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FMCG: Shopping time! - Views on News from Equitymaster
 
 
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  • Jan 10, 2007

    FMCG: Shopping time!

    The Rs 690 bn Indian FMCG sector was on an acquisition spree in 2006. As part of growth strategy, many FMCG companies clinched a string of major buy out deals in both domestic and international markets during the year. The companies have made acquisitions not only in the existing segments, but have scouted for acquisitions in newer categories. The FMCG companies have spread their wings across the globe last year.

    Although there were a fair number of such deals last year, 2006 clearly belonged to Tata Tea. It announced two big-ticket acquisitions and investments worth US$ 900 m, which is nearly the size of its current market capitalisation. In June 2006, the company acquired Eight O'clock coffee (EOC) in the US through its subsidiary Tata Coffee for US$ 220 m. EOC has enough headroom for expansion into other US regions (currently present largely in East Coast). This acquisition was in line with its intent of forward integrating into branded operations and expanding presence into new geographies.

    This was soon followed up by picking up 30% stake in vitamin water company Glaceau for US$ 677 m making it the largest deal in the sector and the third largest global acquisition by an Indian company after Videocon and Tata Steel. Glaceau is one of the early starters in the enhanced-water segment, growing at 200% compounded annual rate since its launch in 1996. The enhanced water segment in the US bottled water industry is expected to grow at a compounded annual rate of 32% till 2010, to US$ 8.6 bn. The sales for the Tata Tea's specialty and ready-to-drink teas are likely to increase due to Glaceau's strong network across 40 states in the US and its portfolio of fast-growing brands. Besides these, Tata Tea has made two other smaller acquisitions - Czech based Jemca specialty tea and the US West coast based Good Earth specialty tea to transfer itself from a tea plantation company to a beverage company and in the process has gradually moved up the value chain.

    Yet another FMCG company, Marico embraced an acquisition-led strategy to expand its brand portfolio and geographic reach. The company bought Nihar from HLL for a consideration of Rs 2.2 bn. This helped the company not only to increase its distribution reach across the country, but also consolidate its position in the hair care segment and garner more market share. The brand is expected to add 10% to Marico's FY07 revenues. The acquisition of the soap brands (Aromatic and Camellia) in Bangladesh enabled the company to strengthen its position in the Taka 6 bn market. Marico acquisition of two hair care brands (Fiancee and HairCode) in Egypt will give a 50% plus share of the hair care market in Egypt with a combined turnover close to Rs 1.1 bn and is a part of the overall strategy to increase its international revenues. The company plans to secure a gateway into new markets through its recent acquisitions.

    Godrej Consumer Products (GCPL), which acquired Rapidol in South Africa in July this year, has also started seeing some amount of incremental growth through the acquisition. In 2QFY07, Rapidol contributed Rs 30 m to its overall turnover of Rs 1,240 m. Rapidol owns, manufactures and distributes the ethnic hair colour brand INECTO and haircare brand SOFLENE in the African continent. This acquisition has provided a springboard for the introduction of GCPL's products in South Africa and other African countries

    Britannia picked up 50% stake in Dairy Breads in a deal valued at Rs 85 m. Daily Bread operates in both the institutional and retail segments and offers a wide range of international quality bakery products. Britannia plans to use Daily Bread as a vehicle to supplement its core business with a fast growing high margin line of products and will work on developing a national footprint for Daily Bread.

    The acquisitions were done with the following objectives

    1. To extend their existing product lines (example Tata Tea and Marico).
    2. To increase their presence in a market (example Godrej, Britannia, Marico).
    3. To enter a competitive market (example GCPL's entry in to South Africa).

    The acquisitions highlight the strategies of the FMCG companies to possess large war chests in pursuit of inorganic growth along with cashing in on attractive valuations. While acquisitions of Marico and GCPL have already started on a positive note, the effects on Tata Tea and Britannia are expected to filter in this year. Also, with HLL, Dabur and Procter & Gamble reportedly stating that they too are on the lookout for acquisitions in India, 2007 promises to be no different, if not bigger.

     

     

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