Wednesday, July 27, 2016
How ITC reinvented itself to “a company that also makes cigarettes”
Aricle first published in +Mint Click here to read
Over a decade ago, one of the doyens of Indian business journalism had written an article, “Tale of two companies”, comparing two packaged consumer goods makers — Hindustan Lever Ltd (still not Hindustan Unilever Ltd (HUL) then) and ITC Ltd. Since then much soap and detergent have been washed down the Hooghly and Arabian Sea — as indeed millions of puffs have been blown through human chimneys. While HUL has regained its old act by re-engineering itself, ITC has got its new act together by reinventing itself.
Till the early 1990s, the punch line of all Hindustan Lever chairmen used to be “we are an Indian company whose largest shareholder happens to be a multinational”. ITC, on the other hand, used to be less apologetic about its BAT Plc. parentage. Following the eminently forgettable K.L. Chugh era, when Y.C. Deveshwar mounted the saddle, in a corporate coup of sorts with the backing of institutional shareholders, he decisively cut off the umbilical chord and embarked on a mission to establish ITC’s Indian credentials with a vengeance.
At the same time, with liberalization of the Indian economy, the new generation chairmen of Lever over time shed their trademark khadi silk bush-shirts in favour of bespoke suits when traversing the power corridors of Delhi. However, this piece is not about comparing the two companies but trace the evolution of ITC as an Indian consumer products giant.
It is easy to surmise why Ajit Haksar — the last of the corporate Mohicans — ventured into hotels. It was partly to hedge against the possibility of curbs on the tobacco business and also as a safe haven for the surplus funds of the mother business that could be easily encashed anytime by selling the brand or the real estate. It is to Haksar and ITC’s credit that they nurtured Welcomgroup for a long time before it became truly profitable. Printing and packaging (where Deveshwar first cut his teeth) and paper boards were but logical vertical integration.
Similarly, one would believe the lifestyle and apparel business was started to secure the Wills franchise. But the real serious diversification was kicked off with ITC’s plunge into the foods business — which arose both out of necessity and opportunity. Subsequently, it naturally extended to pure consumer products play.
The story of ITC’s transformation is one of turning a proverbial threat into an opportunity. As the time-worn cliché goes — cigarettes is a “dying” industry in more senses than one. With the intervention of World Health Organization and a judiciary increasingly sensitive to the hazards of tobacco consumption, the tobacco industry has had to brace itself for a premature sunset like its consumers (smokers).
Simultaneously, there was a need to divert public attention from corporate governance and health (tobacco) to being a socially-responsible organization. This, one would suspect, was the genesis of a “we also make cigarettes” strategy.
The ban on cigarette advertising came as a blessing in disguise as it left ITC flush with cash. Not having a majority foreign shareholding allowed it to enter the food sector — then reserved for domestic players (except those such as Nestle SA, GlaxoSmithKline PLC and a few others — who enjoyed the benefits of a “grandfather” clause). Food was largely an open field with no organized pan-India player barring Britannia Industries Ltd. From biscuits, atta, ready-to-cook or heat meals, it has seamlessly moved to instant noodles, juices and now, one hears, coffee is in the pipeline.
For a cigarette manufacturer with low technology and little product innovation except in packaging perhaps, ITC’s most remarkable achievement was in learning the ropes of an entirely different supply chain and gaining mastery of a new product category, not just in terms of marketing but product development and innovation. Equally challenging was building a network which — contrary to popular belief — had little in common with the cigarette retail channel.
The evolution into personal care was even more interesting because here it had to contend with a giant like Unilever with an 80-year legacy in India, international brands and world-class research and development. Making soaps, body-wash and shampoo brands is as different as paneer is from talcum powder. Globally, too, it is rare for companies to be equally successful in both food and packaged consumer products. Neither Unilever nor Procter & Gamble Co. can really be considered to have handled both businesses with the same level of success while traditional food makers like Nestle and General Foods Corp. have by and large stuck to their knitting.
However, ITC’s real success lies in achieving this transformation with existing, home-grown talent with very little (or practically no) lateral hires at senior levels. ITC remains one of the few large companies that still believes in providing long-term careers to its employees. It is a key differentiator in a fast-changing corporate world where “turnover” and “velocity” are the current flavours of human resources management. Changing the corporate DNA and culture is no mean task. If an organization has to reinvent itself so have to its leaders. This is where Deveshwar scores above many of our present day corporate icons. Arguably, he had an extended stay at the top. But Deveshwar leaves behind a new ITC for the next generation.
In contrast, the much-hyped “Project Millennium” of Lever — riding on which many careers were made — lost steam. Among close to a dozen business ideas incubated — just about one (water, that too in a modified form) has survived the genetic implant.
It was generous of Deveshwar to praise Amul and Patanjali in his speech.The jury on the latter is still out. But, what it does underscore is the rapidly shrinking ramp-up time. What took Unilever 60 years to achieve, Amul did in 40 and ITC in 20. Now, Patanjali has managed to scale up in less than five.
A fascinating battle lies ahead between the global giants and the emerging “swadeshi” challengers.