For most Indian companies, succession planning is a difficult and at times a painful process. In the last few years, the topic has often grabbed headlines, be it the bitter battle for supremacy between the founders and the then CEO at Infosys, or the protracted fight between Cyrus Mistry (former Tata Group chairman) and group patriarch Ratan Tata that is now playing out in courts. There are a few exceptions to this, none bigger than Dabur, the 134-year-old company that is the country's leading Ayurveda-based health care firm.
"Dabur has always been ahead of the curve, be it in planning CEO succession or restructuring family shareholding. Our survey of NSE-listed companies last year found over half had not identified successors for their CEOs. So, Dabur is an outlier in this aspect," says Monica Agarwal, Head, Financial Services and Co-head of Board Services at Korn Ferry India, a management consulting firm. "CEO succession should be the number 1 priority for any professional board. Dabur is a good example of how to go about it."
The retirement of its CEO for close to two decades, Sunil Duggal, on March 31 this year, has opened a new chapter for the company, just as his appointment in 2002 had done. He didn't know then that he would be working from the corner office in the rather sedate building in Sahibabad - on outskirts of Delhi - for this long. Or this successfully.
It wasn't the best of times for the company. In 2002, the domestic FMCG industry was witnessing unprecedented competition and Dabur, despite its strong brand recall, was struggling to grow. The company's first attempt at transitioning to a professionally run entity had not got off to a good start with its first professional CEO, Ninu Khanna, quitting within a little over two years due to differences with the top management. When Duggal took charge, Dabur was going through one of its worst years. Sales had declined and the company reported a dip in profits. Under Duggal, the turnover has grown six-fold, profit is up nearly 16-fold and the stock is a darling with investors, averaging 30 per cent per annum returns between 2002/03 and 2017/18. But his contribution goes beyond just numbers.
"We have embarked on an irreversible journey towards professional management in a way no company in India has. A lot of companies put in professional management and then go back to the old ways in a few years. But we are one of the few companies that have made professional management an irreversible process - in good times or bad," says Duggal. "Even when the next generation of promoters come in, they may make suggestions as board members and advise, as is their prerogative, but they will not come into the management ever. That door is shut. The company is too complex, too fragmented, too wide for anybody to handle. It is difficult enough for professional management to handle this complexity. So, we have to empower our management and give them autonomy. For example, our international business has tremendous freedom."
Leaving on a High
There is no secret recipe to succession planning at Dabur but Duggal, the flagbearer of professional management, knew his legacy will hinge on how the company manages after his exit. That is why planning for the next CEO started much in advance. "The process began in April 2017 and the starting point was that we wanted an internal candidate (like Duggal himself)," he says. "So, when the process of identification began, we had already put in time and effort to shape the people to idiotproof the process. We built huge internal capability by effecting role changes and enhancements and delegating bigger responsibilities to people in terms of skill building, so they are ready for leadership roles. On the emotional quotient, the softer aspects, we are not very good, so we appointed Egon Zehnder to aggressively intervene with a few key people in terms of mentoring, training and a detailed long drawn-out process that lasted one full year."
Yet, in the first half of 2018, the company was facing a lot of headwinds. The ill-effects of demonetisation that impacted cash dependent sectors like FMCG, followed by a messy GST rollout in mid-2017, disrupted the market. At the same time, Dabur faced another challenge - the meteoric rise of yoga guru Ramdev Baba's Patanjali Ayurved which, between 2015 and 2018, grew at a blistering pace by banking on its swadeshi natural and Ayurvedic appeal. It had huge product overlaps with Dabur, and in some key segments like toothpaste, honey and chyawanprash, rattled the 135-year-old company. "Ramdev was a big headache. Three years ago, when he began, and two years ago, when he peaked, we were all wondering how to deal with the situation," says Duggal. This delayed the original succession plan by a year as Duggal decided to steady the ship before leaving. "Our new four-year vision plan (introduced by Duggal in 2002) came into effect in April 2018. I had thought that would be a good time for a new person to take over so that he can implement the new strategy for the next four years in his own way," he says. "But due to the headwinds, I thought I needed to stick around a bit longer to see this through and stabilise the business."
