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The fight that's threatening Patanjali's INR20,000 crore dreams

Patanjali's rush to dominate the consumer-goods market is spreading chaos in the business's engine room: its distribution network.
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soumyagupta
2 May 2018 9 Mins Read 1 comments
Baba Ramdev, Founder, Patanjali Ayurved; Vipin Kumar/Hindustan Times via Getty Images
Baba Ramdev, Founder, Patanjali Ayurved; Vipin Kumar/Hindustan Times via Getty Images
Want to get into business with Patanjali? Here’s what you can expect to find: Several mutations of its official website A form to become a salt distributor appealing to you to be a “well-wisher and supporter of this movement” and “get rid of the foreign MNCs’ loot” A Google Doc collecting sign-ups from aspiring distributors A notice on its website (it’s www.patanjaliayurved.org, in case you are wondering) cautioning against fake agents asking for money to help apply for distributorship, as well as fake application forms, though we couldn’t get our hands on one. The road to Patanjali is filled with temptations, and it’s not hard to see why. The buzziest FMCG company in the country, and the thorn in the flesh of giants like HUL and P&G, said it had breached INR10,000 crore in revenues by FY16 from less than INR500 crore in FY12. Its next target: INR20,000 crore. Given its hulking track record, it would be foolish to doubt Patanjali’s ability to get there — unless you put your ears to the ground, and listen to the rumblings deep in its heart. This is what you will hear if you do: Patanjali’s 20K crore dream is itself falling prey to temptation. And it’s corroding the very soul of its business — its distribution network. This is crucial, for once your shampoo, soap, or masalas are made, distribution (and if you have the cash, advertising) is all there is to a successful FMCG business. Patanjali understood this. It got where it is today by building a canny, low-cost distribution system that was remarkably efficient in getting its products acceptance against far heftier rivals. But that foundation is now under severe stress, ET Prime learnt in a series of conversations with Patanjali associates. As the company doubles sales targets every year and sets its sights on total domination over the Indian consumer, it has developed an uncontrolled hunger for new distributors and new channels of trade, often at the expense of older allies. The upshot: India’s most ambitious consumer-goods firm might be tripping up on its own ambition. A detailed questionnaire sent to Patanjali Ayurved and its spokesperson SK Tijarawala, as well as messages sent to him, remained unanswered. Let’s start at the beginning. Patanjali’s earliest retail locations were its Chikitsalayas, or clinics, where vaidyas prescribed medicines made by the firm. It’s hard to get a number, but estimates suggest there are some 20,000 Chikitsalayas all across India. Coupled with Baba Ramdev’s personal charisma, the Chikitsalayas’ free healthcare advice helped build consumer trust, says Pankaj Gupta, who heads the retail and consumer practice at Tata Strategic Management Group (TSMG). They were a smart way to build the Patanjali brand at a time when the company did not spend heavily on advertising. In return, Chikitsalaya owners benefited from their monopoly over Patanjali’s products. But in 2012, the cozy arrangement started showing cracks. “That year, Babaji expanded into the open market, to small shopkeepers,” distributor Pradeep Garg, proprietor at Baba Enterprises in Shahdara, Delhi, remembers. In India, there is no alternative to this channel — technically called general trade and comprising kirana shops and local unorganised marketplaces — to quickly reach large swathes of customers. “In the early days, the company struggled for distributors,” Garg says. “Shopkeepers were also reluctant to take their material because there was a lack of marketing from the company’s side.” The success of the Chikitsalayas helped break this barrier and bring general trade on board at much lower margins than they would get from competing products, says Gupta of TSMG. “For instance, in categories with lower margins (typically food), where Patanjali's general trade partners earn around 6.5%, rivals can earn them 10%. Similarly on higher margin goods (usually personal care), Patanjali retailers earn around 12.5%, while rivals often offer 18%-20%,” he says. Now, say retailers