Godrej vs. the female Anopheles mosquito

Glass jars crawling with mosquitoes, cockroaches, and other insects line the steel racks at a research and development centre at the Godrej Group’s Vikhroli headquarters in Mumbai. The 50 or so jars are neatly labelled in Latin—Culex quinquefasciatus (the filaria-causing mosquito), Aedes aegypti (the mosquito which transmits dengue, chikungunya and yellow fever), Periplaneta americana (the American cockroach), etc. “They’re all pathogen-free,” says S. Sridhar, general manager of Godrej’s household insect repellent division, giving us a tour of the 20,000 sq. ft. facility where these insects are kept, and sometimes bred.

Elsewhere, cans and bottles of creams and lotions are arranged based on where they are used most—Africa, Indonesia, China, America, and Thailand. “We keep up with what’s happening in our space,” says Sridhar. A little further away is the area where insect repellents manufactured by Godrej Consumer Products (GCPL) are tested. A group of researchers carefully release a swarm of Aedes aegypti inside a glass cubicle where wisps of translucent smoke swirl away from a burning mosquito coil. After buzzing around for a few moments, the mosquitoes frantically seek exits. Other specimens will take their turn inside.

This is the nerve centre of the most exciting business within the Rs 15,000 crore Godrej empire today—household insecticides (HI). It’s already a $350 million (Rs 1,752 crore) enterprise, up more than 23 times in the last 18 years, and accounts for nearly half of GCPL’s sales. (The rest comes from soaps and hair care products, which together account for 43%, and liquid detergents and toiletries.)

Globally, S.C. Johnson is the largest HI company with about $8 billion in revenue, followed by Reckitt Benckiser. GCPL wants to become the second-largest player in the world in the next five years. “Insecticides are currently our biggest category, growing strongly and yet an under-penetrated category per capita. The mainstay is mosquito repellent,” says group chairman, Adi Godrej.

Analysts say GCPL is the only company making any profits from this business in India. “The home insect repellent segment has been growing at 20% a year for the past three years,” says Sachin Bobade, research analyst with BRICS Securities, a financial services company. Players such as Jyothy Laboratories aren’t making profits yet. “They still have to contend with brand differentiation by giving discounts and free [mosquito] coils,” he says.

Much of GCPL’s growth has come from a series of acquisitions in the last five years. And some smart innovations. “Our insecticides business is going for the premium segment. Good Knight, a GCPL brand, is 20% more expensive than other mat-based repellents,” says Vivek Gambhir, chief strategy officer, Godrej Industries, the holding company, which has interests in chemicals, foods, real estate, consumer goods, and agri products. Godrej has spent nearly $500 million in 11 buyouts across the world, most of them in insect repellent businesses. “We figured inorganic growth would be a better way to create shareholder value,” says Godrej.

The business has the potential to be a winner. Though malaria mortality rates have fallen more than 25% globally since 2000 and by 33% in Africa, the World Health Organisation’s World Malaria Report 2011 says there were still 216 million malaria cases and an estimated 655,000 deaths in 2010 across the world, with Africa accounting for 91%. Insect repellents in places such as sub-Saharan Africa, China, Southeast Asia, and India are more about disease control than comfort (as in the West). “Because of diseases, it’s mostly a medical applicant,” says Godrej.

That starts him off on one of GCPL’s new products. “It’s called Hit Magic. It’s like a small piece of paper. You put it on a saucer, and burn one end to render the room mosquito free,” he explains. This is scheduled to be launched later this year, along with an aerosol Hit Lizard scheduled to debut around a year later.

Those who know this business globally say Godrej has a lot going for him in his war on creepy crawlies. However, they say this battle is about volumes since the business fetches thin margins, typically half that of other household consumer products. Also, the scope of ‘up-trading’, which consumer product companies encourage their customers to do, is low: Sure, a user can move from a coil to an aerosol spray, but how many would do that given that aerosols are five to 10 times more expensive?

Adi Godrej has staked quite a bit already but a recent agreement with Singapore’s sovereign wealth fund, Temasek Holdings, for Rs 685 crore in exchange for 5% of GCPL will help pare its debt, as well as give it funds to buy more companies. (At the time the Temasek deal was signed, GCPL announced that it was taking a majority stake in a Chilean hair care company.) Thanks to a series of share buybacks the promoters today own 67% of GCPL. If the business doesn’t deliver as anticipated, they stand to lose more.

Man’s battle against the mosquito and the beginnings of the Godrej empire coincided. The same year that Godrej & Boyce was incorporated, 1897, Ronald Ross, an India-born British officer serving in the Indian Medical Service proved that Anopheles mosquitoes were responsible for the spread of malaria. Ross was awarded the Nobel Prize for physiology or medicine in 1902. The battle against malaria (and mosquitoes) had begun.

