How can Praveen Surfactants turn more profitable?

Come up with a sound plan for the detergent maker to increase its contribution by 2021

The board of Praveen Surfactants Ltd (PSL) met for the first quarterreviewof2019-20andthedirectorswereaworried lot,facedwithadropincontribution,yearonyear.Itwasclear

that if this trend is not reversed, the company would be staring atsome serious financial difficulties.

Afteralotofdeliberations,theboardcametotheconclusionthat cutting costs on sales and marketing in this environment would onlyleadtodisaster,perhaps slowlybutsurely.Theboardthencalled the senior management team and informed them their decision thatthe team was to increase the absolute contribution the company is bringing,andmakesureitincreasesyearonyear.

Product pricing, capacity expansion

The team was told that the board would only look at the increased contribution, and would not care if the sales value or volumeincreasesordecreases.Thedirectorsarealsoready toconsider an increase in advertising spending or even a higher capacity as long asthecontribution,after removingthecostofadvertisingorcostoffundsincaseofincreasedcapacity,ishigherthanpreviousyears.

Theboardfeelsitshouldjustgoaheadandincrease thepriceof the productbutwouldliketotaketheviewofthecoreteam.The board is also open to launching a new product, in the premium segmentifrequired, andisready toprovidethe100-crorefundingnecessary for the new plant as long as the interest is considered whilecalculatingtheContribution.

Finally, for the year 2021, the board needs to go back to the absolute contribution that it made in the year 2016. While this is the boardmembers'wish,theywoulddefinitelyneedatleast20percentincreaseincontributionfromthe currentyear bythe year2021. TheBoard will not be happy even if senior management achieves that number inoneyearbutifitdropsbelow thatmarkbythetargeted year.The logic is that if the company can achieve the 2016 contribution numbersin2021, oratleast20percenthighercontributionby2021, itisastable situationandislikelytobemaintainedandgrow

About the company (PSL)

PSL was founded in the year 1985 with a view to supplying surfactants to major detergent players in the market. While it operated as an ingredients supplier to detergent manufacturers till 1995, it began doing contract manufacturing of detergents forsome multinationals. Having learned the nuances ofthe product and the market, PSL decided to get into the market with its own brandintheyear2000.

Itlaunchedasingleproduct,withthebrandname'Chamak', inthemid-range,anddecidedtosticktooneproduct tillitmadeanameforitself.Itsgoodquality andreasonablepricesoontook the fancyofthemarketand,afterlaunchinginUttarPradesh in the middle of the year 2000, it quickly expanded its market across the country.Today it accounts for 40 percent of the mid-segmentbyvalue,whichisabout40percentofthetotalmarketby volume.

Chamakispositionedasa"highqualitybuteasyonpocketdetergent".While thecompanyhadadream runtilltheyear2014,

it began to see a slowing down of growth thereafter. With the lastfouryearsofnegative growthinvolumes and,consequently,profitability, the company has had to take a serious look at its strategy,goingforward. Thecompany'srevenuesandcontributionoverthelastfouryearsaretabulatedinTable2

Detergent market

The detergent market in India is today valued at 20,000 crores,ata consumer price,andisgrowinginvaluetermsbyamere3-4 per cent each year for the last five years, while volumes are degrowingbyabout2percenteachyearduring thesameperiod. Thedetergentmarketisdividedintothepremium segment,mid-segment, and mass segment, accounting for15 percent, 40 percentand45percentbyvalueatanaverage consumerpriceof

150, 100, and 50, respectively.

Themarket sizefordetergentsbyregion,andthedynamics ofthemid-segment andthepremium segmentaregivenintheTables1,3and4.

The task for the core team

1. Analyze the market dynamics and work out a plan that wouldincreasethecompany contribution,asdemandedbytheboard,inthe year2021.

1. Study the current positioning of the product vis--vis the competition and suggest if the current positioning isgoodorshouldchange.(Usecompetitivepositioning infofromonlinesources.)

1. Study and recommend if launching a new premium productisagoodideaornot.Iftheteamrecommends that a premium product be launched, what should be thepricingandpositioning?

