The Nirma Story

-V S Pai and Vivek Kaul

HLL in 1959, through its blue powder Surf pioneered the bucket wash concept in India. But it was a wily Gujarati entrepreneur, Karsanbhai Patel, with the detergent Nirma, who rewrote the rules of the game. Patel with Nirma offered a value for money detergent, which the consumers simply could not ignore. For nearly 20 years (after the launch in 1969) Nirma was a one-product company. Lately, it has diversified into more FMCG products offering the same value for money proposition, which it originally did. This case tries to trace and explain the Nirma phenomenon.

Executive Summary

Karsanbhai Patel was a chemist with the Gujarat government's Department of Mining and Geology, in 1969, when he created his wonder powder and started selling it locally. Nirma was launched at Rs.3.50 per kg, when surf was Rs.15 per kg, and the lowest price detergent was Rs.13.50 per kg. His home town Kishanpur (Gujarat) was brimming over with demand, and he was soon mixing and packing the formulation in a 10x12 foot room at his Kishanpur home.

Karsanbhai Patel figured out that if a firm managed to get prices really low, more people could afford to buy; and if it found a way to get costs really low, then it could make profits as well. And the arithmetic of small margins multiplied by huge volumes could create a huge gross margin pool, which could pay for overheads comfortably and leave behind a handsome profit. This is the principle around which the entire business of the erstwhile Nirma Chemical Works and now Nirma Ltd., has been built.

In order to get the costs really low the company went about carrying out a huge backward integration exercise into Linear Alkyl Benzene (LAB) and soda ash both key materials for the group's main product, detergents. This led to the establishment of factories at Alindra and Bhavnagar in Gujarat.

In 1969, the Nirma washing powder was introduced for the first time and for the next 18 years, Nirma Chemical Works remained a one-product company. In 1987, the Nirma detergent cake was formally introduced. And the late 80s and 90s saw a slew of product launches as we saw Nirma introducing more detergent products and also getting successfully into the soaps market.

Nirma is banking a lot on these new businesses as growth in the exiting business of primarily detergents is plateauing out. At a stagnant 2%, the situation in the detergent market is grim. The urban market is saturated and so is the rural one. The only way Nirma can grow in urban India is by going up the value chain. This would raise volumes incrementally but margins would be huge.

Nirma still remains a very closely held company, with most of the top posts being with close relatives of Karsanbhai Patel. Karsanbhai has had a huge role to play in Nirma's success. Nirma was one of the first cases of an Indian David taking on an MNC Goliath successfully. The success of Nirma showed HLL that there is a huge demand at the lower end of the market. The strategies that HLL used to tackle Nirma over the years have been successfully reused by it, in other parts of the world as well.

In whatever Nirma does, the goal is to produce "high value products at the lowest possible price", which in simple words means to cut costs and pass on the price benefit to the consumer.

Introduction

Karsanbhai Khodidas Patel, CMD, Nirma Ltd., is a man who can disappear in the crowd. It is precisely this commonness that probably accounts for his uncommon success. An incisive understanding of the needs and sensibilities of the common man on the street. This eye for value as commonly understood, coupled with aggressive cost containment has made Nirma1

the legend it is today.

HLL in 1959, through its blue powder Surf pioneered the bucket wash concept in India, to relieve housewives from the drudgery of laundry soap scrubbing. But it was Nirma that took away the detergents market by providing the benefit at an affordable price. Karsanbhai Patel was a chemist with the Gujarat government's Department of Mining and Geology, in 1969, when he created his wonder powder and started selling it locally. Nirma was launched at Rs.3.50 per kg when surf was Rs.15 per kg, and the lowest priced detergent then was Rs.13.50 per kg. His home town Kishanpur (Gujarat) was brimming over with demand, and he was soon mixing and packing the formulation in a 10 x 12 foot room at his Kishanpur home. He sold 15-20 packets of the detergent a day on his way to the office, on bicycle, some 15 km away2. Thus started the great journey. It all started to earn a side income.

Within a short span of three decades, Nirma has completely rewritten the rules of the game. Offering quality products at unbeatably low prices. In the process, Nirma has helped expand the entire soaps and detergents market to a level ofRs. 82 bn. Today, Nirma has a Rs.17 bn share in this market and has been acknowledged as a marketing miracle. This has been possible through focus on cost effectiveness by integrating latest manufacturing technology facilities with innovative marketing strategies to create world-class brands.