Though continuous anti-malaria drives have reduced the number of malaria cases here from nearly 75 million at the time of Independence, some 1.5 million still fall prey every year and several hundred die. The Rs 3,000 crore mosquito repellent market in India is dominated by GCPL’s Hit, which has a 40% share.

But India is not what will test GCPL; the big battle is being fought in Africa. There, a child dies of malaria every minute and the disease accounts for about a quarter of all children’s deaths. Also, the African strain of the Anopheles mosquito propagates more easily and has a stronger tendency to bite humans. And new virulent strains have formed resistance to drugs such as chloroquine. With better awareness about the need to fight mosquitoes, Godrej is smack dab in the middle of the action. Africa already has an organised HI market valued around $500 million, according to Gambhir; the unorganised market is about $150 million, adds A. Mahendran, managing director for GCPL.

Godrej will have to win Africa if he wants to build insect repellents into a $1 billion business by 2017, which is his stated objective. S.C. Johnson is his biggest competitor there. Its brands Raid and Baygon are popular there, and it won’t be enough for Godrej to build his brands. He will have to fight on price; GCPL executives in Africa say that Godrej products will cost 15% to 20% less than others.

There’s also a plan to reformulate Good Knight products into multiple insect killers or MIKs (instead of a mosquito repellent, a cockroach killer, etc., as is the case in India) to make them affordable to lower income households.

Godrej has a big advantage when selling in Africa. Omar Momin, executive vice president for strategy at Godrej Industries, says that selling in Africa is not very different from selling here. While in South Africa it’s mostly advertising on TV, radio and some print, in the rest of Africa, it is radio, plus on-shop displays (umbrellas), painted vans, and walls. “It’s much like our own rural methods of advertising, and point-of-sales displays,” he says. Aggressive names are popular here, so Hit will remain the brand name, to compete against Raid and Nigerian company Gongoni’s Rambo.

What Godrej really needed was a distribution network, and that’s where its Africa acquisitions make sense. Adi Godrej’s elder daughter Tanya Dubash, executive director and president of marketing for the group, says the Africa buyouts gave GCPL “a great opportunity to ride piggyback, not only on distribution, but also on the brand values of an emerging continent”.

One of the biggest deals was the acquisition of hair care players Kinky and Darling. Both companies had well-recognised brands, popular with the same segment of customers who buy detergents or household insecticides. “That was a One Africa strategy—to become the No. 2 player by 2015. Africa’s largest hair care business, the Darling Group, which has manufacturing facilities in 14 sub-Saharan countries and a turnover of $210 million was a perfect fit,” says Mahendran.

Serendipity lies at the heart of Godrej’s insecticide business. The opportunity came in 1994 when rival Hindustan Lever (now Hindustan Unilever) walked out of a great deal to buy Transelektra, the Pondicherry-based maker of mosquito repellents under the Good Knight brand. All set to buy the company for Rs 126 crore, Hindustan Lever did not get approval from its headquarters in Britain because of a “category dissonance”, recalls Keki Dadiseth, former chairman Hindustan Unilever and now a member of the Godrej family business board.

Investment banker Uday Kotak took the transaction to Adi Godrej who, knowing that Lever would have checked the company’s fundamentals, took the first flight to Pondicherry. There he went through the factory’s excise personal ledger account register which showed Rs 5 crore in goods dispatched every month.

“Checking out the factories of a target is something he never fails to do,” says daughter Nisaba Godrej, president of human capital and innovation for Godrej Industries. There weren’t any worthwhile assets, and the plant was built on just an acre of land. But Godrej closed the deal in a week, buying 70% of the company for about Rs 80 crore, while Kotak took a 10% stake. R. Mohan, Transelektra’s founder kept a 15% stake, and Godrej convinced Mahendran, Transelektra’s existing chief executive, to buy a 5% equity stake and stay on. Mohan exited to pursue a career in movies. “I exited at a 2X multiple when Godrej forged the joint venture with Sara Lee,” says Kotak.

Nisaba Godrej can’t help chuckling all through the discussion. “That’s because every time I meet Dadiseth and Vindi Banga (another former Hindustan Unilever exec), they still talk about how Transelektra was such a lost opportunity,” she says.

He attributes his recent successes to inputs from his children: “Tanya for repositioning the brand, Nisa for selecting key talent and strategy collaboration, and [son] Pirojsha for taking Godrej Properties public,” he says. Godrej has handed operational charge to his children, and his focus is on the overarching strategy of the company. Bala Balachandran, professor at Northwestern University’s Kellogg School of Management, says: “His legacy will play out long after he’s left the group, in terms of the platforms that he’s readied for the next generation.”