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Patanjali, Baba's billion-dollar baby

 
 

Anushree Bhattacharya, VCCircle

New Delhi, 18 February 2016

Naina Singh no longer buys her skincare products from the upscale showrooms of Greater Kailash in Delhi. This home-maker now prefers to pick them up from a small store sporting the red banner of Patanjali Ayurved, from which the picture of patron and de facto owner Baba Ramdev smiles down benignly.

It was her tryst with Patanjali Kesh Kanti Natural shampoo that made her a convert last summer. “I now buy almost everything that Patanjali makes, from atta to ghee to the creams as well as pulses and the spices,” says Singh.

Patanjali Ayurved Ltd today is not just about amla juice and chyawanprash. It sells around 500 consumer goods, from ayurveda-based products to staples such as clarified butter (ghee), pulses and edible oils to personal products such as toothpaste, hair care and skin cleansers and processed food products such as noodles, biscuits and juices.

Acharya Balkrishna, managing director, Patanjali Ayurved, and Baba Ramdev's most loyal disciple, gives credit to the yoga guru for all this. “The vision has been very simple. Whether medicines or food products, people of this country should have the best at the lowest possible price,” he says. He claims the company will hit the Rs 5000 crore turnover mark in FY16 – almost at par with the domestic revenue of consumer goods makers Dabur India, Marico or Godrej Consumer Products.

In FY15, the company registered a turnover of Rs 2000 crore. The firm now expects to enter the billion dollar league in terms of revenues in the coming financial year. Its estimated profit for the twelve months ending March 31, 2016, benchmarked against large industry peers should already make it a $2-3 billion company by market value, purely by price to earnings ratio, as per VCCircle estimates.

To be sure, even as it gives a scare to the biggies of India's FMCG industry strong competition, it is doubtful whether Patanjali, which swears by its ayurveda-inspired products, will be able to maintain the scorching pace it has set.

As it gears up to become possibly the biggest homegrown seller of consumer goods it will face new challenges.

Indeed, Patanjali's projected growth defies the slowdown in the FMCG industry at large. To be sure, it has grown almost five times between FY12 and FY15 when top FMCG firms in India such as Hindustan Unilever, Godrej Consumer, Marico, Dabur and Emami grew 30-70 per cent in the same period. Nestle's sales have actually declined in the same period.

This may look ambitious but add the slew of product launches this fiscal, and key distribution pacts in place, and it may not be too far from its target at the end of next month.

Overflowing aisles

Patanjali's top selling product is ghee, accounting for 30-35 per cent of the company's revenue, according to a report by HSBC Research. Then comes toothpaste Dant Kanti (8 per cent), hair cleansers (5 per cent), wheat flour (5 per cent), and honey (4-5 per cent), says the report. Health care products, its mainstay for many years and on which it has built the Patanjali platform, accounts for 20 per cent of the revenue.

“Pricing itself cheaper than the market leader in each product area is the reason for its popularity,” says Devangshu Dutta, chief executive, Third Eyesight, a retail and consumer management consultancy.

As per the HSBC report, Patanjali had 20 per cent share in the Rs 1240 crore ayurveda-based toothpaste market in FY15, while Dabur had 65 per cent share. By FY20 Patanjali's Dant Kanti toothpaste will have 50 per cent share, while Dabur's market share will drop to 40 per cent in the ayurveda toothpaste category, it says.

Dabur, which has Babool, one of the oldest ayurveda-based toothpaste brands in the country, however, scoffs at the idea. “While a lot of companies today offer herbal or ayurvedic products, Dabur enjoys the consumer’s trust because of its ayurvedic heritage,” says Lalit Malik, chief financial officer, Dabur India. The company says it is close to introducing a range of products in the value-added and premium category, which will help improve its market share.

A report by IIFL Institutional Equities projects Patanjali's annual turnover at Rs 20,000 crore by FY20. The report says it can expect to have a big share of the market in categories including honey, ayurveda-based medicines and ghee. In fact, by FY20, eight categories are expected to have a turnover of Rs 1000 crore each.

Balkrishna, however, says Patanjali has a much loftier goal than toppling any rival brand. “Unlike other companies, which have commercial interest at the heart of everything, our aim is to make products for the welfare of people,” he says.

For the people

That purportedly is the reason why Patanjali is launching an orange juice brand in the next one to two months, which it claims will be “real” orange juice.

“One of the reasons why companies do not sell real orange juice is because it is tangier in taste and not thick in density,” says Balkrishna.

Dabur sells its juices under the 'Real Active' brand.

Patanjali also plans to enter the baby care segment with cream, lotion, soap and shampoo apart from introducing Power Vita, a malt-based health drink brand. All this, the company plans to roll out in the market by early next month.