The Industry Background

The Soaps & Detergents Industry is characterized by a number of small-scale manufacturers at one end of the spectrum and large companies (including MNC's) at the other end. Nirma and Hindustan Lever dominate the detergents market in India (see Chart 1). The market for toilet soaps which is ruled by HLL (See Chart 2) has increased manifold with changing lifestyles, growing purchasing power, increased awareness about personal hygiene, responsiveness of the consumers to brands offering superior value and the spread of audio-visual media.

Fabric wash industry in India is characterized by low per capita consumption and substantial potential in rural markets (in terms of category penetration and per capita consumption). Per capita consumption of fabric wash products in India is just 3.2 Kg3, which is very low compared to developed nations as well as some developing countries. The fabric wash industry is divided into laundry soaps, synthetic detergent cakes & powder. The toilet soaps industry is segmented into economy, popular and premium segments. The market is witnessing fierce competition from MNC firms and requires substantial efforts for market penetration and brand development. Even though, the company entered this market only as late as 1990 with Nirma Batha carbolic soap, it has today garnered a 15% share in volumes, making Nirma the second largest player. It has products in all the segments of the soaps market.

Company Background

Before CK Prahlad4 described the `poor as an opportunity' in the Harvard Business Review and coined the elegant phrase `the bottom of the pyramid5', to describe the large mass of poor people in the world, companies and their consultants used to spend lots of time and effort trying to define the size of the Indian market. Consulting firms used to say that the international experience shows that markets take off when per capita income of about $20006

at Purchasing Power Parity is achieved. Today the line seems to be " there is a lot of pent up demand in the lower income, and if you find the right strategy to tap the bottom of the pyramid, then the market in India could explode"7. This new untested wisdom Karsanbhai Patel and Nirma figured this out around three decades back. They figured out that if a firm managed to get prices really low, more people could afford to buy; and if it found a way to get costs really low, then it could make profits as well. And the arithmetic of small margins multiplied by huge volumes could create a huge gross margin pool, which could pay for overheads comfortably and leave behind a handsome profit8. This is the principle around which the entire business of the erstwhile Nirma Chemical Works and now Nirma Ltd., has been built.

Continuing with this principle, Nirma decided to backward integrate into Linear Alkyl Benzene (LAB) and soda ash, both key materials for the group's main product, detergents. This was on the cards since 1988 and led to the establishment of factories at Alindra and Bhavnagar in Gujarat. There were two main attractions for Nirma getting into soda ash: The market was growing as fast as 10% per annum and the price of the commodity kept increasing frequently9.

At Bhavnagar, Nirma has also built a plant to produce vacuum iodized salt. Nirma has the capacity of producing three lakh tons of pure salt. No one, other than Tata Salt has a similar plant in the country. The plant was completed in a record time of two years and at a cost of Rs.985 cr against an estimated of Rs.2036 cr10.

Karsanbhai Patel knew no marketing, had no management qualifications and no collaborator, Indian or foreign, when he created the first Indian brand to humble the best multinationals. The Nirma Story began in 1969, but it was only 13 years later, that the entrepreneur first went to bank for finance. When Nirma went public for the first time in 1994, Karsanbhai's advisors had a hard time convincing him that if he did not bring in external shareholders his group would be unable to grow in the future. But even after the maiden issue of Rs.44.7 cr, 75% of the equity is still with Karsanbhai, his relatives and his friends. Nirma has a low Price/Earnings ratio when compared to other companies in the FMCG market.

In 1969, the Nirma washing powder was introduced for the first time, and for the next 18 years, Nirma Chemical Works remained a one-product company. In 1987 the Nirma detergent cake was formally introduced. And the late 80s and 90s saw a slew of product launches as we saw Nirma introducing more detergent products and also getting successfully into the soaps market. The Nirma beauty soap was launched in the year 1991 and was positioned against Lux. In 1998 Nirma launched the Nima brand (See Table 1) with the lime variant. Unlike detergents, the soaps market is more fragmented and it is necessary for any serious players to be present in most, if not all the segments in the soaps market. In the words of Karsanbhai himself, "You have to necessarily cover all the segments in the soap market. Otherwise it will not be possible for you to achieve optimum tonnage"11. Nirma is banking a lot on these new businesses as growth in the exiting business of primarily detergents is plateauing out. At a stagnant 2%, the situation in the detergent market is grim. The urban market is saturated and

so is the rural one. The only way Nirma can grow in urban India is by going up the value chain. This would raise volumes incrementally but margins would be huge.

Over the years, Nirma has built a distribution system with 400 all India Nirma distributors and 2 million retailers. This simple 2-tier distribution system helps it keep its cost low. Apart from giving them good business over the years, Nirma gave the distributors financial support whenever they needed it. This earned Nirma their loyalty and trust.

