After non-cigarette FMCG rode its strong distribution for the first 12 years, the segment's first annual profits will now fuel more premium launches.
On his first day in office, Health Minister Harsh Vardhan went on an overdrive to curb tobacco consumption. His effort did not just stop at releasing a print advertisement featuring Rahul Dravid, India's brand ambassador for tobacco control, but the minister even said that he would strongly recommend raising tobacco taxes.
Ahead of the Budget from the new government, such a zealous initiative would have made the ITC management squirm 10 years back, but no longer; the diversified company is much better poised to face challenges that are beyond its control on the tobacco front. The primary reason is the growth on the revenue side led by the relatively newer non-cigarette FMCG segment, comprising foods, lifestyle retailing, personal care, education & stationery, safety matches and agarbattis (incense sticks).
With some 20-odd brands in its kitty, the non-cigarette FMCG segment is growing, more importantly, profitably. More than half of ITC's revenues come from non-cigarette brands, and non-cigarette FMGC commands a handsome share of it.
"These brands, which have been built organically by the company, have attained considerable size in a relatively short period of 10 years and in aggregate currently represent over Rs 10,000 crore in terms of annualised consumer spends - a feat perhaps unrivalled in the Indian FMCG industry," ITC's Executive Director Kurush Grant says.
ITC's latest numbers show that non-cigarette FMCG sales grew by 13.7 per cent to Rs 2,314 crore in FY-14 while the EBIT was positive at Rs 43 crore. This is the first time that ITC has posted profits for the full year in the non-cigarette FMCG segment. Analysts, too, seem to think that ITC has finally got its act together, despite the profits being paltry in the overall company's scheme of things.
"The return in business may not be handsome at present, but it will take time to reach a stage where profits from the segment would be significant. It doesn't happen in a few years and would take 10-15 years. Distribution is one of ITC's biggest advantages," an analyst at Sharekhan says.
It is said that ITC can garner 5 per cent market share for any product it launches just by virtue of its distribution. The breadth of its distribution was, initially, largely built on the back of the tobacco business in 2001.
"ITC has been trying for a long time to drive more out of the non-cigarette business. In terms of brands, they are as good as any other MNC brand in their respective segments, but what's unique is its distribution. With the rise of the Modi government (with its plans for better infrastructure), ITC will be able to take its FMCG products to every nook and corner of the hinterland," advertising film director Prahlad Kakkar says.
Among the different sub-segments in non-cigarette FMCG, foods and personal care brands account for the lion's share at 80 per cent.
The company has a presence across different price-points, but with an accent on premium, be it foods or personal care. The reason is obvious, margins are higher.
The company has repositioned the Vivel brand from a simple skin-softening item to a nourishment product. "We would have products for all price-brackets, but in terms of sheer number of introductions, we will be larger in the premium segment than in others," personal care CEO Sandeep Kaul had said in an interview earlier.
With profitability on its mind, the company is also treading more cautiously with new launches. While Vivel is one of the four brands that it launched between 2005-2007, it has taken
ITC almost six years to launch its brand of deodorants, Engage. ITC's high-recall brands include Aashirvaad, Sunfeast, Vivel, Bingo!, Classmate and Yippee!
"Aashirvaad and Sunfeast have garnered annualised consumer spends of over Rs 2,000 crore each, Classmate has clocked over Rs 1,000 crore, while Vivel and Bingo! have notched up over Rs 500 crore each. Aashirvaad is a clear market leader in the branded atta (wheat flour) segment. Sunfeast leads in the cream biscuit segment and Classmate is India's leading stationery brand. Yippee! is number two in instant-noodles, though it is a new entrant in this segment. Engage deodorants are growing at a very fast pace and has already emerged among the top three brands in the metros. Mangaldeep is the second largest agarbatti brand," Grant says.
The focus on premium has paid off for ITC in foods, as it had turned profitable long before the entire non-cigarette FMCG segment.
The future, too, is cut out for ITC. "Our aspiration is to be the number one FMCG Company and create world-class Indian brands that create, capture and retain value in India," Grant summarises. Are peers listening?