`Consumers will uptrade from bars to powders' - Mr A. Satish Kumar, Managing Director, Henkel SPIC

Aarati Krishnan

The ongoing battle between the detergent industry's two dominant players has turned up the heat on smaller players. But Henkel SPIC has held up well under the onslaught. The company has focussed on the premium and mid-priced segments and pepped up its product portfolio to tap the potential available at the higher end of the market. It expects to close the year with a healthy 15 per cent growth in net sales. Business Line speaks with Mr A. Satish Kumar, Managing Director, Henkel SPIC.

Excerpts from the interview:

You are present mainly in the mid-priced and premium segments of the detergent market, which account for 20 per cent of the volumes. Doesn't this impose a constraint on your expansion?

Yes, in volume terms they would account for 20 per cent, but in value terms, the share of the premium and mid-priced segments would account for 35-40 per cent of the market. We are satisfied with that. We are not interested in merely chasing volumes.

Second, we do have a presence in the low-priced segment through our acquired brand - Chek. We had a problem there with pricing the product in tune with our competitors. We are planning to relaunch Chek, concentrating on regional pockets where the brand is strong. These are Bihar, Karnataka, Kerala, parts of Uttar Pradesh and Madhya Pradesh.

We are also examining alternatives such as repackaging the product at convenient price points to attract consumers. This is not very easy, but we are working out the strategy. This will need some thinking. Once you fit your brand into a price point, it imposes rigidity on your product. Once you start offering, say, a Rs 2 detergent cake, it would be difficult to hike prices without losing customers. Yet, you cannot deliver a detergent cake at Rs 2 year after year without diluting quality.

But haven't growth rates in the premium and mid-priced segments slowed because of the economic slowdown?

In terms of value growth, I would say no. But in terms of volume expansion, growth rates in the premium segment may be lower than the mid-priced segment. But since we have increased prices, the overall value growth is much higher in the premium and mid-priced segments than at the lower end.

But in a slowdown, consumers usually downtrade to lower priced brands, don't they?

Yes, they do. There is downtrading to some extent. Those who use compacts may have downtraded to premium segments. But it all depends on which part of the curve consumers are in and how much they have moved up over the past two years. If most consumers are in the premium segment, they may downtrade to mid-priced brands, but they will not go all the way down to the economy brands. After all, consumers who have moved up to premium brands and have got used to a certain level of performance, cannot go back to using really low-priced brands.

Downtrading also happens through a balancing effect on consumption, where consumers reduce consumption of premium brands and supplement them with mid-priced brands. As marketers, we have addressed that situation by bringing in low unit packs. We have smaller packs, sachets, 200 gm packs of our premium detergents. We have also tried out promotional offers such as freebies. Finally, through all this, the consumer benefits.

Detergents already have a high penetration level with urban and rural consumers. Where is the scope for growth? Are innovations such as detergent tablets possible?

The product per se may have a high penetration level. But we have two opportunities here. First, we can upgrade cake/bar users to powders. We can upgrade low-priced powder users to better quality powders. Second, we can also try to increase per capita consumption, which is really low. I think there is enough potential in the domestic market.

As for innovations, products such as detergent tablets are niche products. And in the present circumstances, we do not want to dissipate our limited resources on very small categories. Tablets can be used only in washing machines, and the washing machine penetration is still low in India. Further, the price per unit for such products is likely to be high. If the same level of technology (as used in tablets) can be translated into a local form, then we can make a success out of it.

Your competitor, Procter & Gamble, recently slashed the price of Tide by close to 30 per cent. What is your competitive response?

We do not plan to change prices as of now. We already have Henko Stain Champion in the premium segment and recently launched Powerpearls in the compact segment.

We do not see any reason to change this. Tide, as it was initially priced, was neither in the Compact segment (Rs 150-155 per kg) nor in the premium segment (Rs 80-90). This is probably the rationale for the cut in prices.

What is your outlook for the near future?

In terms of demand, we have seen signs of a recovery in November and December. With the monsoons being good, we hope this will continue. In terms of our pricing strategy, we will wait to see the effect of the 2002 Budget and the imposition of value-added tax (VAT). If the Budget is cost neutral, we will have no reason to increase prices. But if it is not, it may be tricky to take an increase, just when the market is looking up.

The other issue is the impact of VAT. We are worried that States may impose an entry tax or octroi on the movement of goods or even stock transfers to compensate for the loss of revenues due to VAT. The VAT rate, when it is decided, and the response from the States will be crucial.

Have you examined backward integration as an option? How do your costs compare with integrated producers such as Nirma?

Our cost structure would be higher than larger players such as Nirma or Hindustan Lever. But today, I do not think backward integration is that big a benefit because one has to import N-paraffin at high rates of duty. In the initial stages, the fixed costs of operating a new plant would also be high in relation to older plants such as those of Tamil Nadu Petroproducts or Reliance. A backward integration project may take 3-4 years to stabilise. But if the World Trade Organisation really brings down import duties, and we have the choice to import our inputs freely, then backward integration may not make a big difference then. It definitely has a benefit in terms of secured raw material supplies. But that may not be much of an issue if imports are freed up.

The 2001 Budget cut import duty on both soda ash and LAB. But there has been an upward spiral in prices. What has been the impact on your input costs?

The Budget did reduce import duties on soda ash. But later, an anti-dumping duty was imposed to deter imports from China. When they brought in the anti-dumping duty, most Indian manufacturers of soda ash raised prices. In the year's first quarter, we felt some impact from this. In the second quarter, the fire at Tata Chemicals' soda ash unit restricted the availability, again raising prices. But, subsequently, international prices of soda ash have declined below domestic prices and people have switched to imports. Soda ash prices are now back to their original levels.

Are you satisfied with the growth in your Compact detergent?

Our brand Henko Compact was pitted against Ariel Compact and Surf Excel. We were not too satisfied with the progress, which is why we launched a new product - Henko Powerpearls. This was launched nationwide in November. The initial response has been good but we will have to wait for at least four of five purchase cycles before we can gauge the response. The timing may appear wrong, we are entering the premium segment when consumers are downtrading. But we have not been affected by the downturn as far as our premium brand - Henko Stain Champion - is concerned.

What growth rates did you achieve in 2001 for Henko Stain Champion and Mr White?

Growth rates for both brands have been at around 20-25 per cent in volume terms. We made some market share gains on both brands.

How far have you been in a position to upgrade users of cakes and bars to powders?

That is happening. In urban areas, the compact and premium detergents have reduced the consumption of bars. Also, if you plan to use the bar just for topical application on the garment, you do not require a premium bar, you could do with low-priced bars. In the rural areas, the substitution of bars with powders has not happened. This is due to several reasons. Rural consumers wash in flowing water and only bars can be used there. The level of consumption of premium and compact powders are also lower in rural areas.

But having said that, nobody believes that you can do away with the bar in the Indian situation. In the European situation, where the grime and pollution levels are lower, you may not require a bar. But in the tropical climate of India, we cannot do away with the bar.

Powders here are comparable to those available worldwide in quality terms. But they cannot handle the quantity of grime and dust that we have here. So bars will not be eliminated in India for, say, the next 15 years.

Over a period of time, just as consumers have moved up from lower-end powders to premium powders, we are sure consumers will uptrade from bars to powders. Economic conditions will have to improve too.

What are your expectations for this year?

We expect to close with a 15 per cent growth for the full year. Next year, if a turnaround happens, we are targeting a growth of 15-20 per cent over this year's base. But a great deal will depend on overall economic conditions, the Budget and the implications of the VAT.