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A Case Study on Acquisition of Personal Care

Brands of Paras from Reckitt Benckiser

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© Marico Limited 2013

Marico’s History

Genesis

In 1990, (not so long ago!); Marico was born and newspaper

advertisements dramatically announced “200 Employees Walk out of

Bombay Oil”. This was the result of the vision of the audacious

entrepreneur, Harsh C Mariwala. He strived for over two decades after

joining the family business in 1971 to finally create a distinct identity of

a successful brand based company known as Marico (a name lovingly

given by the then employees of the FMCG division of the diversified

family business known as The Bombay Oil Industries Limited (BOIL)).

From that point on, Marico never looked back. By 1996, Marico became

a worthy adversary to large competitors such as HLL (now HUL) and

ITC. It extended its brand portfolio from two (Parachute and Saffola) to

six (Sweekar, Hair & Care, Revive and Sil) brands. All six of these brands

were No. 1 or 2 in their respective market segments. Marico’s Sales

turnover grew from INR 159 Crores in 1992 to INR 348 Crores by 1996,

a CAGR of 22% accompanied by growths in margins, and post tax

profits and ROCE that were the highest amongst its FMCG peers.

Going Public

Registering impressive business growths, brand successes and enviable

financials in a short span of time did not go unnoticed. Several public

recognitions, awards and commemorations followed. The time was ripe,

Marico went public in March 1996; the issue was oversubscribed twice

notwithstanding the premium and depressed stock market conditions

of the year 95-96.

Coming of Age

Around the turn of the century, HLL had launched an offensive and

public strategy of becoming the category leader in all conceivable

consumer goods categories. MNCs like Colgate were ambushed and had

to lose market share. Marico was said to be one of the primary

acquisition targets of HLL. HLL attacked Marico’s resource engine

Parachute with 2.5X to 3X times discounts to trade and pumping in 2X

times advertising spends. Marico launched “Parachute ki kasam”,

extensive strategic plans were drawn out for market to market combat;

Marico went to war at the marketplace and won it.

By 2005, Marico touched the INR 1000 Crore mark in revenue,

increased its profits by almost twelve times, reached 17 Lac retailers

through 3600 distributors and had twelve brands, all no. 1 or 2 in their

categories.

Now it was Marico’s turn to go on the offensive; Marico acquired the

HLL perfumed coconut oil brand called Nihar. It was a whopping INR

216 Crore deal, by far the highest in the history of FMCG brands, for an

annual turnover of INR 120 Crore. The Company was able to

successfully integrate it to the business and reap synergistic benefits.

Nihar strengthened Marico’s no. 1 position in the branded coconut oil

space and provided market leadership in the perfumed coconut oil

category. Nihar’s tremendous distribution strength bolstered Marico’s

retail reach in the East and North where Marico’s distribution was

weaker as compared to markets in West and South.

This was the first big acquisition and early success tasted sweet. The

organization became experienced in the art of evaluating a strategic fit

when it saw one, making the deal and successfully integrating it. This

was followed by many international acquisitions in emerging markets,

all quite successful which made the organization an Indian Company

with significant international operations.

The Big Move

In the year 2010, Marico’s M&A team thought there was an opportunity

in the Personal Care portfolio of Paras Pharmaceuticals, a company in

which Actis, a PE firm, held majority stake. Later that year, Actis

decided to exit Paras Pharmaceuticals. Apart from the personal care

portfolio however, the asset put up for sale included a list of OTC

brands. That made the potential size of the acquisition too large and at

the same time included parts with a lower strategic fit for Marico. A few

months later, on 9th December of the same year, Reckitt Benckiser

acquired both OTC and the personal care products of Paras

pharmaceuticals for over INR 3000 crore. Personal care brands of Paras

were understood as a “strategic fit” among the small team which

worked on “Project Baseball”, the team which worked on evaluating

Paras as a potential acquisition. The team understood the immense

value that the personal care brands of Paras could bring in. Set Wet,

Zatak, Livon, were strong brands which could bring a whole new “youth

portfolio” launch pad that the organization had been looking for so long

now. There were also the advantages of “demographic dividend” which

the portfolio was to offer, not to mention the tail-wind high growth

categories in which the brands operated. The growth rates of the

categories were far higher than the categories in which Marico

operated. These brands also provided an opportunity to enter the male

grooming category which was Marico International’s area of expertise

in the Vietnamese and Malaysian markets under the brands X-Men and

Code 10. The fact that this acquisition made Marico a market leader in

at least two out of the four major categories- post wash hair conditioner

(Livon together with Hair & Care Silk n Shine) and hair gels (Set Wet

Gels and Parachute Advansed Gels)- was another point in it’s favour.

