Company to resort to more lucrative acquisition strategies
Mismatched perceptions and shifting interests have burnt Godrej’s joint ventures, forcing it to resort to a more lucrative acquisition strategy.
The Godrej Group is looking more and more like the Elizabeth Taylor of Indian business. Much like the Oscar winning actress, the Rs 11,700-crore FMCG company has, over the last two decades, forged eight marriages with foreign companies (although Taylor was twice-married to Richard Burton), seven of which have subsequently soured.
A joint venture (JV) with the US-based Tyson Foods for its poultry business, is the sole survivor of Godrej’s dalliances with foreign companies.
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Recently, four years after the Rs 11,700-crore Godrej Group and American chocolate maker Hershey inked a 51:49 joint venture, came the news that all was not well between them. Apparently cracks had begun to surface in their relationship and the two had agreed to part ways following differences over running the JV.
Both group chairman Adi Godrej and key FMCG executive A Mahendran, who is also the managing director of the Rs 3,643-crore Godrej Consumer Products Ltd (GCPL), dismissed the reports as being speculative, but this doesn’t exactly stun the business world considering the soap-to-cupboard maker's tenuous relationship with JV partners till date.
Take the case of Godrej's high-profile JV with Procter & Gamble (P&G) in the area of soaps in 1993, which fell apart in a span of a few years following differences over P&G's treatment of Godrej’s brands, including its popular soap Cinthol. Godrej, according to industry sources, had transferred the distribution of its soaps portfolio to the JV but discovered that P&G wasn't really interested in soaps as a business. It was only a matter of time before both parties decided to wash their hands off the whole business.
Then, in 2001, the Indian major snapped ties again, this time with GE in the appliances arena. The issue once again pertained to a mismatch in expectations. While both GE and Godrej both had a solid product line, sales offtake was a contentious issue that broke the spine of the union. A year before that, Godrej terminated its alliance with Pillsbury, which was formed to market wheat flour and other products.
There were still more break-ups to come such as the one with Swedish firm SCA Hygiene Products in 2009 or the more recent one with IJM Plantations of Malaysia. In the latter's case, IJM had lost interest in the union three years after the JV was signed, which left Godrej with no choice but to buyout its majority stake in the venture, say people in the know.
Some unions, of course, work better than others.For the Godrej group, its relationship with Sara Lee was the longest in its history, five years longer than Taylor’s turbulent marriage to Richard Burton, and one would hope, much less tempestuous.Godrej's household insecticide portfolio was vested in the JV, while Sara Lee brought Brylcreem, AmbiPur and Kiwi shoe polish to the table. Sara Lee eventually sold these brands globally to different players in a bid to focus on its core foods business.
Persons in the know say it is this development that eventually led to the termination of the JV and acquisition of the 51 per cent Sara Lee stake by GCPL last year. “Sara Lee was moving out of non-core businesses. Plus the contribution of its brands in the JV was not substantial,” says Hoshedar Press, a former Godrej Group executive, who retired as vice-chairman of GCPL last year. "At some stage, a call had to be taken concerning the future of the JV," he says.
Why do these corporate divorces happen in the first place? Seven out of eight misses is an abysmal track record, indicative of inept strategy or a flawed corporate culture, you would think.
Not so, says Arvind Singhal, chairman, Technopak Advisors who says this sort of stuff tends to happen all the time because of different perceptions about the marriage. “Indian partners think they understand the domestic market well and hence come across as being aggressive and demanding. The foreign partner whilst realising the Indian market is complex is quite often unwilling to change worldwide policies and strategies to suit local conditions,” says Singhal. “This mismatch of priorities is what leads to tension and eventual break-up of JVs. I think the scenario has been no different in the case of the Godrej group and its partners,” he adds.
Nothing was as emblematic of this as the recent Godrej-Hershey divorce, according to industry sources. The Godrej group was keen to see greater cooperation and participation from Hershey’s in terms of product launches. Hershey’s, on the other hand, was more calculated in its approach, launching only one product – Hershey’s Syrup – in the Indian marketplace in the four years since the JV was signed.
This raised the hackles of the Godrej group, which had vested its chocolate and confectionery portfolio Nutrine besides allied products in the JV. Hershey’s is now reportedly looking to offload its 51 per cent stake in the JV to interested players but there is also the possibility of Godrej buying back the stake.
“If you look at Godrej’s JVs closely you will find these differences of opinion in every venture that failed. I don’t think there is a problem with the group per se. It is just that there was a mismatch of priorities that led to the collapse,” says Arvind Mahajan, executive director, advisory services, KPMG.
In the Dustin Hoffman starrer ‘Kramer versus Kramer’, a young husband and wife divorce over irreconcilable differences, and then wage a protracted, bitter battle over the custody of their young son. In the business world, your entire business empire can crumble because of not being smart about anticipating a separation. “A smart company is one that has the right type of clauses, especially exit clauses, when getting into a JV. If you scrutinise Godrej’s JVs carefully you will find that there has been no heartburn when the JVs went awry. It wasn’t acrimonious and bitter, which means that they have laid out a set of priorities. If those are fulfiled well and good. If not, they have put in the right clauses to opt out,” says KPMG’s Mahajan.
The flip side of entering into a series of ultimately failed marriages is that the institution has probably taken a toll on your faculties. Instead, you may desire complete control of all future relationships, even if it means buying your partner.
Subsequently, Godrej’s focus on acquisitions has grown. In the last six years, the group through GCPL has made eight international purchases. This includes Keyline Brands in the UK in ‘05, Rapidol and Kinky in South Africa in ‘06 and ‘08, Tura in Nigeria in March ‘10, then Megasari Makmur in Indonesia in April ‘10, followed by Issue and Argencos in Latin America in May and June of ‘10. 2011 saw the group snap up the Darling Group in Africa.
Adi Godrej’s new mantra is his firm's “three by three” strategy which emphasises making “acquisitions in three continents —Asia, Africa and Latin America, across three segments: hair care—especially hair colour, household products—especially insecticides, and personal care.”
International revenues in the last financial year contributed about 35 per cent to the firm's overall turnover. This year, according to company executives, the expectation is that international revenues will contribute close to 40 per cent.
Yet, Godrej isn’t just enamoured of foreign suitors, but is also scouting for domestic ones who strategically fit into the company’s portfolio. “We are well placed as far as the categories we want to play in are concerned. We would rather focus on what we can add to this with our acquisitions in the domestic market,” he had said.
The acquisition of the Swastik and Genteel brands underscores this strategy. GCPL already has in-house brands Ezee liquid wool wash and Godrej Shikakai soap in its portfolio. It has no presence in the neem soap category however. Ezee, according to market experts, is the market leader in the Rs 200-crore liquid wool wash segment with a 75 per cent share, while Genteel has a 12 per cent share largely in the south of the country. “With the acquisition of Genteel, our share in the liquid wool wash segment will be close to 90 per cent now,” Godrej had said at the time of the acquisition.
In the shikakai soap category worth Rs 500 crore, Godrej’s brand, a market leader again, has a 40 per cent share. SwastikShikakai, on the other hand, has a 20 per cent share. “So cumulatively our share in the shikakai segment will now go up to 60 per cent,” Godrej had said.
Not bad for a company with a string of failed marriages.
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