Jul 11, 2013|
Is Marico's Saffola brand under pressure?
Marico is a mid-sized FMCG company deriving more than half of its revenues from oils. The company has overcome the low margins of a commodity business by investing behind value-added products. In edible oil, Marico has a powerful brand Saffola with a strong focus on health & wellness.
Industry dynamics of edible oil
India being deficient in oilseed production, imports meet around 60% of the overall edible oil demand. Huge dependence on imports makes domestic oil companies susceptible to global dynamics and exchange rate fluctuations. Moreover, the inventory holding period is stretched by the seasonality as well as higher share of imported inputs raising the working capital of companies. To add to this, the huge presence of the un-organised players in a market with low entry barriers has kept the margins of the industry thin. Among oils, palm oil, soyabean oil and rapeseed oil are largely consumed. The edible oil industry is highly price-sensitive with the cheapest, palm oil, being the widely consumed oil. The edible oil demand remains elastic and switchable.
Price sensitivity in edible oils
^ representing niche oils such safflower oil & olive oil
||Consumption share (2011-12)
* based on price of safflower oil
Source: Solvent Extractors' Association of India
The Saffola brand
Saffola edible oil was launched way back in the 1960s, but was promoted as healthy oil for the heart in the 1990s. Marico set up the Saffola Healthy Heart Foundation in 1991, and followed it up with several rounds of mass-media campaigns to build awareness about risks that our modern lifestyle poses to the heart. These initiatives have created a 'good for the heart' image for the Saffola brand. This unique brand acceptance has enabled Marico to command a substantial premium over other edible oil brands and shielded it from vagaries of the industry dynamics. Saffola is the market leader in the super-premium refined edible oil category with a 58% market share.
With the Indian consumer being price-conscious, Marico's strategy revolves around coaxing consumers to shift from unbranded or loose oils to branded oils. This is achieved by adjusting the premium charged in line with inflation in other refined edible oils to ensure steady uptrading by consumers. The current inflationary environment has adversely impacted discretionary consumer spending. As a result the offtake of Saffola has been hit.
Emergence of rice bran oil
Rice bran oil was mainly used in soap manufacturing until 1995 and found usage in vanaspati and blended oils from 2000 onwards. Rice bran oil is rich in oryzanol that is known for cholesterol reducing properties. Therefore this oil is known promoting healthy heart benefits. In 2004, Marico launched Saffola Gold, a blend of safflower and rice bran oils. Increased health awareness led to many rice bran and blended rice bran oils entering the market in 2010. As per Solvent Extractors' Association of India (SEA), the country produces the best quality of rice bran oil and is the largest producer of the oil in the world. Presently the country produces 0.9 m tonnes of rice bran oil that can be raised to 1.5 m tonnes. This is still miniscule as compared to 16.4 m tonnes of edible oil consumed annually.
Rising competitive pressures
Marico has been battling slowdown pressures in the Saffola franchise since the December 2012 quarter. The company has cut prices by 3-6% to plug the huge price differential with other refined oils. To further compound problems, another company Adani Wilmar launched unblended Fortune Rice Bran Health oil claiming it contains much higher quantity of oryzanol as compared to Saffola Gold but is still cheaper than the latter. This claim was made on the basis of Adani Wilmar's contention that Saffola Gold has altered its original blend of 70 per cent rice bran oil and 30 per cent safflower oil to 80 per cent rice bran oil and 20 per cent safflower oil. Marico filed applications against Adani Wilmar in the High Court for disparaging its products. However, the applications were finally dismissed due to lack of substantial proof.
The edible oil industry suffers from poor margins. Marico has overcome this drawback by building the premium Saffola brand on the health plank. However, the recent slowdown in discretionary spending has adversely impacted sales. Additionally, increased competition has further exerted pressure on the Saffola brand. The company has taken pricing action and expects double-digit growth in sales in FY14. Going ahead, higher ad-spends to counter competition is expected to cloud Marico's margins.
||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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