Another advantage was the benefit in A&P costs the acquired brands

would enjoy when clubbed along with Marico’s spends - providing

economies of scale in categories that required higher A&P.

The team called the RB headquarters in London to check on the

possibility of their divesting the Personal Care brands of the Paras

portfolio. The team’s optimism turned out to be well founded. RB

indeed had put the personal care business on the block due to

inconsistency with their overall organizational strategy. This was the

big move Marico had been waiting for, a rare opportunity to acquire a

personal care business of such scale.

Rationale Behind the Move

This section has a short write-up on the evaluation the organization did

for the acquisition in 2010-11:

Category Analysis

Deodorant

The Deodorant market experienced a CAGR of 52% between FY 2007

and 2011 with the total value of the market reaching INR 11.4 Billion.

This category is characterized by very strong growth and significant

competition.

Management refers to RB’s management

Per Capita annual deodorant consumption by retail sales in 2011, in US $ per capita

As can be seen from the graph, the stage of development as measured

by penetration levels or per capita usage varies significantly by country.

Developed markets in Western Europe and North America are

characterized by higher male attention to personal care, exemplified by

higher consumption per capita. In comparison, developing markets

particularly India have significant growth potential in the medium and

long term from currently relatively low usage levels. Historical

experience of the growth curve in developed markets suggests that

once critical mass is achieved, usage grows very quickly.

For example, per capita consumption of deodorant in Brazil has surged

over the past decade, growing almost five fold from US $ 4.2 in FY 2001

to US $ 19.1 in FY 2011. The current consumption level in Brazil even

surpasses markets like the USA or the UK, where penetration levels are

around 90% since Brazil has very high penetration levels of almost

100% and an average deodorant usage of twice a day due to hot

weather and high cultural importance of fragrances.

In India by comparison, deodorant penetration is currently still low.

Even in the business’ target market of men aged 15 to 35 in SECs A and

B, penetration remains as low as 16%. In a recent survey by IPSOS

Indica, research found evidence that deodorants are fast becoming

viewed as daily essentials in the aforementioned market, with males

aged 15 to 35 years open to trying deodorant products. With a

relatively untapped market coupled with the fact that it is rare for

someone to start using deodorant regularly and suddenly stop, the

Indian deodorant market offers significant upside potential and growth

prospects.

With retail sales of INR 9.2 Billion, spray deodorant market in India

represents 80% of the category value. Spray deodorants are very

popular in India as they are considered more practical – they can be

bought and shared easily and hygienically with siblings or other family

members. This also makes sprays a more economical option compared

to roll-on versions, further increasing its accessibility and appeal. In

addition, Paras PC’s consumer research found that in warm and humid

climates such as India, roll-on deodorants can trigger an itching

sensation, causing roll-on deodorants of some competitors to fail in

India. Advertisements have also focused on the deodorant spray

market, further strengthening its popularity over its roll-on

counterpart. As such, the spray/aerosol market has grown far faster

and this trend is expected to continue in the foreseeable future. The

retail sales share of roll-on deodorants declined from 2.0% to 1.6%

during the twelve month period between July 2010 and June 2011.

Deodorant markets can be divided according to prevailing inherent

preferences by consumers, traditionally a function of cultural norms. A

number of markets including USA and UK are characterized by

consumers who are driven by the efficacy of their personal care

products and are seen to value performance over fragrance. At the

other end of the spectrum are markets, for instance South East Asia and

the Middle East, where consumers’ buying decisions are driven much

more strongly by fragrance and “image” characteristics. The business’

current deodorant product offering would appear particularly suited to

these fragrance-driven markets given its brand image and general

perception of Indians regarding deodorants as “perfumes” while talcum

is used primarily for absorption of perspiration.

Hair Care Market

The daily hair care market in India is a large and dynamic market

including conditioners, shampoos and styling agents for daily use. In

fact, with total retail sales amounting to INR 67 Billion in FY 2011, daily

hair care is the second largest personal care category in India behind

bath and shower, accounting for approximately 20% of overall

consumer spending on personal care products.

1. Styling agents include hair gels, creams, mousse, waxes, heat protection sprays, gel sprays, gloss

sprays and others

2. Conditioners include rinse off conditioners, leave on conditioners, deep conditioners and hair oil

With more products being available to urban, semi-urban and even

some rural citizens, hair care products have become an increasingly

regular part of an average Indian’s daily grooming regimen. A large

number of products target major types of hair care application, ranging

from ensuring clean and healthy hair to styling and detangling hair.

