8/13/2018 Whoever buys Horlicks must reckon with better informed consumers in a Rs 7,000 crore market - The Economic

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Whoever buys Horlicks must reckon with better informed

consumers in a Rs 7,000 crore market
BY RAJIV SINGH & PRABHA RAGHAVAN, ET BUREAU | APR 01, 2018, 02.29 PM IST Post a Comment

Renuka Gupta, who recalls her “childhood days of religiously gulping a glass of one of the
top malt-based drinks daily,” doesn’t believe in passing on the “irrational legacy”. “I didn’t
let my sixyear-old daughter get hooked to any such drink,” says Gupta, a senior
secondary science teacher at a public school in Delhi.

Though her parents, she says, were gullible enough to believe that such drinks make kids
stronger, healthier and intelligent, Gupta claims to be more aware. “Growth of brain and
height is not linked to any drink,” she says.

Gupta is not alone in shunning malt-based drink brands. This led to the volume growth in
the health food drinks segment reaching -6.8% in 2016-17. But what is most alarming,
Can Horlicks -which according to Walmsley of GSK
perhaps, is another grim statistic: the fall in volume in this category happens to be the first
has for a long time been a winning and performing
in a decade in India. brand, primarily in India- live up to its promise?

GSK Consumer, the maker of Horlicks and Boost, has grown at a slow pace in an already Big Change:
slow growing category, highlighted a Motilal Oswal report released in February. The end of Five-Year Plans: All you need to know

A steep fall in the prospects of the estimated Rs 7,000 crore health food drinks (HFD) segment might turn out to be the biggest
challenge for the new owner of the 144-year-old heritage brand, which was put on the block by the UK-based GlaxoSmithKline (GSK) as
it hunts for funds to buy out Novartis in their global consumer healthcare joint venture.

“Horlicks is a terrific brand with a long history, especially in India,” said GSK Chief Executive Officer Emma Walmsley at an investors’
meet last week. “But in the context of funding for this (Novartis) transaction and our desire to increase focus on our overthe-counter and
oral health portfolios, as well as other group capital allocation priorities, it makes sense for us to review it.” GSK holds 72.5% in its Indian
subsidiary, GSK Consumer Healthcare.

Though the prized catch would bring huge gains for the buyer — brands being reviewed amounted to sales of approximately £550
million in 2017, most of which were from Horlicks in India — the challenge is equally daunting: reviving a segment that has been on a
slide for three years. The past three years, reckon analysts tracking the segment, has been challenging for most HFD players in India.
Apart from intense competition, rising popularity of substitute products such as syrups has also affected growth, says Abneesh Roy,
senior vice-president at Edelweiss Financial Services. Add to it demonetisation, the goods and services tax and a slowdown in urban
and rural economy, and the picture has been bleak for players in the sector.

Roy, however, is quick to point out that there’s light at the end of the tunnel. The companies, he says, need to focus on health, rather
than taste. Over the past few years, Horlicks has been bullish on taste. “But a lot of people would prefer a chocolate syrup for its taste to
Horlicks,” says Roy. “Horlicks is too expensive in rural areas.

You can’t get urban margins in a rural area.” The company needs to explore the option of operating with smaller unit packs and sachets
in the range of Rs 10-20 to tap the lower end of India’s population, which is highly nutrition deficient. “If innovation is not there in FMCG
(fast moving consumer goods), growth rate comes down drastically,” he adds.

A GSK spokesperson, while conceding that the FMCG sector was hit due to demonetisation and the GST, asserts things are back on
track. “In the last three months, the category grew 7.2% and Horlicks grew 10.5%,” the spokesperson claims, adding that Horlicks
continues to remain the market leader. With Horlicks and its extensions constituting about 75% of GSK Consumer’s revenues in India, it
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8/13/2018 Whoever buys Horlicks must reckon with better informed consumers in a Rs 7,000 crore market - The Economic Times

goes on to demonstrate that customers have faith and trust in the company’s brands within the competitive market dynamics, the
spokesperson says.

“We are confident that with focus on higher science, innovation, accessibility of our products and sharp customer insights, we will
continue to stay ahead in the category,” the spokesperson adds.

FMCG traits, reckon marketing experts, are the need of the hour for Horlicks. “In many ways, Horlicks needs the mentoring of a
company that has FMCG in its DNA,” says brand strategist Harish Bijoor. Whoever buys the brand is going to look at a complete brand
refresh. And that can only be good for Horlicks, which is the leader in a category that is seeing a shrinkage in Volume and zing.
Category leader brands can only grow exponentially if the segment grows exponentially. “Creating category growth must be the first
ambition of the new owner er,” adds Bijoor.

