PRESENTATION ON STRATEGIC ANALYSIS OF FMCG COMPANIES

THE NEED FOR STRATEGIC ANALYSIS

• Financial analysis gives a top down picture – from which we infer things like brand
performance and expected stability.
• Lack of transparency by firms when their brands are not performing well – noticed in
quarterly reports
• AC Nielsen (industry research statistics) requires companies to keep knowledge of
market shares proprietary – therefore, less incentive for firms to give a clearer picture.

Aim: To combine grassroots analysis of product positioning in it’s market place with
financial analysis so develop richer understanding of brands and by extension their
parent companies.
BACKGROUND INFORMATION ON THE FMCG MARKET

• Current Market Size - $49bn – expected to grow at 20.6% CAGR till 2020 ($104bn

Growth Sources
1. Favorable demographics – Increasing consumer base with higher population
2. Rising per capita incomes –Strong economic growth expected to increase volume
purchased and drive premiumization
3.Tapping into a bigger consumer base –Dabur, Emami upped rural distributon
networks to improve reach; HUL and ITC already had such investments in place
4. Modern trade expansion – Expected consumption increase from ecommerce
channels opening up (Amazon $4bn investment)

• Policy support – Liberalization of FDI policy and initiatives like ‘Food Security Bill’ are
going to increase activity in the FMCG space
INDUSTRY FIVE FORCES ANALYSIS

Threat of New Entrants Substitute Products

(medium) (high)
-Advertising and distribution -Differentiation is difficult,
network expense price wars, many brands

Competitive
Rivalry
(medium)

Bargaining Power of Bargaining Power of

Customers (high) Suppliers (low)
-Low switching costs -Large parents companies
between brands controlling multiple brands
IMPORTANT STRATEGIC CONSIDERATIONS

From Michael Porter’s “Competitive Strategy”:

• Price wars hurt industry profitability in the long run though some companies
might benefit temporarily if they initiate the war
• It’s hard to co-ordinate industry expectations in an oligopoly, and strategic
interdependence is high; therefore, competitive moves are expected to persist –
all the more reason to analyze strategic positioning.
• FMCG in India has the advantage of banking on population growth to boost volumes
– do not expect industry to come to ‘maturity’ in the foreseeable future – where
the industry is associated with little to no growth.
SEGMENTS WITHIN FMCG
TOOTHPASTE MARKET OVERVIEW

Key Facts:
• Last 3 Years - Average Sales growth – 8% ; Margins - 63%
• Rural growth has been 1.5x Urban growth
• Advertising plays a key role – people want to be aware as dental needs can be
specific – Whitening, Freshness, Medicated etc.

Players and Market Share:

1. HUL – Close up and Pepsodent Patanjali, Others,
2. P&G – Diverse product line Dabur,
5.40% 0.60%
3. Dabur – Red, Meswak, Babool 15% HUL,
4. Patanjali – Dant Kanti 23%
5. Others – Small brands

P&G,
56%
METHODOLOGY: INTRODUCTION TO PORTER’S GENERIC STRATEGIES

1. Cost Leadership – Lowest cost position in product segment – think Patanjali

2. Differentiation – Product uniqueness and brand loyalty from “switching costs”
3. Focus: Very specific target market – assumption that by spending more time in this
market they can become experts and premiumize (Kaya Skin Clinic)

• We wanted to evaluate efficacy of strategies within product segments – cannot

generalize to industry level (Differentiation in Chavanprash v/s Marie Biscuits)
• To analyze how well a strategy was working we needed a metric for brand
performance and the product’s cost position (Insight to strategy employed)
METHODOLOGY – DATA COLLECTION AND ANALYSIS

1. Collected Data from Quarterly Reports up to 5/10 (where available) years ago - about
brand performance (volume growth). Used a binary rating system where;
1 = Growth > 5%
0 = Growth between 0 and 5%
-1 = Growth < 0%
2. Computed a growth score by averaging binary score for each quarter
3. Growth score weighted with focus on recent data– didn’t make sense to equally
weigh product performance from 5 years ago with recent data. Half the weightage
was assigned to the first year of data. Decay factor used was 0.87.
4. To gauge strategic positioning we standardized brand prices on a per gram basis
– and then used price position and qualitative analysis to map each brand to one (or
more) of Porter’s generic strategies.
FIGURE 1 – PRICE STANDARDIZATION AND STRATEGY BUCKETING

