Harsh Mariwala, Chairman and Managing Director of consumer goods company Marico Ltd, describes his penchant for taking business risks as removing the ‘escape buttons’.

Once in a venture, there are no exits. At Marico, he believes in celebrating failures and actually hands out increments to managers who have handled innovative businesses that have failed. The same benchmark could be in use for the Kaya skincare business that was recently spun off as a subsidiary.

Keen to enter the retail business a decade ago, the entrepreneur decided to stay away from the regular modern retail business. Instead, he went niche with the concept of skin-care solution clinics under the Kaya brand.

The year was 2003 when Marico was a cash-rich, debt-free company and Mariwala could afford to take risks. It was unconventional for an FMCG company to foray into retail services then as it was unrelated to its original line of business.

“As there was a lot of interest in retail during that time, we decided to try out niche retail in the area of dermatology as the cost of hiring a dermatologist would be much cheaper in India. After some quick market research, we decided to set up a single incubation cell with a manager who would report to me directly and head a small, entrepreneurial team,’’ reminisces Mariwala, quite aware at that time that it was going to be a ‘long battle’ in the retail business.

Restructuring

With the help of his friend Asif Adil (former Diageo MD) and his New Jersey-based financial and advisory services company, Marico floated Kaya Skin Care Solutions with 24 per cent stake held by Adil (subsequently bought out). Today, after a decade, the FMCG major is hiving off Kaya as a subsidiary and listing it as Marico Kaya Enterprises (MaKe) to give a fresh impetus to the ‘yet-to-be-profitable’ retail business.

The restructuring has been done to consolidate its FMCG business by merging its consumer product and the international businesses while keeping its skin care business as an independent entity, which will take effect from April 1.

Today, Kaya contributes seven per cent to Marico’s Rs 4,000-crore turnover. Kaya reported profits in the September quarter of this financial year after a loss in the last financial year.

It has been steadily increasing its offerings under skin care solutions and technology-led cosmetic dermatological services and products across 107 clinics, of which 82 are in India, and the rest overseas. It has also acquired a profitable company in Singapore — Derma Rx, and has four Derma Rx Clinics in Singapore and Malaysia.

‘Not a mistake’

“The skin care solution was a different business for us and we don’t think we made a mistake by entering it. We did go through the learning curve and the insight we got was that we ramped up too fast. There will continue to be challenges with competition from smaller players with no overhead costs,’’ explains Mariwala.

In the past decade, Marico’s Kaya business has witnessed high-profile employee exits, including that of an MD. “Kaya was being clouded by Marico’s policies and did not have the required retail mindset for the business. It was not being run as a retail company, coming as it did from an FMCG background,’’ recalls an ex-employee of Kaya.

“After the announcement of Kaya’s demerger, Marico’s stock has been doing well and the return on equity will improve. While the focus would go back to the FMCG business, there will not be any major difference in the way the company is functioning,” says Abneesh Roy, Associate Director, Edelweiss Capital.

After the demerger, Marico shareholders will be issued one share of Marico Kaya Enterprises with a face value of Rs 10 each to be issued at a premium of Rs 200 for every 50 shares of Marico with a face value of Re 1 each.

As Milind Sarwate, Group CFO, Marico, explains: “It has been a decade and Kaya did look at expanding operations but it did not meet our expectations. We would be partitioning the balance sheet of the two companies within the group and there will be no cross-holding between them.”

With this, Marico Kaya Enterprises will not carry significant debt on its balance sheet and will start life on a clean slate. Kaya’s losses will also get transferred without being a drag on Marico’s profitability.

While Kaya becomes a retail-focused entity, Marico will get a chance to consolidate its FMCG business in India and abroad.

“The demerger will facilitate the consolidation of Marico’s FMCG business in India and overseas. Now that the international FMCG business has achieved certain scale, we see synergistic benefits with the Indian business.

“This has become more pronounced after the recent acquisition of the youth portfolio from Reckitt Benckiser. There can be benefits in areas such as buying of raw materials and packing materials and cross-pollination of portfolio,’’ says Mariwala. (Exactly a year ago, Marico bought the consumer brands business from Reckitt, which in turn had acquired it from Paras. These include brands such as Set Wet and Livon, among others).

Strategic investors

As for the Kaya business, it is likely to look at strategic investors to take the business forward as in its initial days when the business was started in 2003.

“We are open to inputs, financial or strategic, for growing the Kaya business. But investment in Kaya will continue. We are eyeing break-even in a couple of years but are open to resetting the target depending upon the long-term needs of the business,’’ he adds.

But it is the long gestation period that took its toll on Marico. As Sunil Alagh of SKA Advisors, an independent marketing consultancy, says, “While Marico made no error of judgment entering the skin care business, it was the long gestation period which pulled down the bottomline of Marico’s core FMCG business. The decision to demerge is, therefore, a prudent one as it will lead to greater focus on the skin care business by a different team, and also provide an option of remerging, once this business becomes profitable.”

Marico is now on its way to proving that it can make a success of its retail business.

As Mariwala says, “After all it was our FMCG roots which provided a stronger foundation in the consumer insights area. It was this self-belief on which we entered the skin care business. I do not see any room for self-doubt. It is a matter of tweaking the execution and hopefully the new entrepreneurial way of running the business will yield better results.’’

After all, Mariwala believes in removing all the ‘escape buttons’ when in a new line of business.

More focus on products

In spite of Kaya’s top-line growing, the same stores sales growth had slowed down to single digits. But now with smaller stores planned under Kaya with focus more on products than services, a turnaround in the skin care business may be imminent.

Five prototypes of Kaya Skin Bars are being planned in cities such as Delhi and Bangalore and these would stock products rather than offer skin care services. The Kaya range is also being offered at counters in Lifestyle stores.

“As we grow in the skin care business, we expect Kaya products to contribute almost 60 per cent of the turnover while the balance would come from services,’’ says Ajay Pahwa, CEO, who will move out of Kaya by March-end when Vijay Subramaniam takes over.

The Kaya brand would be adding 18 new skin care products and increasing the number of stock keeping units to 54 with its extended Derma Rx range, which is a premium one, leading to higher margins.

A recent report on the Indian consumer by Deutsche Bank states “For Kaya there is going to be light at the end of the tunnel. The format may be some time away from profitability but the business is showing strong growth. The focus on product sales has led to higher footfall through a shift from ‘cure’ to ‘prevention and cure’ positioning. The smaller store format and the Derma Rx acquisition are going to be the key reasons for the turnaround. The revenue per quarter of about Rs 40 crore has jumped to Rs 91.5 crore in the second quarter of 2013.’’

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