Elder Health Care is heralding a brave new age in the FMCG space — selling licensed brands of likely competitors. Will the strategy pay off?
What is common between pan-Asia superbrand Tiger Balm, Shahnaz Hussain’s Fair One cream and beautician Vandana Luthra’s deodorant called Fuel? These are all brands retailed by Elder Health Care, the five year-old FMCG (fast-moving consumer goods) offshoot of Elder Pharmaceuticals.
The company wants to increase its size from less than Rs 100 crore now to Rs 500 crore by 2012-13, when it will add more verticals to its portfolio. In the near term, it will introduce its own skincare products.
The turning point came in 2004, when Elder Pharmaceuticals which was already retailing OTC (over-the-counter) products such as Tiger Balm, licensed Hussain’s Fair One, a fairness cream for the mass market (in the space ruled by Hindustan Unilever’s Fair & Lovely). While Hussain, the grand dame of Ayurveda, was on the lookout for a partner with a wide reach in the mass market for her skincare products, Elder Pharmaceuticals wanted brands to beef up its FMCG offerings. There was a good fit between the two.
But Elder Health Care Managing Director Anuj Saxena knew that the orientation of the company had to change from pharmaceutical products to FMCG if it wanted to do more such tie-ups. Distribution and communication had to be rethought. People were brought on board from FMCG companies to lead the drive. While the sales leader is from L’Oreal, the head of distribution is from CavinKare and the research honcho from Dabur.
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Reaching out
The challenge lay in getting the distribution act together. Though the sale network of Elder Pharmaceuticals amongst chemists had helped get Fair One on board, Elder Health Care had to build up its credibility with the FMCG trade — groceries, modern retail, beauticians and so on. Elder Health Care products can now be found in 450,000 outlets. It wants to expand the reach 10 per cent every quarter. In value terms, the company claims, modern trade provides it with 15 per cent of its revenues. “Distribution is the single most important factor in FMCG licensing. India has a huge number of stores, which requires a strong presence in the last leg for distribution to get serviced,” Franchise India President Gaurav Marya says.
This has helped Elder Health Care in-license more brands such as the deodorant range from VLCC, men’s hair colour brand Just For Men (JFM) from US-based Combe, Blistex lip balm from Blistex, and recently, BeYu from Innovative Cosmetic of Germany. Of these, Fuel, BeYu and JFM are sold only through modern retail stores such as hypermarkets, while the others through a mix of modern and traditional trade. The licensing partnerships range from purchasing the products from the licensor (BeYu); distribution rights, where advertising is paid for by the licensor (JFM); and royalty payments based on turnover which Elder earns by pricing the products for adequate margins and advertising them (Fuel and Fair One). Some products Elder manufactures in its factories and some it imports.
The licensed brands haven’t done badly. Tiger Balm is a market leader. Fair One has managed to corner 2 per cent of the crowded fairness market. Though rivals say Fair One is a ‘me-too’ product with no clear differentiation to offer, Elder Health Care has sets its target at 5 per cent market share by March 2010. With Fuel, the company says it has secured 4 per cent market share since its launch in March 2009 and done business of nearly Rs 9 crore. With BeYu, the premium cosmetics range that it retails out of 20 stores, Elder has sold Rs 7,000 worth of merchandise everyday in the first month.
Long-term relationship
One question begs an answer here: Is it wise to sell brands owned by others? Also, has Elder Health Care fortified the licensing contracts so that the licensor cannot take its brand back overnight? That could otherwise punch a gaping hole in its portfolio. After all, most FMCG companies have steered clear of in-licensing brands. HDFC Securities Retail Research Head Deepal Jasani says it is a low-risk, low-return model. “Often such agreements are not saddled by inventory and the licensees sell according to demand, with sufficient mark-ups of the marketing costs that they incur.” He adds that even if two products out of five or seven licensed products click in the market, licensing could work out in the company’s favour. However, a rival points out, licensing seldom creates value for the shareholders.
Saxena refutes such fears: “Licensing is very much about building a long-term relationship with the licensor. The profits generated by the licensee’s efforts in building the brands will get passed on to the shareholders. Anyone who enters licensing for the short term would be the one not creating enough value for stakeholders because he will be in it for a quick buck without any idea of brand-building. But we are in it for the long term.” While Elder has agreements stretching to 20 years (“A lifetime in the FMCG business,” says Saxena), there are clauses in the licensing agreements for compensation to guard against any of the licensed brands pulling out.
Elder Health Care has used the licensed products to further its own brand recall. The marketing opportunity of readymade brands has ensured that the company can introduce itself as an FMCG player. “The licensed brands have enabled the company to establish its recall with distributors and vendors and given us the time to understand and build our resources for launching our own brands,” says Saxena.
There are clear signals that Elder Health Care wants to take the next step. In April 2010, it will roll out its own skincare range which will be priced a little more than Hindustan Unilever’s Lakme. To be sure, the company does have its own brands like the AM-PM oral care range. The licensed brands, the company feels, have built confidence in the trade for it to launch its own brands. “Licensing allows the licensees to piggyback on existing brands and to get recognised in the active trade space,” says Marya.
Marya also warns that Elder Health Care needs to make sure the licensed brands and its own don’t cannibalise each other. “Products which are differentiated for different target audiences should prevent such clashes,” says he. Elder Health Care says it has been spreading its products across different price points to avoid just that. It will, the company feels, ensure that extensions of brands such as Fair One will not be at loggerheads with a range like BeYu or its own imminent skincare brand, for example.
Beefing up its protfolio
In fact, several brand extensions and new launches have been planned out. Elder Health Care will reinforce its men’s personal care products through Fuel and JFM with shaving gels and after-shave balms. More eau de toilette and deodorant brands with other companies would beef up the portfolio. “We will have at least two or three ranges in terms of benefits and price in the grooming segments we are present in,” says Saxena. While JFM dyes come for Rs 450, Fuel deodorant costs Rs 140, with their extensions expected to be priced in similar brackets. BeYu retails for anything between Rs 500 and Rs 1,500, while Fair One sells for Rs 35 to 70.
Even with differentiated products, Elder Health Care knows it has to highlight its own brand. It came up with a new logo in September 2009, which flashes after TV commercials of its products. While it has taken five of its brands to the mass media (it spends around Rs 8 to 10 crore per brand a year), its mass-media spends are still lower than those of other players such as Emami which is present in two of Elder’s product categories — headache balms and men’s fairness cream — and spends Rs 20 crore on each of its brands. Emami Director Mohan Goenka believes that mass media is imperative for products such as its Fair & Handsome men’s fairness cream.
But Elder Health Care is looking to other below-the-line measures to optimise spends and effectiveness. With Maverick Productions — the Elder Group’s event management company which is also run by Saxena — Elder Health Care manages to save 20 to 25 per cent in tailoring events to promote its brands compared to hiring an outside agency. So, Fair One recently launched a beauty pageant that would culminate in regional winners vying for a ‘Miss India’ title in April next year. For its premium BeYu collection, Elder arranged the BeYu Fashion Awards and Fashion Weekend in November to underline the brand’s affinity with the fashion world. The Fair One contest in Mumbai saw orders shoot up by 50 per cent the day after the event. Such events get the brand recognised in a more lasting way, feels Saxena. “The Fair One pageant, for example, is a great vehicle for brand awareness as it would mean word of mouth among participants, their families, the media and trade partners. At the same time it would also provide fresh talent for Maverick’s productions,” he notes.
So, is this the road ahead for the FMCG business?