A sharp focus on cost, efficiency and productivity has worked well for brands such as Mr White, Henko, Margo, Pril and Fa'
In roughly 10 days from now, Henkel India will declare an operating profit for the quarter ended September 2011—the first time in its 20 years of existence in India.
Seven months after Jyothy Laboratories, better known as the maker of Ujala liquid cloth whiteners and Maxo mosquito repellents, acquired Henkel India, the turnaround is firmly on course. Henkel had an EBITDA margin of – 4 per cent when Jyothy took it over; today that has swung to 8 per cent and it may close the quarter with an EBITDA margin of 10 per cent. EBITDA is earnings before interest, tax, depreciation and amortisation.
Henkel has brands like Mr White, Henko, Margo, Pril and Fa, which have a good recall, but somehow never quite made money under the management of its German parent.
| THE FIVE STEPS TO TURNAROUND |
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‘‘We are in a turnaround phase. It has not happened yet. But the ship has changed direction,’’ says Ullas Kamath, deputy MD, Jyothy, and widely known as Founder M.P. Ramachandran’s Man Friday.
In the process, Jyothy has erased all initial impressions that the relatively small company had bitten more than it can chew. So how did the turnaround happen? The answer: by driving efficiencies and cutting costs in production, procurement, logistics, advertising and a change in Henkel’s MNC culture, which has helped Jyothy get more out of its sales team.
In case all this sounds predictable jargons, here are the specifics.
Take production. Henkel had a centralised production; it had a plant in Karaikal in Puducherry to serve the entire country. In Europe, Henkel outsources production but when it set up shop in India in 1991, it wasn’t sure of the quality it would get and so it opted for a single plant. But this also meant that logistics costs were so heavy that they wiped out 10 per cent margins. As a first step, Jyothy has decentralised production to its units (it has 28 units in 16 states), including whatever production it was outsourcing.
‘‘We have taken over the production, whatever they are good at, we are continuing. But we have changed their procurement policy, production policies, and some processes,’’ says Kamath. With joint sourcing, which has increased volumes, the new Henkel has cut its procurement cost. Kamath says that Jyothy is able to get the best prices as it negotiates with suppliers upfront and pays them cash. Similarly, to cut Henkel’s distribution costs, Jyothy has extended its learning in the way it manages its logistics costs.
For instance, when it procures raw material, and a truck comes to deliver them to its factory, Jyothy negotiates for the truck to carry the finished goods back. ‘‘We ask them to send the raw material on such and such day when we are ready to load our finished goods, so what rate you can give,’’ says Kamath. In most factories, the vehicle unloads the raw material, and goes back even though the truck operator charges freight for both ways. This way, Jyothy has been able to bring efficiency in its distribution costs.
Besides, in most states, Jyothy has its godowns. These are also being used by Henkel, which has helped it reduce 3 per cent of its distribution costs. Jyothy is also trying to revamp Henkel’s advertising. It has changed all its advertising agencies but for one. ‘‘We felt that new thinking and new ideas have to come. We are working on new creatives. It has helped us save some costs,’’ Kamath says. While one account has gone to Mudra, one to TBWA, another one will go to Publicis or Rediffusion.
The transition required a change in the organisational culture and attitudes at Henkel. ‘‘The employees were good, but they were following the footsteps of an MNC, where the culture is different. An MNC is never starved for money, and rarely borrows. It may not know the cost of capital,’’ says Kamath. Unlike that, Indian companies’ borrowing cost is 12-13 per cent; so they are constantly thinking, if I employ this capital, what kind of returns can it generate. Jyothy calls its employees entrepreneurs and the venture an “enterprise of entrepreneurs” so that everyone knows the value of money.
Jyothy often tells its sales force: your salary comes from this bottle, not from the bank. So respect that bottle. If you sell more, chances are that you will get a better increment.
To sell more, you need to visit more shops. It also tells its salesmen that your costs—your salary, travelling expenses, allowances—should not exceed 3 per cent of sales. ‘‘In an MNC culture, such things do not exist because they say my job is to do this, my job is do that. And it’s a five-day culture,’’ says Kamath.
Jyothy is not against the five-day culture but feels FMCG is a 24X7, 365 days business. ‘‘Every day, there’s new competition, you need new strategy, new thinking. You should be ahead of others. You are working for five days but the market is open all seven days as they expect a customer every day,’’ says Kamath.
| THE FIVE STEPS TO TURNAROUND * Decentralised production to lower logistics costs. Henkel had a centralised production; it had a plant in Karaikal in Puducherry to serve the entire country. Jyothy has decentralised production to 28 units in 16 states. * Joint sourcing has increased volumes and cut procurement cost. Jyothy is able to get the best prices as it negotiates with suppliers upfront and pays them cash * When it procures raw material, and a truck comes to deliver them to its factory, Jyothy negotiates for the truck to carry the finished goods back. This is contrary to the practice in most factories where the vehicle unloads the raw material, and goes back even though the truck operator charges freight for both ways |
* Jyothy has told its salesmen that their costs — salary, travelling expenses, allowances— should not exceed 3% of sales
* Sales force of both the companies will be integrated. From April 1 next year, Jyothy plans to raise distributors’ margins on Henkel products from 5% to 6% and cut margins on Jyothy’s products from 8% to 6%
‘‘In the Indian context companies like Jyothy Laboratories cannot afford to have that comfort zone,’’ says Kamath.
