Asian Paints Limited

Competition & Strategy

Project Report
Submitted
to
Prof. Srinivasan R
on
19th March, 2010

by
Group 16, Section:D

Chinmaya Kumar Sharma

Gedam Santosh
Gurav Shekhar Jaywant
Kulpreet Singh
 TABLE OF CONTENTS

Chapter 1: The Paints Industry ..................................................................................................................................................... 3

The Indian Paints Industry ............................................................................................................................................................. 3

Demand Drivers for Indian Paints Industry ............................................................................................................................ 6

Five Forces Analysis of Indian Paints Industry ...................................................................................................................... 6

Key Success Factors ........................................................................................................................................................................ 10

Chapter2: Asian Paints ................................................................................................................................................................... 11

Value chain and strategic resources ........................................................................................................................................ 11

Value chain of the Asian Paints....................................................................................................................................................... 11

PITstop 1: Raw Material Procurement ................................................................................................................................... 12

PITstop 2: Production.................................................................................................................................................................... 12

PITstop 3: Operations .................................................................................................................................................................... 12

PITstop 4: Supply chain Management .................................................................................................................................... 12

PITstop 5: Working Capital Management ............................................................................................................................. 13

PITstop 6: Distribution network ............................................................................................................................................... 14

PITstop 7: Marketing and Sales ................................................................................................................................................. 15

PITSTOP 8: Customer Services .................................................................................................................................................. 18

Generic strategy of AP ................................................................................................................................................................... 19

VRIO Framework .................................................................................................................................................................................. 19

Chapter 3: Challenges and Recommendations .................................................................................................................. 20

Challenges........................................................................................................................................................................................... 20

Criteria of evaluation of recommendations.......................................................................................................................... 23

Overcoming the Challenges: Recommendations ..................................................................................................................... 23

References ............................................................................................................................................................................................... 26
 CHAPTER 1: THE PAINTS INDUSTRY

Asian Paints Ltd is India’s largest and Asia’s third largest company today with a turnover of around Rs
44.04 billion in FY 08-09. Asian Paints operates in 20 countries and has 28 paint manufacturing facilities
worldwide serving customers in more than 65 countries. While it started off by providing good quality
products in the economy ranges, Asian Paints' current strategyi is to develop good brands and products for
the upper end of the decorative market, establish a strong retail presence, and make inroads into the
industrial coatings business.

THE INDIAN PAINTS INDUSTRY

Indian paint industry is estimated to be ~8.2 lakh tonnes in volume terms and ~Rs.17,000 crore in value
termsii. The industry is dominated by organized players whose combined share is estimated at ~Rs11000
crore or ~65% of the market.

Paints are broadly classified into decorative paints and industrial paints. While decorative paints in India
account for almost 70% of the entire paint industry, industrial paints make up for the remaining 30%iii.
Globally this ratio is almost reverse, which gives enormous growth potential for the industrial paint
manufacturers.
Decorative paints are less technology intensive and hence unorganized players are more active in this
segment. This is also one of the reasons why decorative paints in India has grown at a faster clip compared
to industrial paints. Asian Paints (APIL) controls more than half of the organized decorative paint market
in India due to its strong brand equity, wide product portfolio and pan-India distribution network. On the
other hand, industrial paints are highly technology intensive and hence the segment is controlled only by
the organized players such as Kansai-Nerolac Paints Ltd (KNPL) which has forged technical alliances with
leading global players.
 DEMAND DRIVERS FOR INDIAN PAINTS INDUSTRY

FIVE FORCES ANALYSIS OF INDIAN PAINTS INDUSTRY

Threat of substitute products - LOW:

Lime-wash is the immediate substitute for paint. However, paint is a better form of coating with protective
and aesthetic qualities and hence a superior product; whereas, lime-wash is an inferior quality coating
with no protection quality. Hence, the threat of down-trading from paints to lime-wash, a low-end product
is minimal.

Threat of entry of new competitors - MEDIUM:

Indian paint industry has tremendous growth potential and decent profit margin and hence faces the
threat from entry of new competitors. The decorative paints market can be entered into by a new
company, or by an existing company diversifying its products to include paints and coatings (decorative is
not a technology-intensive industry); also, a player established elsewhere may begin activities in this
region. But industrial paints manufacture calls for latest technology and superior products which a new
player will find a tough nut to crack. However, global players like BASF etc can still make an entry into this
segment too.

All said, the manufacture of paints and coatings is generally a high-volume & automated process, which
tends to favor larger companies able to generate scale economies that offset the initial capital outlay on
production equipment and facilities. Also the Indian paint industry is dominated by a handful of strong
players with well-known brands and products covering all price points, and deep entrenched distribution
network which will help them to keep competition at bay in the short and medium term.