On December 20, 2002 the stock price of Nirma Ltd., reached Rs.227.5012, an eighty-one month low since April 96. In order to arrest the trend, Nirma announced a scheme in which brands Nirma and Nima would be transferred from a promoter owned company `Nirma Industries' to the listed company `Nirma Ltd'13. Usually the reason given for promoter owning brands was that, having created the brand, they are entitled to continue owning them. However, the counter argument is that minority shareholders are deprived of the brands, while promoter benefits by charging a royalty from the listed company, (in most cases14) from brand sales. The desire to improve market capitalization seems to have forced Nirma to bring their brands under the listed company giving investors more comfort.

When brands are in their infancy, they need to be nurtured. Such nurturing is best done in the environs of family ownership, where there is usually more direct involvement as well as a fierce sense of pride in the brand. But once a brand reaches maturity, it can be spun off to a publicly listed company.

In whatever Nirma does, the goal is to produce "high value products at the lowest possible price", which in simple words means to cut costs and pass on the price benefit to the consumer.

Karsanbhai Patel: The Visionary

The CMD Karsanbhai Patel is a visionary who is engaged in fulfilling the mission15 of the company. Some of his qualities, that stand out are listed below.

Get on the Balcony

When Karsanbhai Patel started manufacturing Nirma in 1969 in a 10x12 room in his house at Kishanpur (Gujarat), there was no company in existence, neither had he any employees working under him. It was what we call a ONE MAN SHOW. He saw a pattern that there was no cheap detergent powder available that catered to the lower end of the market. Even while taking Nirma into the soap market, Karsanbhai Patel realized that since majority of the market was dominated by HLL, there was enough space in the market for one other major player. So Nirma had a big opportunity.

"We treat him as a visionary" says VN Desai, vice president, Nirma Ltd16. " He helps in the generation of new ideas", says DG Jakhade, general manager, processes, Nirma Ltd17.

Regulate Distress

Karsanbhai Patel has been able to create a happening environment by18:

Having a very flat structure as flat as possible- with few layers. For all the size that Nirma has acquired, at the factory level, there is only one factory manager and supervisor.

Karsanbhai Patel has got great faith in youngsters. The average age of the employees in the newly built Alindra Complex in Baroda is just 26 years. These people, he believes, are capable of managing key parameters of quality, cost and production level.

He gives direction to the company through his quest for betterment. He thinks in terms of the next 10 years. He wants improvements at every stage. He also maintains a keen eye on the shop floor.

He has a very good memory and remembers sentences to the last word, so later no one can say, " I meant something else."

He likes to get to the root of the matter and is open to ideas. He is frugal and takes stock of every paisa. His emotional capacity is great. He stoically rallied the family together, in 1987, after

the tragic accident of his daughter Nirupama, after whom Nirma is named. This is very important as most of the top brass at Nirma belong to the Patel family.

Empower People

There is a great deal of empowerment at Nirma. Karsanbhai has great faith in the capabilities of his employees. The level of operational freedom is evident. In the five years, the time taken for the Bhavnagar plant to be built, Karsanbhai visited Bhavnagar only five times. But whenever he went to Bhavnagar, it was never a mere look-see. Says DG Jakharde, General Manager, Processes Nirma, "He helps in the generation of new ideas"19. The sheer scale of the Bhavnagar project can boggle the mind. The plant is spread over 25,000 acres of land. The plant's intake is roughly 2,000 tonnes of limestone clay, 2000 tonnes of salt, approximately 1000 tonnes of fuel (coal, lignite) and 100 tonnes of coke daily. The coal is procured from Australia and Indonesia and lignite from Kutch20. The latest example is that of the creation of the distribution network of Nima. The work for this was handed over to his son Hiren. Hiren came up with a distribution network as good as that of Nirma.

What the Company has been doing?

Backward Integration

Nirma decided to backward integrate in the year 1988. The logic is that captive production plants for raw materials are the best way to keep production costs under check. The objective was twofold; one to cut cost and second to pass on the price benefit to the customer. The Nirma brand does not have any aspirational value and consumers trade up as soon as income levels allow.21 Besides, when brand loyalty is almost non-existent at the lower end, a consumer will opt for any unorganized sector brand, if it's even a rupee cheaper.

Nirma had undertaken two major backward integration projects for manufacture of Soda Ash and Linear Alkyl Benzene (LAB). The backward integration projects form an integral part of Nirma's corporate policy which are based on the following rationale:

Soda Ash and LAB are basic raw materials for Detergents. Entire capacities will be captively consumed leading to substantial reduction in raw

material costs. Ensures assured supply of desired quality raw material at controlled costs Cost Advantage.

