Jyothy Laboratories Limited
“The products made for the common man has led to the success of the fast moving consumer goods company Jyothy Laboratories Limited.”
– M.P. Ramachandran,
Chairman and Managing Director,
Jyothy Laboratories Limited.
Jyothy Laboratories Limited (JLL) is a Fast Moving Consumer Good (FMCG) company wherein it deals with fabric care as also household insecticides, surface cleaning, personal care and air care segments in India. Its product range includes fabric whitener, mosquito repellent, dishwashing, bath and incense products under the brand name of Ujala, Maxo, Exo, Jeeva, and Maya respectively. Its leading brand Ujala, a fabric whitener, has a market share of 71.7% and accounts for 45% of company’s revenue, which amounted to Rs.3,619 million for the financial year 2007 (June-Ended). The other key brand Maxo, a mosquito repellent, has a market share of 20.7% and accounts for 39% of company’s revenue for the financial year 2007. Its other brands Exo, Jeeva and Maya are in the growing stage. It also has a strong distribution network across India.
Overview of the Indian FMCG Sector
The FMCG sector is the fourth largest sector in the Indian economy. According to ASSOCHAM, its present market size is approximately worth Rs.700 billion. It plays a key role in the Indian GDP. In India, this sector happens to be a prominent direct and indirect employer accounting for 5% of the total factory employment. It creates employment for three million people in downstream activities especially in small towns and rural India. The major share of the FMCG segment sales comes from low-priced products. The lower and middle-income groups contribute more than 60% of the sector’s sales. Besides this, around 56% of the consolidated domestic FMCG demand comes from rural markets. Agricultural sector is closely related to the FMCG sector as the agro-based products contribute approximately 71% of the FMCG sector sales. It is a prominent value creator and its market capitalization is next only to IT sector. It also contributes considerably to the public exchequer. According to Indian Brand Equity Foundation, Indian FMCG segment is characterized by a well-established distribution network, intense competition between the organized and unorganized sector and low operation costs. It is also expected to increase from US$ 11.6 billion in 2003 to US$ 33.4 billion in the year 2015. In India, the penetration level and the per capita consumption in most product categories indicate a huge unexploited market potential. The growing Indian population, especially the middle class and rural segments, provides the manufacturers of branded products an opportunity to expand.
The Associated Chambers of Commerce and Industry of India (Assocham) conducted a research on the future of FMCG products in India; according to it, the consolidated market size of FMCG products is estimated to grow at a CAGR of 12% in the next 5 years and would be approximately worth Rs.980 billion by 2010 and around Rs.1,233 billion by 2012. Out of the total market, the Indian rural and semi-urban areas cover about 60% by 2012 mainly due to increasing rural penetration as also growth in disposable incomes. The key segment of the FMCG sector is household care products. Household care products include household cleaners, laundry care, toilet cleaners, air fresheners, insecticides, mosquito repellents, polishes and other products related to household care.
Figure 1(a):Household Care segment 2005 (Actuals) Total Market Size – Rs.96,641 million / Figure 1(b):
Household Care segment 2010 (Projected)
Total Market Size – Rs.106,630 million
Source: Euro Monitor International, “Household Care – India”, December 2006.
The following figure 2 shows the estimated sales growth rate of various segments in the Indian household care sector:
Figure 2
Source: A.C. Nielsen.
Main Features of the Industry
Brand Creation
Brand building is a key and essential component of an FMCG company for which considerable amount of time and money is allocated. A clear understanding of consumer tastes and requirements play a major role in brand creation. The basic strategy of an FMCG company should be to design a product, its delivery format, pricing and communication. A company builds strong brand image either by providing good quality products over a period of time or by innovating a product that offers superior functional attributes supported by strong advertising and sales promotion campaigns. The price that a consumer is willing to pay reflects the product, its packaging, its availability and also the image built around the brand. During the initial stages of building a brand image, the company may go through higher expenditures on advertising and sales promotion so that the product is positioned as a brand in the minds of the customers. And once the brand is recognized by the customer, company will be in a position to command a better price and reduce the proportion of advertising support to maintenance levels and thereby improve its margins and profitability. A company with a portfolio of some potential brands can invest in new brands to create a pipeline of new brands and products for the future. In FMCG sector, the success of a product depends heavily on brand building, positioning, and brand extensions. If any product of a company faces the slowdown in demand and fierce competition, then it focuses on major brands and ensures cost reduction in addition to focusing on aggressive and penetrated marketing. Rarely, companies go for the re-launch of the product by re-positioning it, so that the life cycle is re-started to extract better value.