The effects of demonetisation and GST have worn off. Dabur is in fine fettle today. In 2017/18, its India revenue grew 6.7 per cent and profit 6 per cent, while operating margin in the last quarter of the financial year touched a record 27.2 per cent. In the first three quarters of 2018/19, revenue grew 11.6 per cent and profit nearly 12 per cent. Even the threat of Patanjali has reduced significantly in the last one year as the Haridwar-based company has found it difficult to adapt to the GST regime. In 2017/18, it registered its first decline in revenue in five years at Rs 8,135 crore, down 10 per cent from Rs 9,030 crore in 2016/17. Its profitability more than halved during the year to Rs 529 crore.
"The decline in turnover was primarily because of the company's inability to timely adapt to the GST regime and develop an infrastructure and supply chain," says a June 2018 report by CARE Ratings. "Further, there was a sharp decline in margins, with profit before interest, lease, depreciation and tax margin declining from 18.7 per cent in FY '17 to 11.9 per cent in FY '18 on account of increased overheads due to expansion and majorly due to growing selling and distribution expenses."
If the rise of Patanjali was a threat to Dabur, its fall or stagnation is a blessing. Analysts believe Dabur stands to gain the most from any slowdown at Patanjali. "The key factors leading to the decline of Patanjali are brand fatigue, inability to crack general trade distribution, dilution of Ayurvedic credentials due to excessive extension, strong response from other large companies with own Ayurvedic offerings and a sharp drop in advertising spends," said a last year's Credit Suisse report.
These are good signs for 48-year-old Mohit Malhotra, a University of Pune alumnus, who had joined the company as an intern in 1995 and has got the top seat at Dabur after Duggal. Yet, he will face serious challenges. One, the rise of Ayurveda has caught the fancy of large multinational companies, which have drawn aggressive plans in the category. "The MNCs will back it up with deep pockets, but we believe the consumer will eventually see through this," he says. "They will find it tough to match us on our turf of natural, herbal and Ayurvedic products, but we will not be complacent."
Two, Patanjali may be relatively down right now, but is not out of the game. In three major segments, toothpaste, honey and chyawanprash, it had made a significant dent on Dabur's market share in 2016 and 2017. The company says it has recovered most of the lost ground but the might of Baba Ramdev cannot be discounted. "The last thing we can do is to think that competition is fading away. The feedback from the market may be that they (Patanjali) are fading, but to me it is anything but that. There will be multiple attempts from Patanjali to come back," he says. "In segments like honey where we had significant overlap with Patanjali, we had lost 10-15 per cent market share, but have recovered almost all of that. They have supply chain issues. But we have to be cautious."
Dabur has been a beneficiary of the yoga guru's high-decibel campaign for Ayurvedic and natural products that brought this niche segment into the mainstream. Across personal FMCG space segments, the growth of Ayurvedic and natural products is higher than that of other products. Though Patanjali trigerred this, it may end up benfitting Dabur more as the latter is already a pioneer in the herbal and Ayurvedic FMCG segment.
"The journey for Ayurveda to become mainstream has just started. Patanjali has been a trigger. And it includes not just Ayurvedic medical products but anything that is more natural and herbal," says Malhotra. "It is a major tailwind for us as we are a quintessential Ayurveda company and it paves the way for our growth. The onus is on us to accelerate and capitalise on this opportunity without ceding ground."
Dabur also has a big play in fruit juices where its Real brand commands a 56 per cent market share and accounts for nearly 40 per cent of its revenues today. It faces competition from various quarters there - from small regional and local players that sprout every year out of nowhere to big MNCs like Pepsi and Coke that are looking at fruit juices to offset the stagnation in their bread and butter carbonated beverages. "There will always be smaller local players that will undercut bigger players because they operate at low margins. But it is very easy for a company like Dabur to manage them, because they are regional and local and we have enough resources to overcome them," he says. "We do recognise the competition that hits us regionally and quickly mobilise resources by way of trade and consumer activation to overcome them so that they do not become a threat to us. It is easy for us to tackle them. What worries us are MNCs with deep pockets coming in."
The soft-spoken Malhotra could not have taken over the reins of Dabur at a better time. But uneasy lies the head that wears a crown. For now, the company is in safe hands of somebody who has served it for more than 23 years. And counting.