GCPL to hive off India unit; aims to double local sales in 5 years

Sapna Agarwal, Livemint, 18 February 2015

As Godrej Consumer Products Ltd (GCPL), the maker of Cinthol soaps and Hit insecticides, prepares for an upturn in the Indian economy, it is once again restructuring operations to make the domestic business a stand-alone profit centre separate from its international operations.

The change comes barely a year after the company had integrated its international and India operations under a common management structure to drive synergies.

“We are preparing for the next phase of growth,” said Vivek Gambhir, managing director, GCPL, while adding that the company has put in place a project called #FutureNow which is looking at growing domestic sales organically from an estimated Rs.4,500 crore at the end of fiscal 2015 to Rs.10,000 crore in the next five years.

India and other Saarc (South Asian Association for Regional Cooperation) markets will function as an independent zone, headed by Sunil Kataria as chief operating officer responsible for sales and marketing.

The company is positioning itself as a broader home-care company as it chases growth. New sales channels such as the Internet and chemists and cosmetics stores, along with better penetration and segmentation of its markets and consumers, will also drive growth, said Gambhir.

Currently, the contribution of international and domestic revenues to overall revenues is almost evenly split.

“If the company wants to maintain this balance, then, the domestic business has to grow faster and needs higher resources and investments,” said Anand Mour, vice-president and consumer analyst at ICICI Securities Ltd, while noting that the strategy to extend its portfolio gives it an opportunity to introduce more expensive products and enter new segments.

GCPL has also overhauled its entire go-to-market strategy for the Indian market and is using technology and analytics across the sales and marketing functions to drive profitability and address changing consumer behaviour.

To target rural markets better, the company is launching the OneRural programme next month. Currently, with a reach of close to 60,000 villages, rural revenues account for 27% of GCPL’s overall revenues, up from 15% three years ago.

Yet, this is lower than the average across the sector.

Villages contribute to 35% of sales of the consumer packaged goods industry and have grown at a faster clip than urban sales for the past two years, according to a January report by Nielsen, an insights and information provider.

“The target with OneRural is to have rural account for 35% of overall revenues in the next three years,” says Kataria, while explaining that the growth will come from a new set of rural consumers called the progressive rural customer, who behave like urban consumers but reside in the top 35,000 villages.

Additionally, it is looking at launching specific products for the rural market and also increasing its service frequency—the frequency of visits to take orders from retailers—across the top 10,000 villages to once a month.

Consumption in the rural belt is not uniform. Over 70% of rural packaged consumer goods consumption happens in just 10 states and 66% of soft drink sales in rural India comes from just 19,000 villages, said a December report by Nielsen.

For Hindustan Unilever Ltd (HUL) and Dabur India Ltd, rural markets account for nearly 50% of overall revenues, says Naveen Trivedi, lead analyst, Trust Financial Consultancy Services Pvt. Ltd, a brokerage firm, while noting that companies like GCPL and Marico Ltd have scope to improve their revenue contribution from the interiors.

In the urban markets, GCPL is following a two-pronged strategy.

The company will push productivity improvement through technology, improve distribution partnerships and split its portfolio into two lines among its front-end sales staff. The second leg of the strategy focuses on segmentation of high growth channels such as cosmetics and chemists’ stores, as a way to deepen its reach across these channels.

In December, Marico, the maker of Parachute and Saffola oils, also revised its go-to-market strategy, outsourcing everything that the company considered non-core to focus on five areas—innovation, go-to-market transformation, talent value proposition, information technology (IT) and analytics, and cost management, said Saugata Gupta, managing director, and chief executive officer, Marico. The firm is planning to increase its penetration in urban markets by 30-40% in the next two years.

About 18 months ago, Britannia had split its portfolio among its sales staff in the urban markets covering the top 50 cities. This has helped the maker of Good Day and 50-50 biscuits to increase its sales growth on an average by 3-4% in these cities, said Hemant Rupani, vice-president, sales, Britannia, while adding that the returns on investments were justified.

In the past few years, consumer firms such as HUL, Marico and Dabur have been increasing their distribution reach and also trying to improve the quality of throughput from the stores as the penetration comes at a cost, said ICICI Securities’ Mour.

The change at GCPL is being driven by technology.

“All our conventional business models of consumer engagement are being questioned,” says Kataria, while explaining that technology is evolving at a faster pace than was imagined three years ago.

The company is looking at e-commerce to contribute to 7-8% of its sales in the next five years. E-commerce sales are currently negligible.

“India will leapfrog from traditional trade to mobile commerce,” said Gambhir, while explaining that modern retail, which includes supermarkets and hypermarkets, will continue to grow but will go “nowhere near what we have seen in emerging markets like China, Korea or Indonesia”.

The Internet will influence one-third of the total sales in the consumer packaged goods (CPG) sector in the next five years, said a February report from Bain and Co. and Google India, which added that the online channel will contribute $5 billion of CPG sales, growing 50 times to 5% of total sales by 2020 from 0.3% now.

Meanwhile, GCPL has outperformed its peers Marico and HUL with operating profit margin, a measure of a company’s operating efficiency, of 21.15% for the December quarter, whereas Marico’s operating profit margin stood at 16.11% and HUL’s was 14.99%.

GCPL’s shares gained 0.42% to end at Rs.1,173.00 on Wednesday on BSE, while the benchmark Sensex rose 0.63% to close at 29,320.26 points.