Chand Das can't stop beaming. The chief executive of ITC Greetings' Gifting and Stationery Business has just stepped out of a presentation ceremony that honoured winners of the Classmate Young Author 2005 awards.
But that's not the main reason for the smiles. ITC's stationery business, which sells notebooks under the Classmate brand name, brought in earnings of Rs 40 crore (Rs 400 million) in 2005-06.
Granted, that's chicken-feed for a conglomerate like the Rs 7,600-crore (Rs 76 billion) ITC, which has interests spread across hotels, tobacco and the agri-business.
But if you consider the stationery business was just Rs 10 crore (Rs 100 million) in 2004-05, then revenues have jumped 400 per cent. And ITC aims to continue the scorching pace of growth. "The stationery business will be worth Rs 500 crore (Rs 5 billion) in five years," Das declares.
After two full years of being in business, the Classmate brand is already the No. 2 player, inching close to market leader Navneet.
Industry estimates place Navneet's share in the notebooks business to be worth Rs 80-90 crore (Rs 800-900 million), although the company itself refuses to confirm these numbers. That doesn't bother ITC too much. "Next year, we will be the leader," claims Das.
In a world where the word "notebook" conjures up images of a sleek, portable computer (earlier called the laptop), why is ITC betting big on paper? As a first explanation, Das parrots the official explanation.
"Since 2000, ITC has been looking at growing its non-cigarette FMCG business, which blends with the core capability of the group."
More importantly, there is a huge growing market for paper-based consumer products. In 2000, the greeting card industry (the segment ITC first entered) was worth around Rs 250 crore (Rs 2.5 billion) and was growing at a healthy 15 per cent a year.
For existing players like the Delhi-based Archies Greetings and Gifts, the return on capital employed was an incredible 39.4 per cent.
"The most value-added paper product on the face of the Earth is a greeting card," says Das, explaining the rationale behind ITC's decision to enter that business. By 2003, ITC's greeting card brand Expressions was No. 2, with a 20 per cent share of the market.
But this was not a story with a happy ending. The greeting cards' category was being increasingly threatened by various new formats. While e-greetings threw the first jab, the body blow came in the form of affordable SMS and MMS rates and increasing telephone usage. Suddenly, greeting cards were as out of fashion as stone-washed jeans.
ITC didn't give up, though. It tried value-addition: cards with attached rakhis and friendship bands, for instance, in a bid to boost occasion-related sales. But the company soon realised that "greetings could no longer be the only plank for the business to rest. The challenge was to grow the business division," says Das.
In 2003, ITC saw another opportunity. Notebooks was a Rs 5,000-crore (Rs 50 billion) category growing at 9-10 per cent every year. Importantly, there were huge visible gaps in the market. The organised segment accounted for less than 10 per cent of the notebooks market. There were only a couple of players with a pan-India presence: the Mumbai-based Navneet and Nightingale, owned by the Sivakasi, Tamil Nadu-based Srinivas Fine Arts.
While market leader Navneet's sales come primarily from west India (Navneet executives confirm that Maharashtra is a huge market for the brand), Nightingale had restricted itself to the premium end by focusing on superior styling and had built a successful business out of diaries.
Accordingly, ITC launched its notebooks, deliberately pricing itself 10-15 per cent higher than the competition, between Rs 10 and Rs 40. This ensured that it created an affordable-yet-aspirational image and also send a hidden message of being a superior product (60 gsm paper, bleached without using chlorine). Then, ITC focused on the design elements of notebooks: each Classmate notebook has a theme on the cover and related information inside.
For instance, if the cover has a photograph of a ship, the inside front cover has information about ships. Then, the last two pages of the notebook have trivia and the back cover highlights the corporate social responsibility initiatives of the company (Re 1 from each notebook sold is set aside for the cause of underprivileged children).
Of course, breaking into the market wasn't easy. Distribution of a mass product like notebooks can be an expensive proposition - which partly explains the lack of national players. Then, notebooks were reserved for the small-scale sector.
So ITC outsourced the final production to 20 satellite manufacturing plants across the country. These plants are supplied with paper from ITC's plant at Bhadrachalam, in Andhra Pradesh. To keep a check on transportation costs, Das says the company tries to manufacture and sell within the same area.
Then, ITC also had the advantage of sharing infrastructure with its food and cigarette business - the group has 19 branch offices across India. "These offices became a nodal point for sales and distribution of notebooks. Our ability to hit the market was the fastest," says Das.