The Alindra detergent complex in Baroda has a capacity to churn out 65,000 tpa of N-Paraffin. The integrated project to manufacture Linear Alkyl Benzene and synthetic detergents has technology sourced from UOP Inter America, USA. Canada based SNC_Lavalin Group Inc., is the project consultant. The first phase of the plant at Baroda having begun in 1996 was completed in December 1997. The cost was, Rs.380 cr. The second phase was completed in January 2000 (six months ahead of schedule). It was completed at a cost of Rs.250 cr, against an earlier estimate of Rs.280 cr.

The more ambitious of the two projects is the one at Bhavnagar. This plant intends to make an awesome 420,000 tonnes of soda ash every year. These are volumes that global managers gawk at. The company has sourced Akzo Dry Lime Technology from Akzo Noble engineering, Holland, which runs the largest soda ash plant in the world. Bhavnagar's inhospitable terrain made building the plant an uphill challenge. Lack of water, roads and power added to the problem. Nirma had to build an 18 km road to the location. As the soil was treacherous, the plant had to be constructed on 15000 piles. A force of 8,000 laborers, 60,000 tonnes of steel and 100,000 tonnes of cement have gone into the plant, which also has 108 km of salt bunds 22.

Distribution Network

Nirma has a two-pronged distribution system. It has a network of 400 distributors covering more than 2 million retailers. As Nirma's operational area for the distributors is the district, about 80% of Nirma's distributors are exclusive. Most of these transact huge volumes and have between 50 and 80 people working under them. Nirma has curtailed the cost of distribution by doing away with intermediaries. In some places, such as Andhra Pradesh, Tamil Nadu and Southern Karnataka, Nirma has started maintaining depots, as getting stocks to these places becomes difficult at times. The distribution was built more out of necessity than out of choice. Initially the volumes were so low that, people who tried to trade in smaller territories just failed. Only those in the bigger territories survived. Based in the major districts, these distributors managed such huge volumes that duplication of the same was not possible. Typical of the family style of Indian businesses, they are all invitees to the social do's organized by the Patels. Credit has been extended when required and dud products are never dumped on them. A culture of accessibility right from the early days is paying off now. The distributors are free to contact top management directly for any problem they might face.

Mass Media Advertising

Nirma's advertising journey began in 1973 when it launched its now famous jingle23,. What preceded this were wall paintings that used a model resembling Hema Malini. The mass media advertising has been handled by Ahemdabad based Purnima Advertising since the very beginning. The company does not coincide product launches with campaign breaks. It first places the product on the shop shelves, gets feedback and fixes glitches, and then creates enduring ad campaigns that could run and run. The advertising has always been simple and benefit oriented. For this, it has used such starlets as Sangeeta Bijlani, Sonali Bendre, Shilpa Shetty, and Riya Sen etc., to endorse their products. All these stars were relatively unknown before appearing in the Nirma advertisements. It believes in ever lasting commercials, and has never had to withdraw a campaign. Moreover, the company has always managed to keep its advertising expenditure as a percentage of sales at around 2%24, barely heard of in the FMCG sector, where 6% to 10 % is the norm. To quote Karsanbhai Patel, "Advertising can only inform about the product. Thereafter, it's the success of the product alone"25.

Putting punch in packaging

In the early days of Nirma, the theory was that, Nirma's pedestrian packaging had a market appeal mainly because of its ordinariness, just as the average Indian voter would not be very comfortable with a politician who is dressed in the latest western clothing, the common man is not comfortable with very modern packaging26. And therein lay the secret to Nirma detergent's success. The color printing was bad and a loose sealing that could not hold the power inside or keep the moisture outside. Unlike others, it did not have any frills, which again was a strong selling point with the average consumer careful about saving money.

To improve its packaging and also to further the cost reduction exercise, Nirma recently ventured into in-house printing and packaging with the acquisition of Kisan Industries at Moriya, near Ahemdabad in March 2000. The new complex will add that much needed finesse to its packaging. The company decided not to sell shabby looking products, no matter how low priced they are. Earlier the printing was on chrome art paper, but now the printing is on Biaaxially Oriented Poly Proplelene (BOPP) and polyester, while dry lamination is on maplitho. This is how Nirma products get a high gloss look.

Company Weaknesses or Failures?

The Image among the Elite

Nirma's image among the elite has not changed. The elite still feel that it is a poor man's brand. In the past it had to face serious allegations about the detergent affecting clothes and also the user's hands. Nirma has tried to get into upper segments of the market but with little success. "Premiumness" defends Hiren Patel "has always been misinterpreted as a function of price"27. Nirma is trying to redefine the concept by associating it with a quality at an affordable price. Getting into the premium segment is essential for Nirma, if it wants to grow further. The urban market is saturated and so is the rural one. The way Nirma can grow is going up the value chain, making Ariel like products. That would raise volumes only incrementally and the margins would be good.

