GODREJ CONSUMER PRODUCTS LTD. (A)
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In July 2008, A. Mahendran, director of Godrej Consumer Products Ltd. (GCPL), was reviewing the way forward
for the company’s growth strategy. GCPL was a consumer packaged goods (CPG)1 enterprise, which manufactured
and marketed personal care products. The company was part of the Godrej Group, a conglomerate headquartered in
Mumbai in western India.
As part of the review, Mahendran was examining different ways of stepping up the rate of growth of GCPL’s
revenues to 30 per cent plus per annum. He had two dilemmas. Should GCPL expand its footprint in international
markets by continuing to acquire overseas companies? Or should it continue to focus on the domestic market
where consumer demand was growing every year?
Expanding the global footprint is a natural progression for GCPL, which has developed a strong growth platform
over the years in the domestic market. Equally, the domestic market itself offers opportunities that are not
available elsewhere, for growth. Going global and growing at home are both compelling routes in their own
right. There is also another roadmap: exports.2
Mahendran had been inducted onto the board of GCPL a month ago. He had been with the Godrej Group for nearly
two decades. Before joining the Godrej Group in 1994, he was executive director of Transelektra Domestic
Products Pvt. Ltd., based in Mumbai, where he had launched Good Knight, a mosquito repellant. Good Knight had
gone on to become the largest selling brand in its category in the world. When the Godrej Group acquired
Transelektra in 1994 and set up a 49:51 joint venture with the U.S.-based CPG company Sara Lee in 1995,
Mahendran had moved in as managing director of Godrej Sara Lee.
GCPL had already made three overseas acquisitions — Keyline Brands Ltd. of the United Kingdom in October 2005,
the South African business of Rapidol of the United Kingdom in July 2006 and Kinky of South Africa in January
2008. The acquisitions had since been fully integrated into GCPL operations, and their collective contribution
to the company’s annual revenues had increased from 512 million in 20063 to
Worldwide, consumer businesses, particularly those marketing products that were part of discretionary
purchases, were affected by lack of demand. The United States, the largest economy in the world, was
witnessing a liquidity crisis consequent to the fall of its housing market in mid-2007. The crisis was
escalating into Europe and other parts of the world. Although governments in many countries were stimulating
public spending by providing tax rebates for individuals and businesses4 and the central banks were also
planning to reduce interest rates on personal and commercial borrowings, a credit crunch was taking hold. The
rate of growth of gross domestic product (GDP), a barometer of economic growth, was forecast to decline or
remain stagnant till 2013 worldwide (see Exhibit 1).
On the home front, India was an emerging market that had been witnessing relatively higher growth rates than
many other countries in the world. It was part of the EM6 group (comprising the emerging markets of Brazil,
China, India, Korea, Mexico and Russia), which was being seen as a counter magnet to the G7 (comprising the
United States, the United Kingdom, Germany, France, Italy and Canada). The main characteristics of EM6 nations
were not only the growing domestic consumer demand for products and services but their capacity and
wherewithal, in terms of human, financial and natural resources, to support it.5 McKinsey and Company had
predicted that the Indian middle class would grow in size over 10 times from 50 million in 2007 to 583 million
by 2025 and that India would move from the twelfth to the fifth largest consumer market by then. It had also
estimated that Indian GDP would grow by a compound annual rate of 7.3 per cent for the period.6
Doing business in India meant coping with uncertainties in areas such as infrastructure. For example, in spite
of ongoing investments in the power sector, the country was facing energy shortages of 9.5 per cent in 2006
and 2007,7 adding to manufacturing costs. The cost of working capital was high, with the prime lending rate
ruling at 14.1 per cent.8 The personal care market was competitive with both multinational and regional
companies vying for market shares. The cost of brand building was also high; at about 10 per cent of revenues
per annum, it was eroding margins. In 2007, for example, GCPL had spent 6.8 per cent of revenue on advertising
and 3.2 per cent on sales promotion activities in India.
