This post has been corrected.
Last week, Patanjali Ayurved, a company promoted by yoga guru Baba Ramdev, took a big bite of the share held by American multinational, Colgate-Palmolive, in the Indian toothpaste market. Patanjali’s share of the toothpaste pie stood at 4.5% and is poised to grow into double digits through 2016, a report by Kotak Institutional Equities, a brokerage, said.
That means Colgate and other multinationals, who have dominated the Indian consumer market for decades, can no longer ignore Patanjali. From a noodle brand to rival the popular Maggi, to an infertility medicine, Patanjali has been actively building up a vast FMCG empire over the past decade.
This year, the company plans to invest more than Rs1,000 crore to tap into the over Rs16 lakh crore ($238 billion) Indian consumer market. “Patanjali has become the point of discussion in boardrooms of MNCs,” Ramdev, the company’s founder, said on Feb. 02.
Patanjali’s success is largely accredited to the yoga guru’s mass following and its reported use of “herbo-minerals” to manufacture products. The company grows many endangered herbs on its farmlands, Patanjali’s website claims. These herbs are said to be used in the company’s products such as health juices, honey, herbal tea, shampoos, shaving gels and even detergent powders.
“I expect Patanjali to emerge as an important player in the Indian consumer market over the next few years,” Shreyansh Kocheri, a research analyst at Euromonitor International, told Quartz. “I am not surprised to see it competing closely with companies such as Dabur India, Emami and Jyothy Laboratories, given that the company’s focus on expanding distribution in the coming years.”
How exactly is Patanjali winning?
Patanjali Ayurved began operations in 1997 as a small pharmacy in Haridwar.
Since then, it has largely kept its focus on three sectors: healthcare, packaged food, and beauty & personal care. These segments have a combined worth of Rs3.4 lakh crore and are among the fastest growing in the Indian consumer market, according to Euromonitor.
Today, the company sells its products mostly through franchisees. Its products are available in over 177,000 retail stores and through online retail. Over the past three years, Patanjali has recorded a compounded annual revenue growth of 64.7%, mostly by keeping products inexpensive in a price conscious economy and ploughing back profits into the business.
“If you look at Patanjali products versus Dabur’s (an Indian FMCG company), Patanjali sells so much cheaper. For example, Patanjali’s honey is priced at ₹70, whereas Dabur sells it for ₹120,” Kotak Institutional equities said in a report last month.
So, how does the company do it?
“There are four reasons why Patanjali’s products are cheaper than competition,” the Kotak report said.
“Patanjali’s top management takes no salary and they have no big expenses,” the report added. Ramdev, the face of the brand reportedly doesn’t own any stake in the company. His close confidant, Acharya Balkrishna, is the managing director. Ramdev’s brother Ram Bharat runs day-to-day operations, while Deepak Singhal, a pharma veteran and Ramdev follower, is the chief strategy officer.
Secondly, Patanjali benefits from efficient raw material procurement—without any leakages or commissions paid. This cut down costs by at least 5%.
However, Patanjali’s core strength in cutting costs lies elsewhere.
It has largely avoided huge advertisement costs that account for as much as 10-15% of the other FMCG majors’ expenditure. “Baba Ramdev is a great proponent of a direct marketing FMCG company, and is one step ahead of the likes of the Amways and Avons of the world,” Piyush Pandey, executive chairman & creative director of Ogilvy South Asia, told The Economic Times last year.
For years, Patanjali relied on direct marketing by the yoga guru’s disciples and instructors. According to brokerage firm, CLSA, Patanjali has the potential to reach out to more than 200 million directly or indirectly linked to his yoga programme.
This year, however, Patanjali has firmed up plans to spend almost Rs300 crore on advertisements across television, radio, print and digital media. Overall, it plans to invest Rs1,000 crore to set up exclusive stores, and ramp up online distribution.
The fourth and last reason is the company’s ability to maintain very low profit margins, according to the Kotak report.
Last year, the Haridwar headquartered company tied up with one of India’s biggest retailer, Future Group, for promotion and distribution. It is now planning to set up mega stores across the country, this year. “Our effort is to promote swadeshi (home-grown) and give a tough fight to MNCs,” Ramdev announced in October last year.
Clearly, the battlefield is set and it is going to be a Swadeshi versus Videshi (foreign) war.
An earlier version of the story wrongly attributed a quote to Shreyansh Kocheri instead of Kotak Institutional Equities.