• Potential for error in strategy bucketing; though, wherever their was doubt between
which strategy bucket to chose we included the brand in both buckets as hybrid
strategies which are possible conditional on effective execution.
FIGURE 2: RESULTS FROM PRICE V/S GROWTH ANALYSIS

• Growth scores(<-1,<1) have been scaled to assume Brand with max growth score = 1
and then scaled.
• Price units: -1 = Lowest cost (Red) and 1 = Highest cost (Sensodyne) – rest scaled
• Low cost toothpastes are driving growth on the back of Dabur Red and
Patanjali
• Colgate displays healthy growth (0.46) and premiumization (0.71)
HOW THIS SUPPLEMENTS FINANCIAL ANALYSIS

• Our analysis is consistent with financials in that both show growth and premiumization
Net Sales (2013-2016)
1,200 1,091
994 989 1,022 1,032 1,006 1,006
921 951 924
896 884
900 845

600

300

Gross Margins (2013 - 2016)

6/30/16 62.27%
2/29/16 64.00%
64.68%
10/31/15 64.09%
6/30/15 60.89%
2/28/15 63.66%
63.48%
10/31/14 62.72%
6/30/14 62.67%
2/28/14 60.54%
61.20%
10/31/13 59.80%
6/30/13
57.00% 58.00% 59.00% 60.00% 61.00% 62.00% 63.00% 64.00% 65.00% 66.00%
COLGATE HAS BEEN FIGHTING HARD TO DEFEND MARKET SHARE

• While sales and margins have grown well – EBIDTA margins have not due to
expenditure on Advertising to maintain market share – intense competition from
Dabur Red and Patanjali

EBITDA Margins (2013 - 2016)

24.06% 24.55%
25.00% 22.89%
21.89% 21.95%
21.11% 20.85%
20.24%
19.23% 19.54%
20.00% 18.64%
16.25% 16.88%

15.00%

10.00%

5.00%

0.00%
DEVELOPING INSIGHT WITH THE VRIO FRAMEWORK

• The VRIO (Valuable, Rare, Imitability, Organization) views brands as being able– to
sustain a competitive advantage only if it’s processes are valuable, rare, inimitable
and organized.
How rare are is the
strategic
implementation?

Can they be imitated?

How do they
add value to the -Causal Ambiguity
customer? -Social Complexity
-Path Dependence

Is the firm organized to

exploit the competitive
advantage?
VRIO ANALYSIS FOR COLGATE

Value Rarity Imitability Organization

 Extremely diverse  Multiple Dental  Toothpaste accounts  Advertising is

product line experts in product for 79% of Colgate’s targeted to
 Innovation driven development revenue – show’s boost loyalty
by consumer pipeline – company focus on through
insights differentiation just toothpaste – very campaigning –
 10% CAGR in  Generates an aura risky for others to re-inforce
rural areas for of trust with the imitate differentiation
previous 5 years consumer base –  High expenditure factor.
v/s under 6% in “doctor – required to advertise  Reinvestment
urban areas approved” with same intensity likely to be
 Indian Margins  Vast R&D is rare  Hardest to imitate is internally
lower than global the socially funded – have
counterparts- complex trust not tapped into
adapting to high generated with corporate
price sensitivity consumer base parent
resources (high
scope of
retaliation to
“competitive
moves”)
IMPLICATIONS OF VRIO

• Colgate has a competitive advantage in the market from its Product range/quality and
“Trust” factor” – evident in high market share without pure low cost position. Colgate’s
strategy is a hybrid of focus and differentiation – where focus results from 79% of
revenue and differentiation from medical authenticity resulting in a trusting
consumer base – presence of “switching costs”

• We believe Colgate is likely to sustain a competitive advantage – While

advertising with the same intensity is imitable by HUL like companies, generating that
trust with the consumer base might require significant change in strategy, and may
not even work – making that decision very risky for competitors

• Colgate has made it clear that it intends to maintain market share – and has
enough resources (corporate parent, healthy cash flow) to fight off Patanjali and
Dabur Red by making low cost variants like “Cibaca” cheaper – especially to high
growth rural markets