Recent announcement by Grasim Industries to enter paints business, the flagship company of Aditya Birla Group, has shaken up the industry as well as the investors bringing an aura of uncertainty to the oligopolistic industry. It may be remembered here that two years ago JSW, a steel to power to cement group, had mad e similar entry though the event was relatively low profiled compared to the present one. Of course, JSW’s entry has already raised controversy in the industry which has ultimately landed up at CCI doors, pending investigation and final judgment.
However, entry of big names like JSW and Grasim and that too in a span of less than two years highlights the profitability and growth prospects of the paints industry in India – the industry where even multi nationals have failed to scale to the top and have remained on the sidelines.
Big plans by Grasim
Grasim plans invest Rs 5,000 crore in next three years thus indicating the company’s seriousness about its plans. Also, the company has made public its ambition to become a No.2 player in the sector in a reasonable period of time. Presently, Berger Paints is the number two player in the industry who enjoys 15% market share in decorative paints segment. Remember, Indigo Paints even after two decades of existence has not been able to gain market share of 5%.
Asian Paints is the numero uno
Asian Paints is the 3rd largest paint manufacturer in Asia and 9th largest in the world. The company is the market leader in decorative paints segment in India. Further, the company has the rich experience of more than 70 years. The company currently operates in 16 countries and has 27 manufacturing facilities.
Paints industry is consistently growing
Indian paints industry is consistently registering double digit growth rate for the last 15 years. At the same time, per litre realisation is one of the lowest in India. Per litre realization in India is only $1.4 as against the global average of $3.6. On the other hand, there is substantial unorganised market who find the going tougher and has been conceding space to the players in the organised sector in recent years. For example, the share of unorganised market a few years ago was 35% which has now come down to 31%.
Grasim is not newcomer to building materials industry
Grasim feels already at home with the paints industry as the company is a leading brand in white cement and putty business. The company (through its subsidiary, Ultratech) presently has 54000 dealers of which 38000 are selling paints also. The company plans to leverage this distribution network strength to market paints. But Grasim is not going to bring Ultratech’s white cement business under its umbrella.
Paints business is all about dealership management
But the marketing of decorative paints is all about spreading the net of dealership. But appointing dealers is not an easy job as the paint is a voluminous commodity. For a dealer to be successful in paints business owning a tinting machine is almost mandatory. Tinting machine allows the dealer to mix shades of a particular manufacturer to give the right combination to the customer. But the tinting machines are expensive and consume at least 20% of the space (assuming dealer has a total space of 400 sq ft). Some companies offer tinting machines free of cost on the condition of exclusivity of dealership while some offer at concessional rates or on the staggered payment basis. Grasim is aware of this tricky issue of tinting machines and is confident of finding a solution to the tinting machine requirement at its dealer network. The company is fully aware of the entry barriers and challenges of the decorative paint segment and has chalked out a plan for the same.
Some experts are sceptical of the move
Still some experts and analysts are sceptical about the plan. While Grasim is present in paint outlets via white cement and putty, that is a rather small part of a paint outlet’s sales and therefore, the presence is not very strong. In other words, out of the 38000 paint cum white cement dealers, many may not opt for the dealership of the new manufacturer unless the offer by the latest player is very lucrative.
On the other hand, Ultratech Cement, Grasim’s subsidiary and the largest cement manufacturer in the country, also has “UltraTech Building Solutions” division with a network of 2,300 outlets and plans to double it over net 3-4 years. This may also help Grasim initially. Also, relationship with real estate developers (through Ultratech Cement) may help Grasim to gain share in project business.
In the past, new entrants like JSW Paints (entered in 2019 – initial investment of Rs 600 crore with a commitment to scale up to Rs 1,000 crore), Nippon Paints (global no. 4 entered India in 2006), Sherwin-Williams Paints (global no. 2 entered India in 2006), and Jotun (global no. 10 entered India’s decorative paints business in 2010) have made little headway in the Indian market given its strong moats such as distribution, placing of tinting machines, and brand trust. However, such a large capex commitment from a marquee business group is largely unprecedented and cannot be brushed aside easily. So, the industry will be heading for an interesting battle where marketing professionals may get to learn a few lessons on the subject.