Rivalry among existing players - HIGH:

The paints and coatings market is fragmented. The brand share of Asian Paints is still 6.4%, with that of
Berger and Nerolac 2.7% and 2.3% respectively. Modest organic growth also makes it more difficult for a
company to grow its own top line without impinging on its competitors. Exit barriers are high with most
companies highly diversified and owning substantial specialized production assets.
Bargaining power of customers - MEDIUM:

Decorative paint companies have a better bargaining power since they deal with large number of brand-
conscious fragmented retail customers who have low bargaining power. Industrial paint companies on the
other hand have low bargaining power since they deal with other user industries, for e.g. OEMs, who are
bulk buyers and hence wield high bargaining power.

Bargaining power of suppliers - MEDIUM:

Crude Oil derivatives are key raw materials for paint industry and their prices move in tandem with Crude
Oil. However other key inputs for paints and coatings are pigments such as titanium dioxide, and epoxy
and other resins, as well as containers for packaging. Generally, these can be sourced readily from several
companies, thereby weakening supplier power. Major players also tend to adopt strategies of identifying
substitute raw materials and technologies.

Thus overall, the industry is moderately attractive.

 KEY SUCCESS FACTORS

The KSF in the paints industry are again appreciably different for the two segments.

Decoratives Segment Industrial Segment

Extensive distribution network Technical expertise

Strong branding and marketing Strong research and development

Wide product line Customer understanding and customer relation

High service level (continuous availability of

product at retail store)
 CHAPTER2: ASIAN PAINTS

VALUE CHAIN AND STRATEGIC RESOURCES

In Paint industry, distribution and channel management are most crucial factors. AP instead of going to big
cities strategically decided to expand into untapped semi-urban and rural market.

Key differentiating strategies of AP are given below.

AP bypassed the bulk buyer segment and went to individual consumers of paints.
AP went slow on urban areas and concentrated on semi-urban and rural areas.
AP went retail and bypassed the whole sale distributors.
Large distribution and more availability of products lead to more inventory cost but AP decided
high service level.
AP went in for an open-door dealer policy this lead to rapid expansion of distribution networkiv.
AP voted for nationwide marketing / distribution as compared territorial practiced by other
companies.

VALUE CHAIN OF THE ASIAN PAINTS

We will now use the supply chain of AP to understand its strategic resources and their suitability, at the
same time, weaknesses. We will stand at all major pitstops and study what’s been going on and what can be
done better.
 PITSTOP 1: RAW MATERIAL PROCUREMENT

Backward integration immunizes AP to the fluctuation in raw material prices. Raw materials produced at
the plants are transferred to AP at cost or a low margin over cost. More than half the produce is sold to
external clients. It is a profitable business in itself. It is impractical to diversify into commodities or crude
oil derivatives.

PITSTOP 2: PRODUCTION

Production plants of AP are spread across India. AP currently operates at 87% capacity. AP has plans to
increase production capacity. Spare plant capacity readies you for demand spurts but at the same time is
adversarial to margins. It is a trade-off the answer to which lies in an efficient distribution network and
better demand forecasting which we will see how AP is implementing.

Plant Capacity in kl p.a

Bhandup, Mumbai 30,000
Ankleshwar, Gujarat 100,000
Patancheru, Hyderabad 80,000
Kasna, Noida, UP 80,000
Sriperumbudur, Chennai 50,000 + 50,000(addition)
Rohtak, Haryana 150,000 (new)

PITSTOP 3: OPERATIONS

AP is using i2 and SAP technology for its SCMv. This enables AP to set weekly timing requirements on a
plant, unit and machine-by-machine basis.

Strategic Advantages

Increases operational efficiency in the supply chain.

Provides data for accurate sales forecasts.
Improves service level to 87-90% for all SKUs thereby ensuring little loss due to stock out; good
retailer relations.

Risks & Challenges

Retailer level sales data not part of SCM module.

