Analysts positive about the company’s strategy to focus on three categories across three geographies.
While announcing the termination of its licensing agreement with Sara Lee for Kiwi and Kiwi Kleen brands earlier in the week, Chairman of the Godrej Consumer Products Adi Godrej said the development would only help the company concentrate on its three-by-three (3x3) strategy.
Under this, the company plans to strengthen its presence in emerging markets in Asia, Africa and Latin America through three core categories. Analysts say this would reduce the company’s dependence on any one category.
The company has been acquiring companies in personal care in new geographies as part of its strategy to expand in other emerging markets. Hence, termination of the agreement with Sara Lee will fetch the company a bonanza of Rs 177 crore as termination fees.
As part of its 3x3 strategy, GCPL has been reducing its dependence on soaps and increasing the share of other categories in its revenue mix. The company now generates about 45 per cent of sales and 55 per cent of profits from household insecticides, a category in which it is the market leader and is growing its market share.
HSBC Global Research says GCPL has enhanced its growth profile by reducing its dependence on the relatively mature and competitive soaps business. Although increased competition is hindering its ability to raise the price of soaps, analysts feel the company will continue to do well in the insecticide space. GCPL is also trying to bring in hair colour in sachets from Argentina to counter increasing competition at the higher-end of the hair colour segment. All these things fit in with its strategy, while show care does not.
But like most consumer companies, GCPL is threatened by raw material inflation, which is why most analysts have been keeping away from FMCG stocks. However, GCPL has been countering this with calibrated price rises, right behind its competitor Hindustan Unilever (HUL). It increased prices by almost 4 per cent this January for soaps. The price of a No. 1 pack of 4 of 115g was increased from Rs 50 to Rs 52, the price of Cinthol regular 100gms was increased from Rs 24 to Rs 25 and No1 at Rs 40 for a pack of four was reduced from 90g to 80g. Another round of price hike may happen in April.
Analysts believe gradual price increase is the right strategy, even if it entails some margin erosion, as immediately marking prices to market could make end-product prices as volatile as commodity prices. This could erode brand equity, disrupt the supply chain and push consumers towards smaller regional brands/unbranded products. HUL has been taking price increases in a similar calibrated fashion, and to reduce risk, GCPL has been following HUL, which took its first round of price increases in July-August. GCPL waited for four-five months before going in for a price rise in January 2011. HUL went for its second round of price increases around January 2011, and GCPL is now preparing to undertake a second round in April 2011.
If price rises across the board are steep, it could benefit GCPL as some consumers may down-trade. For now, the company seems to be in control of the environment.