and distributors, as the company flexes its marketing muscle and demand for its products soars, its relationship with general trade is increasingly cozy. Who’s feeling left out? The once-formidable Chikitsalayas. “Babaji wants his products to be as visible as possible,” a Chikitsalaya owner in Mumbai’s western suburbs says, requesting anonymity. “But that’s a big problem for us. A kirana has other products to sell, but we are bound to sell only Patanjali products. Besides, kiranas can put any discount they want on the products. We can’t. If I am selling ghee at Rs560 a kg and they discount it to Rs520, how will I compete?” This Chikitsalaya owner says his headaches increased when an ‘ayurvedic supermarket’ right opposite his shop began to piggyback on the Baba. “He used to have a cut-out of Babaji in front of his shop,” he says, pointing to the supermarket across the street. “But he is not selling just Patanjali. His customers come in for Patanjali but he can sell them other products too. We had to complain to the local company officials to get the cut-out removed.” A Chikitsalaya owner in East Delhi sounds just as dismayed at the infiltration by general trade. “If a kirana shop has the basic products you need, like toothpaste or ghee, why will you ever go to a Chikitsalaya?” he says. “Initially, Patanjali had a policy to give products first to us only, but now the goods go first to general trade,” complains a Chikitsalaya owner in Navi Mumbai. As the company pushes for more visibility, territory demarcations are also shrinking. All retailers and distributors we spoke to say that before the big general trade push, Patanjali used to mandate a distance of 5km between two Chikitsalayas, ensuring plenty of business for everyone. This has now come down to as little as 1km-2km. If this wasn’t enough pressure, now there’s the Patanjali Mega Store. “Mega Store is an exclusive outlet, but much bigger,” says the proprietor of two Mega Stores in Mumbai. Owners and distributors in Delhi say Mega Stores are generally double the size and investment of a Chikitsalaya. Mega Stores pose an even tougher competition for goods from “Haridwar”, distributors’ code for Patanjali’s headquarters, since they often get stocks directly from the company along with the area’s super distributor. But not all Mega Store owners are happy with the format. “It is a bit of a flop concept,” says the Chikitsalaya owner in East Delhi cited above, who also owns a Mega Store. “First of all, 25%-30% of products [in the company’s portfolio] are not available. Then, low-shelf-life products are coming in bulk packs. Of the 250 Mega Stores in India, I don’t think even 50 would be profitable.” Anaemic margins and product delays pile on the pain. Take ghee, one of Patanjali’s biggest sellers, which accounts for up to 40% of the sales at some Chikitsalayas. Margin for ghee distributors can be as low as 3%. Chikitsalayas and general-trade distributors get their stocks from an area super distributor, who in turn picks up material directly from Haridwar. The average margins on all kinds of products, they say, is around 11%. However, higher-margin goods don’t move as fast for some retailers. For instance, a Chikitsalaya owner from Mumbai’s western suburbs says stores have trouble selling the pricier facewash range. Patanjali has a buffering problem. Fast movement is essential in FMCG to make enough money to take home. Distributors and retailers say Patanjali has a terrible reputation here. “Babaji will announce a product in the media, but it takes extremely long for it to hit the market,” says the Chikitsalaya owner from Navi Mumbai. “For example, Patanjali Power Vita powder took nearly a year to come to us after Babaji had announced it. On average, it takes between 3-6 months for products to come.” When a customer keeps coming to you over and over again asking for a new product and they don’t get it, they will lose interest, says a longtime Chikitsalaya owner who runs multiple stores in Mumbai. Added to all that, Patanjali is not too fussed about taking care of its partners. Chikitsalaya owners in Mumbai say they neither get credit, nor do the company’s distributors deliver products to their stores at the company’s cost. “How do I protect my margins? First, I have to pick up the goods myself from the distributor, transport it here. My margin on goods is only 8%-11%, how much will I save transporting goods all over Mumbai?” says an owner in Andheri East. “Claims for