• Galactic Advisors

Marico - No Longer A Safe Parachute!

The story of Marico evolving is divided into phases, the first one being establishing Parachute and Saffola as consumer brands, these were previously under the consumer products division of Bombay Oil Industries (The Family Business).

About the Company:

In 1970, Harsh Mariwala, decided to convert the Parachute and Saffola business from B2B to B2C product. Previously, the Coconut Oil(Parachute) and Edible Oil(Saffola) were sold as a B2B product later on they were sold as B2C products in small packing of 100 ml instead of being sold in big containers of 15 Litres.

Marico’s Journey and change in strategies:

Timeline of Marico:

Source: Marico IP

Industry Overview: FMCG is the fourth largest sector in the Indian Economy, the size of the FMCG industry as on 2018 was 53 billion$. The FMCG sector contributes nearly 20% to the Indian GDP as on 2018.

The segments of FMCG Sector:

Source: IBEF

The main segment for Marico under the FMCG industry is the Hair Care market which contributes around 6.5% to the total FMCG sector. The Coconut Oil and Hair Oil is the major market for Marico and both these categories command 50% of the total hair care market. The company also has some presence in Hair Conditioners category.

Source: Bajaj Corp IP

Business Segments:

*The Kaya business was also the part of operations till 2013.

Indian Consumer Product Business Growth: Over the last 30 quarters, Marico’s Indian Business has shown subdued growth both in value and volume terms. The average volume growth was just 5% from Q3 2013 to Q4 2020. Given Marico’s product portfolio majority of its revenue comes from Coconut Oil which has now become a branded commodity so the demand for the product is not going to rise exponentially and it is also fully penetrated with around 70% penetration. The value growth of the business has also remained subdued in the range of 8-9% over last 30 quarters, mainly because of volatile input prices. Let’s look at the reasons why the Indian part of the business is struggling to grow. All the three major areas of company the Coconut Oil, VAHO and Saffola has struggled lately and has grown in single digits over last 7 years.

Source: Marico Company

Glimpse of Mario’s Dominance in Indian Consumer Product Business: Marico has been the leader in various products and segments and is place either 1st or 2nd in various categories, this shows how the company has been over the years focused on creating a brand in each and every category and this has yield results for the company.

Source: Marico’s Quarterly Updates

Indian Consumer Product Business: The Indian Consumer Product Business contributes 77% to the total Group’s Revenue. The Indian Business has been struggling to grow lately, the consistency and double digit which was prior to 2013, is not the case today. The sales CAGR from 2006-13 was 20% whereas the growth from 2013-20 dropped to 8% CAGR. The low single digit growth could be attributed to many reasons, like saturation of growth of Coconut oil portfolio etc. we will discuss it going forward why the FMCG giant of India is struggling to grow despite a strong foothold in the FMCG market and some decade old brands.

Source: Marico Company

Indian Consumer Product Business Segments:

Coconut Oil Business: The company has been known by its Coconut oil brand Parachute over the years, it is the largest player in Coconut oil in the world and it has a dominant market share in India. The Coconut Oil Franchisee of the business is the major source of Revenue for the company since inception. The size of the Coconut oil estimated by the management is around 5500 crores as in Nov-2019.

Branded Coconut Oil Market India: Out of the total Coconut oil market around 60-65% is sold in branded form and remaining 30-35% is still sold in unbranded form, here the company sees a huge headroom for growth. But this has not been the case over the years.

Source: Marico

*The Branded market has been around 60% over the last 7 years.

Leader in Coconut Oil:

The company has been able to maintain its leadership position in the coconut oil market and the market share has continuously increased and is currently at highest 62%.

Source: Marico

* Coconut Oil Brands are Parachute, Nihar and Oil of Malabar.

Coconut Oil Revenue Contribution: The Coconut Oil has been the major contributor over the years, the company has tried to reduce dependency on it but this has not paved the way for the company. Parachute Oil being a branded commoditized play there is no much visibility of growth, the volume growth has been in single digits and there are signs of it reducing in the term going forward.

Source: Marico’s Quarterly Updates

The growth trajectory is now muted with low single digits: The Parachute franchise has been on a muted trajectory since last 6 years in the low single digits, this could be attributable to many reasons like saturation of the coconut oil market, the loose form is not being converted into the branded form and also the raw material copra plays a huge impact on the volumes of Parachute.

Source: Marico’s Quarterly Updates

Period Q1-08 TO Q4-20:

If we have a look the average growth has been around 7% since 2008 and company has also given guidance of 5-7% growth in volumes growing forward.

Period Q1-13 TO Q4-20:

Parachute Revenue:

Revenue has grown at a CAGR of 10% over the last 8 years, so here also struggle is visible. The problem is mainly because of difficulty in volume upticks.

*In 2012, 2013 Kaya was part of Marico.

Correlation between Parachute Value Growth and Copra prices: Copra is the main raw material for Coconut Oil production and there exists a lag effect between the two. For eg:In Q1-15 the copra prices made the peak and you can see that between Q2-15 and Q3-15 the value growth was also the highest so we can here see that there is a 45 day’s lag between copra prices and the value growth (basically the price increase the company takes). So for us to forecast the value growth or the price increase the company is going to take could be ascertained by the copra prices trend.

Source: Marico Quarterly Updates

Competitively Priced: The Parachute is the most reasonably priced product available in the market and given its dominance in the Coconut Oil space, the low price acts as a stimulus for the customers to go for a more recognized brand i.e Parachute.

Outlook for Coconut Oil Category: During the last six years the coconut oil franchisee have not been delivering extraordinary growth as you can see in the highlighted part there has been instances of negative volumes growth, and the management is also expecting a 5-7% volume growth in medium term. So we cannot expect it grow more than 5-7% going forward.

Parachute – Edible Oil and not just a Hair Oil!!: The company classifies the sale from Parachute under the Edible Oil and not under Hair oil part, so everyone who would try to figure out why there is such a high sale from Edible oil when Parachute is the largest contributor. The classification is mainly because the ingredients in Parachute are same an Edible oil and there is guideline by Government wherein the sale from Edible oil enjoys zero Excise duty. The revenue mentioned under Edible oil head includes revenue both from Parachute and Saffola.

Value Added Hair Oil(VAHO):

The Value Added Hair Oil segment is the second largest contributor to the revenue after Parachute and company forayed into Value added segment way back in 1991. Marico has very effectively leveraged its expertise of building the Parachute brand in expanding the VAHO space and here also company has built some well-known brands.

In the VAHO category company is well diversified across different hair oil variants and the company is constantly trying to innovate in this segment. The other players that compete with Marico in the VAHO category are Dabur, Bajaj Corp, Emami etc. Some notable brands of the company are Hair&Care, Jasmin, Nihar Naturals, Parachute Advanced etc.

VAHO Product Portfolio: The Amla hair oil segment is the largest segment in the VAHO category with 27% share. and other categories are shares are mentioned below:

Source: Marico IP

Example of How Marico created a brand in VAHO segment: Currently the top performing brand in the VAHO segment is Nihar Shanti Badam Amla. So, Nihar is in direct competition with Dabur Amla and is leader in the segment with 41% market share in Volume terms. In the table given below we can see that how company has been able to gain a significant market despite Dabur dominating in 2010 with 80% share and during 2010-2019 Nihar share has increased from 9% to 37%.

*The above data is Value market share

Value Added Hair Oil Market: The Overall VAHO category has grown at a CAGR of 13 % over last 10 years.