Taking stock of the FMCG block is tobacco and hotels giant ITC Ltd. A few years ago it climbed onto the retail bandwagon, leveraging existing strengths to diversify into areas from greetings and gifts to lifestyle retail. While it's got a long way to go to challenge Hindustan Lever, ITC is banking on the two mainstays of consumer goods that it does possess - a strong brand equity and a wide distribution network.

The game plan is all about strategic synergy. A year ago the company's newest division, Bangalore-based ITC Foods, moved into the branded packaged foods market and is leveraging the parent company's agricultural products division for sourcing, as well as ITC Welcomgroup's specialist cuisine knowledge and its packaging division.

The ace up ITC's sleeve, however, is the company's established distribution network that includes the e-choupal system - a two-way sourcing and distribution system for farmers in remote villages, as well as its cigarette and paan network.

With this infrastructure in place ITC Foods has launched into four branded foods areas - ready-to-eat, staples, snacks and confectionery. Its Kitchens of India brand sells packaged gourmet Indian cuisine, which offers recipes from ITC Welcomgroup Hotels. "We picked up popular recipes and put them into cans", says CEO Ravi Naware. "This is five-star food prepared by our chefs and targeted at connoisseurs of good food". The brand is marketed through upmarket retail chains in Delhi, Mumbai, Bangalore, Chennai, and Ahmedabad, and select clubs in Kolkata.

The selling point is that no preservatives are added, and through 'retorting' technology the shelf life of these foods is close to one year. ITC Foods has a contract manufacturing facility, where quality is supervised with focus on ingredients and recipe. A panel tastes it and approves it before processing takes place. The canned Kitchens are present in 48 towns (of over 500,000 population) and the group plans to export its products after is has established the brand nationally.

The group sees high growth potential in the staples segment. "The consumption of aata is 45 million tonnes in India", says Naware. "Only 2 per cent of this is branded". ITC's branded aata is customised to cater to different tastes, to suit markets in the north, west, and south. To differentiate each type, the package is colour-coded - the main variant in each area is coded red, while its Ashirwad Select is coded orange. Essentially an urban phenomenon, it covers 27 cities in India. The company plans to have its staples available all over India by March this year - and next on the agenda is branded rice and salt. "There's a need to consolidate, to establish the business and the brand, and then fill up the portfolio", says Naware. Gopal G.V.R., a supervisor at Foodworld in Bangalore, notes: "You just can't compete with Lever's Annapurna or Godrej's Pillsbury". However, he does point out that the awareness and demand is picking up for ITC's aata. Kitchens of India, on the other hand, is doing well with an elite segment of consumers, while the orange Minto confection is taking off.

Minto helped to generate quick volumes in four months, says Naware. Acquired from Candico in March 2002, Minto was reengineered and the flavour variant - orange - introduced. "We got into the untapped potential of the mint market", says Naware. "We brought novelty to this segment - orange mint is 50 per cent of consumption". ITC Foods' product development centre in Bangalore is working at bringing added-value products across segments. The bid to be different "to create a buzz in the market", says Naware, also led to the wild banana variant in the Candyman range of sweets. The flavour was one of the two (the other being mango) chosen after a sampling of six flavours by 3,600 schoolchildren. Here the distribution makes use of the tobacco network: ITC services 1.1 million outlets at average frequency of three days down to villages of population 2,000, and has 1,000 wholesale dealers.

"ITC's distribution philosophy is that of channel-tailored support. ITC and its distributors use different sales forces to cater to the separate channels of convenience outlets, grocers, and supermarkets", says Naware. "ITC services trade channels and not specifically one kind of outlet alone. Thus for impulse purchases like confectionery, the bulk of our sales come from convenience outlets. However, categories like aata, ready-to-eat foods, and snack foods are directly distributed to grocers and key accounts, in addition to some convenience outlets".

ITC directly services more than a million outlets all over India. It has depots in key states and the depots are geographically dispersed to optimise logistics costs, according to Naware. He points out that for high-bulk, low-weight items (such as the most recent launch of snack brand I Bischips), specific retail stocking and display solutions use floor and air space for ease of placement and high visibility.

The other advantage is ITC's backward integration with the parent company's $155 million international business division (IBD), which markets agricultural products abroad. IBD's e-choupal system, which sources directly from the farmers through 1,286 kiosks across 9,000 villages, also helps to develop markets and brands for ITC's consumer goods. As a distribution channel, the two-way-functioning e-choupal is cost effective, with the added scope of increasing in range as more kiosks and more farmers are tagged on to the sourcing network. The e-choupals and the storage hubs - the company has a strategically located hub in each state - function as centres where ITC and the firms it partners can market FMCG goods that range from agricultural products to household items.

The company also uses local paanwalla networks to help to boost its brands. Cash-rich and networked, the company is cashing in on the potential of a 2.5 million-strong force of such retailers. The group's experience in cigarettes has sensitised the system to fine-tune stock control mainly because cigarettes are a high-value product with high inventory carrying costs. At an individual retail outlet level the company has a supervision process that ensures stockouts/overstocking do not take place.

ITC's frequency of retail servicing is one of the highest in the consumer-goods business. Consequently it does not need to resort to dumping of stocks at an outlet as an insurance against stockout situations but can sell only as much as the retailer can dispose of and top up stocks whenever and wherever necessary. This also makes the group manage its working capital better.

Timing and data-gathering regarding stocks is crucial. "We have a fully online ERP-based logistics system linking our distributors, godowns, and marketing branches to head office and factories, continuously feeding in data of sales and stock positions across the entire supply chain", says Naware. "This enables us to track pipelines and sales in real time and keep control over all elements of the supply chain, be it raw material, packaging material, work-in-process inventory, or finished goods."

To leverage its network and distribution reach, and to centralise the data flow between various divisions, ITC has installed Project Infobahn, a companywide hybrid network using a virtual private network (VPN) through an Internet service provider. This comprises 69 leased lines, 103 ISDN lines, 10 radio frequency devices, and four new VSAT links. This lets staff, wholesale dealers, and partner companies access data and transact business over the Internet. It also leverages the existing network to 'cross-sell' and 'up-sell' the company's own business offering and enables it to market offers from other business houses through a secured distribution network. The network spans 110 locations and all ITC divisions.

ITC complements its distribution effort with consumer research. According to Naware, it spends Rs12 crore on consumer research. He says that a study showed that 48 per cent of annual household expenditure goes on buying food. Branded food comprises 5 per cent of this and the percentage will increase as the economy improves. Naware believes expenditure on food will touch Rs100 crore in five years' time.

Meanwhile, how is ITC gearing up to take on Hindustan Lever, Nestle, and others in the foods business? Says Naware : "Competitive advantage will come from distribution strength, servicing of outlets, product quality, relevance, and differentiation. These constitute the mainstay of our business strategy. We hope to leverage our brand development capabilities and establish ourselves in the market place." Naware also points to ITC's abilities in "building consumer brands, in distribution, in unmatched servicing of retail in India to even villages of 2,000 population as well as its ability to deal with agricultural products".

Clearly, with branded packaged foods emerging as a focus area of growth for companies like Hindustan Lever, well-equipped ITC still has a tough battle ahead.