1. MRP,ifchanged,has tobechangedallacross thecountryandnotinoneregion

2. However,thetradeprice canbeincreasedinselectregions

3. Advertisingtobedoneinthefirstyear,andtheimpact ofthatwillbeseeninthe nexttwoyearstoo.Youcanamortize advertisingcostsoverthethree yearsequally

4. New product and advertising spends can be region-specificandneednotbeacrosstheregions

5. Anydata otherthanthedataprovidedistobeusedonly if thatdatacan not bederivedfromthegiven tables,andclearassumptionsmustbestated

TABLE 2 COMPANY PERFORMANCE FOR LAST FOUR YEARS Year 2018 Year 2017 Year 2016 Year 2015 Share Value Share Value Share Value Share Value All-India value ~ cc. 3,200 3,200 3,400 3,800 Avg price per kg MRP ~ 100 100 100 95 North 21.9 700 680 720 800 East 18.8 600 560 600 700 West 31.3 1,000 1,020 1,060 1,200 South 28.1 900 940 1,020 1,100 All-India 100 3,200 3,200 3,400 3,800 Volume in tonnes 3,20,000 3,20,000 3,40,000 4,00,000 Total channel margin % on MRP 20 18 16 16 Net realisation (ignoretax) ~ cr. 2,560 2,624 2856 3,192 Selling cost ~ per tonne 16,000 16,000 14000 12,000 Variable cost ~ per tonne 34,000 32,000 30000 27,000 Total selling cost ~ cr. 512 512 476 480 Total variable cost ~ CF. 1,088 1, 024 1020 1,080 Total contribution after selling cost ~ cr. 960 1,088 1360 1,632 Assume channel margins will remain the same for the next three years Assume variable cost will go up by 1% each year Assume selling cost will go up by 2% each yearTABLE 3 DYNAMICS OF MID SEGMENT Currentprice ~ 100perkg Current Drop in sales % per 5% increase in Increase in % sales per 5% drop in MRP Gain in share % per ~10 cr Max limit of increase Drop in sales per % increase in Increase in sales per % decrease in Volume MRPin Yr1 ( max price increase 20%) in Yr 1 (Max price decrease 15%) additional ad spends in Yr1 through advertising Trade price (max allowed 5%) Trade price (max allowed 5%) Year 1 |Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Tonnes (% on the base figure) (% on the base figure) (% on the base figure) (% on the base figure) North 70,000 8 7 6 15 13 12 1.6 1.4 1.2 5 3 3 2 1 1 1 East 60,000 10 9 17 16 15 1.8 1.6 1.4 4 En 3 1 West 1,00,000 6 6 En 5 4 4 2.6 2.4 2.4 6 1 0 0.5 0.5 0.5 South 90,000 4 3 3 3 3 3 3.2 3 3 0.5 0.5 0 All India 3,20,000 Note All % indexed figures are indexed to year 2018 and not to each subsequent year Advertising spendsare for 10grineachzone, buthave to bespent only in Year 1 and the results will be seenover the nexttwoyears too While MRP cannot be different for various regions, the trade price can vary across regionsTABLE 4 PREMIUM PRODUCT MARKET DYNAMICS Current market size ~3,000 crore Current market size tonnes 2,00,000. MRP ~ 150 MRP ~140 MRP ~135 Market share gain, Max Market share gain, Market share gain, per ~10 crad budget share per 10 crad budget Max share per 10.cr ad budget Max share Year 1 Year 2 Year 3 possible Year 1 Year 2 possible Year 3 Year 1 Year 2 possible Year 3 RS CF. Ya North 21 42,000 1.5 1.4 1.3 5 2 1.6 1.6 7 3 2.5 2 10 East 15 30,000 1.2 1.1 1.1 5 1.5 1.3 1.3 2.5 2.2 1.8 12 West 31 62,000 2.4 2.2 2.2 2.6 2.4 2.3 3 2.8 2.8 10 South 33 65,000 2.5 2.3 2.3 10 2.6 2.5 2.4 11 3.2 3.0 3.0 12 All India 100 2,00,000 Funds required to start premium product ~100 orfor setting up 1000tonnes permonth capacity Cost of funds 15% per annum Selling cost per tonne ~ 16,000 (Assume remains the same for first 3 years) Variable cost pertonne ~ 40,000 ( Assume remains the same for first 3 years) Advertising spend of ~10 cr is for each region and not all-India Advertising money to bespent onlyinfirst year and results come till year 3 Trade margins remain same as mid segment Please note that advertising spends need to be deducted from the revenue before calculating contribution