The ITC Chairman wants to transform his  company into a Rs 5,000 crore FMCG giant but he could face bruising battles ahead

For those watching from the sidelines, nothing that ITC did in recent years seemed to make much sense. Why would a Rs 10,000 crore company get into the greeting card business, which has little potential to grow beyond an outside limit of Rs 50 crore sales turnover ? Ditto with the move to sell overpriced, pre-cooked dals sporting the group’s restaurant brands, like Bukhara. Yes, some NRIs pining for desi food might carry some cans back with them, but would that be a worthwhile business for ITC? And as if making a fetish of thinking small, ITC also went and bought Minto, the poor also-ran (behind Nestle’s Polo) in the peppermint market. But the most mystifying move of them all was in the whole e-choupal game : setting up a computer network in hundreds of villages.

So, what gives?

The answer came just over a week ago, when company chairman YC (Yogi to most people) Deveshwar announced to shareholders at their annual meeting that he hoped to grow fast-moving consumer goods (famously short-formed as FMCG) into a Rs 5,000 crore business in short order. Welcome to the most ambitious corporate makeover since Ratan Tata decided a decade ago to re-mould his empire.

If you think Deveshwar is thinking small, you couldn’t be more wrong. He is thinking bigger, much bigger than you’d think he would dare. Because he is going to take on every (yes, every) well-established FMCG company in the country, in virtually every corner of the FMCG market. From foods to personal care products (home turf for Hindustan Lever); and from matches (Wimco’s patch) to tea (Lever again, not to speak of Tata Tea). And then, perhaps bottled water (Parle and PepsiCo, Coca-Cola and Britannia), and cooking oil (Lever and Marico). And even that’s not all. There’s readymade men’s wear, where he will take on everyone from Raymond’s (Park Avenue) to Benetton and Grasim (Louise Philippe/Van Heusen). And there’s going to be still more: bakery and confectionery products (home turf for Britannia and Nestle, among others).

Is he mad, you might ask. At least, I did. But after you’ve heard him out on his strategy over some three hours on a laidback Saturday morning, it doesn’t seem like it. To be sure, he won’t be able to pull off every trick he tries, and is bound to fail in some markets. And some of the moves are still no more than a gleam in Deveshwar’s eye, with neither product nor marketing game-plan ready. But if you travel south and watch the southern TV channels, you start hitting ads for Aashirwad flour: a direct confrontation with Lever’s Annapoorna brand, and the first time that the two FMCG giants have got into a head-to-head contest.

Deveshwar’s thought process is quite simple. He wants to leverage the ITC group’s (including the hotel company) traditional strengths, build new strengths, and then get into those businesses where the group strengths give it a competitive edge in the market. The traditional strengths are fairly obvious : the overwhelming influence over the million-plus convenience stores at every street corner, for instance, will help break into the match-box market and pose a clear threat to Wimco, especially if ITC is able to offer some product pluses. Indeed, these outlets could also sell tea sachets and bottled water at a later date, if and when ITC decides to go into them. But an overture to Twinings to get jointly into the Indian tea market has been spurned, so this particular venture is on the backburner for now.

Then there are the strengths in paper, packaging and board – helpful in getting into the greeting card market, which builds the channel selling strength that will facilitate broadbasing the venture and going into a larger range of gift items.

The familiarity with high quality foods, including confectionery, is obvious since the group runs a hotel chain. The challenge is to develop shelf brands and the expertise to develop products that meet customer requirements. The Kitchens of India mother label has set the stage with a premium positioning strategy, and readied the company for the broader assault on the market tomorrow, with everyday products like flour.

The e-choupals come in useful both here and elsewhere. For instance, the nationwide network of computer terminals, managed by concessionaires in each village, lay the base for effective sourcing of raw materials like grain and pulses for the foods initiative. The advantages will be low cost and better quality. The e-choupals will also become marketing outlets through a virtual network that will give ITC unimagined marketing reach and perhaps even control.

In the process, ITC has also acquired new technological understanding and strengths, especially in the information technology area, and these are now being leveraged to enter the hottest new business of them all: business process outsourcing. Leveraging the fact that the company has 35 acres of prime real estate in the heart of Bangalore (old factory land ; similar land in Mumbai will now host a new hotel), ITC is making a determined foray into the fastest growing business in the country and has already tied down two anchor customers in order to get the show on the road. More will follow.

Meanwhile, the Wills lifestyle stores have helped the company test the clothing market, understand consumer preferences, and get ready for a more full-scale entry into the ready-to-wear market, with new brands joining Wills for different segments of the market.

If you didn’t see all the different pieces of the jig-saw fit into a pattern till last week, that too was deliberate design. Deveshwar wanted three years to test the waters in different markets, understand what possibilities existed where, gear up the organisation internally, get the channel selling lines in place and have a product game plan in place before tomorrow’s rivals wised up to what was being worked on. The fact that Deveshwar is now ready to talk means that he is now ready for the real action in the market, and in fact he talks of a new product launch taking place every three months, from now on for a long time to come.