Pushing category growth is easier said than done. Reason: the key driver of this category, parents,are making informed choices, say
nutritionists. Parents are increasingly looking for healthier alternatives. “Most of these so-called proprietary drinks have maltodextrin,
sugar and milk protein added, which don’t make much of a value-add,” says Priyanka Rohatgi, chief clinical nutritionist and head of
dietetics department at Apollo Hospitals in Bengaluru. With child obesity rising, additional calories in the form of sugar and maltodextrin
is not a great idea. A, health drink the doctor explains, is worth it if it can offer something that milk does not have. “We would be happy
prescribing a product which has more Vitamin D,more DHA and more choline.”

What’s also adding to the woes of players like Horlicks and Bournvita is competition from an unexpected quarter: PediaSure. The brand
from Abbott has been the sole bright spot in the HFD category. It has even eaten into the market share of top HFD players says the
Motilal Oswal report.

David vs Goliath
When brands like Horlicks and Complan were talking to mothers of the world, PediaS ure smartly took a different route to reach the
moms: paediatricians. “Tough fight, most of the time, does not come from predictable rivals but unforeseen ones,” says Ashita Aggarwal,
head of marketing at SP Jain Institute of Management and Research. An upstart like PediaSure has become the David fighting the
Goliaths of the HFD in India, she says, adding that startups offering health foods and snacking options have also made a dent in the
fortunes of HFD players.

Take, for instance, Delhi-based packaged food brand Slurrp Farm, which focuses on healthy breakfast and snack products for children.
The start-up claims it makes preservative-free products such as cereals, cook-ies, pancakes and dosa using ingredients like ragi. Start
ed in October 2016, Slurrp Farm quickly roped in 1,000 customers in the first month, and recently tied up with 300 grocery stores in the
National Capital Region. “I feel the shopping behaviour is changing,” says Shauravi Malik, cofounder of Slurrp Farm, which services
5,000 customers a month.

Parents are paying more attention to product labels. “We wanted to create preservative-free alternatives using whole grains, normal
amount of sugar and healthy fats,” she adds. Though the going might seem tough, GSK has been doing its bit to claw back its market
share. It is looking to be more rational on pricing and also to focus on sachets. Though the sachet category is 10% of sales, it acts as a
great introductory incentive to a category that still has under 40% penetration across the country, points out the Motilal Oswal report. A
massive distribution reach of over 3 million out-lets gives GSK an enviable position to leverage on new launches. “The brand just needs
a reboot, and hunting for new owner comes at a right time,” says Aggarwal.

Can Horlicks -which according to Walmsley of GSK has for a long time been a winning and performing brand, primarily in India- live up
to its promise? Well, that will depend on the kind of drink the new owner comes up with.

Where Horlicks Went Wrong

Category Under Pressure: The health food drinks (HFD) category, which contributes 94% of GSK Consumer’s sales and where the
company has over 65% market share, is under stress. For the first time in over a decade, HFD volumes witnessed a fall in growth of
6.8% in fiscal 2017.

Availability of Milk: Earlier, lack of availability of milk in south and east India was the reason for the growth of Horlicks in the country.
However, milk availability has improved substantially over the past decades.

No Longer a Masking Agent: HFDs were used as flavouring agents to mask the poor quality of milk. Better milk has reduced the need

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8/13/2018 Whoever buys Horlicks must reckon with better informed consumers in a Rs 7,000 crore market - The Economic Times

for HFDs.

Breakfast Cereals: HFDs were used to get kids to drink milk. There is now a growing preference to have cereals with milk, so parents
don’t bother about HFDs.

Just for Children: While companies like Mondelez (parent of Cadbury) have been successful in turning chocolates and confectionary
suitable for all ages, GSK Consumer, Heinz (Complan) and even Mondelez (Bournvita) lose their core consumers once they turn 13
years old.

Where Horlicks Went Wrong

Pricing: When commodity prices were benign, gross margins were significantly above long-term average and volumes were poor, there
was no need to hike price in FY15 and FY16.

Sachets and Brand Extension: Sachets are less than 10% of sales. Category penetration is low at less than 40%. Roll-out of Women’s
Horlicks, Mothers’ Horlicks and Horlicks Lite has been too late and their contribution is still small.

Falling Market Share: GSK Consumer has been losing market share over the past few quarters, which means that it has grown at a
slow pace in the already slowgrowing category.

Nigeria to GST: The annual report of the parent company attributes fall in the growth of nutrition business to sale of Nigeria beverages
business and implementation of the GST.

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8/13/2018 Whoever buys Horlicks must reckon with better informed consumers in a Rs 7,000 crore market - The Economic Times

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