Despite quite a few brands in its portfolio, the FMCG major couldn’t take off in India because of the disagreement between the two partners
There’s an interesting section on the website of Henkel India, the fast moving consumer goods company that is in the midst of a takeover bid. It’s called ‘Responsibility all along the line’. It shows in graphic detail the coordination between various elements of the product value chain — from research & development to sourcing, manufacturing, distribution, consumption and even disposal. Henkel describes it as its sustainability stewardship. An end-to-end model that factors in every process of the product life cycle.
While the concept has been articulated well in theory, it hardly appears to have been emulated on the ground.
Henkel, a joint venture between the Dusseldorf-based Henkel AG and the Chennai-based A C Muthaiah group, and the owner of brands such as Chek, Margo and Neem Active, has been grappling with quite a few problems — an underperforming business, mounting losses, huge debt, and a set of products that hardly evoke recall beyond the south and the east.
Sample this: For the year ended December 31, 2010, Henkel India’s consolidated net sales were down almost 10 per cent to Rs 533 crore. It continued its downward spiral at the operating level, posting a loss of Rs 23 crore for the period under review. Cost of debt was higher for the year at Rs 28.89 crore versus Rs 25.92 crore reported in 2009. What’s more — selling and distribution expenses were high at Rs 227 crore pointing to possible inefficiencies in the distribution system.
Now how could one of the most successful fast moving consumer goods (FMCG) companies in the world, that is, Henkel AG, with a presence in 125 countries and total revenues of $21 billion falter so badly in one of the most promising geographies on the globe?
The answer, say persons in the know, lies in the relationship between the two partners. While Henkel AG was the majority shareholder in the JV with a 50.97 per cent stake, it still needed the guidance of the local partner - A C Muthiah - to help it steer the venture in a competitive market like India.
Formed 24 years ago, the joint venture was said to be the coming together of two formidable forces, one an international major with a strong footprint in Europe and North America, and a local company, which produced the raw materials that went into making detergents. Tamil Nadu Petroproducts (TPL), the firm through which the A C Muthaiah group held a 16.6 per cent stake till recently in Henkel India before offloading 14.9 per cent to Jyothy Laboratories (JLL), is a key producer of linear alkyl benzene (LAB) and caustic soda - both used to make detergents.
The move then of the Chennai-based group to get into a JV with Henkel AG was viewed as a forward integration into the FMCG business by it. For Henkel AG it meant stepping into the Indian market. This was further consolidated with the acquisition of Shaw Wallace’s Calcutta Chemical Company in 2000, which gave the joint venture brands such as Chek, Margo and Neem Active toothpaste.
Despite this, executives from the A C Muthiah group say it had a limited role to play in the JV owing to its minority holding. Executives from the Chennai-based group say the German parent simply wasn’t devoting enough time and attention to the business. “For them it was a small dot in their universe,” says an executive from TPL.
This tug of war between the partners was clearly taking a toll on the business. For the 2010 calendar year, for instance, both laundry & home care and beauty & personal care - the segments where Henkel India operates - saw a 10.1 per cent and 9.3 per cent drop in net sales respectively.
Analysts cite the increasing competition in the two segments especially from the likes of Hindustan Unilever (HUL) & Procter & Gamble (P&G) for the drop in sales. In 2010, for instance, both HUL and P&G waged a price war to capture share. Both dropped prices by almost 25-30 per cent in key brands such as Tide Naturals and Rin. The resultant war hit companies such as Henkel too who had to drop prices to stay competitive.
While pricing power has been an issue, Henkel’s inability to expand reach beyond the south and the east has also been worrisome. Its distributors number 750 in all - mainly concentrated in the urban pockets of the two regions. Compare this with JLL, which has a total distributor strength of 3,500, and the game plan is to ramp up further.
The eventual buyer of Henkel AG’s 50.97 per cent will control the Indian brands and will pay a licence fee for using Henkel’s international brands such as Pril, Fa, Mr White and Henko. While winning the bid may not be that tough, the same can’t be said about turning around the company.