PITSTOP 4: SUPPLY CHAIN MANAGEMENT

Effectiveness and operational efficiency is analyzed in term of supply chain length. Using the financial
statements the length of the supply chain (in days) is found out to be:
 AP BERGER PAINTS ICI INDIA (DULUX) SHALIMAR PAINTS
2008- 2007- 2006- 2008- 2007- 2006- 2008- 2007- 2006- 2008- 2007- 2006-
09 08 07 09 08 07 09 08 07 09 08 07
Days of Raw 33.22 36.16 30.92 37.30 46.69 42.48 20.19 28.24 31.97 34.74 36.13 35.56
Material
Days of WIP 3.80 5.28 5.04 5.95 6.96 6.41 1.73 1.25 1.67 7.06 7.85 8.47
Days of FG 29.90 43.58 38.28 55.91 60.79 55.91 50.32 59.41 125.44 50.24 58.87 60.60
Inventory
Total length of 66.92 85.02 74.24 99.16 114.43 104.80 72.24 88.91 159.08 92.04 102.84 104.63
Chain (days)

Against Industry average of 82.6 days, the length of AP’s supply chain is 66.92 days.

Strategic Advantages

Short supply chain takes less time to respond to spikes in demand.

Short supply chain reduces inventory carrying cost for raw material and finished goods.
Low safety stock requirements at dealers’/retailers’ end.

PITSTOP 5: WORKING CAPITAL MANAGEMENT

The objective of Supply Chain working capital management is to analyze the impact of inventory, accounts
payable and accounts receivable on the performance of the firm.

ISWC = internal supply chain working capital

AR = accounts receivable

AP = Payable to the suppliers

NS = Net Sales

AP has very low working capital as compared to its competitors.

Low working capital in a business with price sensitive customer and volatile demand is a sizeable
advantage.

Credit policy of AP is given below

Name of scheme Cash Discount RPPD LUB

Discount 5% 3.5% 3%
Period 1 day 21 days 40 days
The incentive of discount and efficiency of the supply chain have helped to maintain the customer
relationship and keep the working capital in check.

Strategic advantages

Low working capital leads to better cash flows (for investment in other initiatives without
dependence on external financing).
Improved margins.

PITSTOP 6: DISTRIBUTION NETWORK

AP has a 3-Tier distribution network via CFAs cutting down other intermediaries as far as possiblevi.

The fast moving SKUs are supplied by the plant directly to the Depots, whereas the slow moving SKUs
follow a route from RDC to Depots before reaching the dealer network. RDC provides stocking facilities &
thereby economies of operation for the Slow moving SKUs.

There are two types of dealers in AP’s network; exclusive and common dealers. Dealers are segmented
based on sales volume, product mix, and a number of other criteria.

Strategic advantages
 Having lesser intermediaries improves the cost benefit passed to the end customers and reduces
holdup riskvii.
Improved margins.
Differentiating dealers also increases motivation levels of dealers to increase sales.
Extensive network leads to economies of scale in distribution.
Different supply chain for different SKUs, improves operational efficiency.

Risk and challenges

Cost of distribution and maintaining such a large dealer network is critical for the company.

PITSTOP 7: MARKETING AND SALES

Company has made excellent use of the electronic and print media, besides publishing informative
brochures for its productsviii. The company's mascot "Gattu", created to give an ethnic touch-has almost
become synonymous with the generic product. Product mix of AP and competitors is given below.

All the big players have presence in all the product categories and offer economy, medium and premium
product ranges which enhance competition. AP is present in all price segments as clear from below figure.
Analysis of different product categories and key differentiating factors is given below.
 Particulars Premium Medium Economy
Product Description Super-Acrylic Plastic Emulsions, Oil-bound distempers,
Emulsions, Premium Acrylic Distempers Synthetic Enamels
Enamels
Target Segment Up-Market Buyers High income group, Middle Class and Rural
Upper-Middle Class Markets
Key Purchase Quality, Shades & Quality, Surfaces, Cost & Availability
Influencers Dealer Push Shades, Cost & Dealer
Push

PITSTOP 8: CUSTOMER SERVICES

AP offers end to end home solution, “AP home solutions”. Through this service the company also gets in
touch with the customer and gets first hand information regarding the changing taste and consumer
preference before the competitors does. In case of Niche and Premium segment of paints like AP Royale,
painters are also provided by AP.

Strategic Advantages

Provides first hand customer experience and customer insight.

Customer care helps in attracting niche customers in big cities through WOM marketing.
End to end and quality of services provide basis for differentiation in the premium and niche
segment.
Tinting machine and other services provide customized solution to the consumers.
Improved margins

Risk & challenges

Extensive network and availability of specially trained painters is costly and difficult to maintain.
 GENERIC STRATEGY OF AP

AP offers an array of product for all customers and as we have seen at almost all the pitstops, it seeks to
provide differentiation and thus improve its margins; therefore it’s a broad differentiator.

VRIO FRAMEWORK

Among all the resources that we have identified as a part of AP’s value chain, its distribution network
and branding are the most important and defining resources for AP and hence has been analyzed in
the VRIO framework.

