In December of 2010, multinational consumer goods firm Reckitt Benckiser announced that it was taking over Ahmedabad-based Paras Pharma for Rs 3,260 crore, almost eight times its sales then. The size of the deal left the business world gasping as Reckitt outbid homegrown rivals Dabur and Emami by far to clinch it. It was in some sense a culmination of the higher valuations that local fast moving consumer goods brands commanded over the years as MNCs scrambled for a slice of the action in a growing Indian market.
In the past two decades, a host of entrepreneurs sold their brands, some national, mostly regional to either hungry MNCs or to larger Indian companies. It started with Bisleri selling its popular brands such as Thums Up and Maaza in the early 1990s to Coca-Cola and gathered steam along the way (see chart).
Some of them stayed the course to emerge as large, national players in their own right: Wipro, which began life as a vegetable oil producer, is now an IT giant. Others such as Emami, Dabur, Marico and CavinKare today parlay strong brands in the Indian market. Many brands continue to thrive but largely in regional pockets; brands such as Gokul Santol, Aachi and Shakti masala in Tamil Nadu, Vadilal ice creams and Wagh Bakri tea in the western region, to name a few.
C.K. Ranganathan, Chairman & Managing Director, CavinKare Pvt Ltd, says it’s a clear signal that entrepreneurs want to cash out when the going is good. “If you see, most brands have sold out when they are on a high. Some times it is also to do with a lack of management vision and ability to grow beyond one’s market.”
Fundamentally, he says, it’s a fear of the unknown for entrepreneurs to grow beyond their local markets. For brand owners, say in Tamil Nadu, it was easy to scale up in the southern states; language and audience profile is similar. But, the big leap came when one had to tackle upcountry markets. The costs, especially of advertising, become prohibitive, he says. And, it’s at that stage, brand owners make a decision. “I think the same trend will continue; entrepreneurs will come to a certain scale and then sell out if they cannot expand,” he adds. Another reason for selling out is lack of a succession plan.
V.S. Sitaram, Operating Partner, India Equity Fund, a PE fund, and former COO of Dabur India, endorses this view. Says he: “A key reason is the financial risk involved in entering new markets. In FMCG, promoters have built up the business in their home market fairly slowly without taking large risks. When they target new markets they find entrenched competition and they see that the money required to break in is high and many don't want to take that risk. So they end up selling to companies with superior organisational and financial capabilities. Or they partner a PE firm (as Paras and Nilgiris did with Actis) to bring in additional risk capital and management talent.”
For kitchen appliance brand Preethi, which sold out to Philips two years ago, it was a decision to take the brand to new markets, from the South where it was strong. Vijay Srinivasan, then marketing director, says it was also a matter of timing to sell the brand. “Moreover, Philips has a far wider distribution network brands, and could take Preethi to new markets.”
As Sitaram says, in most instances it is management bandwidth and the inability to build a scalable organisation, which has led brand owners to sell. “So you have an entrepreneur who has had a great product/brand idea, successfully executed that strategy in one or two markets. But, he doesn’t have organisational capabilities to move into more markets due to several issues: supply chain, customer management, marketing, R&D. In a home market, the entrepreneur and one or two key employees were enough to make a success; but that is not enough when you enter multiple markets.”
And, today, it isn’t just about building brands nationally; it hurts at the local level as well. Says D. Shivakumar, former head of emerging markets, Nokia, “Media, and specifically, the explosion in TV, helped local brands, but now the cost of TV advertising has gone up and hurts building brands locally.” Any brand, he says, can only grow if it consistently innovates and surprises; if it does the thinking for the consumer in retail. “We will see more local brands, in apparel especially,” he adds.
But, as Shivakumar says, it’s not an imperative for all regional brands to scale up and be national players. Food brands, willy-nilly, will be regional. Says he: “Food is region specific and hence even big company brands like 3 Roses, Bru are more regional in nature. Kanan Devan (tea brand) is in Karnataka and Kerala, and in Andhra it is Gemini.”
There will always be regional brands as, Sitaram, says, “What we in India call a region is often bigger than many countries, so they are large markets. There will always be entrepreneurs who identify opportunities that the 'national' brands miss out on. Local tastes, habits, preferences will always enable such opportunities. But they will hit a growth challenge sometime or the other.”
But, as CavinKare’s Ranganathan says, this trend will continue in the future as well – brands will come up to a certain size and either they will scale up or sell out, a denouement played out several times over the past decade or two.