Notebook battles

ITC is leveraging its retail strengths to grow its stationery business

In search of paper to pack its cigarettes, ITC had set up a pulpwood plantation and paperboard factory at Bhadrachalam in Andhra Pradesh in 1975. In 2010, the plant not only supplies the bulk of packaging paper to India’s manufacturing industry but also fuels another revenue stream for ITC — stationery. Somewhat lost in the noise of ITC’s cigarette, fast-moving consumer goods, food and retail divisions, it has quietly reached Rs500 crore in size.

The paper is sourced from Bhadrachalam and another unit in Coimbatore. And there are two brands: Classmate for notebooks and Paperkraft for photocopier paper. The first caters to school kids and the second to offices. While brands have always had a strong presence in office stationery, the other segment is more of a commodity. Seldom does a customer ask for a notebook by its brand. Thus, though it accounts for two-thirds of the Rs11,000-crore stationery market, the notebook segment is largely populated by unbranded Chinese and regional players. Their share is as high as 75 per cent; the rest is with a handful of national brands like Navneet and now Classmate.

Still, ITC thinks it has breached the market; the task ahead would be to grow at the expense of local and Chinese brands. ITC Education & Stationery Products CEO Chand Das says: “The most challenging legwork in the stationery business has been done and that is in notebooks.” ITC also had a greeting cards business which it wound up in 2008 after e-mail and SMS dealt a body blow to the whole industry.

Playing on strengths ITC had to design its stationery strategy to suit its strengths of marketing and distribution. “Office stationery banks more on price wars and the muscle of the office product distributor. Our strength is in retail marketing because our sales and marketing teams have expertise in FMCG. Hence, Classmate is our focus brand because notebooks and writing instruments are FMCG-like,” says Das.

ITC claims it clocked around Rs480 crore in notebook sales in 2009-2010 (Rs300 crore net of excise), up from Rs400 crore the year before. So, the company grew 20 per cent during the period, which is double the industry’s growth of 10 per cent. Paper experts say the market for notebooks is well penetrated; as a result, it will grow around the same rate as the country’s gross domestic product. However, with education being a prime focus of the United Progressive Alliance’s Bharat Nirman programme, most of them expect this growth to continue for some years.

ITC has identified the different needs in the market, which is evident from the variants that Classmate has. Buying for new school sessions vary across India. In the North-East, it is in November and December; in the East, it goes on till January and February; in the North, it starts in February and March; and in the South and West the sales begin in April and May. Not just the seasonality in the different markets, ITC has also adopted its portfolio to local preferences. “We have a range with 350 variants of notebooks based on different sizes, bindings, rulings and page numbers. Students in North India use notebooks with different sizes and bindings from students in Assam, for example. Replicating this alone would be an entry barrier in a category that is highly seasonal,” says Das. One of the first national brands in notebooks, Navneet too has over 300 stock-keeping units (SKUs). Navneet’s owner, Shailendra Gala, says: “Having so many SKUs is necessary for a national player because the requirements of different school boards differ, especially among the state boards.”

A number of outsourced small-scale manufacturers means no single manufacturer has to bother with more than 15 to 20 variants at a time. ITC consolidates its off-season products to a central warehouse in Hyderabad before dispatching them as and when required to the regional warehouses.

ITC has moulded its distribution after the FMCG sector. “We appointed distributors based on how well they are able to service the retailers,” recalls Das. Traditionally, companies would sell to wholesalers who would distribute in the last mile; but ITC eschewed that route. Instead, it chose to distribute its products directly to retailers. The obvious benefit is that the company has cut out the wholesaler’s margin, which can help it offer better terms to the retailer. But there could be more to it: it helps ITC’s sales team keep a watch on replenishments, merchandising and trade schemes to push sales. Out of a universe of 100,000 retailers, ITC reaches 75,000 of them. Rivals with a national footprint reach around 60,000 outlets.

So far, the direct-to-retailer model seems to have worked. The North-East is one of its strongest markets which not many branded players address. However, in the crowded markets of metros like Mumbai, it does not lead in market shares. “There are players who have been in the market for the last 15 years with strong distributors. So, even if I lead nationally, in Mumbai I am not the market leader,” says Das.

ITC has moved to augment the Classmate portfolio with pens, pencils and geometry boxes. Next up would be art material. But there is a vital difference: These are not as commoditised as notebooks. Seventy per cent of the Rs2,600-crore market for pens, for instance, is with branded players. Brands like Reynolds and Cello are well entrenched in the market, and it will not be easy for ITC to dislodge them. Geometry and art boxes, which together make a Rs2,000-crore market, are dominated by national brands like Camlin. So, the rules of the game here could be different for ITC than in notebooks.