damage or expiry of goods are not available for us,” says the Chikitsalaya owner in Navi Mumbai. “That cost eats into our margins.” Some Chikitsalaya owners say the company will often delay deliveries until it gets a big enough order from an area. “Stocks are not delivered on time,” says the Chikitsalaya owner in Navi Mumbai. “Unless an order worth at least Rs1 lakh comes up, delivery does not happen to that area.” “The company does not give a single rupee in credit,” says the owner of the Mega Stores in Mumbai area. “Patanjali advises cash against stock,” Garg from Baba Enterprises says. “The super distributor may give you credit for just about a week, but it depends on how long you have been in business and how well you know him.” For context, most FMCG firms offer credit for anything between a week to 30 days to their distributors, especially those dealing exclusively with their products. The outcome of this chaos? A feeding frenzy that could put paid to the company’s growth plans. “Patanjali has broken the distribution system,” says the East Delhi Chikitsalaya owner. He had taken up a distributorship to sell to general trade in 2013. He soon shut down that business. “A margin fight has broken out,” he adds. “Four distributors have changed per year per area in most parts of Delhi.” “Their attitude is all about making money and building their brand,” says the Andheri East Chikitsalaya owner. “Once the maal (stock) leaves their factories, they don’t care.” “For us, sales are down almost 20% year on year,” the Chikitsalaya owner from Navi Mumbai quoted above says. “We used to do INR16 lakh a month, but it’s now down to INR10-INR12 lakh.” "Brand equity is what creates trade equity. If you want to have goodwill with the trade, your brand has to be strong,” says Milind Sarwate, advisor to Future Consumer, the FMCG arm of Future Group, and former chief financial officer of FMCG major Marico. “Patanjali may have stretched their brand equity beyond limit.” “[Sure,] as long as there is throughput, the trade will pick up Patanjali stock…” Sarwate adds. [But] the trading community is astute and cares most about its own margins.” Patanjali could brand itself as a “movement” all it wants, but it would do well to remember this brutal home truth about business. (Clarification: The chart titled 'Comparison of Patanjali sales profit, with major listed FMCG firms' (FY17)' has been corrected to accurately reflect Patanjali's May 2017 revenue announcement.)
Want to get into business with Patanjali? Here’s what you can expect to find: Several mutations of its official website A form to become a salt distributor appealing to you to be a “well-wisher and supporter of this movement” and “get rid of the foreign MNCs’ loot” A Google Doc collecting sign-ups from aspiring distributors A notice on its website (it’s www.patanjaliayurved.org, in case you are wondering) cautioning against fake agents asking for money to help apply for distributorship, as well as fake application forms, though we couldn’t get our hands on one. The road to Patanjali is filled with temptations, and it’s not hard to see why. The buzziest FMCG company in the country, and the thorn in the flesh of giants like HUL and P&G, said it had breached INR10,000 crore in revenues by FY16 from less than INR500 crore in FY12. Its next target: INR20,000 crore. Given its hulking track record, it would be foolish to doubt Patanjali’s ability to get there — unless you put your ears to the ground, and listen to the rumblings deep in its heart. This is what you will hear if you do: Patanjali’s 20K crore dream is itself falling prey to temptation. And it’s corroding the very soul of its business — its distribution network. This is crucial, for once your shampoo, soap, or masalas are made, distribution (and if you have the cash, advertising) is all there is to a successful FMCG business. Patanjali understood this. It got where it is today by building a canny, low-cost distribution system that was remarkably efficient in getting its products acceptance against far heftier rivals. But that foundation is now under severe stress, ET Prime learnt in a series of conversations with Patanjali associates. As the company doubles sales targets every year and sets its sights on total domination over the Indian consumer, it has developed an uncontrolled hunger for new distributors and new channels of trade, often at the expense of older allies. The upshot: India’s most ambitious consumer-goods firm