PERSONAL CARE INDUSTRY
The personal care industry included a wide range of products serving the needs of skin care, hair care, oral
care and also home care.10 The products covered the full spectrum of consumer spending, from those that met
basic needs to those that enabled individual consumers to make personal statements. The latter, marketed as
lifestyle products, faced a fall in demand in times when cash and credit were scarce. With the former,
consumers were inclined to gravitate towards low-priced products during periods of economic downturn.
Generally, personal care products had three characteristics: they were part of staple purchases; they were
used by people of all ages; and they were available at multiple price points. A large part of the demand was
price elastic. Companies were pursuing volumes as a means of lowering costs and gaining market share.
Distribution was a major element of cost; it was also a key success factor. Manufacturing was thus located
close to consumption clusters. Relationship with retailers was another success factor.
For many decades, personal care products were considered as luxury items in India and attracted, with the
exception of oral care products, a high excise duty of around 120 per cent. Post-liberalization, the federal
government had progressively reduced it to 30 per cent, making them more affordable. Rising income levels had
also led to higher aspiration levels on the part on Indian consumers. Three other factors were driving the
growth of the personal care industry. Consumers were conscious of product design; they were becoming aware of
the ecological impact of their buying decisions; and the demand for technologically advanced but easy-to-use
customer solutions was rising.
The industry witnessed two trends during periods of economic recession. One was the growth trend wherein
consumers were postponing big ticket purchases (for example, real estate and automobiles) and spending on
“feel good” items of which personal care products were part. The other was the down-trading trend wherein
consumers would buy a low-priced variant of the brand they were loyal to. Companies whose products covered the
entire price spectrum were thus assured of demand; they were also well poised for the economic upturn when it
Soaps, hair colours and detergents were the main segments of the personal care industry in India
The soaps segment, known globally as the bath and shower segment, was valued at 63 billion in India in 2007
(see Exhibit 2). Its products were being retailed at three broad price levels — premium, popular and economy.
The price differential between the premium and economy segments was about double. The popular and economy
segments accounted for over 95 per cent of the Indian soaps market by volume. The market was led by Hindustan
Unilever, which had a market share of 53.5 per cent largely through straddling all price points (see Exhibit
Worldwide, soap manufacturers used animal fats, which were superior to vegetable oils and were also cost
effective. But since Indian consumers had reservations about buying products made from animal fats, Indian
soap manufacturers were using vegetable oils such as rice bran, palm, soybean, neem, karanji,
olive and copra. The most commonly used oil was rice bran, followed by palm. Other oils were also added, but
in a small quantity, to launch new variants.
Bar soap was the largest category, accounting for 98 per cent of sales in India; there were opportunities to
increase the sales of categories such as liquid soap (e.g., hand sensitizers) and bath additives (e.g., body
wash and shower gels). Long-standing habits such as using buckets during bathing rather than showers were
pre-empting the use of products, such as all-in-one gels, which were popular in overseas markets.
Hair care products
Thehaircaresegmentwasvaluedat 53billionin2007.HindustanUnileverhadthesinglelargestmarket share of 19.4 per
cent. The market was driven by a growing pool of customers valuing the attributes of looking good and feeling
good. Conditioners were the largest category of sales. Since the segment consisted of lifestyle products, the
slightest drop in consumer confidence or consumer sentiment, typical in a period of economic downturn, would
affect sales. The market was competitive, and companies were innovative in attracting new customers. They were
tapping into the aspirations for differentiation among young Indians by launching new variants of existing
brands with herbal and natural-based ingredients. Medicated shampoos, for example, were a growing category.
The detergent market served the needs of fabric wash. It consisted of synthetic detergents (such as bars,
powder and liquids) and oil-based laundry soaps. The synthetic detergent market was classified into premium,
mid-price and popular segments, which accounted for 15 per cent, 40 per cent and 45 per cent respectively of
the total market. The product category as a whole was mature, with low rates of growth. It was also dominated
by two companies: Hindustan Unilever and Nirma. The price differential between the premium and popular
segments was almost sevenfold. The per capita consumption of detergents was 2.7 kilograms per annum compared
to 10 kilograms in the United States.