To be sure, ITC is not the first to extend its stationery brand to pens, pencils and so on. Navneet (under the Fun brand) and Gautam Thapar-controlled Ballarpur Industries (it is the country’s largest paper company) too have tried their hand at writing instruments and art materials. But their market shares are nothing to write home about. But then these products are mainly added to augment the basket they offer to the distributors. The only synergy between the two is distribution; ITC sources pens, geometry boxes and so on from low-cost producers in countries such as China, Malaysia and South Korea. ITC has not made much headway with around 10 variants of pens/pencils in the year of their launch but hopes to change that by adding 30 more variants to the range. With writing instruments, the company would tap into groceries, 6,000 e-choupal outlets (village communities with an internet connection) and its 23 Choupal Sagars that its cigarettes and other products already reach to address the rural market.

Its presence in writing instruments will pit it against players such as Reynolds which have used celebrities in the past. Above-the-line communication will be needed to rise. Aware of the challenge, ITC is now sprucing up its mass media advertising, earmarking up to 4 per cent of its revenue on promotions. It has signed on actor Soha Ali Khan and cricketer Yuvraj Singh for a brand campaign. “For the first few years we had concentrated our firepower on below-the-line activities through schemes for retailers, merchandising and school and college contact programmes,” says Das. It has been in touch with a million students across 5,000 schools. The creative copy team of greeting cards has been taken on board to compose the content for notebooks — the covers of these carry information and trivia on different themes. And now it is ready to shift gears.

Green paper Meanwhile, ITC has fine-tuned its office stationery brand, Paperkraft, as well. It has positioned Paperkraft as the greenest paper for business applications such as copying, scanning, printing and faxing. The paper is bleached without chlorine to stem pollution at the Bhadrachalam plant. “It already has a capital-intensive plant in place; all ITC has to do is add value to the paper and brand it,” says Kotak Institutional Equities analyst Manoj Menon. But it is still early days for Paperkraft. It accounts for just Rs30 crore in the Rs1,800-crore office paper stationery market, or less than 2 per cent. It will continue to complement the stationery business but ITC is wary of getting into the volume game for fear of losing its premium. “Companies understand sustainability issues, which is why we have supplied to the likes of Tata Group, IBM and HSBC,” adds Das. The volumes in office stationery are with JK Paper (JK Savannah and JK Copier paper) and Ballarpur Industries (BILT Matrix notebooks and Royal Executive Bond paper).

“With Classmate and Paperkraft, ITC has given its paper-manufacturing a consumer-facing entity. As a result, it has both backward integration with its pulp mill and front-end connect with brands in the stationery space,” points out Menon. ITC has turned its access to pulpwood to its advantage. Das says: “Manufacturing paper pulp ourselves helped us develop the right quality of paper for the different products we have. So, for notebooks we have come up with paper that resists curling from rough use. The number of trials to get at the right quality would have been restricted if we depended on others for our raw material.” Economics from buying paper internally also make it more cost-effective.

However, differentiation will still remain a challenge. Gala says: “Even though we have been the first to market a lot of innovations such as tight binding and bring changes in distribution such as uniform pricing in all seasons, it is not a tall task to replicate these in the market.” Navneet lost its first-mover’s advantage as a result of more nimble-footed players such as ITC which got ahead (Navneet clocked a sale of Rs168 crore). Players are trying on different avatars to sink their teeth in the larger unorganised market to tap the quality-conscious consumer. Navneet has pencilled in on segmenting the market further with an economical range called Boss so that Navneet can take on a more premium image. Ballarpur Industries, on the other hand, claims to operate only in the premium space in both student and office stationery space. Ballarpur Industries Chief Operating Officer Yogesh Agarwal points out the reason: “Our bestseller, the Royal Executive Bond paper, paved the way. Printing and the way an office uses paper has completely changed. Today, users care more about the paper which goes into the machines like printer, fax and copier for consistent, glitch-free output. They don’t mind paying more for these traits. So, we did not have to scrimp on efforts to make it more user-friendly in packaging and qualities.”

Straddling office and student stationery, Ballarpur Industries has tried to expand its range by becoming a distributor for some leading foreign brands. “There is a sweet spot between branding everything on our own and bringing in well-known brands to widen the portfolio. The key is to make the distributor see the worth in the famous brands. It gives us a chance to cross-sell other products on the back of these,” adds Agarwal. While student notebooks and other products carry branding of Disney, MTV, Mattel’s Barbie and IPL franchises, its office supplies sport products from Stantdello, Rapid (staplers) and UHU (German leader in gluesticks).

Growth, so far at the cost of regional brands, may have been easy for ITC; the days ahead clearly will be tough.