Search:



The Web

Rediff








Home > Business > Special


Wimco tries to blow out losses

Arti Sharma | October 30, 2004

Is John F Doherty, managing director of match company Wimco, back to square one?  In 2002, when he took over the reins of the Indian arm of Swedish Match AB, his job was to extinguish the company's losses.

Today, after two years of being in the black, Doherty is back to square one and again trying to blow out Wimco's negative bottomline.

Doherty has numerous fire-fighting techniques on the cards. He's looking at entering a new category - the Rs 600 crore (Rs 6 billion) mosquito coils market.

Then he's hoping to enter into distribution tie-ups with consumer goods companies that want to utilise Wimco's established network. Also, he's looking at launching disposable lighters from Wimco's parent's stable by the year- end.

Wimco recently launched mosquito coils under the Homelites brand and is gradually rolling the product out nationally. This in a market that is dominated by existing players like Mortein, Godrej Sara Lee's Good Knight and Jyothy Laboratories' Maxo.

At another level, it has tied up with Dalmia Consumer Care to distribute Chabaaza - a gumlet- and Himalaya Drugs to distribute throat lozenges through its network of 6,50,000 grocers and paanwallahs.

It is also exploring a similar tie-up with a US-based toiletry company that may enter India. And by December, Wimco will be launching the 'Cricket' range of disposable lighters priced at between Rs 15 and Rs 25 to cash in on the Rs 50 crore (Rs 500 million) market, which is growing at 20 per cent.

Why is Doherty thinking outside the matchbox? Not only is the ex-Tetley manager facing a stagnant matches market, but today new entrants like ITC and a doubling of excise duties are crippling Wimco's growth (matches account for more than 80 per cent of turnover).

Cigarette major ITC jumped into the Rs 900 crore (Rs 9 billion) matchbox fray eighteen months back and is selling at cheaper prices than players like the Rs 153 crore (Rs 1.53 billion) Wimco.

Additionally, the last Union Budget saw excise duties on matches grow from 8 per cent without Cenvat to 16 per cent with Cenvat. With ITC's aggressive lower prices and increased excise duties, Wimco's bottomline has gone from a profit of Rs 6.96 crore (Rs 69.6 million) in 2002-03 to a loss of Rs 7.15 crore (Rs 71.5 million) in the last fiscal year.

"We are facing a crisis today due to this which is why we need to look at giving the company a new direction to grow in. Also, ITC's entry has disrupted what was otherwise a stable market," says Doherty.

Clearly Doherty is about to face the toughest challenge of his career. The 36 billion matchbox market is plagued by competition from the unorganised or hand-made match industry which is exempt from paying duties.

By comparison, 24 per cent of this market that is mechanised comes under the duty axe. So if unorganised players sell matchboxes for as little as 0.25 paise, Wimco sells for 0.48 paise.

"It's a very peculiar trend in the industry that the retailer will sell the matchbox under the marked retail price," says Subrata Dutta, vice -president, sales & marketing, Wimco. A retailer sells the 0.50 paise box for 0.48 paise with just a 0.02 paise margin.

It's not just the unorganised sector that's giving Doherty headaches. Lifestyles are changing and consumers are shifting to gas lighters (to light up cookers) and disposable lighters.

This has led to volumes falling by one per cent each year for the last three years. However, it's the decline in value that is worrying Doherty the most.

Today excise duty and taxes constitute 15 per cent of the costs of making a 40-stick match box priced at 0.50 paise, while labour and factory costs account for 24 per cent and raw material costs amount to 45 per cent.

Compared to this, two years ago excise duty and taxes constituted around 6 per cent of cost. Throw in the fact that ITC has entered the market at a 25 per cent lower price.

"If the market doesn't correct itself and the excise duty is not revised, we may have to shut down one of our factories, since the business is becoming unviable," says Doherty. Wimco currently has four factories in India and 22 brands in matches including Ship, Homelites and a clutch of regional brands.

So Doherty is turning all his attention to new business, which is where the tie-ups and new products come in. The tie-ups and coils have already added Rs 11 crore (Rs 110 million) to revenue. Doherty and Dutta are expecting to see it double in the next three years.

It is also getting into selling packaging equipment from the parent's China-based subsidiary Arenco in India through the engineering arm. Revenues from this business have already touched Rs 10 crore (Rs 100 million) and are expected to double in two years.

Wimco is clearly used to turbulence. Consider its past history. Though Swedish Match entered India in 1923 to set up Western India Match Company (later rechristened Wimco), it had to reduce its stake in the company as per the prevailing foreign exchange regulations of the Seventies.

By 1991, its stake had reduced to 38.61 per cent. Then when a global restructuring exercise saw Swedish Match exit operations in several countries including India, the stake was sold to a Hong Kong-based NRI group Raj Kumar Jatia & Associates.

But a shrinking global matchbox market meant Swedish Match had to re-look at developing markets like India. So in 1997, it bought out the 38.61 per cent stake from the Jatias. A preferential issue in the same year led to the Jatias regaining a 20 per cent stake in Wimco.

Again through a preferential issue in 1999, Wimco allotted Swedish Match an additional 13.50 per cent equity and a 4.11 per cent to the Jatias.

In 2000, Swedish Match acquired 21.89 per cent from the Jatias, taking its total stake in Wimco to 74 per cent. The Jatias still hold a 2.22 per cent stake in the company.

However, the entire transaction came under Sebi scrutiny with the regulator issuing a show cause notice to Swedish Match for not making an open offer to the minority shareholders and violating the takeover code. The matter is still under dispute with the minority shareholders awaiting an open offer from the parent.

Also, the Jatias had diversified into several unrelated businesses like food processing; as a result there were eight subsidiaries of the company, most of which were a drain on bottomline. Today, Wimco has three subsidiaries in engineering, seedlings and saplings.

In the last year, the company has implemented three voluntary retirement schemes to streamline operations. Poor industrial relations had also led to a strike and a lock-out at the Chennai plant.

Today, manpower is down to 3,300 compared to around 4,000 two years back. Also the management structure was de-layered and operational efficiencies were introduced at the plants. "We had managed to resolve most of the operational issues leading to profitability. Now we just have to look forward," says Doherty.

However, competitors in the coil industry don't think much of Wimco's foray into their territory. Says one competitor, "There is no unique selling proposition or different selling price to the brand, so one doesn't quite know the consumer incentive to try the product."

The Homelite mosquito coil retails at the same rate of Rs 16 as the other brands in the market. Even analysts tracking the sector aren't enthusiastic about the developments.

"They've reacted very slowly to the changes in the market, and are now looking at low margin products. It remains to be seen whether that changes the bottomline," says a Mumbai-based analyst.

But Doherty remains optimistic. "We specialise in distribution of small items, that is what we should exploit. It's the volumes that matter," he says.

It may be a tough lesson to learn, as Wimco has found in the past, for example its tie-up with Nivaran Herbal to market Velvette Shampoo didn't work. "We have to concentrate to building on this and stick to good brands," says Dutta. Whether Doherty will be strike lucky the second time remains to be seen.


Powered by

More Specials

Share your comments




Article Tools
Email this article
Top emailed links
Print this article
Write us a letter
Discuss this article









Copyright © 2005 rediff.com India Limited. All Rights Reserved.