Valuable

Largest distribution network amongst competitorsix which gives faster access to larger market and
economies of scale.
It is by far the most recognized and wanted brand in the Indian paints story and this contributes
majorly to its dominance in the decoratives.

Rare

Strongest distribution network with Supply Chain length of 66.92 days, as compared to industry
average of 82.6 days.
AP is the only player in the market with such strong branding capabilities.

Imitable

Building extensive pan India distribution network (including the intransigent rural areas) is not
imitable in short to medium term. SCM initiatives can be imitated.
Such brand takes years of quality products and services coupled with incisive marketing efforts to
create.
Non-substitutable

No close substitute for vast pan India distribution network. Becoming a focused very-high margin
player might be envisaged as a substitute, but current paints industry clime in India doesn’t back
this strategy.
In the decorative segment, there is no effective substitute to the brand although low price, better
discounts might give brand a competition. In the industrials, brand isn’t the decider- technology is.

Risk

Small and fragmented dealers pose low hold up risk. Bigger dealers are incentivized appropriately;
however, their bargaining power is increasing rapidly. Overall holdup risk is medium.
The creation of brand takes place at different levels including the retailers who vouch for the
products. Sometimes, retailers have been found complaining about the inaccurate/untimely
accounting practices of AP. This might be a result of slack and can go worse of not controlled.

CHAPTER 3: CHALLENGES AND RECOMMENDATIONS

CHALLENGES

AP today, despite or because of, being the market leader by a sizeable margin is face-to-face with several
challenges. They are enlisted below:

Segment Squeeze
At the lower end of the paints segment, new entrants like Nippon Paints and Kaamdhenu Paints have
entered the markets with competitively priced productsx. We spoke to AP distributors in Gurgaon and
Ghaziabad to realize that Kaamdhenu is a serious threat now, with its high margins for retailers and other
favorably designed schemes. Examples of such schemes would be organizing trips to Turkey etc for dealers
with turnover exceeding one crore annually!

Similarly, at the top end of the spectrum, Dulux emulsion is increasing its hold of AP customers. In fact, a
retailer based out of Chennai even went to the extent of saying that there are an increasingly large number
of customers who are asking for Dulux emulsions as their first choice and hence he has brought back ICI
into his racks.

Minuscule holding in industrial paints and coatings segment

With rapid infrastructure development and proliferation of industries in India, the industrial segment is
expected to expand at a fast ratexi. KNPL has more than 60% in automotive and more than 90% share in
OEM manufacturersxii.

Rampant Duplicity
This is an issue more limited to North and Central India but is assuming larger proportions at an alarming
rate. Several instances of duplicate production have been identified at premises nearby AP’s depots or
distributors.xiii This issue needs to be tackled as it results in a twofold loss: first, in form of revenue loss,
second, loss in credibility due to inferior-quality (fake) ‘AP’ being used by customers.

Hold-up by large dealers

Large dealers (with annual turnover exceeding Rs. 2 crores) often pose a serious hold-up risk to the
company. The company offers greater discounts to the larger dealers due to their larger order sizes. Very
often, small dealers are found to be procuring stocks from these larger dealers due to their large discounts,
these dealers often offer more discounts to the small dealer than the company would have offered him.
This introduces an unnecessary middleman in the system in the form of the large dealer several of whom
have even been found running their own ‘distribution’ systems on TATA Ace for all smaller dealers of the
region!

Erratic movements in raw material prices

Crude-based derivatives are important raw materials in paint manufacturing. Unprecedented risexiv in
their prices last year had made a significant dent on the profit margins of all paint companies, which were
already affected by slowdown in demand. Though off their peak in 2008, most of the commodities have
seen an upturn in prices; thus a sudden rebound in prices could affect profitability which has improved in
line with demand recovery in the first half of FY10.
 CRITERIA OF EVALUATION OF RECOMMENDATIONS

On the basis of following criteria, the recommendations have been weighted:

1) The recommendation should be in line with AP’s strengths. Thus, relative expertise of AP in
executing all the recommendations is a precondition.
2) The recommendation should not dilute the high-margin strategy of AP.

OVERCOMING THE CHALLENGES: RECOMMENDATIONS

1) Painting Products to Painting Services

AP has relatively successfully tried to make paints a services business rather than a products business. In
fact, through different initiatives like Color Worldxv, Colour NEXT, the signature store Colors with AP,
Foresite and most significantly AP Home Services (APHS), AP has tried to transform paints from being a
products business to a services business. This is inherently a more profitable exercise than selling paints.