might be tripping up on its own ambition. A detailed questionnaire sent to Patanjali Ayurved and its spokesperson SK Tijarawala, as well as messages sent to him, remained unanswered. Let’s start at the beginning. Patanjali’s earliest retail locations were its Chikitsalayas, or clinics, where vaidyas prescribed medicines made by the firm. It’s hard to get a number, but estimates suggest there are some 20,000 Chikitsalayas all across India. Coupled with Baba Ramdev’s personal charisma, the Chikitsalayas’ free healthcare advice helped build consumer trust, says Pankaj Gupta, who heads the retail and consumer practice at Tata Strategic Management Group (TSMG). They were a smart way to build the Patanjali brand at a time when the company did not spend heavily on advertising. In return, Chikitsalaya owners benefited from their monopoly over Patanjali’s products. But in 2012, the cozy arrangement started showing cracks. “That year, Babaji expanded into the open market, to small shopkeepers,” distributor Pradeep Garg, proprietor at Baba Enterprises in Shahdara, Delhi, remembers. In India, there is no alternative to this channel — technically called general trade and comprising kirana shops and local unorganised marketplaces — to quickly reach large swathes of customers. “In the early days, the company struggled for distributors,” Garg says. “Shopkeepers were also reluctant to take their material because there was a lack of marketing from the company’s side.” The success of the Chikitsalayas helped break this barrier and bring general trade on board at much lower margins than they would get from competing products, says Gupta of TSMG. “For instance, in categories with lower margins (typically food), where Patanjali's general trade partners earn around 6.5%, rivals can earn them 10%. Similarly on higher margin goods (usually personal care), Patanjali retailers earn around 12.5%, while rivals often offer 18%-20%,” he says. Now, say retailers and distributors, as the company flexes its marketing muscle and demand for its products soars, its relationship with general trade is increasingly cozy. Who’s feeling left out? The once-formidable Chikitsalayas. “Babaji wants his products to be as visible as possible,” a Chikitsalaya owner in Mumbai’s western suburbs says, requesting anonymity. “But that’s a big problem for us. A kirana has other products to sell, but we are bound to sell only Patanjali products. Besides, kiranas can put any discount they want on the products. We can’t. If I am selling ghee at Rs560 a kg and they discount it to Rs520, how will I compete?” This Chikitsalaya owner says his headaches increased when an ‘ayurvedic supermarket’ right opposite his shop began to piggyback on the Baba. “He used to have a cut-out of Babaji in front of his shop,” he says, pointing to the supermarket across the street. “But he is not selling just Patanjali. His customers come in for Patanjali but he can sell them other products too. We had to complain to the local company officials to get the cut-out removed.” A Chikitsalaya owner in East Delhi sounds just as dismayed at the infiltration by general trade. “If a kirana shop has the basic products you need, like toothpaste or ghee, why will you ever go to a Chikitsalaya?” he says. “Initially, Patanjali had a policy to give products first to us only, but now the goods go first to general trade,” complains a Chikitsalaya owner in Navi Mumbai. As the company pushes for more visibility, territory demarcations are also shrinking. All retailers and distributors we spoke to say that before the big general trade push, Patanjali used to mandate a distance of 5km between two Chikitsalayas, ensuring plenty of business for everyone. This has now come down to as little as 1km-2km. If this wasn’t enough pressure, now there’s the Patanjali Mega Store. “Mega Store is an exclusive outlet, but much bigger,” says the proprietor of two Mega Stores in Mumbai. Owners and distributors in Delhi say Mega Stores are generally double the size and investment of a Chikitsalaya. Mega Stores pose an even tougher competition for goods from “Haridwar”, distributors’ code for Patanjali’s headquarters, since they often get stocks directly from the company along with the area’s super distributor. But not all Mega Store owners are happy with the format. “It is a bit of a flop concept,” says the Chikitsalaya owner in East Delhi cited above, who also owns a Mega Store. “First of all, 25%-30% of products [in the company’s