GCPL: COMPANY BACKGROUND
GCPL was part of Godrej Group, one of the largest industrial conglomerates in India with interests in
unrelated businesses such as consumer products, home appliances, furniture, real estate, animal feeds, locks,
construction, software and tooling.
The group was founded by Ardeshir Godrej, a lawyer who opened a business of manufacturing locks in Mumbai in
western India in 1897. In 1918, the group started making soaps by setting up Godrej Soaps Ltd, (GSL), which
went on to become, in later decades, a premier unit within the group. In 1923, the group diversified into
making steel furniture, which became as iconic as the Godrej locks for their ruggedness and reliability. The
latter image was reinforced when, in an explosion in the docks in Mumbai that destroyed cargo and led to many
human casualties in April 1944, the few things that survived the catastrophe in one piece were Godrej
By 1978, the group had a total of 12,000 employees and was exporting its products to over 60 countries. It had
diversified into animal feeds and property development. A decade later, GSL entered into technical
collaborations with Lurgi GmbH of Germany and Siat SA of Belgium. Subsequent to the launch of economic reforms
in India in 1991, GSL entered into a strategic alliance with Procter & Gamble (P&G) in
India. In 1995, it tied up with Sara Lee, a consumer brands company in the United States, for securing equity
participation in Transelektra, then the largest Indian manufacturer of mosquito mats in the world.
In 1997, the company set up a new factory at Silvassa, a federally administered territory, for manufacturing
hair dyes. It also established Godrej Hair Care Institute at the sprawling Godrej campus in Mumbai, with a
view to understanding the needs of the Indian consumer, develop specific products to meet those needs and
educate consumers. GSL also tied up with U.S. management consulting firm Stern Stewart & Company to
incorporate an economic value added (EVA) framework in its system.
The group was in its fourth generation of ownership by the founding family in 2007. It held 25 per cent of the
shares of Godrej & Boyce — the holding company — in a trust that reinvested in projects related to
environment, health care and education nationwide. The Godrej Group had annual revenues in excess of $1.7
billion and employed over 20,000 people in various businesses.
GCPL came into being as a result of the de-merger of GSL in December 2000. The new company represented the
group’s interests in personal care and gave focus to a business that not only had nationwide presence by then
but was particularly strong in the rural markets of West and North India. GCPL had manufacturing facilities at
Malanpur (in the province of Madhya Pradesh), Baddi-Thana and Baddi-Katha (in the province of Himachal
Pradesh), Guwahati (in the province of Assam) and at Namchi (in the province of Sikkim). Its plants in
Malanpur and Baddi manufactured soap. The company’s plants at Assam and Sikkim manufactured mainly colourants
In its first year of operations for the year ending March 2002, GCPL’s operating margins (profit before
depreciation, interest and taxes, or PBDIT, to sales) stood at 15 per cent as compared to the range of 9.5 per
cent to 15.9 per cent for its industry peers at the time.12 The company’s products were available in nearly
three million13 retail stores across India, providing a competitive advantage in distribution. GCPL
hadconsolidatedrevenuesof 11billionfortheyearendingMarch2008andprofitaftertaxof 1.6billion (see Exhibit 4).
While domestic sales contributed to 79 per cent of overall revenues, soaps generated 64 per cent of domestic
sales (see Exhibit 5). The company had growing reserves (see Exhibit 6) and cash flows (see Exhibit 7).
GCPL was driven by the vision of “delivering superior stakeholder value by providing solutions to existing and
emerging consumer needs in the personal care business.”14
The company had stayed focused on increasing revenues even while its competitors were moving from growing
revenues to growing margins. The latter were maximizing efficiencies; consolidating operations as part of
coping with the economic environment had become difficult. Growing revenues was important for GCPL “in order
to build on our foundation and strengthen our position in all our incumbent sectors”15 and “to promote growth
across our brand franchises.”16
All strategic activities at GCPL were rooted in five corporate values: delivering stakeholder returns,
ensuring transparency in dealings with stakeholders, being innovative in manufacturing and marketing in
particular, attracting and retaining the best talent and adapting to changing business paradigms.17 The
company’s customer value proposition was in providing “superior quality products at affordable prices.”18
Manufacturing, distributing and building brands were the core activities of the company. Manufacturing was
characterized by process rigour, operational discipline, sourcing strengths and state-of-the-art technology.
