How you too can fight big competitors (CavinKare Story)

(The Economic Times Mumbai, Aug 31, 2012, Corporate Dossier)                       

I have lightly edited the article

This is the story of how CavinKare grew right under the nose of Hindustan Levers and Procter & Gambles. It continues to be a thorn in their side even now; in spite of being a fraction of their size. According to C K Ranganathan (CK), the founder, it is the “ideas” that have enabled this. He transformed “Beauty Cosmetics”, a company he founded in 1983 when he was 19 with a shampoo called Chik - into a Rs 1100 crore CavinKare of today.  

Choosing a target market different 
from the target markets of the competitors 

Chik went after low priced sachet market. Big companies like Hindustan Lever and Procter & Gamble thought it didn’t suit their and their brand's image. The competitors did not seem to bothered by the market CavinKare was creating. At least in the beginning.

A differentiated value proposition

CK was accustomed to the “Velvet” shampoo business and hence went into the same business on his own under the “Chik” name and began creating a me-too product. “Velvet had a flavour called ‘Lime’, so he called his  ‘Lemon’. Similarly,  Velvet has ‘Henna’ so he called his ‘Heena’, Velvet had ‘Doctor’ so he called his ‘Tonic’. But retailers called him copycat.

He says, “I then realised I didn’t understand the true meaning of differentiation. It took me some time to learn it from retailers and distributors. And that was the starting point of our growth.”

Ranganathan then ‘invested disproportionately’ in imported fragrances that helped him shake the ‘me-too’ tag. The idea to launch a 50p Chik sachet, in a market full of Re.1 sachets, was pure gut feel. The early adoption was driven not just by the sheer affordability, but the fact that many Indian women washed their hair once a week — and a single-dose low cost product was perfect for it. Not only did the 50p shampoo do well, the 1 Re. shampoo did even better. Today the Chik brand is worth Rs 250 crore.

Former Hindustan Levers executive director Dalip Sehgal, who worked for the FMCG giant between 1982 and 2007, acknowledges that Ranganathan possessed strong insights into the mind of the consumer. “The Fairever fairness cream used saffron and milk, considered by South Indian consumers as skin whitening products.” He adds, “But it didn’t work in the North because those consumers didn’t feel the same way.”

In recent times, analysts have commented on the company’s inability to focus on its core brands and innovate. Ranganathan admits that CK was ‘caught in the sachet game for a long time’. But CavinKare has changed tack again and is now looking at market gaps where it can achieve easier growth with higher margins. It is also investing about 2.5% of its revenues in research and product development.

Staying within its 
Value-chain paradigm

HULs and P&Gs had big pockets and big muscle. CavinKare did everything in small doses.  The company outsourced  its manufacturing  until 2006 to keep its costs low. It also entered no-credit deals with distributors and this automatically precluded large distributors like ITC’s (who demanded 45 days of credit) from being attracted by Beauty Cosmetics. His team then “created distributors” .

He identified people who gave bicycles on hire and asked them, “why are you struggling like this? Open a distribution business for us” and the deal was they would give a demand draft for Rs. 2000, get trained by Beauty Cosmetics’ staff and then go to the market on cycles, taking and filling orders. This gave Beauty Cosmetics a steady supply of working capital. “We kept rotating the wheel without investing; it was cash all the way,” he says.

The humble cycle continues to be a potent weapon for CK. Earlier this year, CK created a rural distribution organisation with specialised rural stockists responsible for covering smaller villages in the vicinity and setting up sub-stockists there. The idea is that you need a whole different mindset to serve the rural market. “Unlike a rural guy, an urban stockist won’t wait an hour for a bus in a village. In a specialised rural system, everything is geared towards low cost, from distributors to salesmen and logistics.”

Converting problem into an opportunity :
Go to market

Making a dent in Velvet’s dominance was no easy task because it had become the generic name for ‘sachet shampoo’.  He then thought of a scheme — buyers could exchange 5 empty shampoo sachets and get one Chik sachet free because “Chik had barely half a percent of the shampoo market. And sales had started to dwindle. We needed a radical idea to get people to try our product.”   The great surprise wasn’t that the idea worked; the reason was the shocker. A sales representative who met a retailer reported back to Ranganathan saying that collecting empty sachets and exchanging them for Chik was getting so profitable, he actually started feeling guilty! So he bought more Chik sachets and would hand them to buyers who asked for Velvet. As this picked up — and also, as people began appreciating the new fragrances — the market exploded. “From being present in one out of 10 outlets, we were now present in nine. That’s when I knew we were in business,” says Ranganathan.

People Oriented

CKR was ‘ruthless’ about selecting the right people and  was clear he wanted people who always remained updated and performed on any assignment handed to them.  But he was never unreasonable or insensitive. In 1984,  when the company faced a major financial setback they had no money to pay the 15 sales representatives. CK set up a temporary rose-flavoured shampoo manufacturing unit. This kept the turnover rolling and CKR was able to make enough to pay its sales staff.