In a truly path-breaking move in the prevalent fast-moving consumer goods climate, Nirma has announced the exclusive marketing and manufacturing arrangement by which Nirma will bring Camay (brand of P & G, one of the world's leading beauty soap brands), to the Indian consumer [earlier manufactured by Godrej Soaps]. It also helps Nirma to help it move up in the value chain. Nirma Consumer Care, the wholly owned subsidiary of Nirma, obtained the license of the trademark Camay from Procter and Gamble Home Products (PGHP), for an undisclosed license fee with effect from October 8, 2002. The arrangement is valid for a rolling period of five years and covers toilet soaps.

Soaps Market

The other point of doubt is whether Nirma can ever hope to alter the rules of the soaps game. Unlike detergents, soap is a personal use product. Some customers form deep psychological associations with their brands. What's more, it is a market where HLL has etched the segmentation patterns in stone (by price, by scent, appeal and by brand personality). Can Nirma win by playing by HLL's rules? Worldwide floral beauty, health, freshness platforms, account for most of the soaps sold. What Nirma has done is to produce high fatty matter soaps but with the right scents, but priced a rung below, thus creating a sub-premium segment. The

rest of the game is in managing the geographical diversity of consumer preferences. If the North prefers pink colored soaps, in the south it's green that sells.

An Outfit Still run by Family and Friends

Most of the top management at Nirma are the relatives of Karsanbhai Patel. The Patel family owns more than 70% equity in Nirma Ltd. The Patel family believes that it's a folly on the part of the market to believe that promoters cannot be professionals.

A Part of the Backward Integration Exercise has turned out to be Ineffective

Nirma had diversified into the production of soda ash as backward integration strategy. The company has an installed capacity of 4.2 lakh TPA for Soda ash. However, the company could utilize only 49% capacity during the FY01. Backward integration in Linear Alkyl Benzene (LAB) and Soda Ash has improved the margins of the company. The installed capacity of soda ash in India is in excess of domestic demand. Even though the imported soda ash is cheaper, the imports are limited due to the nature of the product being hygroscopic and bulky and bottlenecks in transportation. The reduction in import duty on soda ash from 35% to 20% in the budget 2001 has adversely affected the performance of the company.

Issues: Opportunities Before Nirma

Small-scale Detergent Sector

According to Hiren Patel, MD, Nirma Consumer Care Ltd, " About 30% of the market lies with the small-scale sectors and we see this as a big opportunity"28. Nirma has launched the Nirma popular detergent to cater to this segment.

Penetration

The definition of penetration as per National Council for Applied Economic Research is the average number of households who have bought the product during the reference year in a population of 1000 people. Even a one-time buy is recorded in overall penetration. So, the actual figures for the regular use must be substantially low. The per capita detergent consumption of about 500 gram per Indian when compared to USA where the per capita detergent consumption is around 2000 grams. (See Charts 5 and 6), is very low. If this goes up even by 20%, volumes will go up by more than half the current market by 1.48 million tonnes.29

Other FMCG Categories

To quote Hiren Patel30, "We are thoroughly convinced that the future of our company largely depends on diversification into other FMCG categories". Nirma took over a small company in Bangalore called MP confectioneries and used its distribution network to launch Nima rose. The Nima distribution network unlike the main one is a three tier one with C&F agents. It has 35-40 depots, some stock points and 1700 distributors, who are supplied from the depots. This has helped them to tap chemists, paanwaalas and other retailers in addition to the two million retailers it already had. This in turn will help them make inroads into Personal Care products. Nirma already has a shampoo introduced in the market, which has been quietly introduced into

the market, in the traditional Nirma way, without any hype and hoopla. Nirma also has launched Nirma Shudh Namak, and was till recently the third largest player in the market, when Dandi Namak beat it, to the fourth place.31

Toilet Soap Segment

There is a huge gap between the market share HLL has in the toilet soap market and Nirma that is second. Nirma can play catch-up with HLL in this segment of the FMCG industry.

Outsourcing

On June 26, 2002, at the HLL Annual General meeting, Chairman MS Banga said, "HLL's vision is to build a billion dollar (close to Rs.5, 000 cr) sourcing business out of India". HLL sees it as a stable earnings opportunity wherein the Inventory and marketing costs are minimum. P&G's India operations have been identified as a key hub in P&G's global sourcing strategy, which revolves around deriving the best-cost efficiencies from within the P&G world. Nirma can also act as a sourcing base via tie-ups with detergent makers from the American and European markets.

