Patanjali Ayurved, started in 2006 by the famous Yoga Guru Baba Ramdev, has seen a meteoric rise in the past few years with revenues of ₹5,000 crore in FY16 from ₹450 crore in FY12. While Patanjali’s combination of low prices, ‘natural and pure’ proposition and ‘ swadeshi ’ positioning are widely acknowledged to be the reasons behind success, what is not that well known is the critical role played by Patanjali’s path-breaking sales and distribution strategy in driving this exceptional growth trajectory.

Patanjali can offer low prices to consumers due to very low selling, administrative and general costs at 2.5 per cent of revenues. Advertising spend in FY 16 at 6 per cent is also well below the peer set. Critically, it has kept retail margins at half or lower levels as compared to competition. The focus of the article is to demystify how Patanjali scaled up distribution in an intensely competitive retail FMCG environment in India despite low retail and A&P spends.

Distribution strategy Patanjali has followed a two-stage distribution strategy in general trade (GT):

Stage 1: Create a strong alternative distribution system for demand creation and building word-of-mouth advocates

Stage 2: Pivot to GT once a sizeable consumer base is generated from Stage 1

Another distribution system In a new market, Patanjali first drives trials and consumption using dedicated stores. These stores are essentially Ayurveda clinics, run by entrepreneurs entirely with their own investment. They are of three types – Arogya Kendra, Chikitsalaya and Swadeshi Kendras.

Patanjali extends support in two ways: It trains and certifies medical practitioners nominated by these stores in Ayurveda, and provides usage of the Patanjali brand name. This automatically bestows trust and credibility due to the rub-off effect of Baba Ramdev’s credentials on Yoga and Ayurveda.

In return, these stores provide various services. One is free consultation by certified medical practitioners. This assures high footfalls and likelihood of building a large scale of early adopters. It serves as a retail store. The entire range of around 200-260 SKUs is stocked across both OTC, pharmaceutical and FMCG products and there is typically a weekly replenishment cycle. There is skillful cross-selling across pharmaceutical and FMCG products. The presence of Ayurvedic medical practitioners at the outlet is a major determinant of sales. On the days when the medical practitioner is absent, sales fall 30-40 per cent! The average FMCG throughput per dedicated store is typically at ₹6-7 lakh per month in a metro.

A powerful network effect is seen at these stores. Early adopters bring in additional footfalls through strong word of mouth. The fact that a trustworthy consultation is free in an important area such as healthcare provides a strong hook for passing on recommendations to friends and relatives.

These stores also serve another function – product introductions are done extremely efficiently and decisions to continue tweaking or scaling up the product and communication mix can happen in a short time frame.

Currently, 10,000 dedicated stores (Chikitsalaya, Arogya Kendra, and Swadeshi Kendras) contribute to 60 per cent of the company’s revenues. In Delhi NCR, one of the older markets for Patanjali, there are over 400 of these stores whereas in a newer market such as Mumbai, there are approximately 270 stores.

The pivot to GT Once a sizeable consumer base is built through these dedicated stores, these consumers would expect Patanjali’s products to be available at general stores, grocers and chemists in the vicinity of the dedicated store. These retailers are then forced to stock up on Patanjali’s products for fear of losing out on a customer’s goodwill. This builds a platform for the next stage of growth.

Various towns are at different stages of evolution. For instance, the company’s biggest market, Delhi NCR, is in Stage 2 and is responsible for revenue of ₹1,500 crore.

In 2013, dedicated stores contributed to 80 per cent of total FMCG sales across GT and the dedicated store network. As consumer awareness and pull were created, GT started stocking Patanjali’s top products (oral care and honey) despite uncompetitive margins. This pivot to GT continued resulting in dedicated stores’ contribution falling to around 45 per cent today.

Mumbai is still a Stage 1 market; dedicated stores contribute to around 70 per cent of FMCG sales across the GT and dedicated store network. As consumer trials and consumer pull is created, it is increasingly evident that availability in general trade would increase. Higher incidences of placards outside several outlets stating ‘Patanjali products are available here’ bear testimony to the same.

Alternative channels While Patanjali’s scorching pace of growth has stupefied most FMCG players, the concept of winning in alternative distribution channels is not new. Select players have adopted a “flanker” strategy to bypass competition, entrench their position, encircle and then launch a frontal attack in mainstream channels.

Notable examples include Starbucks’ consumer packaged goods (CPG) business. Starbucks leveraged its retail store footprint to build a flourishing CPG business. The intent was to capture a larger share of coffee consumption – reaching consumers whenever they want great coffee.

The stores provided a perfect platform to drive effective sampling and build partnerships with retail consumers. Starbucks then enhanced availability through a tie-up with the CPG giant Kraft. Today, with its own network, these at-home consumption products are now available in grocery stores, airports, hotels, and convenience stores as well.

In the case of Yellow Diamond Wafers, the company targeted a relatively lesser contested space – smaller mom-and-pop retailers within the intensely competitive wafers market. Yellow Diamond also provided higher margins than competition to ensure a very high shop share with those retailers. In six years, Yellow Diamond grew to ₹700 crore. Yellow Diamond is now planning to enter the more mainstream bigger retailers.

Developing an alternative channel strategy can help a company create white-space opportunities and dominate them. This approach is valid both for incumbents as well as new entrants into the FMCG market. The question is “will a company take risks in a blue ocean and enjoy the associated upsides or will it try to compete in a red ocean with a classical sales and distribution approach”? Time and risk appetite will separate the winners from the rest of the pack.

(Pankaj Gupta is a Sr. Practice Head of the Consumer & Retail Practice at Tata Strategic. Deepak Himan is an Engagement Manager while Vasant Ramadoss is an Associate Consultant at the same division)