portfolio] are not available. Then, low-shelf-life products are coming in bulk packs. Of the 250 Mega Stores in India, I don’t think even 50 would be profitable.” Anaemic margins and product delays pile on the pain. Take ghee, one of Patanjali’s biggest sellers, which accounts for up to 40% of the sales at some Chikitsalayas. Margin for ghee distributors can be as low as 3%. Chikitsalayas and general-trade distributors get their stocks from an area super distributor, who in turn picks up material directly from Haridwar. The average margins on all kinds of products, they say, is around 11%. However, higher-margin goods don’t move as fast for some retailers. For instance, a Chikitsalaya owner from Mumbai’s western suburbs says stores have trouble selling the pricier facewash range. Patanjali has a buffering problem. Fast movement is essential in FMCG to make enough money to take home. Distributors and retailers say Patanjali has a terrible reputation here. “Babaji will announce a product in the media, but it takes extremely long for it to hit the market,” says the Chikitsalaya owner from Navi Mumbai. “For example, Patanjali Power Vita powder took nearly a year to come to us after Babaji had announced it. On average, it takes between 3-6 months for products to come.” When a customer keeps coming to you over and over again asking for a new product and they don’t get it, they will lose interest, says a longtime Chikitsalaya owner who runs multiple stores in Mumbai. Added to all that, Patanjali is not too fussed about taking care of its partners. Chikitsalaya owners in Mumbai say they neither get credit, nor do the company’s distributors deliver products to their stores at the company’s cost. “How do I protect my margins? First, I have to pick up the goods myself from the distributor, transport it here. My margin on goods is only 8%-11%, how much will I save transporting goods all over Mumbai?” says an owner in Andheri East. “Claims for damage or expiry of goods are not available for us,” says the Chikitsalaya owner in Navi Mumbai. “That cost eats into our margins.” Some Chikitsalaya owners say the company will often delay deliveries until it gets a big enough order from an area. “Stocks are not delivered on time,” says the Chikitsalaya owner in Navi Mumbai. “Unless an order worth at least Rs1 lakh comes up, delivery does not happen to that area.” “The company does not give a single rupee in credit,” says the owner of the Mega Stores in Mumbai area. “Patanjali advises cash against stock,” Garg from Baba Enterprises says. “The super distributor may give you credit for just about a week, but it depends on how long you have been in business and how well you know him.” For context, most FMCG firms offer credit for anything between a week to 30 days to their distributors, especially those dealing exclusively with their products. The outcome of this chaos? A feeding frenzy that could put paid to the company’s growth plans. “Patanjali has broken the distribution system,” says the East Delhi Chikitsalaya owner. He had taken up a distributorship to sell to general trade in 2013. He soon shut down that business. “A margin fight has broken out,” he adds. “Four distributors have changed per year per area in most parts of Delhi.” “Their attitude is all about making money and building their brand,” says the Andheri East Chikitsalaya owner. “Once the maal (stock) leaves their factories, they don’t care.” “For us, sales are down almost 20% year on year,” the Chikitsalaya owner from Navi Mumbai quoted above says. “We used to do INR16 lakh a month, but it’s now down to INR10-INR12 lakh.” "Brand equity is what creates trade equity. If you want to have goodwill with the trade, your brand has to be strong,” says Milind Sarwate, advisor to Future Consumer, the FMCG arm of Future Group, and former chief financial officer of FMCG major Marico. “Patanjali may have stretched their brand equity beyond limit.” “[Sure,] as long as there is throughput, the trade will pick up Patanjali stock…” Sarwate adds. [But] the trading community is astute and cares most about its own margins.” Patanjali could brand itself as a “movement” all it wants, but it would do well to remember this brutal home truth about business. (Clarification: The chart titled 'Comparison of Patanjali sales profit, with major listed FMCG firms' (FY17)' has been corrected to accurately reflect Patanjali's May 2017 revenue announcement.)

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