Paras brands have established a presence in three key niche markets:

1) Hair Gel, a specific product group within the styling agent segment

2) Hair Serum, a niche product within the conditioner segment, and

3) Hair Gain, a nascent hair care segment in India

Including products such as hair gels, mousse, waxes, gel sprays and

others, styling agents are still a niche segment within the daily hair care

market. Since FY 2006, however, styling agents have significantly

outperformed the markets for shampoos and conditioners with retail

sales growing by approximately 28% per annum.

The strong dynamic is derived from high consumer engagement with

new users entering continuously. Accordingly, per capita consumption

of styling agents increased exponentially from INR 0.5 in FY 2006 to

INR 1.5 in FY 2011. Increasing penetration is expected to continue

delivering superior growth rates for the segment in the foreseeable

future.

Growth profile by daily hair care segments in India

(1) Conditioners include rinse off conditioners, leave on conditioners, deep conditioners and hair oil

(2) Styling agents include hair gels, creams, mousse, waxes, heat protection sprays, gel sprays, gloss

sprays and others

Styling products are used to help consumers achieve and maintain their

ultimate desired look and can thus generate high customer loyalty,

credibility and often a desire to purchase multiple products.

Hair Gel Market

Hair Gel and Hair Cream are two major types of styling agents in India.

However, hair gel sales have been outpacing those of hair cream due to

the gel’s emphasis on styling, which appeals to the younger

demographics, whereas the hair cream focuses on hair nourishment. As

the styling agent market remains nascent in India, there is limited

competition for hair gel and other potential substitutes such as mousse,

wax or sprays.

While the hair gel market itself remains under-penetrated in India, its

growing popularity amongst young urban males is expected to continue

to drive growth. This is evident from the 32% growth in hair gel in FY

2011.

Hair Serum Market

Geared mainly towards women, hair serum is a specific product group

within conditioners. Hair Serum is a solution or gel traditionally applied

to hair post wash to detangle it and make it shiny. Some serums include

vitamins, proteins or other chemical compounds that nourish the hair.

The market remains under penetrated as the frequency of usage of hair

serum has been limited by the hair washing habits of Indian women and

the growth in the conditioner market. Most Indian women view

washing their hair as a time consuming process and endeavor to wash

once or twice each week. As hair serum is often applied post wash, this

has limited its overall usage in the Indian market. In addition, many

consumers do not feel the need to use hair serum if they have already

used conditioner. In order to increase the usage frequency, Livon has

been advertised as a product that can be used also on the non-wash

days to help give a silky and shiny look everyday rather than just on

wash days. As a result of this expected change in user habits,

management believes that the market of hair serums is deemed to

return to strong growth over the coming years.

Hair Fall and Re-Growth Market

Hair fall and lack of hair growth are two major problems facing many

Indian men nowadays. Traditionally, Indian consumers have used hair

oil due to its perceived benefits of nourishment and supposed ability to

reduce hair fall and promote hair gain. Many hair loss treatments

produced by global brands have been restricted to distribution via

chemists only due to their formulations; consumer demands for readily

available and accessible products remain largely unmet.

Brand Analysis

Paras brands had established themselves as successful personal care

players, driving growth and profitability through product innovation,

insightful market research and consistent advertising. Common

attributes of Paras’ product portfolio include:

Well established Brand Recognition with category leadership

Strong track record of innovation and new product development

Strong consumer awareness and loyalty

Umbrella brand with strong product extension potential

Paras pursued a consumer oriented strategy focused on developing

umbrella brands. The development cycle began with significant

investment in market research to identify unmet needs of consumers.

From these insights, Paras developed products that addressed these

unmet needs and then advertised the products extensively to build

brand awareness.

The brands were then evaluated by the internal team and following was

understood about the two major brands, Set Wet and Livon.

Set Wet

Set Wet is the flagship brand of Paras and the pre-eminent men’s

grooming brand in India with a range of offerings including Hair Gels,

Deodorants, Shaving Foam &Cream, Perfumed Spray Talcs etc.

The brand was launched in 2005 as a contemporary hair gel brand

targeting young urban men. The brand name has been derived from the

hair gel’s function of setting the hair by wetting it. Before Paras entered

into the hair gel category, it was historically a low growth category due

to lack of product innovation or enhancement. Brylcreem had been the

clear market leader for decades with limited advertising spends.

