PRESENTATION ON STRATEGIC ANALYSIS OF FMCG COMPANIES

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.

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

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)

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.

SEGMENTS WITHIN FMCG

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%

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)

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.

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.

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)

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)

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)

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?

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”)

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