Cost Considerations
The primary costs the company incurs in the FMCG sector are: materials costs, marketing costs, and advertising costs. In some cases, the company that undertakes large-scale production will purchase raw materials in bulk; as a result, they can negotiate on costs and can get lower input costs of raw materials. Many innovations have taken place in the packaging segment thereby providing superior and more convenient packaging with cost effective packing material. FMCG sector gives importance to branding; consequently, the term cost includes advertising expenses and sales promotion expenses. In order to popularize a brand and position it in the minds of consumers, constant investment is required over a period of time. Generally, to build strong consumer franchises and create demand for their brands, companies spend huge amounts on advertising and sales promotion including the above-the-line advertising. In order to increase sales in
short-term, companies spend huge amount on sales promotion and channel discounts. This has comparatively low manufacturing costs, as the process to manufacture goods is simple. Investments in manufacturing assets are relatively low which leads to high turnover to investment ratio. Companies further reduce their investments in fixed assets through availing third party manufacturing facilities as the highest value addition comes in the process of branding. In recent times, companies availed certain excise and income tax concessions by setting up their own manufacturing facilities in selected tax-free zones.
Wide Distribution Network
The key determinant of a company’s success in this sector lies in delivering products based on consumer demand. A strong distribution network helps the product to grow volumes through increased penetration levels. Any company, which wants to establish in a big country like India, must establish a wide distribution network. The main mediators of the distribution chain are the company’s C&F agents, distributors, wholesalers and retailers. With the help of these intermediaries in the widespread distribution network, a company can deliver products to the consumers wherever they want them.
Huge Unorganized Segment
The growth of strong unorganized sector in India is due to many factors like, low entry barriers in terms of low capital investment, fiscal incentives from government, and low brand awareness in small towns and in rural India. This segment offers both localized brands and products in a loose unbranded form. Under this segment, unorganized players offer products to customers pricing them low and also provide high margins to the stockists and intermediaries to boost their sales. On the other hand, organized sector players incur losses due to fake and counterfeit products manufactured by the players of unorganized sector. The FMCG sector incurs 10% to 30% loss in its business due to these fake and counterfeit goods.
Third Party Manufacturing
Companies subcontract their production requirements to third party manufacturers in order to concentrate on building brand, to develop product and to create distribution networks. In recent times, the concept of contract manufacturing gained momentum as small-scale industry units enjoy tax incentives.
Comparatively Low Product Penetration
In India, the per capita consumption in most of the FMCG categories comprising high penetration categories is low compared to both developed and emerging economies. This shows that there is huge scope for increasing product penetration.
Figure 3
Source: A.C. Nielsen.
Changes in Retail Format
FMCG sector in India has witnessed new forms of distribution with the introduction of super markets, hypermarkets and large-scale retail malls. They offer wide range of products at discounted rates through direct selling or through multi-level marketing wherein agents instead of the usual bulk or small-scale retailer carry on the sales. There is huge impact of newer distribution channels on the traditional retail margins as they allow greater penetration of products, which lead to an overall increase in revenues for this sector.
The following figure depicts the prominent increase of supermarkets and hypermarkets with regard to the share of Household Product sales between 2000 and 2005.
Figure 4(a):Household Product Sales Distribution – 2000 / Figure 4(b):
Household Product Sales Distribution – 2005
Source: Euro monitor International, “Household Care – India”, December 2006.
Key Factors and Trends in the Fast Moving Consumer Goods Sector
Large Unexploited Rural Market
Rural areas have a share of more than 50% in the total revenue of major FMCG companies while 70% of India’s population lives in rural areas. In case of brand choices, rural market consumer has less access to branded products compared to urban market consumer. Rural market is untapped to a large extent and has vast potential with attractive prospects, but difficulties confront it in exploiting this market. For example, high prices of branded FMCG products, inadequate infrastructure facilities (like roads and power), a strong unorganized sector, heavy dependence on external factors (like monsoons), a low per capita income as also low disposable income, and seasonal consumption linked to harvests, festivals and similar events. On the other hand, government has taken steps to improve rural infrastructure, to increase efficiencies in distribution, ensure availability of branded products at lower price levels. Also, price correction by the FMCG companies, penetration levels in many FMCG categories are expected to go up in rural areas.
Growing Economy
Indian economy has grown rapidly in recent years. According to Reserve Bank of India (RBI), in the last three years, Indian economy has grown significantly with the GDP recording at 8.5%,
7.5% and 8.4% for fiscal years ended March 31, 2004, March 31, 2005 and March 31, 2006 respectively. This has positively affected the FMCG sector wherein many companies had experienced slow growth in the few years prior to 2005. The Indian economy growth has been accompanied by an increase in disposable incomes both in urban markets and rural markets.
Increase in Disposable Income Levels and Growing Middle Class
The growing middle class, which is considered the consuming class, is set to boom the demand for FMCG products. According to Indian Brand Equity Foundation, the following figure 5 shows the expected increase in middle class.
Figure 5
Source: IBEF.
The increase in disposable income in the hands of the middle class with the growing share of middle class will impact effectively on the increase in demand for FMCG products.