Seeking an opportunity, Paras identified a changing trend in the urban

Indian male who had become increasingly conscious of his image due to

high disposable income and the advent of satellite TV.

Set Wet’s target consumer was a fashion forward and trendy man in his

twenties who was concerned about his looks. To successfully address

this consumer base, Paras made significant investments in building Set

Wet’s brand image.

Paras’ strong marketing efforts resulted in very high brand awareness.

For instance, brand awareness of hair gel increased to 77% in 2008.

Amongst hair gel users as well as amongst young men at age 15-24, the

awareness level elevated to 86%. Targeted advertising and packaging

design fostered consumers’ perception of Set Wet hair gel as a status

symbol with appealing brand attributes like cool, modern, stylish and

trendy. This image reflected the sharpness in Set Wet’s positioning.

Approximately 36% of all Indian hair gel users had tried Set Wet hair

gel at least once – a solid share owing to the brand’s aspirational image.

In particular, the trial rate was approximately three times higher

amongst young men 15-24 years of age than for men at 25-35,

illustrating Set Wet’s success in catering to its targeted consumer base.

In addition, studies had shown that once consumers tried Set Wet hair

gels, the retention rate proved to be very high at 75%. This strong

consumer loyalty indicated the strength of Set Wet’s product

performance and its ability to deliver on marketing promises.

Initially launched as a hair gel, Set Wet was successfully extended to

other categories, including deodorants, shaving products, perfumed

spray talc and hair cream. In particular, deodorants had become the

largest contributor to the brand.

Combined with an early mover advantage among young urban men, Set

Wet’s carefully crafted consumer perception as an international brand

enabled it to generate profitable growth through a premium priced

offering and capture substantial market share from Brylcreem over the

past few years. As a result, Set Wet uccessfully established itself as the

leading male hair gel brand in India with 29% market share during the

first six months of 2011.

Moreover Paras’ focus and investment into the brand reinvigorated the

hair gel category as a whole, spurring growth beyond Set Wet for the

overall category. As a result the hair gel market in India was expected to

grow in excess of 40% between FY 2011 and FY 2014.

Livon

Livon, the leading brand in specialty hair care in India owing its name to

the initial product line launched under this brand, is a leave-on hair

conditioner for women. At the time of the acquisition, Livon was the

second largest brand in Paras’ Personal Care portfolio. This had three

product groups- Livon Silky Potion Hair Serum, Livon Rinse- off

Conditioner and Livon Hair Gain Tonic.

Livon Silky Potion Hair Serum

An iconic hair serum, it had over 64% market share. With the launch of

Livon in 2002, it created the category of detangling hair serum in India.

Despite the competition, it was successful in maintaining its leadership

position in terms of market share.

Livon Silky Potion owed its market dominance to several favorable

factors, the most important being the first mover advantage and hence a

very strong brand awareness.

A major turning point in the history of the brand was when it gained

share and returned to a strong growth trajectory. This was due to

repositioning of the brand through the “Damp-Dab-Dazzle” campaign,

where it was positioned as a serum to be used on both wash and non-

wash days. It increased the frequency of hair serum use and hence

consumption.

Livon Rinse-off Conditioner

In 2009, Paras Personal Care launched the second product line under

the Livon brand, a rinse-off conditioner to capitalize on the fast growing

acceptance of conditioners as part of a regular hair care regimen.

Enriched with ceramide and natural extracts to revitalize hair, Livon

conditioners targeted the consumer group of urban women between 18

and 40 years old. The business also developed four different product

formulations to address specific consumer needs (frizzy hair, dull hair,

dry hair and fine hair with low density).

Livon Hair Gain

A highly efficacious product operating in the hair fall and re-growth

category, it was clinically tested to accelerate hair growth by improving

the anagen and telogen phase ratio of hair by 25% within 90 days of

use. It was perhaps the only product which offered the benefits of both

hair fall control and hair growth.

It had been positioned in the premium price segment charging Rs 600

for 150 ml bottle.

Annexure

Marico’s Nihar Acquisition

Context:

Marico had issued an Information Update on January 24, 2006 covering

the developments until that date, primarily its financial results for the

quarter ended December 31, 2005.

Executive Summary:

Marico announced the acquisition of the brand Nihar from Hindustan

Lever Limited in the last week of January 2006. When the process of the

brand transition had significantly moved ahead, along with

documentation and other formalities, Marico shared greater details

about the acquisition- how the acquisition may be financed and how it

will contribute to Marico’s growth and creates value through increased

turnover, market share, synergies across value chain and tax benefits.