Distribution was characterized by direct access to 2.5 million outlets throughout the country, which gave the
company a competitive advantage. Brand building was characterized by not only extensions and variants of
existing brands to fill gaps in the portfolio but regular launches of new brands.
GCPL had four lines of business: soaps, hair colours, liquid detergents and toiletries. Over 98 per cent of
its revenues came from the domestic market till 2006; in 2008, the revenues from the domestic market,
international markets and exports comprised 79.1 per cent, 19.8 per cent and 1.1 per cent respectively.
Soaps were the largest line of business, generating nearly 80 per cent of annual revenues. GCPL was the second
largest soap company in India with a market share of 8.9 per cent for the year 2007. It was regularly
launching variants of its two major soap brands — Cinthol and Godrej No 1. The variants were available in
several pack sizes — e.g., 75 gram, 100 gram and 125 gram — covering many price points. It was also extending
Cinthol, its flagship brand, to other categories such as talcum powders and deodorants. GCPL was a mass-market
player; it was advertising its soaps in media such as billboards, the Internet, print, television and cinema.
It was using a popular film actor as its brand ambassador in its advertising.
In hair colours, GCPL was present in the popular, sub-popular and premium categories of the overall hair
colour market. The premium category was growing faster than the other categories. GCPL led the hair colour
category with 32.5 per cent share of the market. Its Godrej Expert Powder Hair Dye was also the world’s
largest selling brand in its sub-category of powder hair dyes. The product was available in sachets, meant for
one-time usage, of 3 grams (for men) and 6 grams (for women). Sachets were a unique Indian innovation that
attracted non-users, one-time users and new users because they were convenient and affordable.
In the toiletries category, GCPL was offering shaving cream, talcum powder and deodorants. In liquid
detergents, it was offering a premium fabric brand designed for garments such as woolens, silks, baby clothes
and premium cottons.
GCPL exported its products from India to 36 countries. The customers were the Indian diaspora who were
familiar with Godrej products before relocating to countries outside India. The company had established a
fully owned subsidiary, Godrej Global Middle East, in the United Arab Emirates (UAE) in October 2007 as a
distribution arm with which to expand into the larger markets of the Gulf Cooperation Council (GCC).
GCPL had exports worth 83 million in the first full year of its operations in 2002. The company had
established a tie-up with a contract manufacturer in Bangladesh from where it could service the demand for
soaps and hair care products from countries of the South Asian Association of Regional Cooperation (SSARC)
comprising Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. The
tactical move had offered significant cost efficiencies and logistical benefits. GCPL had also identified
South Africa as an export destination for its hair colour products. By 2005, the company was focusing on
geographies where the Indian diaspora was sizable (e.g., the Middle East and Southeast Asia) but also where
the demographic profile was similar to that of India (e.g., countries of Latin America).
It was in October 2005 that GCPL began its international foray by acquiring 100 per cent ownership of Keyline
Brands, a leading U.K. company engaged in the manufacturing and marketing of cosmetics and toiletries. Keyline
was a 15-year-old private enterprise that had grown by acquiring low volume but high equity brands from
companies such as Unilever, P&G and Henkel, which had divested them for reasons of synergy and focus. Its
portfolio included Cuticura (an anti-bacterial medicated soap), Erasmic (a range of shaving products) and
Henara (hair care range). A major part of Keyline’s sales came from the United Kingdom and Ireland, but the
company was well-known in Europe, Canada, Australia and the Middle East. Keyline’s competency was in dealing
with modern trade retailers (such as Tesco and Sainsbury).
GCPL took a second step towards globalization in July 2006 by acquiring 100 per cent ownership of Rapidol SA,
a leading maker of permanent hair colours in South Africa, which had manufacturing facilities at Pinetown near
Durban. Rapidol had two trademarks, Inecto and Soflene, comprising over 20 brands with many variants. Inecto
had 70 per cent share of the ethnic hair colour market in South Africa and had the top retailers and
wholesalers in the country as its customers.