Issues: Threats Facing the Organization

Counterfeit Products and Pass offs

This is one problem that is proving to be a major headache for the company as well as every major FMCG Company in India. This is giving a bad name to the brands. To counter this, Nirma has gone in for inhouse printing and packaging. It has done so by acquiring Kisan industries at Moriya, near Ahemdabad.

The question that needs to be answered here is, how can a fake product reach shop shelves unless someone has infiltrated the distribution chain. That's precisely the way it works. The wholesalers themselves manufacture large amount of fakes. For example, if a wholesaler sees a certain product doing well, he quickly sets up a small manufacturing facility to make that product. The critical element in the chain is the retailer. For him, the advantage of buying counterfeits is obviously, higher margins.

Counterfeiting of branded products has been an age-old phenomenon in India, not to mention other Asian countries such as China. The Federation of Indian Chambers of Commerce and Industry (FICCI) set up the Brand Protection Committee. It will be the apex body that fights the fakes. One of the first things that the Brand Protection Committee did was to kick off a study by market research firm AC Nielsen to put a number to the counterfeit problem. And it came up with findings that FMCG industry loses around Rs.1700 cr32 to fake products.

Other Companies doing a Nirma on Nirma

What Nirma did to HLL, it has had to face from other entrepreneurs. The two of the biggest competitors to have emerged are Kanpur Trading Corporation and Dandi Namak. Kanpur Trading Corporation are the makers of Ghari detergent. It is headed by a 56 year old Murli Dhar, who himself is an ardent admirer of Karsanbhai Patel. He is following the footsteps of his idol- both in sharing a humble beginning marked up by tin shed operations and bicycle

marketing, through fiercely extending flagship detergent brand Ghari to kirana store shelves in UP and adjoining markets. Ghari has crossed the Rs.550 cr33 sales mark in 2002 and is the largest single brand in UP and adjoining markets. To give a sense of sizes Ghari is almost as big as Surf, Cadbury and Fanta, twice the size of Dettol and three times that of Ariel by sales 34. Ghari is the fastest growing brand in the detergent sector at around 40 and 10% volume share on an all India basis.

Suresh Agarwal makes the Kunwar Ajay brand of sarees. The trouble was people bought sarees twice a year. There were other irritants like retailers returning stocks unsold. To chivy up the demand he spent Rs.25 cr on a nationwide ad campaign. But sales of the Kunwar Ajay sarees did not perk up. Then he thought of getting into FMCGs. The two reasons of getting into the FMCG sector were that buying is much more frequent and goods once sold to the traders aren't taken back. So he decided to enter something as plebian as salt. Since its launch in October 2001, it shipped 60,000 tonnes to the trade.35 Agarwal also launched Friendly wash, a detergent in April 2002, in a bid to take on Nirma.

The Distributors Own Brands

In European and American markets the distributors in the late 80s and early 90s became competitors by launching what are known as private label or distributor's own brands. Distributors carried their brands because without them their ability to attract customers into their stores was limited. Conventional wisdom held that as shelf space was limited and future expansion was not in sight, brand names already on the shelf would have the power to generate huge cash flows. With hindsight this optimism was misplaced. In India organized retailing is growing with Food World in southern India and Vivek's in Tamil Nadu. Over the next few years, these distributors can start stocking products and brands of their own. Food world is already doing that, though at present it does not have any products that would compete with Nirma's products.

Contract Manufacturers Coming up with their Own Brands

Traditionally, in fast moving consumer goods companies like HLL and P&G, manufacturing never drives sales and profits. It is marketing that brings in the margins. Consider this. A small Mumbai based firm, VVF, contract manufactures soaps for many MNCs in India and abroad. It happens to supply soap to large number of hotels in the US. In late 2002, VVF launched a replica of Liril, branded Jo, complete with the unique marble effect on the soap cake. The price is Rs.10 for a 100gram bar, while Liril retails Rs.15 for a 75-gram bar36. This is the latest threat that FMCG companies are facing and since most of the contract manufacturers will play the money game, Nirma, which plays the same game is bound to be affected, as more such units get into making their own brands.

Competition in the Industry

The competition in this industry is basically between Nirma and Hindustan Lever Limited. There are other players like Godrej soaps, P&G and Henkel Spic. Of late, direct marketer Amway has also been able to corner substantial stake in the market. Other than these players, there are also, local level players (like Ghari and Double Dog in UP and Maharashtra, Friendly Wash in Western India) in every territorial market. At an all India level what makes it a two-way fight is the fact that no other company has the kind of geographic reach that these two companies have.