The aim is to enter categories where consumers are unhappy with quality or price, says Balkrishna. “The decision to enter a new category is triggered by a controversy or when Baba Ramdev is approached by people,” he says, alluding to the launch of its instant noodles brand.

That, however, hasn't stopped it from downplaying the fact that Patanjali Atta Noodles is actually a 50:50 blend of atta (wheat flour) and maida (refined flour made from wheat flour).

Patanjali launched its Atta Noodles last November, almost at the same time when Nestle India Ltd's Maggi returned to stores, five months after the multinational's noodles brand was pulled out over safety concerns.

Nestle, its biggest competitor in the instant noodle category, remains unperturbed. “Every brand seeks to define its competitiveness given its intrinsic strengths, its appeal and the price-value relationship it seeks to define,” says the Nestle India spokesperson.

Dabur and Nestle aren't the only two companies watching Patanjali's every move. Hindustan Unilever Ltd (HUL), India's largest FMCG company, is also building its arsenal. It recently revived its herbal brand Ayush, introducing a range of new products across haircare, skin care and pain balms. The acquisition of Kerala-based hair oil brand Indulekha Bringha hair oil late last year also needs to be seen in the same light.

Speed test

Market analysts say the back-to-back product launches by Patanjali is an area of concern. A major food products company such as ITC Ltd or HUL takes one to one-and-a-half year to launch a new product. Even then, the product is first launched in select markets. Another three-four months later, depending on the consumer feedback, it is gradually rolled out across the country. Similarly, skin care products need to go through a battery of tests before these can be launched.

“Launching a regular cream may take only six months to one year, but for an anti-wrinkle cream, or age-specific cream, it is a much longer journey,” says Rajat Wahi, partner and head, consumer markets, KPMG in India, an audit firm.

But this doesn't bother Balkrishna, who says the firm maintains high standards of quality. Last month there was much discussion on social media on the quality of its ghee, he says. “But the Food Safety and Standards Authority of India (FSSAI) cleared our product.”

Rather, according to him, inability to meet the spiraling demand for its products is the biggest concern. Atta, juices, rice, and other food products are processed at its Haridwar plant, Patanjali Food and Herbal Park. This factory also makes skin and hair care products. Its other factory in West Bengal rolls out 400-500 tonnes of biscuits every day.

Hence, expansion is the next big task. Patanjali plans to spend close to Rs 1000 crore in FY17 to ramp up its manufacturing capacity. The money will come as loans from public sector banks. It is looking at starting three new plants. “We are looking at different states including Andhra Pradesh, Maharashtra, West Bengal and Madhya Pradesh. We plan to acquire 400-500 acres of land in each state, to build state-of-the-art facilities,” says Balkrishna.

Patanjali created its own shelves

It’s a tiny shop with no fancy lights or glass panels. Iron shelves lined against the walls hold cartons, bottles and plastic canisters. In a corner, sits a man with a long register, the wooden table in front of him laden with small packages. The cash goes into the little drawer under the desk.

You may feel you have stepped back into the eighties but that's the ideal Patanjali Chikitsalay store. Tucked away in a corner of a busy marketplace or in the bylanes of a residential colony, such stores are the lifeline of Baba Ramdev's brainchild, Patanjali Ayurved Ltd.

These stores, spread across the country, numbering nearly 10,000 accounted for the bulk of Patanjali's Rs 2000 crore turnover in FY15.

“They were the best medium when it came to spreading awareness about our products through word-of-mouth,” says Acharya Balkrishna, managing director, Patanjali Ayurved.

Run by franchisees, the Patanjali stores can be classified into three formats. Typically 100-150 sq feet in size, the first two sell processed foods and ayurvedic medicines, respectively. The third format, a tad big at 200-250 sq feet, sells medicines, pulses, rice, detergents, hair care and skin care products.

Not the first choice

These stores weren’t exactly the first choice for Patanjali.

Around 2010, when it started its big push into consumer goods, Patanjali found retail outlets unwilling to keep its products because of the low margin it gave to retailers.

Unlike other FMCG companies, which apart from giving a standard discount to retailers allow further discounting to be able to sell their products, Patanjali could not afford to sell at discounted rates, nor give any special discount to retailers. It also did not give goods on credit.

“Moreover, we want our products to be placed at the front aisle, so that people get to see them,” says Balkrishna.

While large FMCG companies including Hindustan Unilever Ltd (HUL), ITC Ltd and others pay 19-20 per cent margin to modern retailers and 12-15 per cent to mom-and-pop/kirana shops, Patanjali pays 12.5 per cent margin to modern retailers and 8-9 per cent margin to kirana shops.

It was the same story when Patanjali tried to place its products in modern retail stores.

