Asian Paints is one of the greatest firms in the history of the Indian business ecosystem, and the most remarkable aspect of it is that it is the only company to have expanded at a CAGR of 20% for the past 60 years. And if you had invested one lakh rupees in Asian paints in 2000 at Rs 3000 a share today, your wealth would be worth at least Rs 1.87 crores, even without dividends. Asian Paints’ business doubles every three years, and the company has been a market leader in the sector for 54 years.
If one compares it with its competition one will see that Berger stands at a revenue of Rs 6869 crores Nerolac has a revenue of Rs 5793 their combined total is Rs 12662 crores but Asian paints alone generated revenue of Rs 22,044 crores. Similarly, Berger generated a profit of Rs 719 crores., Nerolac stands at Rs 529 crores their combined profit is Rs 1,249 crores but Asian Paints alone generated a profit of Rs 3139 crores.
How did Asian Paints become such a dominating force in the paint industry?
Mr Champaklal Choksey and three of his friends set up Asian Paints in Mumbai in 1942. During the 1950s Mr Choksey saw that there were two major products in the market. One was a basic dried distemper that was extremely cheap, but it had a tendency to peel off, it used to stick to the clothes and it used to stink very badly. The second product was the plastic emulsion product that was free from all of these problems but was five times costlier than tried distemper. Therefore, it was unaffordable for the common man. So Asian Paints came up with a game-changing product called the washable distemper that was placed exactly between dry distemper and plastic emulsions.
Now, this was a revolutionary product because it has the qualities of plastic emulsion, but it was way cheaper than the emulsion product and this product was marketed using a very successful marketing campaign which said, “Don’t lose your temper, use tractor distemper.” In no time, washable distemper was a massive hit in the market and the company started taking giant leaps. Although the firm was not very profitable during the 1950s, from 1952 to 1962, the revenues grew at a compound annual growth rate of 21%, with margins rising from just 2% to 13% by 1962.And by 1967, that is 25 years after the company started, Asian Paints became the largest paint company in India. And the most amazing thing is that even today, that is even after 54 years, Asian Paints is still the largest paint company in the Indian market
How is it even possible that not a single company could challenge the position of Asian Paints?
Firstly, the company provided a world-class supply chain that they’ve built over the past 60 years. And the Foundation came way back in the 1960s.During that time, large multinational corporations used to offer at least 180 days of credit period to their distribution channel and this included the shopkeepers, the dealers, the distributors, who supplied paints to the retail customers This channel allowed the distributors to expand the credit period even as long as one full year.
For example, let’s say you are a paint company, and I am the shopkeeper and you gave me Rs 60,000 worth of paints that I am supposed to sell at Rs 80,000. So, I can take up to six months to sell the paint and then pay you back Rs 60,000 and this means that for you Rs 60,000 of capital is stuck and cannot be used. Now, if the same thing happens with 1000 distributors across the country, that is Rs 6 crore worth of capital of yours that will be stuck. This money cannot be used to buy raw materials and for the next cycle, you will need another Rs 6 crores, which means that you need an exorbitant amount of working capital to even survive in the market. This is the reason why the smaller players found it very difficult to enter the market. So the entry barrier was very very high. But if the shopkeepers have sold Rs 60,000 worth of paints, then they have got 180 days to pay back, no one really bothers to pay back. So Asian Paints came out with something called ‘Regular Payment Performance Discount’ wherein the regular payback was incentivized. For example, a shopkeeper would get a 3.5% extra discount if he made the payments within 30 days throughout the year. Similarly, if a dealer made payments in cash, they would get a 5% discount on his procurement price. This was a very big deal for the dealer because the paint industry by default operated at razor-thin margins at the dealer level.
The second critical factor is the relationship with dealers. A classic example of the same was a Distribution of tinting machines. Tinting machines are machines that could produce a large variety of shades using a small set of standard colors.
For example, if you wanted saffron, the tinting machine will be able to mix red and yellow in appropriate quantities to give you the exact same saffron color that you’re looking out for, so because of the usage of a tinting machine, you no longer had to store every single color bucket in your inventory. Today, you can produce thousands of colors with tinting machines without going back to the manufacturer. Therefore, the very presence of these machines meant that the sales of the company would skyrocket and Asian Paints alone has 50,500 machines. It is possible not just because of the extensive network that Asian Paints has, but also because Asian Paints built a seamless system for the adoption of the tinting machines. Back then the problem was that tinting machines were manufacturer-specific, they required significant space in the store and they were extremely costly. And while many paint companies asked the dealers to bear the heavy cost, Asian paints used to bear the initial investment, and then it would give the machine on a lease agreement to the dealers. This way, the dealers felt less burdened, and the company established a solid relationship with its dealers. Therefore, the entry barrier even for small players was almost eliminated. This is the reason why the network Asian Paints grew from just 15,000 dealers in 2001 to 52000 dealers in 2018 because even the smallest dealer in the market could afford to partner with Asian Paints.
Lastly and most importantly while many companies fill their boards with friends and cronies in order to pay lip service to the legal requirement that mandates that 50% of the board should comprise of independent directors. But Asian Paints is among the rare breed of companies whose boards are truly independent. Out of 14 directors, Asian Paints has 7 independent directors who are credible individuals with extraordinary backgrounds, who always make sure that the company is always a notch ahead of its competition.
The lessons that we can learn from this study is that no matter how big the players in the industry are, if you want to become successful, it is absolutely important to identify the gaps in the market.
On one side we’ve got companies that treat their employees as objects and exploit them in the name of efficiency, on the other side, we’ve got Asian Paints that goes beyond its call of duty to make financing easy for dealers, to give them extended credit period during hard times and to resolve their queries with utmost care within 24 hours.
Lastly while good brands have a legendary leader great brand has a legendary culture.
In this case it was the impeccable board of directors of Asian Paints the star recruits from IIM, and wise marketers of Asian paints, who kept the legacy of the company not for five, not for ten but for seventy consecutive years.
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