Bajaj Corp plans to extend the hair-oil company into other personal care categories. Can it take on well-entrenched rivals?
When the Bajaj brothers, Rahul and Shishir, split their business in 2008, the sugar business, under Bajaj Hindusthan, went to Shishir Bajaj. It is the country’s largest sugar producer — more than double in size of its nearest rival. The business is driven by Shishir Bajaj’s elder son, Kushagra. Those who know him well will tell you that his appetite for growth is far from satiated. Some big ticket acquisitions could happen in the days to come.
In addition, father and son own and run Bajaj Corp. The closely-held hair oil company is a hidden gem. In 2008-09, it did a business of Rs 244 crore with a gross profit margin of 62 per cent and net profit margin of almost 20 per cent! The return on capital employed, at last count, was 188 per cent. Its Almond Drops is the largest brand in the fragrant hair oil market with a share of 51 per cent. It is the third-largest hair oil brand in the country after Marico’s Parachute and Dabur Amla.
This seems to have fuelled Kushagra Bajaj’s ambitions for the fast-moving consumer goods business. Sector experts expect Bajaj Corp to get into soaps, skincare, shampoos and other hair oils in the near future. Bajaj Corp is tightlipped about the new product lines. But it has filed a draft red herring prospectus with the Securities and Exchange Board of India for a public issue. This is where growth capital will come from. “The IPO will take the company to the next orbit. The personal care space in FMCG is far from saturation. We hope to tap that,” says Kushagra Bajaj.
Bajaj Corp’s strength is that it runs a tight ship. The company claims it has one of the lowest cost ratios in the industry. It is an asset-light business with low overheads. People costs are kept at a minimum with a lean team. Higher numbers of distributors’ salesmen in the sales team cut costs up to a third for the company. The challenge is to rein in raw material costs. Bajaj Corp Vice-president RF Hinger says: “Forward buying in liquid paraffin and bulk deals for packaging material and vegetable oils for every quarter help keep our costs in check.”
Also, unlike pure oils, Bajaj can price Almond Drops, which is scented and comes with added ingredients, at Rs 38 per 100ml, much higher than coconut oil which sells at Rs 21 per 100 ml. Only cooling oil (Himani Navratna and others) retails for more at around Rs 44 for 100 ml. The company operates three factories in Uttarakhand and Himachal Pradesh and hence gets substantial tax breaks. It reaches 1.5 million retail outlets in the country.
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Challenges ahead
Is this good enough for Bajaj Corp to get into new categories? The challenges are huge. One, expansion into soaps, shampoos and skincare will bring Bajaj Corp face to face with the might of multinational corporations like Unilever and Procter & Gamble. Hair oil, as it happens, is a uniquely South Asian product. As a result, it does not fit into the global product development plan of most multinationals. That’s why the Indian market is ruled by homespun companies like Marico (coconut oil), Dabur (amla oil), Bajaj Corp (fragrant oil) and Emami (cooling oil).
Two, Kushagra Bajaj has so far proved his mettle in sugar which is a commodity business; brands are a different ball game. Bajaj Corp, for instance, spent only Rs 18 crore in 2008-09 on advertising. On a turnover of Rs 244 crore, this works out to a little over 7 per cent of turnover. This is way below the 13-15 per cent norm in the FMCG business. Also, Bajaj Corp is largely a single brand company. Though it also has amla and jasmine hair oil as well as a tooth powder, almost 90 per cent of its business is Almond Drops.
But this could change in the days to come. The draft red herring prospectus, which lists the products for launch as 1, 2, 3 and 4, puts down the marketing budget for 2011 at a total of Rs 60.7 crore for the four products. That would be almost 20 per cent of its earning, should it continue with a 22 per cent growth rate. “For marketing, the top ten soap brands spend around Rs 600 crore in advertising every year. If we have to make noise, we need to have a similar budget. We will need at least 10 per cent share of the voice,” says Bajaj Corp Director (sales & marketing) Sumit Malhotra. This is where the IPO money will come in handy. Some developments suggest that the company is ready to step on the gas. It has signed on Lara Dutta for a new campaign. For its southern market, it has Ramya, the Kannada actor, advocating the oil’s nutrition and protection quotients.