Since, Jyothy started with its founder’s Rs 5000-capital and has come the hard way, it is always thinking of how it can make its money sweat more. Jyothy has tried to drive home this business philosophy to Henkel employees.
Many people in Henkel have left as they felt it is difficult to work in an Indian company. ‘‘The people were fine, but were not fitting into our kind of culture,’’ says Kamath. Henkel had 475 people, only 225 are left now. Those who have stayed back are hardcore sales people, and are rising up to the challenge, covering more shops per day. This is working: revenues are up 25 per cent and Henkel should do annualised sales of Rs 500 crore, up from Rs 395 crore when it was acquired. ‘‘I am clocking a 25 per cent run rate growth with decreased cost of production, decreased cost of distribution, and decreased cost of employees,’’ says Kamath.
‘‘In Henkel, there were lot of things which was going waste—guest houses, club memberships, big cars, drivers, secretaries. In today’s internet world, why do you need a secretary. They don’t come cheap,’’ says an insider.
Kamath says the turnaround will take full shape by March 31, 2012. But profitability will start coming in by September quarter, when it turns EBITDA positive. Jyothy is trying to integrate the sales and distribution of the two companies. In some areas, it has taken over but in states where Henkel is strong, Jyothy has left them alone. For instance, Henkel is extremely strong in South and East, but not so strong in North and West. This will go on till March 2012, when Henkel’s EBITDA margins are likely to come in line with Jyothy’s margin of 16-18 per cent. At this point, they are at 8.8 per cent.
From April 1, 2012, all the areas will be merged as one as Jyothy plans to merge the two companies. Jyothy’s distributors will start selling Henkel’s products and Henkel distributors will sell Jyothy’s products. ‘‘It is better to have a distributor who has a small area but all the products. Servicing retailers will be easier and cheaper,’’ says Kamath. Jyothy plans to raise distributors’ margins on Henkel products from 5 per cent to 6 per cent and cut margins on Jyothy’s products from 8 per cent to 6 per cent.
Jyothy also had a super stockist in some markets. Now, it is using Henkel’s godowns and its mother depots to supply goods so that the super stockist it used to pay 5 per cent margin will not be there from April 1, 2012. That will be a big saving for Jyothy as the super stockist accounted for 65 per cent of its Rs 800-crore sales in North India and East India. Jyothy will save 5 per cent or Rs 26 crore.
All these synergies will come in when it starts working together, with its entire product portfolio from April 2012.
There will be saving on other fronts, too. When Jyothy produces all the products from the same factory, its fixed costs will get absorbed by a bigger turnover. Similarly, when the same salesman sells seven more products, even if he makes fewer calls a day, Jyothy’s operating costs will come down. Decentralised production will lower logistics costs. ‘‘We are everywhere because diesel is the killer. When you bring the raw material (soda ash) coast to coast, and send the finished goods from coast to coast. your freight costs can be 20 per cent; you need to be careful,’’ says Kamath.
As Jyothy consolidates Henkel’s presence in North and West India, there could be a one-time spike of 40 per cent in sales in 2012-013, thereafter it expects to grow the business steadily at 20 per cent. A good thing for Jyothy is that Henkel India has accumulated losses of Rs 500 crore, which can be offset against Jyothy’s profits. A carry forward loss of Rs 500 crore is as good as earning Rs 150 crore (tax benefit – 30 per cent). Jyothy’s tax liability is around Rs 22-23 crore, which will go up post-merger. Still the tax shield is good enough to offset Jyothy’s tax liability for three-four years.
Strategically, the Henkel acquisition was very important for Jyothy as it brought brands and categories that could help it break into the big league. When it has 10 brands and four categories (fabric care, household insecticide, surface cleaning, personal care) it can reach everybody’s home. In fabric care, for instance, Jyothy will have brands starting from Check at Rs 40 a kg, Ujala, Mr White, Henko and Henkomatic at Rs 220 a kg—giving it a presence across price points.
Henkel has given it access to brands with high recall with a base turnover of Rs 400 crore. Can Jyothy make it Rs 4,000 crore in the next 10 years? ‘‘Rs 400 crore to Rs 4,000 crore is easy because from Rs 100 crore to Rs 800 crore, we had only two brands. Rs 400 crore to Rs 4,000 crore, I now have seven brands,’’ says Kamath.
Many people will be closely tracking that figure.
