Consumer Care and Lighting looking for a suitor for its Sunflower Vanaspati brand. Chaudhry and his top management team had been eyeing the brand for several years. Over the next three months, hectic negotiations followed and the deal, reportedly worth Rs 40 crore, was finally announced in the first week of December. "The brand is iconic, positioned next to desi ghee in many households across Maharashtra," says Chaudhry.

This was the third acquisition by Cargill in the country's Rs 75,000-crore edible oil market in the past three years, which has taken the number of brands in its portfolio to five: Gemini, Nature Fresh, Rath, Sweekar and Sunflower. With the acquisition, it has also become the third largest player in the market in terms of oil processing capacity, and among the top three players in terms of consumer market share in the Rs 15,000-crore branded edible oil market. Chaudhry puts the multi-brand strategy in India into perspective. "We are trying to turn a cargo ship into a passenger liner," he says.

Till 2005, Cargill India's food business - under which falls the edible oil business - was a loss-making proposition. Price-sensitive bulk business, which is open to fluctuations in commodity price and exchange rate, accounted for majority of the edible oil sales. It was largely a volume-driven business, profit margins varied between 1 per cent and 2 per cent. The company had only one consumer-facing brand in Nature Fresh. Launched in 2003, the brand was used to market packaged sunflower and mustard oils. Market research by the company showed that up to 70 per cent of the edible oil consumed in India was at home. To cater to this market, Cargill decided to focus on a brand-led strategy.

On a buying spree
In 2005, Cargill thus bought out its partner, Pune-based Parakh Foods, reportedly for around Rs 100 crore. It gave Cargill ownership of three edible oil refineries at Paradeep (Odisha), Kandla (Gujarat) and Kurkumbh (Maharashtra), with the capacity to process 4,000 tonnes of oil annually. Along with it came the Gemini brand that had strong distribution presence in Southern India. In 2010, Cargill added to its portfolio heritage vanaspati brand Rath from Agro Tech Foods, which had a sizeable market presence among institutional and industrial segments in north India. This was followed by acquiring Marico's Sweekar brand of refined sunflower oil in 2011. The buyout of Sunflower Vanaspati has strengthened Cargill's presence in the institutional and household segments in west India. In the last three years, Cargill has forked out around Rs 100 crore on its acquisitions.

With just a few branded players in the market and some strong regional players, the strategy makes sense for Cargill. "Given the low margin in the business, there is a higher risk attached as one is not sure of the success of the national brand in each region," says Chaudhry. Analysts say a regional approach works in the edible oil business with different consumer preference in different regions. So, Gemini is popular in South and Rath in the North, while Sunflower Vanaspati has a long presence in Maharashtra and pockets of Karnataka. Sweekar is positioned as a premium national brand, while Nature Fresh has a basket of oils in its portfolio and is strong in East and North.

Cargill has the largest range of vanaspati brands in Rath, Gemini, Nature Fresh and Sunflower, for bulk consumers like hotels, restaurants and the catering industry. Also, the brands fill different price points, from Rs 60 to Rs 140 per litre. Chaudhry wants to strengthen the top end of the portfolio with an olive oil brand.

In May last year, Cargill re-launched Sweekar with a changed product mix and packaging, positioning it as a healthier option for premium consumers. Master chef Sanjeev Kapoor was roped in as the brand ambassador. Sweekar is now pitted against the likes of Sundrop from Agro Tech Foods, a company owned by US-based ConAgra Foods, and Saffola from Marico Industries. The plan is to push for 20 per cent of the premium market, with price points pegged at around Rs 140 per litre. Industry players point out a consumer shift in preference for premium brands as the price differential between popular and premium brands has come down to 5-10 per cent over the last one year. Cargill may be well-placed to ride the change in consumption pattern. There are similar plans to re-energise the other brands in its portfolio.

The dual strategy of organic and inorganic growth has given added momentum to Cargill's edible oil business which has grown at 12-15 per cent per annum over the last five years, says Chaudhry. In 2011-12, Cargill India's top line was Rs 9,000 crore, against Rs 6,750 crore in 2010-11. However, perceptible change on the consumer front would be more visible over the next three to five years when Chaudhry expects the edible oil business to grow by at least 15 per cent annually. "We have now created the platform, growth will follow," he says.

The risks
There is a downside to a brand-driven strategy. "Sales volume may take time to scale up," notes a report by ICRA. Sanjeev Giri, the business head of Dhara range of edible oils by Mother Dairy Fruit & Vegetable, says Cargill needs a clear segmentation strategy to avoid cannibalisation among the brands. "The acquired brand should demonstrate potential for growth rather than show signs of fatigue," he adds. V N Dalmia, the chairman of Dalmia Continental, the owner of Leonardo Olive Oil, feels the biggest challenge for Cargill going forward would be to build a FMCG mindset across the company for the consumer-facing business. Chaudhry, too, accepts this point. "We are still in the transition stage to be a full-fledged food company," he says. Over the last few years it has set up a dedicated sales and marketing team - of a couple of hundred people - checking out opportunities in the retail and consumer space.

Chaudhry, however, puts a caveat to Cargill's growth strategy. "We will push growth only if it is profitable," he says. Analysts agree it is easy to grow the top line in the edible oil business by pushing volume by reducing price. Being a privately held company - both in the US and India - Chaudhry is unwilling to give out profit details of Indian operations. A Mumbai-based analyst, however, notes a brand-driven strategy would only improve profitability of its edible oil business going forward. Competitors such as Adani-Wilmer, Ruchi Soya, Bunge India, too, are towing a similar line, and expanding their reach and brand portfolio. Most of them are pushing one or two brands.

Going by the initial response, Chaudhry says the portfolio approach has helped create traction at the retailer level and also with consumers. He is still conservative when it comes to spending big bucks on over-the-line adverting. "We prefer to be more active below the line, and at point of sale level," he says. As for his appetite for more buy outs: "We are always on the lookout," says Chaudhry.

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