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Have foreign brands really helped FMCG companies? - Views on News from Equitymaster
 
 
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  • Dec 27, 2012

    Have foreign brands really helped FMCG companies?

    The domestic FMCG industry valued at Rs 1.6 trillion (Source: Nielsen) is characterized by the large presence of multinationals through subsidiaries. Hindustan Unilever (HUL), Nestle, Colgate and GlaxoSmithKline Consumer Healthcare (GSKCH) are among the top companies that define the consumer goods landscape in India. While these companies have the advantage of access to their parent companies' established global brands, they are required to pay royalty charges for selling the overseas brands in the domestic market.


    A look at the chart above clearly shows that FMCG behemoth HUL pays the lowest royalty among the multinational companies in the country. The reason for the same can partly be attributed to Indian brands that contribute a sizeable share of 47% to overall revenues (industry estimates). HUL's well known Indian brands include Wheel, Fair & Lovely, Lakme, Hamam, Breeze, Annapurna, Kissan and Pureit. Among its global brand offerings are Lux, Lifebuoy, Ponds, Vaseline, Dove, Surf, Close-Up, Sunsilk, Brew, Axe, Knorr and Clinic.

    But does ownership of a large portfolio comprising of Indian and global brands really help?

    The answer to this question lies in studying the brand performance over a period of time.

    HUL's brand performance remains tepid
      PAT (Rs bn)   Networth (Rs bn)   Brand (Rs bn)  
      FY02/CY01 FY12/CY11 *(%) FY02/CY01 FY12/CY11 *(%) FY02/CY01 FY12/CY11 *(%)
    HUL 15.8 28.0 6% 31.4 36.8 2% 73.7 149.9 7%
    Colgate 0.7 4.5 20% 2.5 4.4 6% 2.2 25.4 28%
    Nestle 1.7 9.6 19% 2.7 12.7 17% 8.9 51.4 19%
    GSKCH 1.3 3.6 11% 4.4 11.4 10% 4.0 12.2 12%

    * 10-yr Compounded Annual Growth Rate
    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


    The study clearly shows that brand success is not guaranteed by number of brands alone. In fact, HUL with its huge brand portfolio has been a laggard as far as brand performance is concerned. In the past decade, the company's brands grew by a measly 7% as compared to robust double-digit growth clocked by Nestle and Colgate. Even a relatively small company, GSKCH with presence only in malted beverages has performed much better on the brand front.

    Conclusion

    While addition of a brand certainly adds to the company's brand equity, but it starts contributing towards shareholder's returns only through a concerted and focused brand strategy. Therefore HUL has been sharpening its brand focus in the past two years. The company has expanded existing power brands such as Vaseline, Ponds, Fair & Lovely and Dove to adjacent product categories. At the same time, the company recently launched premium personal care brands Sure (anti-prespirant) and TRESemme (hair care) from its global portfolio. Going forward, HUL should benefit from its revamped brand strategy.

      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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