Aditya Pittie, CEO, Pittie Group, Patanjali's sole distributor for modern retail and e-commerce, says a pilot programme it ran for the firm’s oral care brand Dant Kanti, helped the homegrown company crack modern retail.

Though Patanjali paid 10 per cent margin against a rival brand’s 20 per cent, the modern retailer was able to sell Rs 3 lakh worth of Dant Kanti toothpastes against Rs 1 lakh worth of toothpastes of the latter, says Pittie. That clinched the deal and Patanjali got a foothold in modern retail.

“With retailers realising that despite getting lower margin they get to earn more on Patanjali products, they are eager to give shelves to the company,” adds Pittie.

It was only last October that Future Group opened the doors of Big Bazaar for Patanjali. Before this, in January the company piloted its products in five Reliance Retail stores in Mumbai, following which Patanjali took its products to 45 stores in the city.

Balkrishna points out that its decision to go for its own stores played a big role in establishing its credentials. “The no-frills store with the store owner actually advising customers on products built a level of trust and popularity which helped in our modern retail foray,” he says.

Today, Patanjali products are available across key Future Group retail chains- Big Bazaar, KB's Fairprice, Aadhaar and Nilgiri's. Patanjali claims it has recently increased the margin for modern retailers to 16 per cent, though it declined to reveal the share of sales contributed by modern retail versus kirana shops and its own stores.

Kishore Biyani, founder and chief executive, Future Group says he is satisfied with the margin offered by Patanjali.
“Margin is a combination of various factors such as sourcing of goods, supply chain, etc. Moreover, the aim was to allow a homegrown company, a 'swadeshi brand' to flourish,” says Biyani.

Making a statement

500-3000 sq ft in size and will house all products under one big roof. It plans to have 100-150 such stores by end of this year. “Two such stores have been launched in Lucknow and Nagpur. Delhi, Mumbai and Pune are next on our list,” says Balkrishna.

Pittie, too, is joining hands with Patanjali to start four mega-stores. Two will be in Mumbai, and one each in Delhi and Bangalore. “Baba Ramdev himself is screening all the applications received,” says Pittie.

Going online

The opportunities in e-commerce haven’t escaped the notice of Patanjali. According to a person close to the company, Baba Ramdev, along with top executives from Patanjali, is busy devising an e-commerce plan.

At present, Patanjali sells its products on patanjaliayurved.net. Moreover, its products are sold by vendors on online marketplaces such as Flipkart, Amazon, Snapdeal and Grofers besides inventory-based grocery e-tailer Big Basket. It has also tied up with Pluss, an on-demand medicine and healthcare products delivery service to deliver its products in Delhi.

“One of the reasons as to why we haven't been able to make a mark online is that we are not able to give very high margin to e-commerce companies,” says Balkrishna.

According to industry estimates, an e-commerce company's target is to earn a margin of 15-20 per cent on each transaction. However, with almost everyone offering steep discounts, the actual margin earned is 8-10 per cent and at times, even as less as five per cent.

To be sure, grocery e-commerce is not all about margins. “Grocery e-commerce is more of a local play than national. While one can still parcel a large packet, grocery is all about fulfilling daily needs for which a relevant local network is essential,” says Rajat Wahi, partner and head, consumer markets, KPMG in India, an audit firm.

For Balkrishna, the first step towards making Patanjali a national brand has been taken. “With more and more people joining the swadeshi movement, it’s just a matter of time before almost all the small as well as large stores sell our products,” he says.

Decoding Patanjali’s popularity

A premium product but an economical price tag. That is what yoga guru Baba Ramdev-backed brand Patanjali Ayurved promises customers. That strategy has worked, with Patanjali Ayurved Ltd, which flaunts its ‘Make in India’ roots, set to touch the Rs 5000 turnover mark in FY16.

Keeping prices low has been the cornerstone of Patanjali's marketing strategy. For instance, a 250 gm bottle of honey from Patanjali Ayurved Ltd comes for Rs 70. In contrast, market leader Dabur India sells the same pack size at Rs 120. Similarly, chyawanprash, one of the first products from the Haridwar-based company, is priced at Rs 250 for a 1000 gm jar. A 900 gm jar of chyawanprash from Dabur comes with a Rs 300 price tag.

“We arrive at the price by calculating the cost of raw material, administration, processing cost and a bit of margin for sustenance,” says Acharya Balkrishna, managing director, Patanjali Ayurved, and Baba Ramdev’s close confidant.

While its pricing strategy isn't anything new, it has helped in attracting eyeballs, especially in a price-sensitive market like India. “Any newcomer who enters the market tries to make a dent by crashing the price. Patanjali has also followed the same strategy,” explains Rajat Wahi, partner and head, consumer markets, KPMG in India, an audit firm.