When erstwhile Finance Minister Manmohan Singh announced in 1993 that excise concessions for small shampoos and cosmetics manufacturers would be withdrawn, Ranganathan realised his staff would be worried about the impact it would have on CavinKare now that it would have to fight the big guys directly. “People were wondering if I had anything up my sleeve. That year, we have the highest increments (40%) to our staff across the board to give them confidence,” he says.

Street Smart and Nimble

 A senior industry veteran who requested anonymity has a different point of view on the excise duty issue. He says that Ranganathan ‘flew under the radar by taking advantage of the excise exemptions for small scale industries’. “He owned many manufacturing units that made shampoo. The moment one unit reached the permissible limit for exemption, it would pack up, move elsewhere and restart operations under a new name. We called them factories on wheels,” says the veteran, acknowledging that while this may not have been illegal per se, but it was ‘on the ethical borderline’.

One thing was clear: for Ranganathan, survival was key. He knew that moment he touched Rs five lakh worth of goods, he would lose his the advantages he was getting as an SSI (small scale industry). He says, “I scouted for people to outsource my manufacturing to. But no one was interested. So I came out with a very attractive scheme — invest Rs. 40,000 in the business and you will get Rs 40,000 as profit (plus capital) in 4 months. The scheme really worked. At one time I had 150 units running for us.”

Values Mean Money
In Long Term

 While Ranganathan may have taken advantage of the SSI status, the value system he tried to inculcate in the organisation stood him in good stead. In the mid-nineties, CK got into some trouble with the authorities over shortfall in sales tax dues. Ranganathan says that because they didn’t understand the nuances of taxation, they were paying tax at the old rate of 12%, as opposed to the new 18% rule. The shortfall was about 1.5 crore, but with penalties added, it came to Rs. 5 crore. “My accounts person met a corrupt tax official who said he would clear the whole thing for a Rs 10 lakh bribe. The accounts executive came back happily saying ‘I have saved the company so much money’,” recalls Ranganathan, who was infuriated with the executive. The company eventually went to court to pursue the dispute legally and eventually paid the Rs 1.5 crore rightfully owed by them to the government.

Ranganathan doesn’t feel like he did something heroic. “Though we were paying much more because of our honesty, there were advantages. We couldn’t compete with our taxevading peers on discounts, so we were forced to differentiate our products, which grew our market share. Secondly I could attract decent talent. Respectable people come to you when they know you’re not up to hanky-panky. And finally, our bank started increasing our overdraft limit and sanctioned large loans because the manager recommended us saying  ‘Unlike other companies, this firm pays income tax properly’.”

Fail Fast, Learn
And Move  Faster

Unlike the giants, it didn’t have the luxury of pouring money and resources into experiments indefinitely. So it did the next best thing: failed fast and got the heck out. In the early nineties, CavinKare introduced its own mineral water brand, Minerva. But they ran into an unexpected roadblock. The majority of the company’s distributors used tricycles for delivering products to the retail outlets. And each case of mineral water weighing 18 kg earned them Rs 100. However, a shampoo case of 10 kg got them Rs 1000. Even the simplest of minds can figure out what the distributor would prefer. “We got a rude shock,” laughs Ranganathan. There was no option but to exit and the company did so promptly.

There were other experiments gone wrong too, like the one in the soap category. CavinKare’s soap was priced at par with competitors and it was even doing decent sales, thanks to the company’s distribution network. But given the potential of the market, it wasn’t adequate. “We discarded the soap early because there was no point. It wasn’t worth investing in advertising and marketing to sustain the brand. And we didn’t want to stay in business just for the sake of it,” he says.

Something similar is happening with the restaurant business CK launched with much fanfare in July 2009. Three years on, Ranganathan confirms that he plans to dilute CK’s stake in United Agrocare, which owns its ‘CK's Foodstaurant’ and ‘Vegnation’ brands. “We have diversified (sic) the restaurant business and are getting out of it,” he affirms, adding that other brands may also be pruned.

An FMCG analyst who did not want to be named says, “Though CK’s success is a case study in itself, its portfolio expansion strategy was all over the place. While others like Ghadi detergent was able to grow by focusing on their core strengths, CK got into areas unrelated to its core businesses of haircare and skincare.”

Raise Capital At The Right Time,
For The Right Reason

For many years, CavinKare has had opportunities to raise funds from the markets, or through private equity. But the company was driven by a firm policy. “One strong belief we grew with, is that there are no money problems, only idea problems,” Ranganathan says. The brand’s strong performance, particularly in the personal care segment in South India, enabled it to roll funds internally. Ranganathan says that he was never in the business to make a profit and clear off. That is why, despite the opportunities to get Private Equity funds or go for market listing, CK bade its time. “We are sitting on powerful capabilities, and its taken time to build those. So there is no question of exiting in a hurry,” he says. Now, almost three decades after he started the company, CavinKare is looking to raise funds. “We want to raise around Rs. 500 crore and will begin discussions with Private Equity players in the next couple of months,” Ranganathan reveals.