Expanding Retail
In the last few years, the retail segment underwent revolutionary changes. In recent times, the concept of chain-of-stores is gaining momentum as they focus on affordability delivered through squeezing efficiencies from their supply chain. As a result, they offer better discounts compared to other stores. Besides these, large modern retail format like supermarkets and hypermarkets has been on the rise. Though they do not have significant share in the total FMCG sales, they are expected to increase in future. Foreign Direct Investment (FDI) in this sector is expected to be permitted. Through this, overseas retailers are allowed to participate in one of the fastest growing consumer markets in recent times in India. If this happens, players in the FMCG sector have to improve their skills in merchandizing and shelf management as the open formats in order to allow more interaction between the consumer and the products. By this, experimental consumers will get an opportunity to try new brands and products and the companies can also improve their information in order to create supply chain synergies.
Household Care – Profiles and Outlook of Product Segment
Laundry Care
In the year 2005, the total sale of the laundry care product segment of household was Rs.6,69,034 million, accounting for about 69.23% of total sales in the household care sector. Laundry care products include laundry detergents, laundry aids, fabric softeners and carpet cleaners. Out of these, Laundry detergents alone cater to 92.44% of total laundry care sales amounting to Rs.61,842.8 million in 2005 while Laundry aids is the second largest category catering to 7.56% of total laundry care sales amounting to Rs.5,060.6 million in 2005 according to Euro monitor International, “Household Care – India,” December 2006. Laundry boosters like fabric whiteners, spot and stain removers, starch and ironing aids in addition to the general products used in laundry are included in the Laundry aids.
The key players in the laundry care product segment are: Hindustan Lever Limited with its brands “Wheel,” “Surf,” and “Rin,” Nirma Limited with its brand “Nirma” and Procter & Gamble Home Products Limited with its brands “Ariel” and “Tide” according to Euro monitor International, “Household Care – India”, December 2006. Over the past five years, laundry detergents have grown at a CAGR of 4.7%, laundry aids have grown at a CAGR of 8.7% and overall laundry care market have grown at a CAGR of 5%.The following figure 6 shows the historical and projected sales values as well as CAGR growth rate of total laundry care in India according to Euro monitor International.
Figure 6: Total Laundry Care
Source: Euromonitor International, “Household Care – India”, December 2006.
Insecticides
Insecticides are products used for eliminating insects. Products in this segment comprise insecticide coils, electric insecticides, spray and aerosol insecticides and other forms of insecticides. Their sales comprised 7.53% of household product category sales amounting to Rs.12,840.7 million during 2005. The sales of insecticide coils were 43.52% of total insecticides sales amounted to Rs.5,588.9 million. The sales of electric insecticides were 42.59% of total insecticides sales amounting to Rs.5,467.7 million. For the last five years, the sales in insecticide segment grew at a CAGR of 7.2% and from 2004 through 2005 it has grown at a CAGR of 6%. The following figure 7 shows the historical sales values as well as CAGR growth rate of total insecticides in India according to Euro monitor International.
Figure 7: Total Insecticides
Source: Euromonitor International, “Household Care – India”, December 2006.
Dishwashing Products
This segment includes products used for washing dishes like powders, bar soaps and liquids. Bar soaps has a major share in the Indian hand dishwashing segment according to the Euro monitor International. In India, presently dominant share of sales are from hand dishwashing segment because the concept of automatic dishwashing is still new with penetration of dishwashers remaining at below 1% in India as a whole and 2% in urban India in particular. In the year 2005, the total sale of dishwashing products was Rs.7,759.2 million, or 8.03% of total sale of household products according to the Euro monitor International. The following figure 8 shows the historical sales values as well as CAGR growth rate of dishwashing products in India according to Euro monitor International.
Figure 8: Dishwashing Products
Source: Euromonitor International, “Household Care – India”, December, 2006.
Air Care
This segment includes spray and aerosol air fresheners in addition to other household air care products. This segment has strong presence in urban areas of the country as it has aspirational consumer demand within the increasingly prosperous urban consumers. The following figure 9 shows the historical sales values as well as CAGR growth rate of total air care products in India according to Euro monitor International.
Figure 9: Total Air Care
Source: Euromonitor International, “Household Care – India”, December, 2006.
Jyothy Laboratories Limited – Company History
In the year 1993, Mr. M. P. Ramachandran started a sole proprietorship firm in Kerala by name Jyothy Laboratories. The firm’s basic business was to manufacture and sell fabric whitener, “Ujala”. On January 15, 1992, the company was incorporated as Jyothi Laboratories Private Limited using certain intellectual property rights and got license from its promoter
Mr. M. P. Ramachandran. Later, on September 13, 2002, the rights of the promoter and Jyothy Laboratories were transferred to the company Jyothi Laboratories Private Limited. On October 6, 1995, it turned into a public limited company and changed its name to Jyothi Laboratories Limited. On August 12, 1996, finally the name was changed to Jyothy Laboratories Limited.