When Nirma introduced a laundry detergent targeted at low income Indian families, HLL, the Indian subsidiary of Unilever, reacted in a way typical of many multinationals: they did nothing. "That is not our market," HLL executives rationalized. "We need not be concerned."37 Nirma's Return on Capital Employed (ROCE) for the project was upwards of 121%38. This convinced HLL that it needed to take a closer look at the low-income market. Elementary market research showed that there was an opportunity to create a detergent of reasonable quality, catering to the traditional washing methods used by women from low-income families.

Following Nirma's lead, HLL invested in process, packaging, distribution and pricing innovations to make that detergent, dubbed "Wheel," a reality. This drove production costs to a minimum. Rickshaws were used to transport finished goods to the thousands of local stores that would sell them. In villages, murals of colorful appeal were used for advertising the new HLL product. The results were astounding: "Wheel" quickly became HLL's largest seller by volume. HLL's ROCE on its traditional high-end detergent line was in the neighborhood of 22%; ROCE on the low-income line approached 93%39. Unilever was quick to leverage this new insight in Brazil; its "Ala" detergent is currently selling through more than 10,000 outlets in that country. The major lesson HLL learned from the Nirma experience was that no niche should be left unplugged. Consequently, Levers had a brand in virtually every segment of the detergent market. This strategy changed since MS Banga took over and now HLL concentrates on its 30 brands, which have been identified as power brands.

In 1993, Nirma tried to put off the merger of the ailing Tata Oil Mills Company Ltd., (TOMCO) that was to be merged with HLL. The strategy was to try and wrest away 20% of TOMCO's shares by offering 50% more (Rs.75 for each share) than what HLL was offering at its swap ratio of 2:1540. Acquiring TOMCO would have given Nirma a 10% market share in the toilet soaps market. The winner among TOMCO's brands was Hamam. The other soaps that did well in their segments were OK and MOTI. Karsanbhai was not successful as the Tatas decided to sell off the stake to HLL.

In 1999 HLL again underestimated the wily Nirma. Nirma again changed the rules of the games with the launch of its fighter brand, Nima. All the while HLL had a substantial stake in the soaps market. Its growth strategy was focused on deriving greater realization by upgrading consumer to higher priced soaps. Things seemed well on course till Nirma started severely undercutting key Lever brands. This led to Nirma getting substantial stake in the soap market. In 2000, the honors went to Nima. With a penetration price of Rs.5, Nima's rose and sandal variants took away share from Lux and other brands in the popular soap segment, growing rapidly to about 50% of Nirma's volumes in the soap market.

HLL responded to the challenge by using Breeze and Jai to counter Nirma. Breeze did well, Jai came a cropper, and its perfumebased positioning simply didn't cut the mustard with customers. What's more Lever's business system could not price soap at Rs.5 to take on Nima. Lean and mean Nirma could do itbecause it did not have the kind of overheads that HLL had. The result was Nirma's total tonnage increased from 80,000 odd tonnes to almost 109,000 tonnes41, cornering close to 80% of the market growth.

Nirma's heady growth created another problem in the Lever portfolio. The volumes of its biggest brand, Lifebuoy began to decline. (The Rs.575 cr plus brand is one of the HLL's biggest cash cows for which it invests about Rs.8 cr on advertising). As a carbolic soap at the lower end of the market, Lifebuoy had always seen a natural migration of its consumers to beauty soaps. But every year, new users would come into the carbolic segment thereby negating any drop in volumes. One reason why Lifebuoy attracted new users was its price. But with entry of

Nima, a significant chunk of first time users moved away from Lifebuoy. Lux too declined in volumes as value conscious buyers gravitated towards Nima.

The Nirma experience made HLL more alert than ever and HLL kept launching campaigns to keep increasing its distribution reach. The latest two projects being Project Shakti42 and Operation Streamline43. Further, the marketing, process and distribution lessons learned via HLL's Indian success proved highly transferable. Everything that was done in Brazil was invented here in India. Unilever took Indian managers to build their entire system. They [Unilever] are doing exactly the same in Indonesia, in China and Mexico. The interesting thing is, this opportunity is for about 2 billion people around the world. Not a small market by any stretch of imagination.

Low Growth Rate of Sales

Companies in this sector for the last half decade are not growing at the same high growth rates that they were used to growing in the past (See Chart 8). To quote CK Prahalad44, "And four dominant themes seemed to appear in the explanations in the industry; failure of the monsoons, negligible increases in rural incomes, customer spending moving away to consumer durables and fragmentation of the media. Each of these can be easily challenged".