However, Wahi says the big question is how long the company will be able to sustain its low pricing strategy.

Price platform

Going by the latest IIFL Institutional Equities report, it seems Patanajali is already revising its strategy. The report states that there has been an increase in prices of popular products such as toothpastes and shampoos over the past few years. A 100 gm tube of Dant Kanti toothpaste, one of its top-selling products now sells for Rs 40 against Rs 28 earlier. Similarly, shampoo, a category which it entered much later has also witnessed price revisions. The price of a 200 ml bottle of Kesh Kanti Natural shampoo has gone up from Rs 68 to Rs 75. The company has also increased the price of its anti-dandruff shampoo from Rs 85 to Rs 95 (200 ml).

Ghee is one product where Patanjali has followed a different strategy. Marketed as a premium product, a 1000 gm jar of Patanjali Ghee comes for Rs 450 compared to a 1000 gm jar of Amul Ghee which sells for Rs 390.

The IIFL Institutional Equities states that by FY20, Patanjali is expected to have double-digit market share in 10 of the 25 categories including ghee (33 per cent), and chyawanprash (30 per cent). It projects a revenue of Rs 3,100 crore from the sale of its ghee by FY20.

Balkrishna says that as a company Patanjali is not competing against anyone. “Each one of us is trying to do a good job, so that eventually people benefit from it,” he explains.

Yet, even as the firm has increased the price for some of its products, the low price points have helped in sampling of its products, ultimately resulting in in high sales. “In India, people do not mind testing a new product if it does not pinch their pockets,” says N Chandramouli, CEO, Trust Research Advisory (TRA), a brand intelligence and data insights company.

To be sure, the low pricing strategy does not impress everyone. “Low price points always raise questions about product quality. If other companies have been charging a certain rate for the same kind of products, how is Patanjali able to sell it at a much lower price,” asks Anil Verma, a resident of upscale Defence Colony in Delhi.

Patanjali has also been adopting the marketing tactics of its competitors, which could alienate customers who trust the brand’s promise of purity. Its instant noodles brand, launched just before one-time market leader Maggi returned to store shelves, was named Atta Noodles, thus downplaying the fact that it was actually a 50:50 blend of atta and maida.

Last December, a quality test was done on Patanjali's Ghee by the Food Safety and Standards Authority of India (FSSAI) after much debate on social media on its perceived quality.

Brand building

That is where Baba Ramdev’s charisma comes in. With a cult following, a television channel, and his yoga shows round the country, Patanjali’s brand campaign is already at the halfway mark before it has even started.

This has also helped the brand keep a tight leash on its advertising spend.

Contrary to media reports that the company spent a whopping Rs 200-300 crore in advertising in FY15, Patanjali claims to have spent only 1-1.5 per cent of its total turnover. Hence in FY15, the company spent Rs 20-30 crore in advertising and marketing. Similarly, the company is expected to spend Rs 50-60 crore on advertising in FY16.

As Balkrishna unabashedly admits, Patajali has bought media inventory at a discounted rate, which has helped the company in controlling the ad spend.

The company wants simple ads just to disseminate information about its brands, says Balkrishna. “We don't make any false promises in our ads. The ads are more like infomercials,” he adds.

For DDB Mudra Group which handles the creative duties for Patanjali Ghee, Atta and Dant Kanti, the creative brief was to inject the communication with a brand proposition.

“The ads for Patanjali talk about the product and its promise to consumers. The idea was to make interesting ads but not boring ones,” says Vandana Das, president, North, DDB Mudra Group.

Infomercial or not, brand evangelists say that the simple ads by Patanjali have helped in winning consumers' confidence. “While the whole world is creating theme based ads, here is one company which has stayed away from all the razzle dazzle. Straight talk, with no fluff, has helped in creating the trust factor,” says Harish Bijoor, brand strategy expert and CEO, Harish Bijoor Consults Inc, a consulting firm which specialises in brand and business strategy.

According to Bijoor, 32 per cent of the ads released by brands are tagged by consumers as ‘false’.

Even as the company is riding on its charitable trust tag, Bijoor says it cannot continue doing so forever. “It will be forced to behave like any other FMCG company soon, even in case of its communication,” he explains.

The meteoric rise of the company, parallel to the ascendancy of the Bharatiya Janata Party (BJP) to power, has also raised many eyebrows. Baba Ramdev is seen to be close to the BJP and its affiliates, sharing similar views on several subjects.

Balkrishna, however, dismisses talk of any such linkages and says all the talk about Patanjali has actually helped it grow. “We have never had the government's backing. In fact, we have openly protested against some of the ideas of the BJP-led government. As for the quality of our products, the FSSAI test results on Patanjali Ghee say it all,” he says.

(Published in VCCircle)

 
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