Marico's acquisition of HLL' hair oil brand Nihar is a win-win strategy for both companies. It strengthens Marico's hair oil market and enables HLL to focus on the segment it has a stronger growth potential.

Mumbai: The hair care market is getting clearly demarcated. For affluent young urban Indians hair oil is passé and hair-conditioners and after washes are the new byword. For the less affluent urbanites oil is still very much in demand but the preference is value added oil with herbs, additives, menthol and perfume thrown in for good measure. Rural India is still oiled by hair oils sold loose, though it is seen to be gradually moving towards packaged products on fears of adulteration.

Action has been hotting up in the hair car market and new hair care products are flooding the market on an almost weekly basis. The most recent piece of action includes Hindustan Lever selling off its hair oil brand Nihar, which it acquired from Tomco, in the '90s to personal care products major Marico Industries for Rs300 crore last month. (See: Marico to acquire Nihar from HLL)

Nihar fits snugly into Marico's portfolio of personal and haircare brands and is in keeping with the company's increased focus on the personal care and grooming segment. The acquisition will help it strengthen its distribution in the eastern markets and increase its presence in the perfumed coconut oil segment, which offers higher profit margins.

Nihar, through its brand Nihar Naturals (Jasmine and Rose), spread over two segments - coconut oil and perfumed hair oils - has a market share of around 8-9 per cent in the coconut hair oil segment. The brand will add a little over 10 per cent to Marico's current turnover, which stood at Rs857 crore for the nine months ended December 31, 2005. The company posted a net profit of Rs62.9 crore for the first nine months of the current financial year.

Nihar has a large share of the rural hair oil market at 74 per cent. In comparison, till the sale to Marico whose coconut oil Parachute, was Nihar's closest competitor with a 47.5 per cent market share. The credit for Nihar's rural market share goes to HLL's Project Shakti that was exclusively targeted at rural India.

Marico, with brands like Parachute and Shanti Amla, is the market leader in the branded coconut oil market with more than 50 per cent share. Undoubtedly the acquisition of Nihar will give it increased penetration into the rural markets.

Nihar's market share has been declining in the past few years mainly due to decreasing marketing and advertising support from HLL since it does not figure among its elite power brands. However, even though Nihar's over all market share fell from 22 per cent a few years ago to less than 8 per cent in 2005, it is still among the top three brands in the country, after Marico and Dabur. Nihar contributed Rs120 crore to HLL's anticipated turnover of Rs11,000 crore for the year ended December 31, 2005---slightly less than 1 per cent.

The Nihar brand is also popular in eastern India and is the second-highest selling brand in the region after Shalimar, which does not have a pan India presence unlike Nihar. Dabur and Marico are strong in the north, the south and the west markets but have a negligible market share in the east.

Though the Nihar acquisition helped HLL make inroads into the hair oil market that was earlier the stronghold of Dabur and Marico, clearly hair oil is not the company's focus anymore.

Apart from the fact that Nihar does not fit into HLL's upmarket brand category, the company also seems to be moving away from traditional hair oil category. HLL has begun increasing its presence aggressively in the non-oil hair care category, the fastest growing segment in the FMCG category.

Last year it began exploring the post-hair wash market and extended Sunsilk as an `after-wash combing lotion,' along the lines of products such as Livon and Silk & Shine. At present HLL is busy launching new products and extensions of its existing brands. Its subsidiary Lakme Lever too has decided to foray into the already cluttered hair care market. It is making bold moves by launching new product categories such as hair sprays and hair mousse (aerosol foam used in hair styling) - segments untapped by the other majors in the hair care segment.

HLL recently launched Sunsilk Naturals 9 to 9 combing lotion for both wet and dry hair after withdrawing the Sunsilk Naturals brand of hair conditioners. The company says that the product is a new concept, offers the benefits of oil minus the stickiness and smell.
However, HLL faces competition in the form of Livon, Silk & Shine and newly launched Mrs Marino, which offer similar benefits. HLL is aggressively playing the price card in the after wash category and the product comes with the lowest pricing among existing brands.

Industry observes believe HLL is trying to expand the post-wash market and with its economy pricing, wants to market the product to the mass users.

HLL's subsidiary Lakme Lever is also offering hair care product under a new sub-brand - Lakme HairNext under which it is introducing specialist products hair sprays and hair soufflé.

According to research firm Crisil the personal care segment in India has grown at a CAGR of 7-8 per cent in the past 3 years. Premium personal care products consisting of cosmetics, skin care products, fragrances, deodorants/ antiperspirants and shaving products, are growing at above 10 per cent due to low penetration levels while mass market products like detergents, oral care products, hair care products and toilet soaps have achieved high penetration levels and are registering a slowdown in demand growth.

The hair care industry in particular, till now growing at 8-9 per cent, is also expected to slow down to 6-7 per cent in future, due to high penetration levels and competition from unbranded hair oils. Crisil predicts that value growth in the hair oil segment will come largely through value-added products.

The hair oil market is dominated by coconut hair oil with a 72 per cent market share and growing at 5-7 per cent per annum over the last few years. The coconut hair oil market valued at approximately Rs8 billion has been witnessing a shift in usage patterns in both urban and rural markets. Even the rural market, a traditional user of unbranded loose oil (market size: Rs7 billion) is expected to gradually shift to packaged and branded hair oil, in order to avoid adulteration.

According to Crisil coconut oil is a low value-added product, compared to shampoos, gels and creams. The price of the raw material copra determines the price of the final product. Hence sourcing of raw material is the key to its competitiveness. Despite this and the fact that raw material prices have bottomed out, value growth will be difficult to come by because of the low retail prices prevailing in the industry.

Crisil says coconut oil usage is declining in the urban market, especially amongst the younger generation, because of a declining usage frequency and a shift to value-added hair oils, a category estimated to be growing at 20 per cent per annum. Thus, companies have started catering to the shifting urban preferences by offering products in the value-added hair oils segment. In the premium hair oil market, the main players include Marico (Hair & Care, Parachute Lite), Dabur (Vatika) and Dey Chemicals (Keo Karpin).
With this acquisition, Marico's share of coconut oil would go up to 63 per cent from the current 54 per cent and in perfumed hair oil to 60 per cent from 30 per cent.

For Marico, the acquisition of Nihar would not only give it a strong position geographically but also a larger product range. As coconut oil and perfumed oils are high margin products, the company will make a substantial leap in terms of topline and bottomline. Nihar's distribution reach, in Bihar and Jharkhand will also provide Marico a platform for its other brands.

After the news of the acquisition shares of Marico moved up by Rs35.65 or 8.85 per cent to Rs438.3 on the BSE while shares of HLL remained almost unchanged at Rs195.05.

Marico markets 15 brands, including Parachute, Saffola, Kaya, Sundari, Hair & Care, Shanti and Mediker. Earlier this month, Marico had acquired a local soap brand Manjal, in Kerala.

The focus of both the companies is clear. Marico is increasing focus on the small town / rural markets while HLL is targeting the affluent urban segment.

The good news for Marico is that rural markets are fast moving towards packaged hair oils as awareness of adulteration in loose oil is increasing. The bad news is that the unbranded packaged oils offer intense competition.

HLL on the other hand faces a threat not only from domestic brands like Livon that have the prime movers' advantage and also from the vast imported goods market.