Hair oils: Time for consolidation

Aarati Krishnan

UNLIKE shampoos or hair colors, which are products relatively new to the Indian psyche, the usage of hair oil is a deeply ingrained habit with Indian consumers. Therefore, this is one product where the major players do not have to fight either monetary or psychological barriers to usage. But this does not necessarily mean that being a branded player in the Rs 1,300-crore hair oils market is easy.

Branded players account for just over a third of the total hair oil market. Players in the plain coconut oil segment operate in a category where there are few entry barriers in place. Loose oils are priced on the basis of input costs and availability, both of which are notoriously volatile. Since branded players have to grow at the expense of the ubiquitous unorganised segment and a host of regional and local brands, it is difficult to shield margins and selling prices from the vagaries of loose oil prices.

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Players in value-added hair oils are better off on this count. But competition in this segment is intense with Hindustan Lever, Marico Industries and Dabur India launching a slew of new products. Ad spends have been on a sharp uptrend.

Input price swings

The price of copra, the key input in coconut based hair oils, has been a key factor determining the fortunes of the major players in this segment. Take Marico Industries. Its brand Parachute dominates the branded coconut oil segment with a 53.7 per cent share (by September 2000). For the financial year 1999-2000, Marico Industries reported a sharp drop in operating profit margins to 6.9 per cent from 8.3 per cent the previous year. The key reason -- an upward spiral in copra prices in the first nine months of the financial year.

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Between March and November 1999, copra prices climbed 18 per cent. The impact on Marico would have been more dramatic but for the fall in edible oil prices, which are the second largest inputs for the company.

The situation has completely reversed in the first half of 2000-01. Copra prices crashed by close to 21 per cent between March 2000 and January 2001. There has been a visible improvement in Marico's operating profit margins to 8.9 per cent in the first half of 2000-01 from 7.1 per cent the corresponding previous period.

A product price war?

The growth opportunity for the major players in the coconut oil segment lies in recruiting new users from the loose oil segment. Players in this segment are, in effect, walking a tightrope. On the one hand, passing on the full impact of the upward spiral in input prices to consumers impedes volume growth rates. On the other hand, if they cut prices to match the trends in the loose oil market, the value growth would suffer.

While coconut oil prices spiraled upward between March and November 1999, Hindustan Lever (Nihar) and Marico Industries (Parachute) revised product prices upwards in phases through the year. However, volume growth for Parachute dropped from around 14 per cent in 1999-2000 to 6 per cent in the first half of 2000-01.

Since November 1999, coconut oil prices at the wholesale level have dropped by close to 50 per cent. Though players in the branded coconut oil market held off price cuts until the last quarter of 2000, there have been a series of price cuts on branded coconut oils since then. However, the price war is not yet over, with both players still in the process of trimming prices. Whether these price cuts pay off in terms of healthier sales volumes remains to be seen. However, the drop in sales realisations is likely to impact value growth in this segment adversely.

Growth opportunities

Intense price competition has spurred a consolidation of sorts in the coconut oil segment, with the larger players acquiring small brands with strong regional franchise. Both HLL's acquisition of Cococare and Marico's acquisition of Oil of Malabar have helped add volumes to these players brands. More importantly, the acquisitions have helped the national players gain a better distribution foothold in regional markets.

Value-added hair oils

Given the limited differentiation possibilities in the coconut oil segment, major players in the branded hair oils market have been training their sights on value-added hair oils. This has spawned a range of product innovations -- hair oils with herbal ingredients, non-sticky oils, light hair oils, and lately, dandruff solution hair oil.

An entry into the value-added hair oils segment appears to offer quite a few benefits to the branded players. One, with easier differentiation from the regional and local brands, establishing a brand identity is easier. Two, this makes value-added hair oils less vulnerable to price competition from cheaper alternatives. Third, value addition helps players command a price premium over the no-frills coconut oil brands.

Both herbal oils and non-sticky hair oils have been quite successful as product concepts. Dabur India's Vatika hair oil, one of the first players to milk the herbal category through aggressive advertising, registered a growth rate of 74 per cent in 1998-99. Dabur's hair oils business continued to grow at around 18 per cent in 1999-2000. HLL's Clinic Plus non-sticky hair oil (which combines coconut oil and mineral oil) has also been an unqualified success.

While Parachute continued to remain the lynchpin of Marico's hair care business, it was the value-added hair oils, such as Hair and Care, which clocked higher growth rates of late. While Parachute's growth rate fell from 14 to 6 per cent in the first half of 2000-01, Hair and Care's growth rates improved from around 7 per cent to 23 per cent in the same period. HLL's Clinic All Clear hair oil and Parachute Dandruff Solution have also entered the fray.

Importantly, while the plain coconut oils have revised their product prices downward, in line with the meltdown in loose oil prices, value-added hair oils have been able to maintain their price line.

Packaging innovations

Drawing on the phenomenal success of this concept in the shampoo market, players in the coconut oil segment have also migrated to low unit packs to rope in new users. Both Marico and HLL have launched 100 ml pouches priced at less than Rs 10.

Apart from making the product more affordable to mass market consumers, the 100 ml pouches are cheaper on a per ml basis than the larger bottles and flip top packs. This is likely to bring in new users from the loose oil segment. Packaging innovations such as all-weather jars and flip top packs have been experimented with over the past year.

Meanwhile, soft trends in input prices have been the driving force behind each of these initiatives. With copra prices on a steady decline, the major players in the hair oil segment have had larger margins to plough back into promotional efforts. Lower input prices also helped bring down the unit costs and helped players effectively compete with the unbranded segment.

Outlook

The continuation of the present price trends in copra would probably determine the near term financial performance of the large players in the plain hair oils business. On this count, there appears to be no near term cause for worry. A large part of the decline in copra prices is due to the substitution of copra by cheaper imported palmolein.

Even after three successive import duty hikes on palmolein, it continues to the remain the cheaper option for industrial users such as the soap industry. Prospects of a near-term uptrend in coconut oil prices therefore appear remote. With an aggressive price war breaking out between the players in the coconut oil segment, value growth in this segment is likely to remain subdued. Strategies in this segment will clearly hinge on price. The value-added segment appears likely to sustain the present growth rates of 20-30 per cent.