Saturday, May 18, 2024

How Patanjali and pandemic reshaped Dabur

Citing an investigation, Narain claimed that 10 of the biggest honey brands in India had flunked a purity test. The list included Dabur Ltd, the country’s leading branded honey seller. The company had the most to lose on reputation and market share.

Dabur rubbished the investigation. Subsequently, a bitter battle ensued on the sidelines, not so much with the CSE but with a rival company.

Marico Ltd started advertising that its product, Saffola Honey, was the purest. Marico had ventured into the honey segment only a few months earlier and was one of the three brands that had cleared the test conducted by the CSE.

Graphic: Mint

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Graphic: Mint

Dabur wasn’t amused. There was a recent history of bad blood between the two companies, too. Earlier in 2020, Dabur had taken the Harsh Mariwala-owned firm to the Delhi High Court alleging that the latter had imitated the packaging of its honey to confuse customers. Now, on the issue of purity, both the companies traded multiple barbs and soon found themselves at the altar of advertising regulator, the Advertising Standards Council of India (ASCI). Eventually, Marico changed its packaging and also stopped using the advertisements.

“Their product (Marico’s) was cheaper than ours and they said there was a quality issue (with Dabur). We couldn’t sit idle and fought back tooth and nail,” said Mohit Malhotra, the 53-year-old chief executive officer (CEO) of Dabur. “Whether it is retail, visibility, prices, consumer promotion or advertising, we did not want to give them any space.”

This sort of aggression was new and quite uncharacteristic for a company that is synonymous with Ayurveda in India. Founded by Dr S.K. Burman in 1884, famous for providing low cost Ayurvedic medicines to the people of rural Bengal, Dabur is now known for a range of products. Apart from honey, the company sells herbal dietary supplements (like Chyawanprash); herbal digestive tablets (Hajmola); Ayurvedic medicines (Pudin Hara); beverages (Real fruit juices); oral care products (Dabur Red Paste); hair oil (Dabur Amla) and even mosquito repellents (Odomos).

At the turn of the century, the company transitioned from being family-run to being steered by a professional management. Dabur 2.0 began with the company’s first ‘outsider’ CEO, Ninu Khanna (November 1998-January 2002). Sunil Duggal, who had worked at Wimco, Bennett & Coleman and PepsiCo before joining Dabur in 1995, took over as CEO in April 2002. He ran the company for a marathon 17 years, making several acquisitions, streamlining the business, and laying the foundation for overseas expansion.

Malhotra, who joined Dabur as an intern in 1994 and rose through the ranks, becoming the CEO in 2019, is trying to erect a superstructure on that foundation. He wants the company to take the next big leap. Project Dabur 3.0 is playing out.

“The company, in the past, was a bit fearful. Sometimes, we were too respectful of our rivals. I want this company to be fearless and not afraid to take risks,” Malhotra said. “The Dabur of today and tomorrow does not believe in losing market share at any cost. As in the case with honey, we will never cede an inch.”

While the company’s revenue and profit have grown at a steady clip over the last decade (see chart), it faced serious challenges along the way. And two events have largely shaped the aggressive Dabur of today.

Wake-up call

Before taking over as the CEO, Malhotra managed Dabur’s international business division—the international business spans over 120 countries and netted revenue of nearly 2,806 crore in 2021-22, a quarter of its consolidated topline. But he had a ring side view of the challenge posed by a new company on the block, Patanjali Ayurved Ltd.

The company, which sells a range of products, from Ayurvedic medicines to natural food products, burst into limelight in 2015. It benefitted from two tailwinds. A nationalistic fervour was sweeping through the country and two, popular yoga guru, Baba Ramdev, was—and still is—the face of Patanjali.

Though the company was set up to target multinationals, Dabur felt the heat. Patanjali unleashed a disruptive pricing strategy in the initial years—it started selling honey at 70 against Dabur’s 120 per 250 gm. The result? Dabur lost significant market share between 2016 and 2017 in segments like honey (20 percentage points) and chyawanprash (2 percentage points).

“Patanjali was a big wake-up call for us. They came in and took significant market share from under our feet; they discounted products by 50-60%,” Malhotra said. “I was a bystander at that time, and it was painful. There was a sentiment at board meetings that we were not able to do anything. Baba is an evangelist with many die-hard followers. They were putting their life savings into retail outlets and creating a channel for Patanjali. How could a company like Dabur counter that?”

Dabur, eventually, did get into a bruising price war and emerged triumphant—it recouped almost all the market share in two years.

How did Dabur win?