A brand strategy is also in place. “We have identified categories in personal care in which we could extend Almond Drops. Segments in which we can’t, we will look to acquire brands or launch new ones,” says Malhotra. Bajaj Corp claims it has zeroed in on companies to acquire. For now, these would be brands that Bajaj Corp can retail through its existing system for better profitability through synergies. “We would be saving up to 5-7 per cent distribution costs that way,” says Malhotra. Its attempts at acquiring brands over the last two years did not meet with success. Naturally, it is reticent to delve into its current prospects. Bajaj Corp plans to divide the market into four zones for launch of its four products. “We looked at the kind of distribution we had. We were strong among grocers, so we could flop in launching a chemist-led product,” says Malhotra. Both extensions and new products would need to start in the markets the company is strong in — North, West and East. In the South, the company will work towards increasing the brand recall of Almond Drops.
Within hair oils, it is important for Bajaj Corp to get into new categories. Nielsen puts the branded hair oil market at Rs 4,943 crore and growing at 13 per cent. Of this, coconut oil is 52 per cent, amla 15 per cent, light or fragrant hair oil 14 per cent and cooling hair oil 12 per cent. If it wants to expand, Bajaj Corp cannot ignore the other categories. While the company is tightlipped about its plans, market observers say that cooling oil could be next on the company’s radar. “It is strong in the Hindi-speaking belt where cooling oil has a strong hold. Cooling oil is also priced higher than regular hair oils, in the same range as Bajaj Almond Drops,” says Technopak Advisors Associate Vice-president Purnendu Kumar. This segment has been growing at over 20 per cent per annum.
Crowded space
Emami Director Harsh Agarwal does not seem too bothered: “Our brand is strongly entrenched in the market, which makes it difficult for newcomers to carve a niche for themselves.” He adds that Marico and Dabur have both backed off from the segment. The brand is fortified with Shah Rukh Khan and Amitabh Bachchan as brand ambassadors.
Malhotra, on his part, rules out an entry into coconut oils for now. But he is confident that the brand equity of Almond Drops will fetch him customers in other categories as well. “The name of the game is conversion. You have to convert the person from the hair oil he or she is currently using. For us, it has to be other branded oil because of the premium pricing of Almond Drops.” he says. This is easier said than done, say rivals. Hair oil is bought largely by women who happen to be very loyal towards the brands they consume, and it takes a lot of persuasion to change their preferences.
Meanwhile, attracted by Almond Drops’ domination of the fragrant hair oil market, rivals have entered the segment. Marico with its Hair & Care light hair oil and Dabur with its Vatika are the latest entrants to the almond hair oil space. Says Dabur India Executive Director (consumer care) VS Sitaram: “We will leverage our herbal heritage for Vatika Almond oil since it is enriched with herbs.” Then there are imminent new brands such as Mumbai-based VVF’s newly acquired Mahabhringol oil which could be redone in a year’s time for launch. VVF also lays claim to backward linkages in oil-making, just like Marico in coconut oil.
Aware of the mounting competition, Bajaj Corp has begun to expand Almond Drops in the South. “The South being a stronghold for coconut oil, we had to offer something more wholesome,” says Malhotra. While southern markets account for 28 per cent of the overall hair oil market, light hair oils only get one per cent of their revenue from there. Brand ambassadors would also help make it younger, according to Kumar of Technopak. The company has done well in the other regional market of the East, where Dey’s Medical’s Keo Karpin, the second largest light hair oil, rules the roost. It has around 40 per cent of volume share and 43 per cent value share in this market.
Almond Drops’ unique selling proposition is its Vitamin E content that is claimed to be 300 times more nutritious than coconut oil. The ingredient open up possibilities for extensions in skin care such as creams and soaps, as it would for scalp and hair care products such as shampoos and creams, details of which will be let out after the IPO. To initiate further, Bajaj Corp is also pushing its smaller packs priced at Re 1 and Rs 5 in these regions. “The smaller units give around 7 to 8 per cent of total sales,” says Malhotra.
Emerging from a one-brand company to a multi-brand one would require Bajaj Corp to juggle priorities. Would it scatter its focus? Kumar of Technopak says: “It is better to diversify and leverage top-lines and economies of scale, rather than wait for margins to get hit with new player coming in.” Malhotra agrees, “Organic growth for our flagship hair oil brand, Almond Drops, is 30 per cent. But sooner or later, it will slow down to 13 per cent. For a boost, we have to look at inorganic means beyond the existing product, outside hair oils.” Well said, but can he deliver?