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Building Brands, the ITC Way
The Economic Times - 25 Jan 2013

ITC chairman says brand-building requires a lot of investment, but it has the staying power as well as the resources

Declaring that ITC is building 'Indian brands' in its consumer goods business, Y C Deveshwar has sought to differentiate his cigarettes-to foods conglomerate from its mainly MNC rivals, opening an unusual flank in the battle for the affections of the Indian consumer.

"From baby food to breakfast cereals, there is a surfeit of foreign brands in the country. Our country has not been able to build strong local brands. ITC is engaged in building Indian brands across all consumer goods categories. Brand-building requires a lot of investment, but we have the staying power and the resources," Deveshwar told ET on the sidelines of the World Economic Forum (WEF) in the Swiss ski resort of Davos.

The long- serving ITC chairman said Indian units of multinational companies pay royalties to their parents for the products they sell in the country, resulting in Indian money going abroad and the government losing out on tax revenue. "With our brands, value will be captured and re-invested in India," he said, in comments likely to be viewed as an attempt to frame a marketplace battle in nationalistic tones.

His observations come at a time the issue of royalties is in the news after consumer goods market leader Hindustan Unilever last week announced a new trademark and royalty agreement with its Anglo-Dutch parent firm Unilever, which will more than double the outgo to 3.5% of revenues in a phased manner from 1.4% now. Several other Indian units of MNCs have raised their royalty payments to parents.

ITC has been trying for the past several years to build its consumer goods business, constantly expanding the list of categories. Its non-cigarette FMCG revenue stood at around 5,500 crore and the company has set itself a target of raising this figure to 15,000 crore by 2015-16.

ITC's foods business, which accounts for about 60% of its non-cigarettes FMCG business, has been gaining both scale and market share in packaged foods categories such as biscuits, chips, pasta and noodles despite being a relatively new entrant.

For example, it has more than a 25% share in cream biscuits in urban India, which, industry officials say is neck-to-neck with Britannia Industries. In noodles, ITC's Sunfeast Yippee! is ahead of other new entrants - HUL's Knorr Soupy noodles and Glaxo SmithKline's Foodles instant noodles - and second only to category leader Maggi. In chips, ITC's Bingo has been giving stiff competition to rival PepsiCo's Lays.

"We are the fastest-growing FMCG company in the country. I want to make ITC the No.1 FMCG company in the country. This won't happen in my life but I want to set it on that course," said the 65-year-old-Deveshwar, who has been chairman of the company since 1996, and was recently ranked 7th among the top 100 CEOs of the world by Harvard Business Review.

The ITC chairman said his company would foray into all consumer goods categories including dairy products, chocolates, drinks, and functional foods, although he did not specify a time frame. "If you ask me, will we enter the chocolate market, my answer is yes. If you ask me, whether we will enter it in the next three years, I will say it is unlikely," said Deveshwar.

A lifer at ITC, one of India's proudest and oldest corporate names with a history that dates back 101 years when it was born as the Imperial Tobacco Company during the British Raj, Deveshwar is particularly passionate about the consumer goods business, which spans foods, confectionery, clothing and lifestyle retail.

ITC is now developing food products at its R&D facility in Bangalore that it hopes will benefit consumers suffering from diabetes, cardiovascular ailments and cognition disorders. "Life sciences research is a huge focus area for us," said Deveshwar. The non-cigarette FMCG business made a loss of 24 crore in the previous quarter and Deveshwar said it was now self-sustainable. "The profitable parts of the business are funding the non-profitable ones. But if in the future, we decide to make more investments, we will use the cash flow from cigarettes to build brands and assets," he said.

ITC also runs the country's second largest hotel chain. It also owns a near 16% stake in the P R S Oberoi-led East India Hotels (EIH), which a couple of years ago inducted Reliance Industries as an investor partly to parry any possible takeover attempt by ITC. Deveshwar has always insisted that ITC never had any hostile intentions vis-à-vis EIH and always considered its investment to be a treasury operation. But he admitted that synergies existed between ITC Hotels and EIH and the thought of a strategic partnership did cross his mind. "This was a treasury investment which could have resulted in a strategic partnership. There were a huge amount of synergies, and I did speak to Mr Oberoi but he didn't think so. Now, it's too late," he said.