Underlying it all is the biggest strength that ITC brings to the launch of new businesses : a powerful balance sheet that has grown enormously in strength over the six years of Deveshwar’s chairmanship. Brand managers and division chiefs know that they have the financial firepower to take on anyone in the market – but equally, they are accountable for the money they spend.

The other big resource is of course people. Time was when scandal-ridden ITC had stopped attracting the best and the brightest. Now with the scandals distant memory, the provisions for tax cases fully made, and internal systems streamlined sufficiently for the company to even get a corporate governance rating from ICRA (a first in the country), the company has begun acquiring a different image. Deveshwar says the company is back to first day position at many premier management institutes – and good human resources will help make the new businesses a success.

Ten years from now, if Deveshwar’s grand design works, ITC will have made FMCGs its second largest business (next only to cigarettes), and ahead of hotels, paper, packaging and printing. It will also be in every one of the largest FMCG segments that exist. So, all of you at Lever, Nestle, Britannia, PepsiCo, Coke, etc. don’t say you haven’t been warned.

A classic turnaround

While ITC decides to become a full-fledged FMCG company, what is happening to its existing businesses? The answer is that they are doing famously well – in fact, that is what gives creditability to Deveshwar’s audacious FMCG plans.

Look at paper, for instance. Bhadrachalam Paperboards was hopelessly in the red, to the tune of hundreds of crores of rupees. Three years ago, Deveshwar promised to turn the company around, and he has done just that. He has developed new, cheaper sources of raw material, he has expanded capacities and modernised plant and machinery, and from being a company that was threatened by imports, he has turned it into an exporting company that is taking the war to other markets.

He has also done some financial engineering : by merging Bhadrachalam into ITC, he has been able to use Bhadrachalam’s accumulated losses as a tax shelter in ITC – and improved the merged company’s cash flow by a staggering 75 per cent almost overnight.

Then there’s hotels. ITC’s Welcomgroup was an also-ran in the category, with no nationwide chain, and large holes on the map (no hotel in Mumbai, for instance). Not any longer. The first hotels is up and running in the commercial capital, with the best room yields in the city, and one more is being built in mid-town, with a third likely if an acquisition deal goes through. Welcomgroup will then have more rooms than anyone else in Mumbai.

Kolkata too will be on the group map within a year, while Delhi has added a second hotel with a Marriott tie-up, and a new super-luxury wing added to the Maurya. The Grand Kakatiya has already taken pole position in Hyderabad and Bangalore is seeing a second hotel come up.

But the really strategic hoteliering move has come in the share market, with a 14.8 per cent stake being taken in East India Hotels, which runs the Oberoi chain. Though Deveshwar denies it, he can easily cross the 15 per cent threshold that will make a 20 per cent public offer mandatory under the takeover rules, and then he will be within shouting distance of the Oberoi family’s 41 per cent stake in the company. From that to a merged operation with Welcomgroup (say an ITC-Oberoi chain) wouldn’t be a giant step for a corporation of ITC’s size. Idle star-gazing? May be, but you never know. If it happens, ITC quickly becomes the largest hotel chain in the country, overtaking the Tata’s Indian Hotels (the Taj chain).

And finally, there’s cigarettes – the group’s bread, butter and jam. Here too, some good marketing minds have been at work, melding brands (Classic and Wills, for instance) to bring focus to marketing and advertising efforts, and steadily improving profitability.

Overall, the group’s finances have been transformed over the six years that Deveshwar has been at the helm. Despite huge write-offs to clean up the mess that he inherited in agri-business (sold to Conagra), financial services (remember Classic Finance?) and ITC Global (wound up), profits have more than quadrupled in six years – a compounded annual growth of over 25 per cent. If Deveshwar and his colleagues in the ITC system can recover so well from a crisis point, don’t scoff at their FMCG plans. Six years from now, ITC could look like a whole different company.

Fast – moving plans

ITC’s objective is to get into the biggest consumer product markets in the country and is, therefore, venturing into the following FMCG areas :

FOOD :
The sector has four segments.
Top end : ITC has launched the Kitchens of India brand.
Ready-to-cook : Products are still being developed.
Mass market products : These include Aashirwad Atta and more products are likely to follow.
Bakery : ITC has acquired Minto Peppermints and is developing new products.

PERSONAL CARE PRODUCTS :
ITC has not revealed its plans for the sector but is likely to launch the full range.

MATCHES :
Aiming to upgrade and price up matches.

GREETING CARDS, STATIONERY AND GIFT ITEMS :
Expressions Cards have already been launched and others are expected to follow.

CLOTHING :
Wills Sport has been launched countrywide. There are plans to launch clothes for the mass market at a later date.