We’ll get out of some businesses, and we’ll never enter retail: Adi Godrej

Adi Godrej has had a busy year, having sewn up a slew of acquisitions for Godrej Consumer. The well-spoken veteran says fast-moving consumer goods will do very well over the next two years and the next decade will be very, very good for residential housing, especially in the mid and lower ends. Excerpts
from an interview with DNA:

What is the sense you are getting on business today?
Well, I think generally the economy is doing very well; to my mind we have fully recovered from the downturn we saw in 2008-09. It’s a shame we are faced with some issues of probity and corruption, but other than that I think economic progress has been very good. In our case, all our businesses are doing extremely well, fast-moving consumer goods are doing very well. We expanded internationally. We acquired four companies abroad this financial year. Those are growing very well. We also acquired 51% shareholding that Sare Lee Corp had in our joint venture called Godrej Sara Lee. The joint venture has been renamed Godrej Household Products. And before the end of this financial year, we are going to merge these two companies so there will be only one company, Godrej Consumer Products Ltd (GCPL).

We expect the FMCG sector and our company to do very well next year too. We are seeing big growth in our property development. There is tremendous demand for residential properties, especially at the mid and lower ends. Incomes are rising strongly and people in their late 20s and early 30s are now able to afford a house of their own. And mortgages are easily available. We think the next 10 years will be very, very strong for residential housing.

Do you see any correction at all in property prices, especially in Mumbai?
It’s difficult to say. I think prices in some areas which had gone up a lot might correct a little bit. But overall, I feel property is still affordable, if you look at the lower-end and middle-end. Price increases took place only on big properties in Mumbai, and perhaps to a certain extent, in Delhi. We have projects across the country, so there we don’t see any correction. Mumbai prices had gone up a lot and maybe they will correct a little bit but I don’t see a correction yet. When demand goes up, it shouldn’t lead to price increases, it should lead to supply increases. That’s what we are going to do in other businesses. However, in real estate, because of regulatory approvals, supply does not come in quickly. The government should take a look at why there are regulatory delays. Also, what we call floor space index (FSI) is far too low in India. If you look at any other country in the world, the FSI in the larger cities are much higher. Also, India is much more land-short than other countries. Our density of population (among large economies) is the highest except for Bangladesh. We are 10 times as densely populated as United States and two-and-a-half times China. And our policies should reflect that but unfortunately they don’t.

I think there is going to be a tremendous demand. I hope there won’t be a shortage — but that depends on regulatory framework. I think everybody is telling the government that you must create more supply, and policies must be changed, regulatory approvals should to be hastened.

How is the merger of your acquisitions coming along?
They are not really being merged, they are being integrated. And that is doing very well. As a result of our acquisitions, growth in Godrej Consumer in the first two quarters has been very high and that will continue going forward. And now we are merging Godrej Household Products into Godrej Consumer. This will create a lot of synergies, both in terms of costs and operational efficiency. So we will leverage the strengths of each of the companies for the benefit of the other, and that will create tremendous advantages in Godrej Consumer. The company is very strong in north and Godrej Household is very strong in south. Godrej Consumer is very strong in rural India. while Godrej Household Products is very strong in the chemist channel. A team of roughly 100 people from both the companies are getting together.

What about synergies in your acquired businesses, like Megasari’s portfolio and Godrej Household?
Yes, there are a lot of synergies between our acquisitions. For example, Megasari is the leader in household insecticides in Indonesia. We are the No. 1 here. A lot of interchange of ideas, products and technologies are possible. Our South African operations and South American operations are leaders in their countries in hair colour. So there is a lot of interaction with our hair colour business in India. We are leaders in India. Now we are leaders in 21 countries in hair colour. Thirteen of them are in Africa, 4 in Asia and 4 in Latin America. L’Oreal is the global leader — they lead everywhere except these 21 countries where we are ahead, and in Germany and Japan. There is tremendous interaction between all our businesses for improvement. India learns from some of the other countries, and they learn from India.

There is a premium gap in your hair colour portfolio. How do you plan to take on L’Oreal in this space?
We don’t have gaps in our market. If you look at our hair colours, we are there in all forms — powders, crémes, liquid and oil. But in certain areas, we are very strong; in others, not so. So the aim is to improve our strengths in the weak areas. For example, in powder colours, we are extremely strong. We are the world’s largest manufacturer of powder hair colours ever since we overtook a Japanese company called Hoyu Chemicals, which makes a brand called Bigen, about five years ago.

In crémes, where L’Oreal is the leader, we are not as strong in India but we have products. We are innovating to improve our strengths in those areas, also innovating in powder hair colour, where we will add a lot of value. Over the next six months, you will see a lot of new innovative products.

What about launching products from your international stable locally?
Yes, those technologies are always looked to. We will be branding them specific to India. For example, when we acquired a company in Africa five years ago, there was no powder technology. So we have taken the same powder but it is being marketed there as an African brand — called Inecto — which is very strong there. The branding has to be local, technology can go from one place to another.

How has the toilet soaps business changed now from a few years ago?
It is growing, but remember, soap is one of three packaged branded categories that are fully penetrated in India; the others are heavy-duty detergent bar or detergent powder and match sticks. No food product, packaged or branded, is fully penetrated. Since soaps are fully penetrated, the growth rate we expect will be single digits. Hair colour, household insecticides, deodorants and liquid wool wash will grow much faster.

When will you have a presence in mainstream skincare?
When we see either an interesting positioning possibility or an interesting product from our R&D (before deciding). There’s no use getting into a category with a ‘me too’ product. Unless you are differentiated, unless you are of some advantage, it makes no sense (to enter).

Any plans to diversify the group further?
No, we are sticking to our core. In fact, we are getting out of some businesses. Over the last three years or so, we got out of the BPO business; we had our medical diagnostics business which we got out of. We had a pest control services business which we sold. We have many businesses in the group, but we are more interested in strengthening our core business. But of course, we will diversify in to adjacent businesses. So, the FMCG business can get into other categories but it will essentially still stick to the sector.

With Nature’s Basket you have introduced a niche but an interesting gourmet retail concept. Any plans of replicating that in other retail categories?
We are still relatively small, operating in Mumbai and New Delhi. Soon we will be operating in Bangalore. And clearly we cater only to the upper income group with Nature’s Basket. It will remain a niche business but growing rapidly. But we won’t go into general purpose retail ever for two reasons. One is that generally retail, unless it is very specific, is struggling. Not too many people who have gone into retail have done well. The other is we don’t want to compete with our customers, because all the large retailers are our customers. So we won’t get into mainline retail. Many years ago, we launched rural retail stores called Aadhar but we later sold 70% of it to Future Group, which is the expert in retailing.

Are you still looking for acquisitions?
Definitely. We are looking at potential acquisitions all the time. We are focused on the developing world, including India, for this.

And if you are offered any food brands?
I shouldn’t say categorically, but no, we are not interested.

What is the feeler on input costs?
Yes commodity prices are rising — minerals are rising, metals are rising. In our case, the only commodity that creates some concern is vegetable oil, which is a major input for soap-making. So, we have had to increase some prices. In some cases we have had to reduce some weight so that our margins are maintained. That is the only area where we are affected.