WHY MNC HEALTH DRINK MAKERS ARE EXITING INDIA

Slowing growth and intensifying competition are providing serious food for thought to multinationals in the health food drinks market

Given the flurry of interest from companies across the board for Horlicks, it would be interesting to see who would want to pick up Complan, a brand that has in the past fought Horlicks tooth and nail for market share

In a span of three months, owners of two big health food drinks — Horlicks and Complan — have said they are looking to exit the category. Coming at a time when the broader consumer goods industry in the country has settled down after disruptions such as demonetisation and a new tax regime, statements by GlaxoSmithKline (GSK) and Kraft-Heinz, owners of Horlicks and Complan, have surprised many.

Horlicks is the leader in malt-based drinks, valued at ~78.70 billion in India, according to Euromonitor International. Horlicks’ estimated market share is 44-45 per cent, according to industry officials.

Complan, meanwhile, sits in an adjacent category called supplement nutrition drinks, valued at ~17 billion, says Euromonitor. While Complan’s market share was not immediately available, Euromonitor says it is the leading brand within its segment, followed by Abbott Healthcare’s Ensure.

Along with Mondelez’s Bournvita, another malt-based drink, Horlicks and Complan have pushed the peddle on investment in brandbuilding, marketing, distribution and launch of new variants within the larger health food drinks market in the last few years.

Then why have two out of the top three decided to bow out of the race now? The answer, say analysts, has to do with structural issues within the category, which leaves little room for growth in the future.

“Brands such as Horlicks emerged as substitutes to milk decades ago, when India was deficient in milk production,” says Abneesh Roy, senior vice-president, research (institutional equities), Edelweiss. “It would be stirred in water instead of milk and given to children as a nutrition supplement. As availability of milk increased, Horlicks began being stirred in milk itself as an extra dose of nutrition to children. Now, there are many more nutrition substitutes available in the marketplace, pushing children and parents away from brands such as Horlicks and Complan and bringing down growth rates in the process,” he says.

Euromonitor data points to this trend of slowing growth of malt-based drinks and supplement nutrition drinks. Between 2013 and 2017, maltbased drinks as a category slowed to 8.6 per cent from 13.2 per cent per annum. Supplement nutrition drinks, on the other hand, slipped from 21.3 per cent to 11.5 per cent per annum in terms of growth rate. And Euromonitor says the two categories will slow further to 5.6 per cent (supplement nutrition drinks) and 3.7 per cent (maltbased drinks) per annum by 2022.

Sachin Bobade, senior research analyst at Mumbai-based brokerage Dolat Capital, says that in recent years competitive intensity from players such as Patanjali has also increased in health food drinks, pushing brands such as Horlicks to react quickly. The road hasn’t been smooth though. “In the last one year, Horlicks has come back in the ~5 price point after discontinuing it earlier. While it is a good strategy, this has to be pushed aggressively and there has to be more innovation at lower price points,” says Roy.

For the discerning consumer, Horlicks has launched specialist products including variants for protein (Protein+) and heart management (Cardia+), says Roy, but these are a small part of the Horlicks portfolio currently, he adds.

At a broader level, says experts, as consumers increasingly demand more herbal and natural products, theparticipationofayurveda-basedcompanies in health food drinks is expected to grow.

“Ayurveda-based companies, including Baidyanath and Dabur, are planning to enter this category as demand for ayurveda products increases. Existing players are also expected to revamp their product portfolios in line with changing consumer preferences and demands as people feel natural ingredients are supportive of physical and mental wellbeing,” says Devchandan Mallick, research analyst (drinks and tobacco), Euromonitor International.

Experts say that pricing power has been slowly but steadily slipping out of the hands of brands such as Horlicks owing to slowing category growth as well as competitive intensity from substitutes. “Barring the last two to three years, health food drinks such as Horlicks saw a price increase of 5-6 per cent per annum. This ensured that gross margins were the highest in the industry for this category at over 65-66 per cent. This is now coming down,” says a consumer good analyst tracking the market.

For the uninitiated, gross margin is a company’s total sales revenue minus its cost of goods sold, divided by total sales revenue. It is expressed as a percentage. And the higher this percentage, the more the company has retained in terms of sales to service other costs.

In the case of GSK Consumer, the listed Indian healthcare subsidiary of GSK, gross margins for 2017-18 stood at 66.8 per cent versus 67.5 per cent in the previous year (2016-17). Analysts estimate this number could slip further as the company focuses on volume growth rather than price growth.

GSK had said in March that the strategic review of its India business, including the Horlicks brand, would be completed by the end of calendar year 2018. Given the flurry of interest from companies across the board for Horlicks including ITC, Nestle, Danone, Hindustan Unilever and CocaCola among others, it would be interesting to see, say experts, who would want to pick up Complan, a brand that has in the past fought Horlicks tooth and nail for market share.