Baba Ramdev’s Patanjali at Rs 200 bn will not cause much pain for FMCG companies; here’s why

By: | Updated: June 29, 2016 9:13 AM

Although we believe Patanjali can reach our estimate of Rs 200 billion turnover by FY20, it does not necessarily mean that this will cause significant pain for all FMCG companies.

patanjaliA conventional FMCG company has to spend heavily when it introduces a new product, on two main items a newly launched product or a product with a 1-2% market share has to spend on media disproportionately since there is a bare minimum threshold to run a media campaign.

Although we believe Patanjali can reach our estimate of Rs 200 billion turnover by FY20, it does not necessarily mean that this will cause significant pain for all FMCG companies.

This seems a contradiction but can be explained by three factors:

1) Patanjali’s ability to survive with low market shares across multiple categories;

2) Patanjali’s ability to expand the market;

3) Patanjali’s exposure to categories where our coverage companies have low exposure.

We believe that there will be some very specific categories impacted, and the jury is still out on the results.

Conventional wisdom suggests that no FMCG company can survive with low market share for a long time; it will either increase market share to a bare sustainable level, or it will be wiped out. There is good reason for this hypothesis.

A conventional FMCG company has to spend heavily when it introduces a new product, on two main items a newly launched product or a product with a 1-2% market share has to spend on media disproportionately since there is a bare minimum threshold to run a media campaign.

It is not possible to have a share of voice of 1-2% simply because market share is 1-2%; more likely, the share of voice is likely to be at least 10% in order to be visible to consumers and prompt them to shift from their current brand. The advertising-to-sales ratio, therefore, is likely to be much higher than for an established brand, and is not sustainable at these levels for a long period.

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