Har ghar kuch kahta hai” was the tagline for a very successful advertising campaign that Asian Paints ran a few years ago. It was among the many commercials that helped the company find its way into hundreds of homes across the country; from Meerut to Madurai, there weren’t too many houses that hadn’t seen a coat of paint from Asian Paints.
It also helped the Mumbai-headquartered firm make its way to the top of the industry with a commanding 50% plus share of the organised market. By March, next year it should clock revenues of over Rs 15,000 crore and profits of close to Rs 2,000 crore, no mean achievement.
The going might have been better but the slowdown in the economy is hurting and it’s the dominant market share—twice that of its nearest rival—that’s giving Asian Paints an edge; whether it’s procuring resources or leveraging the dealer network, size helps. And in a slowdown, like the current one, it has the wherewithal to sell low-margin products that help dealers turn over stocks faster; that helps since paints are a relatively low-margin product yielding 3%-4% and dealers look to churn inventory frequently.
The distribution chain wasn’t built in a day; it took years of painstaking handholding to convince dealers to stay on in the business. But today it’s probably the company’s lifeline and from 25,000 dealers about eight years ago the network is now 35,000-strong. Brokerage Jefferies believes the recent initiative in distribution—‘Ezycolour Retailer’programme, that equips each dealer shop with a self-help colour consultation kiosk, trained shop assistant and trained contractors, is particularly impressive.
Piyush Pandey, national creative director of Ogilvy & Mather India says that even before Asian Paints started advertising, its distribution network and systems were well established. “Their products were available in the smallest of places. Only when they had a strong marketing set-up did they start advertising in a meaningful mass media fashion,” says Pandey. He should know since Ogilvy, has for more than two decades now, fashioned the paint maker’s campaigns across products and price points.
Asian Paints was among the earliest product companies to realise not only that the Indian consumer’s aspirations were growing but that the trend was true across Tier II and Tier III towns— the premium Royale, for instance was launched in 2004 and in a few years it was selling more in small-town India than in the metros. With emulsions outselling distempers and repainting cycles getting shorter the firm’s 35,000 dealers felt they were being rewarded.
After a point, thanks to some effective advertising, dealers would have had it relatively easy; Asian Paints’ campaigns have not just played on emotions linked to festivals or weddings, they have also played on the urban middle-class consumer’s aspirations—the “Wah Sunil babu” campaign, for instance. Observes Ogilvy’s Pandey, “The communication has tried to keep pace with product innovations through equally innovative campaigns.” He adds, however, that communication has been just one factor driving the firm’s success.
It’s all paid off. Consolidated revenues have grown at an impressive compounded annual rate of 18.5% over the past decade while operating and net profits have risen a remarkable 20%.
Much of this, as KBS Anand, MD and CEO, Asian Paints points out is thanks to the continuing premiumisation.
“Every new premium product that we have launched—Aspira, Ultima Protek or Nirlaya wall paper —has met with a good response from the market,” says Anand. Compared to the industry average of 20%, premium products contribute close to 25% of decoratives at Asian Paints and could grow to a third in the next three years. That would boost revenues meaningfully given decoratives already fetch two thirds of the firm’s topline. In the meantime, the company is taking measures to see that a sub-normal monsoon doesn’t upset the momentum; it has cut prices of products by about 2% to 4% partly to pass on the benefit of lower raw material costs; the management has indicated further price cuts could be considered. That would help it protect volumes and market share since volumes have slipped in the last few months.
Indeed, the firm has managed prices astutely not hesitating to take price hikes of even 11-12% in the past when prices of crude oil went up; the result of these hikes can be seen in the strong gross margins of 40-45% that the firm routinely turns out. But as Kotak Institutional Equities points out, the company’s rather jaded numbers for the three months to March, 2015, underscore an important point; that earnings are never about a single variable—gross margin expansions, in this case. So while gross margins did expand by 320 basis points year-on-year to 45.1%in Q4FY14, they couldn’t deliver the kind of profits that were expected. Ultimately, it’s the top line that matters and the negative operating leverage coming from a very muted growth in sales, limited the expansion in the Ebitda margin to 114 basis points year-on-year. It’s a reflection of how tough the times are; the weakness in the real estate and construction sectors and falling purchasing power in the semi-urban markets, a consequence of rural incomes rising more slowly, are both hurting. But you can bank on Asian Paints to come through with flying colours.