Is Patanjali Ayurved Limited (PAL) the next behemoth in the FMCG sector?

Overview of Patanjali Ayurved Limited and FMCG sector 

Patanjali started as a small pharmacy in 1997 in Haridwar and was incorporated as a company in 2006 to sell FMCG products. A decade into the business, PAL has started sending jitters down the spine of FMCG giants in India including HUL, Nestle, Coalgate, Dabur, Britannia and Emami among others. The FMCG sector accounted for 2.94 lakh crores in 2016 and is expected to grow at a CAGR of 13% to 4.79 lakh crores by 2020. The key growth drivers are increasing income (as per the IMF estimates, GDP (PPP) per capita for India will increase from $6,162 in 2015 to $8,351 in 2019), burgeoning youth population, changing lifestyle & structural reforms to promote FDI inflows and market sentiments. PAL’s share in the FMCG sector is expected to increase from 1.7% in 2016 to 4.2% by 2020. PAL is set to disrupt the FMCG space and is projected to register a growth of 58% till 2020.

FMCG Market Size and Turnover

Key differentiators for PAL

1.  Advertisement and Promotion (A&P) expenditure

For an FMCG company, the average A&P expenditure amounts to 14%-15% of the annual sales. This is important to register the product in the mind of consumers and create recall value. Also, the multitude of products launched by the company and competitors makes it imperative for the company to invest in marketing and promotional events to create a value proposition for the customers.

On the other hand, PAL incurs A&P expenditure equivalent to 5% of annual sales. It relies heavily on the brand value and customer connect is established by yoga guru, Baba Ramdev. Amongst the myriad of products and companies, Baba has surreptitiously created a unique value proposition of Ayurveda and fit lifestyle through PAL’s products. He fervently opposed the consumption of MNC’s products given the high usage of chemicals, rampant corruption in corporates etc.

2. Pricing

A majority of PAL’s product are offered at a discount of 15% – 30% on competitors’ offerings. This serves as an important factor in penetrating the middle and lower middle-class population residing in urban and rural parts of the country. The pricing goes in line with the purpose of PAL which is “Upkar and not Vyapar” (Welfare, not business).

Products Price

Additionally, it has been able to reciprocate the idea that its products are of utmost quality prepared using fresh, organic and herbal raw materials. Given the growing health consciousness in the nation, the high-income population is also slowly drifting towards products being offered by PAL. Thus, PAL has a value proposition for all the sections of the society.

3. Distribution cost

Most of the FMCG companies rely on retail trade through a chain of distributors to sell the products, which requires large network of warehouse, distributor, wholesaler and retailer. PAL relies on its retail network of ~10,000 Chikitsalays and Aarogya Kendras to sell the products. However, it is now focussing on robust distribution channel with its product available in more than 2,00,000 retail stores in India. The company is planning to grow the outlets by ten times in next one year. Its production units are also relatively modest. Low distribution and overhead costs result in a cost advantage of 20%-25% compared to competitors. PAL also saves in human resource cost as it has only a handful of expensive employees from elite MBA institutes. This helps them propagate the idea that they trust their brand immensely. Thus, expensive resources are not required to sell and/or market their products. If the products are good, the customers will buy them willingly.

4. Indigenous vs. Foreign

Ramdev Baba capitalized very well on the fact that many of the players in FMCG sector are MNCs which have captured a significant chunk in the market. He urged people to support indigenous companies as they are in line with the greater purpose of generating employment, Make in India and helping the economy to grow. Also, he critically accused MNCs of high usage of chemicals and rampant corruption. His cameos as an agent for social change contributed to establish the fact that he is working for the welfare of society. He has been associated with Jan Lokpal agitation, treatment of patients suffering from incurable diseases such as AIDS and other social issues.

Impact of PAL on the FMCG ecosystem

FMCG Ecosystem

Challenges and way forward

PAL is facing a huge gap in meeting demand for its products. There are only 2,00,000 retail outlets which sell PAL’s products across India and frequently fall short of supplies. As more than 90% of the Indian consumers buy FMCG products from such retail outlets (kirana stores), PAL not only needs to push deeper into its distribution network but ensure a constant supply. FMCG giants such as HUL, Dabur, Colgate and Nestle outnumber PAL by a margin of 15-30 times in terms of the number of retail outlets (Fig. 3). As per the report by Nielsen, availability of the product is the largest driver of FMCG sales, and it is 30%-40% likely that the consumers shift their preference if the favourite brand is not available at the store. To increase its outreach, PAL is targeting to expand to ~20,00,000 retail outlets by FY 17. Given the expansion plan, PAL needs to ramp up its production and logistics services to ensure regular and adequate supply of products to the new and existing outlets.

FMCG Ecosystem

Retail outlets earn low margin (5% – 10%) on PAL products as compared to other brands where cumulative margin on the entire range can shoot up to 50%. The store maintenance on an average costs up to 15% of sales. Given the low profitability of PAL products, these outlets need to sell in bulk to realise the benefits of economies of scale. It becomes imperative for PAL to ensure regular and adequate supply of products so that the outlets are motivated to sell their products.

Given the trust and loyalty that PAL has created among customers, it is expected to further increase the consumer base by leaps and bounds. With cheaper goods, it has the potential to attract lower middle class population for consumption of branded FMCG products. This will open plethora of opportunities which has been largely untapped by most of the FMCG players. However, it is equally important to maintain the quality products as it has been the differentiating factor for the company.