The company then tapped into its customer through below-the-line advertising. In 2003, the year of Classmate's launch, it introduced the Young Author competition for students across schools in India, who were in the 9th to 12th grade. In the third edition of the Classmate Young Author competition, for which the awards were given away in March 2006, there were close to 40,000 participants from the top 15 cities. Note that ITC is tapping only the top 4,000 schools in the country.
Children from these schools are likely to be early-adopters of the Classmate range. Das says that since last year, the competition has been extended to create a Young Artists contest aimed at younger children in the same schools. After all, "The young artist of today may become the young author of tomorrow," says Das.
Apart from competitions, ITC is also looking at customisation. In most top-rung schools across the country students have to buy notebooks only from the school book store - the notebooks often have the school's name and emblem embossed on it. To get a share of that market, Classmate has inked deals with 100 schools across the country to provide them with customised notebooks.
It's not just schools. ITC might soon lock horns with Nightingale in the upper end of the market. The company is in the midst of re-launching its Papercraft range of executive notebooks. ITC executives claim that the range used to be earlier sold only through greeting cards outlets.
"The Papercraft portfolio needs augmentation," is Das'only comment. However, ITC itself might have to contend with competition. Over the past two years, notebooks has become an attractive business destination for several companies.
These include TNPL, the Tamil Nadu-based maker of maps and diaries, writing instruments makers Cello and Kores and paper manufacturer Bilt. For Cello and Kores, notebooks have a synergy with their existing businesses - which means the companies can tap into the existing distribution networks and customers. On the other hand, Bilt and TNPL find a connect in pulp and printing, respectively.
Still, the notebooks foray isn't going to be easy for these new players, either. If Bilt has access to paper, it still needs to augment distribution. Cello and Kores have already got products into the stationery stores, but they still have to sort out the logistics of distributing bulky notebooks - pens, for instance, can be transported even on bicycles.
Meanwhile, the existing players don't seem concerned about the prospect of increasing competition. Not even first mover Navneet - which is facing a barrage of competition - is worried.
Says Shailendra Gala, vice president, stationery, Navneet Publications, "The industry is poised to grow in a more healthy and organised manner, with new entrants making their foray into the notebook business."
In fact, Navneet is soon extending its brand into pencils, because there is a synergy with the existing notebook business. Clearly Das'enthusiasm is infectious.
Quick bite: noteworthy
If ITC has extended its reach from greeting cards to notebooks, Navneet Publications is doing exactly the opposite. The Mumbai-based company is looking at greeting card galleries as an alternative retail outlet to promote its notebooks range. Navneet, which has just entered its 10th year in notebooks, feels the only way to capture this market is through distribution.
Navneet plans to strengthen its distribution network and aims to increase sales by nearly 30 per cent in 2006. At present, the company operates through more than 50,000 retail shops and over 500 distributors. It is now looking at selling its products through local grocers, petrol pumps, gift shops and so on (in addition to the regular stationery shops) to increase its base.
Similarly, Bilt is planning to expand its retail base from 20,000 to 25,000 outlets and is targeting retail sales of Rs 100 crore (Rs 1 billion) in 2006. Says Yogesh Agarwal, president, paper business, "In India, notebooks or notepads have always taken a back-seat. It's time to make people as conscious of notebooks as they are about other accessories."
Shailendra Gala, vice president, stationery, Navneet Publications, believes that transformation is already happening. "The notebook industry is moving to an organised market with standardisation in prices, notebook size, packaging and so on," he adds.
Apart from beefing up distribution, Navneet is also taking a direct approach by talking to its customers. "The aim is to understand students' requirements and what they think of our products," says Gala. For instance, Navneet found that the earlier practice of notebooks being stitched only at the top and bottom was a problem for students who worried about pages coming loose. Accordingly, the company introduced fully-stitched notebooks, which have proved very popular.
For its part Kores, which has made its mark in office stationery, underplays its ambitions. "We do not compete with leading players like Navneet or ITC. To maintain our niche positioning, our company is banking on the differential marketing aspect," says A K Garg, senior general manager, marketing and sales, Kores.
The company introduced its notebooks in January 2005 under the hi-mark brand, and has launched a loyalty programme to ensure that children keep coming back. Children between five and 15 years are encouraged to join the Hi-mark Club, where they get 10 points for every purchase.
These points can be redeemed for gifts, after they accumulate a minimum of 100 points. Apart from selling directly through schools and colleges, Kores may also look at starting a standalone store. Says Garg, "We may consider a standalone retail outlet once the company has a wider portfolio."
If it's brick-and-mortar for Kores, Bilt is going online.
In January 2006, Bilt started exploring online sales as an option. Possibly that's the meeting point for notebook PCs and pulp notebooks.
Additional reporting: Meghana Biwalkar