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Have FMCG bigwigs milked their brands? - Views on News from Equitymaster
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  • Feb 29, 2012

    Have FMCG bigwigs milked their brands?

    The fast moving consumer goods (FMCG) industry rests on the pillars of strong recall value or brand value and robust distribution network. With most of the consumer products more-or-less appearing the same and offering the same functional benefits, it is the brand value that differentiates products from the me-too syndrome. Therefore, it is hardly surprising that whenever an FMCG company goes on the block, the brand valuation plays a vital role in determining the sale value of the company. A strong brand value not only ensures consumer loyalty but arms the company with pricing power in terms of higher premium enjoyed on the selling price and price-hikes pass through. Moreover brands help the company in warding off competition from incumbents.

    Therefore, a valuable parameter in evaluating the business strength of consumer goods companies is studying the brand performance over a period of time. Despite the huge importance of brands in case of FMCG companies, they lack a tangible existence in the company’s books, unless of course the company revalues the brands or has acquired them. In the latter case, the company would amortise the brands over a period of time.

    The performance of the intangible brands can be studied by analyzing the growth in the company’s earnings and networth. It can be safely assumed that large FMCG companies operated at least at the weighted average cost of capital of around 15% in the last decade (2002-2011). At this cost of capital, the networth required is considerably higher than the visible networth sitting in the books of companies. It is basically this contribution of invisible net worth to earnings that is the brand power enjoyed by FMCG companies. Using this premise let us now measure brand growth trajectory of topline FMCG companies.

    Colgate & Nestle: Armed with strong brands kitty
      PAT (Rs bn)   Networth (Rs bn)   Brand (Rs bn)  
      FY01/CY00 FY11/CY10 % CAGR FY01/CY00 FY11/CY10 % CAGR FY01/CY00 FY11/CY10 % CAGR
    Colgate 0.6 4.0 20% 2.4 3.8 5% 1.8 23.0 29%
    Britannia 0.7 1.5 7% 1.7 4.5 10% 3.0 5.2 6%
    Hindustan Unilever 13.1 21.5 5% 24.9 26.3 1% 62.5 117.2 6%
    Nestle 1.2 8.2 21% 2.6 8.6 13% 5.3 46.0 24%
    Glaxosmithkline Cons. 1.1 3.0 10% 3.6 9.6 10% 3.9 10.4 10%

    Note: Brand value has been estimated as the difference between the visible networth sitting on the books of the company and the total networth required by a company to earn 15% ROE at the same net profit level. In other words, whatever profit growth the companies have been achieving over and above what is required to earn more than 15% ROE is being attributed to its brand value

    A look at the numbers clearly shows that Colgate and Nestle are clearly the king of brands, witnessing over 20% compounded annual growth rate in the last ten years. Even Glaxosmithkline Consumer Healthcare has been deriving reasonable degree of mileage from its brands, logging an average growth of 10% in the past decade.

    However, what comes as a surprise is the relative under-performance by the brands of FMCG behemoth, Hindustan Unilever. Its brands registered a measly 6% decadal growth. A prime reason is the large amount of brands that the company has acquired over a period of time. It is a typical case of having too much on its plate and losing focus. Another company whose brands have been laggards is Britannia. A leading biscuit player which has diversified into other bakery and dairy segments, Britannia’s brands, though not many, have still been a slow mover. In fact for this company, brands have grown slower than the actual networth. In recent times, the company has been shifting focus of its brands towards health & wellness which is expected to deliver stronger returns in future.

    In a nutshell, brands equip a consumer goods company to earn higher growth in profits. However, it is not the number of brands but the strength of the brands that guarantee superlative and sustainable income generation capacity for a company. Backed by this brand equity, companies like Colgate, Nestle and Glaxosmithkline Consumer Healthcare have surpassed their counterparts in profit generation.

      Madhu Gupta (Research Analyst), Managing Editor, ResearchPro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages. Madhu contributes towards our small cap service Hidden Treasure.



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