The past couple of months have been like the Charge of the Venture Capitalist. There have been at least two to three meetings with VCs who want a slice of the action in a couple of companies for which I consult, and the usual complement of board meetings.
The common thread running through all -- besides the question of what plans the companies have for scaling up and manpower planning, supply chain and systems to supplement this scale-up -- has been: what is the company's marketing-spend currently; what is it projected to be and please, can it be increased?
The reason for this mismatch between the money the companies are actually spending on advertising and promotion and the expectation is that, traditionally, retail has low margins.
So if a company with a Rs 10 crore (Rs 100 million) turnover spends Rs 50 lakh (Rs 5 million) on advertising and promotion, that's 5 per cent of the turnover going into brand building -- this, often enough, is the net margin of the company.
The board, however, wants more. It wants 6 per cent this year, 10 per cent next year and 12 per cent the year after. Where's this money going to come from?
At interiors and home store Arcus, where I've worked, we were careful to spend only 3-4 per cent of the Rs 15-crore (Rs 150 million) turnover on advertising. Similarly, at grocery chain Nanz, with a turnover of Rs 25 crore (Rs 250 million), we allocated 1.25 per cent of sales for advertising and promotional expenditure.
Obviously, such budgets could not support advertising in mass media, so we stuck to newspaper inserts and banners to announce the monthly schemes and discounts on groceries.
That brought in the customers. But we were still asked whether marketing expenditure could be increased, which led to the question, where was the money to come from -- internal accruals or borrowing?
Since in the retail business, internal accruals are on the lower side, the only choice is borrowing; but a 10-11 per cent cost of capital often makes the option unviable.
In contrast, larger companies like confectionery firm Perfetti (2003-04 turnover: Rs 400 crore, or Rs 4 billion) spent as much as 40-50 per cent of turnover on advertising and brand building in the first few years.
The payoff is evident when you consider that Perfetti now enjoys almost 25 per cent market share in value terms. The company proudly says that further marketing spends will come from internal accruals.
On the other hand, Hindustan Lever Limited's brand Ayush (market estimates of turnover: Rs 25-35 crore, or Rs 250-300 million) hasn't really taken off because it was put on supermarket shelves earlier and is now being sold through the HLL direct marketing network and Ayush Therapy Centres.
However, HLL Director Dalip Sehgal has been quoted as saying the problem now is that while Ayush's sales may be high, it is perceived by people as having failed because they don't see 10 ads a day on television for the brand! At any rate, HLL has deep enough pockets to run these centres purely for branding purposes, if it wants to.
So the problem of increasing spend for brand building is really something that applies most directly to small companies and to the vast majority of companies in the retail space, where margins typically are wafer-thin.
For instance, one of the companies I consult with is a personal care products company. Faced with a choice, it may be advisable for it to spend Rs 30 lakh (Rs 3 million) on opening a new store rather than on brand building.
That's because these sales will help subsidise the cost of setting up the factory that the company needs if it is to lower the costs of third-party contract manufacturing -- besides, it also helps monitor quality.
At the same time, both the board as well as wanna-be investors point out, and managements understand, that brand building, if successful, pays for itself through higher sales. And since costs don't go up in the same proportion, the result is a huge increase in profits.
That's the theory. Every practical manager, faced with an outlet-versus-adspend choice will opt for the former, especially when funds are tight -- as they always are.
One way out, though its usage hasn't really spread as yet, is to count part of the costs of setting up new stores as marketing expenses, especially since when these stores are set up in high street locations, they serve as advertisements as well -- more people relate to the personal care products firm now that it's opened up an outlet in a tony south Delhi market.
But since you don't have well-known management gurus endorsing this practice as yet, I'm not sure how many investors or boards will see this as a substitute for advertisement and brand building expenses!
One way this will happen, perhaps, is if managements can show that the customer retention and acquisitions from new stores are as good as from traditional brand spend, perhaps even better.
Another option, increasingly getting more purchase, is the one offered by The Times of India's Times Private Treaties. I understand that many newspaper groups frown upon the practice, but what Bennet, Coleman is doing is to buy into the equity of a firm (Pantaloon, Hakoba Lifestyle, Indian Terrain and so on), not for cash, but for barter advertisement over a period of a few years.
The best thing is that, as compared to other investors, TOI takes no board position and so does not try to drive a company's agenda the way other investors try to.
It is a win-win for both sides if the brand building exercise works the way it's supposed to. Say, company X gives a 10 per cent stake to TOI in a company worth Rs 10 crore. Now over a period of time, as new stores get set up and sales rise, the company's value will grow to, say, Rs 30 crore (Rs 300 million), even if the TOI ads don't help -- in which case, for Rs 1 crore (Rs 10 million) worth of free ads, the company's given away Rs 3 crore (Rs 30 million) to the Times.
Where it works is if, following the fact that the Times has invested in a company, its worth goes up because of the ads -- say, the company that would have been worth Rs 30 crore (Rs 300 million) is valued at Rs 40 crore (Rs 400 million) by potential investors.
In which case, the 90 per cent stake of the promoters is worth Rs 36 crore (Rs 360 million), which is higher than what 100 per cent would have been worth in the pre-Times valuation of Rs 30 crore.
Again, that's the theory. In the case of Indian Terrain, the articles in print suggest this has not happened. In January this year, when the Times group picked up a 12 per cent stake for Rs 21 crore (Rs 210 million), this gave the company a valuation of Rs 175 crore (Rs 1.75 billion).
Subsequently, the New Vernon Bharat Fund based out of Mauritius picked up a 22 per cent stake in the company for Rs 25 crore in May 2005, giving the company a valuation of Rs 113 crore (Rs 1.13 billion). And finally, the Anil Ambani group picked up a 13.2 per cent stake for Rs 15.48 crore (Rs 154.8 million) in September 2005 making this a valuation of Rs 117 crore (Rs 1.17 billion).
Of course, to judge the efficacy of a brand exercise such as this over a period of just nine months is not fair, and it is possible the ad-brand value proposition may hold true over a longer period of time.
For company managements, and their current and future investors, however, this is another innovative brand-building route worth examining.
Namita Jain runs Abhinàm Business Management Consultants, which operates in the marketing and retail space.