The third step was the formation, in October 2007, of Godrej Global Mideast FZE (GGME), as a 100 per cent
subsidiary of GCPL. Based in Sharjah, UAE, its objective was to distribute GCPL products in UAE and other
countries of the GCC where many Indian expatriate families lived.
The fourth step was the formation of a 50:50 joint venture with SCA Hygiene Products AB (SCA) of Sweden in
October 2007. SCA was a global enterprise, headquartered in Stockholm, with production facilities in 40
countries. It was
Godrej SCA Hygiene Limited had been incorporated to manufacture and market paper-based hygiene products, such
as sanitary napkins and baby diapers, in India, Nepal and Bhutan.
The most recent step was in April 2008 with the acquisition of a 100 per cent stake in the Kinky Group
(Proprietary) Ltd., a 36-year-old business set up by a family of entrepreneurs in South Africa. It had a
variety of products such as hair braids, hair extensions, hair pieces, wigs and woven pieces. Kinky also
offered hair accessories such as styling gels, hair sprays and oil free shampoo. These were a new line of
business for GCPL. Kinky had two manufacturing plants at Johannesburg and Durban. It sold its products both
through Cash’n Carry outlets and its own stores as well as to hairdressers and salons that were businesses in
their own right.
ISSUES BEFORE MAHENDRAN
Each of the three options in securing scale — expanding globally, targeting exports and focusing on domestic
growth — had its risks and rewards.
The revenues from global operations had jumped nearly 300 per cent within a year — from 512 million in the
first year of globalization in 2006, it had moved up to 1,956 million in 2007. It was a pointer to how
globalization could quickly mobilize scale. But there were two contrasting pointers to how the events in the
macro environment, which were outside the control of GCPL, could, equally quickly, derail the momentum of
growth. First, the rate of growth of revenues from overseas subsidiaries had declined to 12 per cent for the
year ending March 2008 at 2,189 million. Second, the rate of growth in the overall revenues of GCPL had also
slipped from an average of 24.8 per cent for the three-year period beginning April 2004 to 15.9 per cent for
the year ending March 2008. The impact of the ongoing credit crunch, both globally and in India, was beginning
to be felt at the ground level. Economic recovery was likely to take a long time. Was this the right time to
pursue global expansion?
Globalization was also the route to acquire best practices in retail trade. India did not yet have the
grandeur of modern retail (comprising big boxes, hypermarkets and shopping malls) typical of the United States
and Europe. Over 95 per cent of its retail activity was conducted through traditional retail shops (comprising
mom and pop establishments, hand cart hawkers, pavement vendors and general stalls known locally as kirana
shops), together numbering nearly 12 million nationwide. But, as part of its ongoing economic liberalization
policies, the federal government was likely to allow foreign direct investment (FDI) in retail trade, which
would bring modern retail formats to India. Globalization would upgrade GCPL’s skills in competing with
multinationals not only in overseas markets but also on its home turf.
The rate of growth of exports had averaged 10 per cent over the five-year period — from 78 million in 2004 to
125 million in 2008. But the contribution of export sales to overall revenues of GCPL was less than 2 per cent
year to year. In addition, the rupee was fluctuating against the dollar, leading to progressively lower
realization from export sales. The trend was showing signs of change (see Exhibit 8).
Focusing on Domestic Growth
Domestic demand was strong in India, as was evident by four factors. The Indian economy was forecast to grow
at a higher rate than countries of the developing world. The per capita consumption of soaps and hair care
products was low. Income levels were rising in India, and 70 per cent of Indians were younger than 35 years of
According to a study by McKinsey Global Institute (MGI), India would become the world’s fifth largest consumer
market by 2025, moving up from the twelfth position in 2007. It had also estimated that over 300 million
people would be moving up from the category of rural poor to rural lower middle class between 2005 and 2025.
Approximately 315 hypermarkets were expected to be operational in Tier-1 and Tier-2 cities across India within
three years, and 212 Indian towns were already capable of sustaining the development of such hypermarkets.19
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