Monsoon does have an influence but it cannot be the primary reason for the growth of the industry. The second and the third reason contradict each other. If salaries aren't rising, people would buy fewer motorcycles and TVs-not more. But look at what's happening. They are buying TVs, radios, and DVD players. That could be attributed to the easy availability of consumer finance. But consumers still put 25% down and then repay the loan every monthtypically over 24 or 36 months. The fourth explanation is even more surprising. It suggests that FMCG business totally depends on media advertising. When Ramayana was popular, everybody was glued to his or her TV sets and we could advertise. But now, it is all fragmented and is so expensive on a per capita basis that we cannot advertise and, thus, we cannot sell. If TV is becoming more expensive, shouldn't we examine the role of regional and local media"?45.

The question that needs to be answered here is, how do we increase penetration and usage first, and then create new categories? Creating new categories is very difficult. And FMCG companies already have enough problems facing them. Instead the focus should be on increasing usage. No product has high usage by international standards. So the interesting question is what is the impediment to usage? Partly through education, people don't know the importance of using the product more frequentlylike the importance of washing hands before eating. Part of it is also access to the infrastructure needed for usagelike availability of water. But part of it is just sheer cost. And therefore, a combination of education, access and affordability should be the basic approach46.

To quote Prahalad47, " Why isn't anyone looking at qualitatively important attributes of the Indian consumer? Just because nobody has done that in the US, it doesn't mean we cannot do it. What we are talking about is not marketing, but market development. For example, everybody in the FMCG business has to deal with the availability of waterquality of water, amount of water used, washing clothes cleaning the floor or cooking. It is also a tremendously scarce commodity. What if I create a soap or detergent, which will need only one-fifth of the water that is currently required? Will there be a huge benefit? I think there is. Similarly, take salt. Forty percent of children in India suffer from goiter despite eating iodized salt. That is because Indians add salt during the cooking process. Due to heat, the iodine escapes. To solve

this problem, companies would have to develop encapsulation technology that protects iodine during the cooking process but releases it when ingested."

Low R&D Expenditure

The R&D expenditure as a percentage of sales for Nirma is very close to zero (see Chart 9). India has a lot of technical talent to drive new product development in the detergents and soaps industry but the company has not mobilized them.

The Future

The low-cost business model Nirma follows has a chance of going awry. Listen to the man who is giving HLL chairman Vindi Banga sleepless nights in the northern markets with his Ghari detergent powder: "In our case, as our range increases and we move into other markets, our overheads go up. Within UP it was fine, but now it's telling on our costs. If we don't do it slowly and cautiously, our cost structure could go haywire. Cost, which is our advantage, could become our disadvantage," says Murli Dhar48. The trinity of low cost, low technology and low sophistication can become stifling when the bigger players turn on the heat. What is in Nirma's favor is the fact that over the years it has invested a lot in technology and this has helped the company keep the cost of raw materials low.

"Entrepreneurs can create a brand, but taking it to the next level is a different ball game altogether,"49 says Munesh Khanna, head of NM Rothschild. Professionals need to be hired to do that. Members of the Patel family who are majority shareholders continue to manage Nirma. Now that Nirma is a listed company this is something that analysts like Khanna feel needs to change.

Questions / Issues to be Addressed:

Can the past strategy followed by Nirma in the soaps and detergents business ensure success for it in future now that quite a few new players are waging a low cost war on the company in certain pockets of the world? Justify.

Nirma has long relied on family members but now as the company has grown very large it needs to professionalize its management. How can this be done to ensure future success of the company?

The company has to face it. Should it diversify and grow or should it penetrate the market and expand along the existing line of business? What will be the implications of either courses of action on the company?

1 Patel named the powder Nirma after his daughter Nirupama.

2 The Legend Continues, A&M, October 15, 2000.

3 Source: nirma.co.in.

4 CK Prahlad was among the first batch of students who came out of IIM Ahemadabad and is credited with coming up with the concept of core competency.

5 Serving the world's poor profitably by CK Prahlad and Allen Hammond.

6 Convert India's Problems into Opportunities by CK Prahlad, November 25, 2002, Business World.

7 What should it be-mass or class? By Rama Bijapurkar, The Economic Times March 24, 2003.

8 ibid.

9 A brave new assault, June 3-16, 1996, Business India.

10 The Legend Continues, A&M, October 15, 2000.

11 A brave new assault, June 3-16, 1996, Business India.

12 CMIE's Prowess Database.

13 News Article, April 4, 2003, The Economic Times.

14 Godrej Soaps is a case in point.

15 `Better Products, Better Value, Better Living'.

16 The Legend Continues, A&M, October 15, 2000.

17 ibid.

18 ibid.