The Hindu Business Line : ‘Our strategy is to put more grams in more mouths!'

Even as the Hershey-Ferrero combine pitch for the global business of Cadbury in a bid to thwart Kraft Food's hostile bid for the confectionery maker, the Indian affiliate, with 70 per cent of the domestic chocolates market, is sitting pretty. Cadbury India, with sales of Rs 1,587 crore in 2008 and a sales growth rate of 23 per cent in 2007-08, is the fastest growing in the Cadbury world, albeit on a lower base, while it contributes 5 per cent to global sales. The challenge, says Anand Kripalu, President, Asia, and Managing Director, Cadbury India Ltd, is to grow the market or, as he says, “put more grams in more mouths”.

In Chennai recently for the launch of the Rs 5 pack of the new glucose-infused Perk, Kripalu says the company's ambition is to grow by 20 per cent year-on-year and be a Rs 2,000-crore company by this year-end. At a low per capita consumption of 54 grams compared to the developed markets — the UK at 10.5 kg and the US at 5 kg — the market opportunity is huge, says Kripalu. With a low unit price strategy in place, he hopes to increase the volume consumption of chocolate. While refusing to comment on the bids for Cadbury's operations worldwide by competitors, saying it's a global decision, Kripalu spoke at length to BrandLine on a host of issues the chocolates and confectionery maker confronts. Excerpts:

How are you managing your input costs as prices for your key inputs such as cocoa and sugar have gone through the roof?

Both cocoa and sugar are a matter of concern. There is obviously pressure on the cost side of the business. We are great believers that affordability and volume growth are fundamental to business success in this country. So, to the extent possible, pricing — delivering great value — has to be protected and nurtured. So what we are trying to do is every time when there is cost pressure, we ask ourselves what else can we do in the business to cut costs. So, a price increase is the last decision and not the first decision. So we try harder and harder to squeeze costs out everywhere else in the business. And we have done that.

The measure of that is the fact that if you look at specific cost inflation at Cadbury India, our price increase has been materially less than the cost inflation. In any company, there is always cost to be saved. You never quite reach a position where you can say now there is no more cost to be saved. And, you have to attack with that philosophy.

Are low price points also an issue to do with coinage?

Consumers in this country, I have come to the belief, buy SKUs (stock keeping units) first and brands second. They buy a commodity at Rs 2. If this brand is not available at this price point, they will buy some other brand at Rs 2. So, you are in the market for an SKU first very often, and the brand second. Therefore, getting price points right is fundamental.

What happens to brand loyalty then?

I don't think you can ever say that brand loyalty is not there. A brand may be relevant to me. But if it is outside my price matrix, then it is not as relevant to me. Particularly in India; if you start getting into lower price points, affordability is fundamental. It may be less relevant when you go from Rs 40 to Rs 45 or Rs 45 to Rs 50. If a consumer has two rupees in his pocket, and the product price is Rs 3, the company is out of the market for that consumer.

So, you straddle the entire price spectrum?

Yes. We must. If you want to be a 70 per cent player in the chocolate category, you can't really be a minor player.

So many categories are morphing, some are encroaching on chocolates. What are you doing to safeguard your brands, your territories and categories?

Our gameplan is to stay in confectionery. And I think, as long as we can create adequate excitement with confectionery, we can be there. So we are not really looking at leveraging our brands into other categories at this point in time. I don't see any reason why I need to look for horizons or opportunities beyond my core portfolio where the home opportunity is so large (he refers to low per capita consumption in India of basic chocolate — 54 gm vs 10.5 kg in the UK). Our strategy is to make sure that our offerings are exciting. Globally, one can find Cadbury chocolate-coated biscuits and Cadbury ice-cream in the UK. As a business model, it is not alien to Cadbury. But, the question is whether it is relevant to the Indian business? At this point of time, no. However, I am not saying it is totally irrelevant. But there are far more exciting opportunities for growth than going and doing a slugfest with somebody else in his own turf. So, there is enough and more for us.

The brand had a scare few years ago on the issue of worms found in your chocolate. What are you doing to safeguard your brand from any such scare?

We now really try to raise the commitment to deliver quality. If you look at packaging, from an environmentalist's perspective, one can argue that our packaging is over-engineered. If you open a pack of our Dairy Milk, you will see three layers. We have to be absolutely certain that both technically and visibly, we deliver the consumer a product that is safe. And the level of testing that we do in product and packaging development today, and the rigour of process that we go through for any new product development, has been significantly scaled up.

How does the Indian market compare with other markets you are dealing with as President for Asia?

In terms of consumption of our categories, India is one of the lowest. The per capita consumption here is lower than that of Pakistan, and one-tenth of that in Sri Lanka, and less than Malaysia, Singapore and China. For this, ultimately, the economy and income is only one dimension of the access. There are other dimensions: the kind of marketing investment and the kind of offers people have made over the years to drive consumption. Having a larger affordable portfolio helps to develop much faster.

I have spent many years in consumer goods marketing with brands such as Wheel (Hindustan Unilever) and I have seen how markets have emerged. The biggest points of inflexion in this country are disruptions on affordability… from the Nirma story, giving a detergent power at one-third the price of Surf. In India, the pyramid is such that a one per cent drop in price multiplies the percentage of the population you appeal to. I have just started going towards the bottom now.

Do small packs contribute significantly to your revenues and volumes?

Yes. They contribute a very material amount. I think for the CDM (Cadbury Dairy Milk) brand, I would say that the Rs 2-pack could be almost 15 per cent of the volumes of the brand now. And, it's been in the market only for the last 15 months. The less-than-Rs 2 price is about 7- 8 per cent of the market. This happened only recently. Only when aspirational brands have offers which are accessible, the market explosion truly happens. I think there is enormous opportunity at that end of the market. In fact, India is the kind of market where there is a massive opportunity at the top, the middle and the bottom, and you can't choose and say I will play only in one. With a 70 per cent share, you have to play all.

