Will Grasim disrupt Paints industry?

Existing Paints Industry & offering of Grasim

Paints industry is up for a rejig.
Of the 60000 crore industry , leader Asian Paints control 42% of total, and Berger 12%.

32% is still unorganized sector.

Though new players like JSW Paints n Indigo Paints are too small , Grasim is set to disturb the industry structure with 10000cr investment, capacity of 1330 million litres/ year by FY 24 end.

Asian paints capacity is 1700 Ml set to increase to 2600 Ml now.

Such big capacity addition of Grasim will surely call for huge ad spends and price war to sell the product, which may affect the margins of Asian paints & Berger Paints also since volume growth of industry is going to remain same at 10-13% . It is likely that there will be no market share loss of Asian Paints, Berger Paints.

Grasim already has a big dealer network through their already selling product Birla White wall putty ( top 3 player) . Plus they have Ultratech cement network in market. This will help them create a distribution channel much faster than any other new company.



Moat of Asian Paints - Can it be taken away?


Asian Paints has a very strong moat in terms of its direct distribution model without distributors which allows them to eliminate the margins they had to pass on to distributors.

Huge distribution reach and fulfillment of orders 3-4 times/ day leads to very efficient operations at dealer end- this is another moat which can't be replicated by a competitor. Paint being a voluminous product, with lot of SKUs , this step reduces capital requirement of dealers. Instead of increasing credit limits that traditionally companies do, Asian Paints gives additional cash discounts to dealers if they make payments on time.
Asian Paints has the largest number of depots in India, and largest number of dealers as well. Deep rooted long term relationships with dealers is another moat.
Given these factors, along with its leadership position and demand from customer side,a dealer will always promote products of Asian Paints more than others, even if margins offered by new player is more.

Brand legacy and pricing power they enjoy due to years of operation is another moat. They have developed this by spending a lot on brand building and promotions since last several decades. Their brands and even sub-brands have high brand recall among customers. Asian Paints has associated themselves in customer's mindspace where they take pride in painting their homes with Asian Paints. Their ads have been constantly communicating the same for years together.

Availability of customer data is another moat - Asian Paints have access to town wise color wise paint consumption data with seasonal variations  since last so many years. Asian Paints installed ERP in 2000.
Do you know who in India bought the first mainframe computer in the 70s- its Asian Paints , not BARC or ISRO. So with this huge data, they can predict demands better, schedule raw material procurement and optimize their production - which takes them ahead predicting customer trends, needs and behavior. These moats are not easily taken away by a new player.

What is required from Grasim to challenge?

Grasim has to burn a lot of money to get to that position.

They are spending 10000cr to setup the business from their cash accrued in commodity business .

Now Grasim has to match ad spending of Asian paints which is 1200cr per year. So they have to spend 5000cr in 5 yrs only in ads to reach there.

Plus Grasim will operate at lower margins ( lower prices possibly or discounting) to capture market as they won't have any brand power for 5 yrs. They will have to give more margins to dealers than other players to lure them to sell their products. They will have to create a high sales manpower incentives structure to reach there .

15% market share achieving from scratch is an uphill task. ( They aspire to be number 2) .
Possibly they won't earn much in paints business for next 5-7 years.



Possible impact on Paints Industry

No other rival can challenge Asian Paints, only Grasim may, all depends on its appetite and aggression. But if a small player like Indigo Paints can take 3% market share from Kansai Nerolac & Akzo Nobel, Grasim will do lot more , maybe in 5-7 yrs , they may achieve 15%.
Also another thing will happen, as per capita income increases in next 10 yrs, share of unorganized industry will reduce from 33% . That market share will go to Grasim maybe.

Usually smaller players lose market share in such wars, so Indigo, Akzo, Kansai will lose here. If price war continues longer, PE de-rating from 70 levels may happen also for Asian Paints, Berger Paints as ROCEs may drop .

Investors in Asian paints, Berger may keep a watch on FY 25 results.

Nothing will change for Asian paints, they will remain the market leader. Only wealth compounding that happened for last 20 yrs may not happen for next 20 yr- impact will depend on how aggressive aspirations Grasim is displaying in paints.

But given its DNA to excel, Asian paints will find an alternative way to grow at this pace, maybe in some other associated new business.



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