Nihar added about 10% to Marico’s turnover. With this, Marico targeted

growth of about 25% in topline during FY 07.

Market Shares and Turnover:

During the time of the acquisition, Nihar operated in two categories-

coconut oil and perfumed hair oils. It had a strong franchise in the

Eastern region, where Marico’s brands were relatively not as strong as

in the rest of the country. In the coconut oil category, Nihar’s all-India

market share was ~9%. Marico’s Parachute was already the major

player in coconut oil with over 50% market share in this Rs 800 crore

category.

In perfumed coconut oil, Nihar, with two variants (Jasmine and Rose)

was the market leader with 40% market share. Parachute Jasmine had a

35 % share. The acquisition of Nihar thus enabled Marico to become a

clear leader in this category too.

How did the Acquisition help the Brand grow:

Nihar did not fit into HLL’s portfolio and therefore received a relatively

low focus leading to its divestment as a part of HLL’s brand

rationalization exercise. The focus that Marico was to provide to the

brand would have led to harvesting its potential for growth. During the

first full year of operation in FY 07, the brand was thus expected to

deliver about Rs 120 crore of turnover, about 10% of Marico’s revenue.

Marico followed a twin brand strategy- invest in and promote both

Parachute and Nihar in the coconut oil category and Parachute Jasmine

and Nihar Perfumed Oil in the perfumed coconut oil category. Over the

next few months, it planned to conduct prototypes and experiments in

the market place before firming up its long-term strategy in these two

product categories.

Synergies:

Apart from the incremental turnover and profits that the acquisition

brought directly, Marico was expected to derive significant synergies:

1. Nihar’s distribution reach, particularly in Bihar and Jharkhand would

give other Marico brands a larger base to ride on.

2. The incremental throughput increased the turnover of Marico’s

distributors and their earning potential through Marico, leading to

increased trade equity for Marico.

3. Backroom cost advantages, given Marico’s scale of operations and its

high focus on coconut oil and hair oils.

Placement vis-à-vis Competition:

HLL had signed a 5-year non-compete in the pure coconut oil category

(Marico’s largest segment). Also strategically, it was important to

Marico acquiring Nihar rather than letting it fall into the hands of any

current or prospective significant player in the FMCG industry.

Financials:

The acquisition comprised the transfer of several assignable rights

relating to the brand “Nihar”. These included trademarks, copyrights,

design rights, know-how, internet domain name, business rights and a

5-year non-compete in the filtered coconut oil category. Taken together,

the consideration was Rs 216 crore, excluding transaction costs of

about Rs 11 crore.

At the PBDIT level, Marico would have benefitted, as Operating margins

in Nihar were higher than the average margins of Marico. While there

was a hit on account of depreciation charged in the books of account,

the depreciation on the intangibles provided a tax shield. Thus,

although in the short run there was likely to be a net hit at the PAT

level, in the medium to long run, this acquisition would create value for

the Marico shareholders through increased turnover, market share, and

synergies across value chain and tax benefits.

Outlook:

Nihar was expected to add about 10% to Marico’s turnover. With this,

Marico had targeted a growth of about 25% in topline during FY 07. The

Nihar acquisition was a significant event in Marico’s growth journey- it

helped the turnover to increase from Rs 1,000 crore to Rs 2,000 crore.

This had been a large acquisition relative to the Company’s size.

About Marico

Marico (BSE: 531642, NSE: “MARICO”) is one of India’s leading

Consumer Products Group, in the global beauty and wellness space.

During 2012-13, Marico recorded a turnover of about Rs. 46 billion

(USD 836 Million) through its products and services sold in India and

about 25 other countries in Asia and Africa. FY13 financials include

Kaya which has been demerged from Marico Ltd effective April 1, 2013.

Marico touches the lives of 1 out of every 3 Indians, through its

portfolio of brands such as Parachute, Parachute Advansed, Saffola, Hair

& Care, Nihar, Livon, Setwet, Zatak, Mediker and Revive. The

international consumer products portfolio contributes to about 22% of

the Group’s revenue, with brands like Parachute, HairCode, Fiancée,

Caivil, Hercules, Black Chic, Code 10, Ingwe, X-Men, L’Ovite and Thuan

Phat.

Marico’s focus on sustainable profitable growth is manifest through its

consistent financial performance, a CAGR of 19% in Turnover and

Profits over the past 5 years.