“Patanjali shook companies across the entire FMCG (fast-moving consumer goods) industry and it showed just how big the potential for Ayurveda was and that the industry was not tapping into it fully,” said Abneesh Roy, executive director of Nuvama Institutional Equities, a brokerage. “Eventually, to win in FMCG, it comes down to regular innovation, agility, extremely strong feet on the ground in terms of sales, use of analytics and the flexibility on pricing. This is where there is a gap between Patanjali and a company like Dabur,” he added.

The Patanjali threat withered away with demonetization in 2016 and implementation of the goods and services tax (GST) the following year. It exposed Patanjali’s vulnerabilities in supply-chain.

Pandemic lessons

India declared the first lockdown in March 2020 to battle the covid-19 pandemic. While every other FMCG company ran helter-skelter to deal with it and strategize, Dabur found itself particularly stuck.

Most of its offerings fell under the discretionary spending category—it had no staples to sell. A mighty scramble to procure emergency passes from the authorities for business ensued.

“It was a big realization. We needed to add some staples to our portfolio as a de-risking strategy, which will help us in a black swan event like covid,” Malhotra said.

Subsequently, the company ventured into segments such as edible oil, ghee, sauces, tea and spices. Recently, it acquired Badshah Masala Pvt Ltd, a spice maker. The company also expanded its beverage brand Real to include milkshakes and carbonated fruit juices.

More launches are now a priority. Four years back, Dabur would, on an average, launch 12 new products every year. Today, it does 16 in a quarter alone.

“The ability to experiment and try new things is the essence of the fearlessness that I am trying to instill. Nothing is off the charts for Dabur now,” Malhotra said. “A few years back, you could not have imagined us getting into fizzy drinks but now we are. Why not?”

Will it pay off?

This diversification strategy is not without risks. Dabur is venturing into categories that hold the promise of growth (see chart). However, they are either highly fragmented (like spices, sauces and condiments) or have bigger, well entrenched players (like carbonated beverages, ghee or edible oils).

“In some categories that are adjacent to segments where it is already well established, Dabur has a definite right to win. In others, like ghee and tea, the company is very late and I think it will be more of an e-commerce play,” said Roy of Nuvama Equities.

“The biggest challenge in new product launches is that failure rates are very high,” said Prakash Kapadia, principal officer, Anived Portfolio Managers, a portfolio management services firm. “However, Dabur has always been a diversified company. That works well for them as certain segments face issues – due to competition or rural slowdown—other categories make up for lost sales,” he added.

Diversification can also act as a distraction, especially at a time when more companies are showing interest in Ayurvedic products. The Ayurveda products market size was estimated at 1 trillion in 2020-21 by the Ayush ministry. It is expected to double in five years and quintuple in 10 years. This sort of growth potential will attract competition.

And then, comes the issue of margins. Unlike pure-play Ayurveda products, mass market staples do not offer high margins. So, a big bang foray would not only be capital intensive but also see margin dilution. Dabur, today, has a healthy 21% operating margin that compares favourably with peers like Marico or Procter & Gamble. The likes of Adani Wilmar Ltd in edible oil or KRBL Ltd (which sells India Gate Basmati Rice) have significantly lower margins.

“It is true that these dilute our margins. So, we are not going all out. But it is a conscious call to build our food business,” Malhotra said.

While the CEO has the backing of the promoters and the board right now, he can’t take it for granted either. “The old guard at Dabur does not really like it (the diversification) but they do not want to be seen as averse to change. They will get a voice if growth stalls or profitability dips,” said a board member who did not wish to be identified.

Having spent over three decades in the company, Malhotra is well aware of the pitfalls. “I faced huge resistance—not just from the board but from everyone. I told them you made me the CEO, so you have to bear with me for some time,” he said.

Malhotra is hoping that a majority of his plans would work out and that he can live with a 40% failure rate.

He has his work cut out though. As Dabur spreads its wings, the company would need to strike a balance between low and high margin products; between fortifying its core Ayurveda business and pressing the accelerator in newer segments. And even though predicting the future in the world of corporates is nearly impossible, the CEO does seem to have time on his hands. Considering he is 53 now, Malhotra has at least a seven-year runway ahead of him. In any case, age is not a barrier at Dabur—Duggal was 62 when he retired in 2019.

Malhotra is definitely preparing for the long-haul and internally, has set a stiff target—of doubling the company’s market capitalization to 2 trillion by the time he hangs up his boots.

“We are preparing the organization not for today or tomorrow but for generations to come,” he told Mint at the end of a long interview.

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