This low unit price market has always been there, always existed. Why is it that marketers such as you have only of late come in to the market with such offerings?

For people from outside, it may be very obvious. But people sitting inside the business are constantly looking for avenues of opportunities. Moreover, playing a low unit price strategy requires a change in manufacturing mindset. It requires different kinds of machines, different kinds of packaging, and the supply chain has to ensure distribution and availability. And, I suppose, for anything there is a time.

This new Perk you launched, is a volume game? Are margins very slender for that or reasonable?

Reasonable. We wouldn't do it if not reasonable. But, at the same time, every SKU need not have the same margin either. Bournville may have a higher margin, and on my CDM Rs 2-pack, I may be very happy taking a lower margin because accessibility becomes the key priority there. However, fundamentally, category development is about the volume game. And, volume growth is the real growth. And our strategy for growth is to put more grams into more mouths!

With chocolates coming in Rs 2 packs now, are you encroaching on the confectionery space?

I don't know if we can call it encroachment. But, confectionery is morphing. Within confectionery, we have chocolates, sweets, fruit-flavoured, chocolate-flavoured and chewing gum ... so there is a whole gamut. And, there is no blurring even there. So, it could encroach on confectionery. But, in confectionery the bulk of the market is 50 paise. As I said, consumers go in for SKUs. A small part of it is from Re 1.

What's happening at the premium end? You have Lindt making a foray, then you have brands such as Snickers and Bounty coming in. May be they are more expensive than your offerings, but can take away share at the top end?

Lindt is going to come into the market in a measured way. But, the other brands you are talking about, have been there for more than a decade. So consumers who wanted to upgrade to those would have done it by now. Our strategy is to grow the chocolate market. So, we will keep looking for opportunities. Driving Bournville at the top end of the market is one of our strategies. We believe that consumers have reached the stage to buy at that price, and for their taste to evolve from pure milk chocolate to darker chocolate. So, that's our reading of the evolution of the consumer, both economically and in terms of taste. And therefore we are doing that. That was not in response to anybody else. And, ultimately, at the end of the day, if you were to do a test and ask consumers what is the best taste in chocolate in the Indian market ... they would say Cadbury Dairy Milk. So our objective is to make sure that CDM remains the best taste in the Indian chocolate market in the Indian consumer's mind.

But your competition comes not just from competing brands but also from other categories, doesn't it, perhaps even from a phone card?

They continue to come. If Kellog's offers chocolate-coated cereal ... it is competition. If Britannia launches biscuits coated with chocolate, it is competition. So, those kinds of things keep coming. I think, we have to stay steadfast.

The real choice that today's teenagers make is that if they have Rs 5 or Rs 10 to spend, whether to spend it on a chocolate or a telephone recharge card to speak to someone … so what do you do? I can't be a better mobile phone service provider, so I have to ensure that my categories create as much if not more excitement than other offerings in the market. You protect your share of that wallet.

The moment you stop innovating, you don't have exciting advertising, you don't have exciting packaging or display at the point of buying in the store; it's not impossible for somebody to go for a completely different category, not just brand, and buy something else that excites them. Ultimately, you are looking for a treat...that gives a bit of fun. So, the strategy for us is to remain in the forefront of innovation and excitement.

So, the slowdown has not impacted you or the chocolates category at all?

We do not see any slowdown. Even our top-end offerings are growing at the same rate that they did in the earlier three years. I think business is harder to come by... you have to work harder to deliver the same business that you delivered two years ago. You have to think harder, innovate harder and distribute harder... if you just sit back, the sales slow down. I can tell you that.

But, the Indian market still lacks the breadth and variety in chocolates that is on offer abroad?

Generally speaking, if you go to a Western shelf or a supermarket shelf, the range is quite mind boggling....you are hard-pressed to choose what to buy. So, in the West, any category is far more fragmented. It's not just for confectionery, it's true of shampoo, it's true of detergent, it's true of toothpaste, and almost every single thing. That's partly because you need a segment size that is adequate to build a business.

How much does modern trade contribute to your revenues?

It's about 10 per cent... because of the slowdown and some closures and consolidations which happened, the growth, which used to be around 60-70 per cent, came down a little. But, it got back to its original levels from the middle of this year. The consolidation is over, no one is closing any store now, they may be slow and selective on expansion.

You said that you want to be self-sufficient in your supply of cocoa eventually... what are you doing on the ground?

The four southern States of India fall within what we call a cocoa sweet spot in the world. Cocoa grows in plus-minus 15 degrees of the Equator ... like the Ivory Coast, Indonesia, Malaysia... So, fundamentally these States are appropriate areas to grow cocoa.

A couple of things happened - one is the inclusion of cocoa under the National Horticultural Mission. Second is the fact that the agricultural research universities have found that cocoa works as a brilliant interplant with coconut. One cocoa tree in the middle of coconut trees makes for great synergy. Both help each other. Cocoa takes one-third of the water that a coconut tree takes and improves the yield per hectare for the farmer by 50 to 100 per cent. So, this is a massive initiative and investment for Cadbury to make India self-sufficient in cocoa.

As your sales go up will you increase your ad spends?

We have to. Going back to the point of creating excitement, what we have done consciously is we have chosen to focus on the power brands. Out of the 10 also, if you look at our top five brands, we have increased the advertising support exponentially.

Our ad spend growth has far exceeded our sales growth. In fact, we see it as fundamental to category development. We are great believers in aggressive marketing support. Year to date it would have grown by about 30 per cent or so.

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