Rising crude oil price is causing worry among the wood working adhesive manufacturers as their main raw material, vinyl acetate monomer (VAM), is crude oil based product and crude oil price movement affects the VAM prices too. After two years of relative stability, VAM prices started moving up in the second half of last year. VAM is a key ingredient in the manufacturing of adhesives and accounts for 13-15% of the total raw material costs. VAM prices historically have been less volatile than crude in either direction and tend to follow crude typically with a one quarter lag. However, this time, it is not just the crude price which is going up but the rupee is also depreciating which is a double whammy for the manufacturers.
But for this raw material price movement wood working adhesive industry in India has a smooth sailing without much hiccups. The industry has overcome the demonetisation blues much faster than rest of the industries and even the GST hasn’t had much impact on the products demand.
Indian adhesive industry has a peculiarity – it is dominated by one manufacturer, that is, Pidilite Industries. Pidilite Industries enjoys nearly 70% of the market share and its brands have become synonymous with the adhesive products. Dominance notwithstanding, Pidilite does face competition from a host of regional and MNC (Multi National Company) players. However, while most regional players have limited market presence and lack scale, MNCs are stronger on the industrial (B2B) business side but lack focus and infrastructure to grow their consumer (B2C) business franchise.
A case in point is Henkel, a leading player globally in the adhesive segment with 50% of its total sales of €19 bn coming from adhesives. Henkel has a strong portfolio of adhesive brands both in B2B and B2C segments. Henkel has been in India for quite some time but hasn’t been able to make much difference in the retail segment, though it has a significant presence in industrial adhesives segment. It failed to make mark in the Indian retail adhesive segment due to a lack of strong brand equity in India. Further, in India retail business distribution is largely wholesale/dealer dependent unlike modern format dependent in the developed world and the company was unable to scale up its distribution in India.
After failing to make much impact on Indian consumers, Henkel entered into a distribution tie-up with Asian Paints which is India’s largest paint company with a wide distribution network and which commands enviable brand equity. What Pidilite is in waterproofing and adhesives, Asian Paints is in decorative paints – both have strong brand equity in their respective fields. Henkel in association with Asian Paints launched Loctite quick and Loctite rapid brands in India , a few years ago. While Loctite quick is an instant adhesive for quick bonding of surfaces like glass, wood, stone etc., directly competing with Pidilite’s Fevikwik, M-Seal, Loctite rapid is a two part epoxy adhesive used for bonding of larger surfaces of different material which competes with Fevicol range of products. Apart from the ‘Loctite’ brand, Henkel’s global portfolio has other strong products such as Pattex (a wood-working adhesive) and Pritt (art and craft glue range) which is likely to be introduced in India using the Asian Paints distribution network.
However, Pidilite is not unduly concerned by the recent developments in the industry where Asian Paints making foray into adhesive segments. The company feels that entry of Henkel via Asian Paints is good for the industry as it helps to expand the market. Further, there is another reason for Pidilite’s confidence. In the core adhesive segment, carpenters are the main users and the incentive for them to switch to another brand is less, as adhesives make up only 1-2% of the total cost of making furniture, but the cost of failure can be high. So, users always prefer to play it safe and go with the established brands and are usually unwilling to switch loyalty.
Pidilite has been known for its consistent andeffective advertising, strong engagement withthe user segmentlike carpenters and interior designersin terms of training, education and persistent product andpackaging innovation. All these have created strong entry barriers which,both local and MNC manufacturers found difficult to break. Strong brand equity, consumer trustand a large distribution reachhave put Pidilite in an enviable position with 70% market share.
Indian furniture market at $20 billion is small in size considering its huge population. However, one positive thing about the furniture market is that it is growing at 18% CAGR during last 10 years. Another important factor which need to be noted is that in India urbanisation is taking place at a rapid pace and as people urbanise, the demand for furniture will increase. Also, there is transition taking place – transition from ‘Kachha’(temporary shelters) to‘Pucca’houses (stronger houses built with bricks and mortar) which will also enhance demand for furniture in the coming years. Also, the government under its ‘Housing for All’ scheme, is aiming to construct 10 million rural houses by 2019 and 20 million urban houses by 2022. Although this is an ambitious programme, even partial success here will help accelerate growth in housing. All these factors will eventually push up demand for furniture which in turn drive up demand for adhesives. Therefore, adhesive manufacturers are not only confident of sustaining the current growth rate of 12-13% but are also optimistic of improving upon it in the coming years.