Till now APHS has been rolled out in just 13 citiesxvi and it has already been availed of more than 55,000
times! As a first step, we recommend launching the service in all A1, A and B1 cities in India in the next 12-
15 months. Simultaneously, AP should also roll out home décor and interior decoration consultancy
services to keep track of the changing needs and demands of customers before it becomes a mass
aspiration.

In the course of this report, we have discovered AP’s extensive efforts to improve the margins of its
business and also saw how its strongest resources are streamlined towards this objective. Hence, AP
should not aggressively get into the industrial paints segment which is a low margins business. However,
premium industrials like automobile paints etc that are already a part of AP’s portfolio should be continued
with and focused on.

2) Expand dealers network

AP should expand its small-dealers network to tackle the increasing power and clout of the large dealers.
More the number of small dealers in an area, the more the sales gets diversified from the larger dealers to
the smaller ones. One of the ways of doing so is trying to introduce its tinting machine as soon as possible
in the dealer’s premises. More often than not, due to both space and capital constraints the dealers get
‘locked-in’ with whichever company’s tinting machine they buy earlier. It is also an effective way of dealing
with the lower end competitors like Kaamdhenu, Nippon which are providing tinting machine
complementary with stock orders.

Besides, AP should come up with more attractive schemes for smaller dealers so as to incentivize them to
target for those deals through direct procurements from the company rather than bigger dealers. However,
the dealers’ network should be taken slow in areas fraught with duplicity.

3) Brand-building measures

The fact today in the market is that all competitors of AP incentivize different players like dealers, painters,
consumers more than AP does. However, being an AP dealer is still a more ‘profitable’ enterprise than
being a Nerolac dealer because of the higher ROI AP provides due to a much higher turnover. Similarly, the
consumers have faith in the strong brand that AP has built over the years. An example of a consumer of
Nippon paints expressing his dissatisfactionxvii over Nippon’s complaints-redressal on a public forum has
been pasted below. AP should set a firm standard whereby each customer complaint is resolved within 7
working days.

From AP side, improperly incentivized painters mostly recommend other brand. In fact, several companies
introduce ‘money-back’ coupons inside each canister of paint bought so as to monetarily incentivize the
painters. We recommend holding more ‘painter meets’ as these not just incentivize painters through
different gifts like T-Shirts or toolpacks but also educate them towards usage of more exclusive products
like Royale PLAY. Painters feel the need to be trained and ‘connected’ to the company; thus, it is strongly
recommended that AP should hold painter meets so that more and more painters and their
recommendations can be secured as early as possible.

4) Backward integrate

To immunizing itself against the fluctuating raw material prices, we recommend that AP backward
integrates into the production of the raw materials. This is another measure which will help improve
margins and decrease hold-up risks. Keeping in view the future growth potential of the paints industry in
India, it makes sense to diversify into raw material production also from the point of view that it in itself
can comprise a sizeable business interest. AP has already done it for Phthalic Anhydride and
Pentaerythritol and sells one-half of the production of these to customerxviii. Such a step can be taken for
compounds which have to be manufactured from commodities. Goes without saying that backward-
integrating into commodities or petroleum-based products makes no sense.
 REFERENCES

i Asian Paints Annual Report FY09

ii CMIE
iii KNPL FY09 annual report
iv http://www.scribd.com/doc/6655788/ASIAN-Paints-Distrbn
v http://www.i2.com/news/view_news.cfm?id=BCEED484-E215-FD23-35511206EB01CBC1
vi http://www.scribd.com/doc/6655788/ASIAN-Paints-Distrbn
vii http://www.oppapers.com/essays/Asian-Paints-Place-Marketing-Mix/198660
viii http://www.indiahousing.com/asian-paints.html
ix http://www.slideshare.net/guest395c348/demand-analysis-of-asian-paints-emulsions-presentation
x http://www.domain-b.com/industry/paints/200012_paint_overview.html
xi http://www.equitymaster.com/research-it/sector-info/paint/
xii http://www.business-standard.com/india/news/kansai-nerolac-paints-records-net-salesfor-fy-2008-

2009/356711/
xiii http://www.merinews.com/article/duplicate-asian-paints-plant-unearthed-in-haryana/154559.shtml
xiv http://mostlyeconomics.wordpress.com/2008/07/25/crude-oil-prices-are-about-demand-and-supply/
xv http://www.monarchpaints.com/colour_world.html
xvi http://www.asianpaints.com/homesolutions/faqs.aspx
xvii http://www.consumercomplaints.in/complaints/nippon-paint-c169252.html
xviii http://www.scribd.com/doc/24673549/Asian-Paints-Ltd