Asian Paints is one of the greatest companies in the history of India. The most astounding thing about this company is that it is the only company to have grown at a CAGR of 20% in the past 60 years. And if you invested just one lakh rupees in Asian paints in 2000 today at Rs 3000 per share, your wealth would be worth at least Rs 1.87 crores, and that too without dividends. The business of Asian Paints literally doubles every three years and it has been a market leader in the industry not for five years, not for 10 years, but for the past 54 years.
If you draw a comparison of Asian paints with its competition in Tickertape, you will see that well Berger stands at a revenue of Rs 6869 crores, Nerolac has a revenue of Rs 5793 crores their combined total is Rs 12,662 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 12,049 crores but Asian Paints alone generated a profit of Rs 3139 crores.
The question is
- How did Asian Paints become such a dominating force in the paint industry?
- What exactly is the secret sauce that enabled them to be a market leader for 54 years?
- What are the business lessons that we need to learn from the greatest paint company India has ever seen?
Story of Asian Paints
The story of Asian Paints dates back to the volatile times of 1942, in India. This is something that you might already know during that time, India was still under British rule, World War Two was still going on and the government had temporarily banned the imports of paint into India. During those days the paint industry in India had a few foreign companies and Indian players like Shalimar paints were the major players in the market. But this ban resulted in a brilliant opportunity for domestic production. And spotting this opportunity. “Mr. Champaklal Choksey” and three of his friends set up Asian Paints in Mumbai in 1942. One of the most amazing traits of this gentleman was that he was an incredible market researcher and he spent a lot of time understanding the paint industry. This is when he understood that there were two segments in the paint industry. One was the industrial segment and the other was the decorative paint segment. In the industrial segment, it was a B2B space that is all about supplying paint to giant factories and plants. Whereas the decorative segment was a B2C as in a business-to-consumer space wherein you could sell paint to the common man to paint his house.
Long story short, initially, the large distributors rejected Mr. Choksey so he turned to the villages wherein people painted the horns of the bulls and the South Indians painted the entrance of their houses considering it to be auspicious. Looking at this demand, MR. Choksey started supplying to the village distributors, the demand soon enough shot up, and within some time, the bigger distributor started approaching Asian Paints. In the next 10 years with this rural-to-urban approach, they hit revenue of Rs 23 crores by 1952. Now the obvious thing over here is that they couldn’t have become the biggest player just by selling paints for bull horns.
How did Asian Paints become the biggest player in the market?
This is where the second phase of Asian Paint’s growth started when Mr. Choksey noticed another huge gap in the market. During the 1950s Mr. Choksey saw that there were two major products in the market.
1. 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.
2. 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.
Asian Paints came up with a game-changing product called the washable distemper that was placed exactly between dry distemper and plastic emulsions. This was a revolutionary product because it has the qualities of plastic emulsion, but it was way cheaper than the emulsion product.
The First Marketing slogan – “Don’t lose your temper, use tractor distemper”
This product was marketed using a very successful marketing campaign that said, “Don’t lose your temper, use tractor distemper.” And guess what, within 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.
By 1967, that is 25 years after the company started, Asian Paints became the largest paint company in India. The most astounding thing is that even today, that is even after 54 years, Asian Paints is still the largest paint company in the Indian market. Now, this begs the question, in this volatile and uncertain market with such a vast customer base spread across an extremely diverse country like India, how is it even possible that not a single company could challenge the position of Asian Paints?
Why no competitor could beat Asian Paints?
The answer to that lies in three critical aspects of the Asian Paints organization.
1. World Class Supply Chain
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, and the distributors, who supplied paints to 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. 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 the one practice that was prevalent and even today it is still prevalent in any credit system is that even if the shopkeepers have sold Rs 60,000 worth of paints, then they have got 180 days to pay back, and no one really bothers to pay back. And even if they did, they used to pay using post-dated checks. Now the Asian Paints team understood this very clearly. So they came out with something called ‘The 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, very big deal because the paint industry by default operated at razor-thin margins at the dealer level. And these initiatives worked wonders because it was a win-win for both Asian paints and the dealers. Why? Because Asian Paints was able to rotate its capital faster. So they were able to serve a larger network of distributors with very less working capital. And at the same time, the dealers were getting discounts and managing their working cycles better.
Technology Advancement in Asian Paint organization
Similarly, in the next 50 years, Asian Paints always remained a pioneer in supply chain management. In fact, Mr. Champaklal Choksey bought the first-ever supercomputer in India in 1970 for Rs 8 crore. And what blew my mind is that Asian Paints had a supercomputer 10 years before ISRO had it, 10 years before IIT Powai had it, and 21 years before any other company in India had it. They use these mainframes to forecast demand by which they could run their supply chains at insane levels of efficiency. They started branch billing on computers way back in the 1970s. Even started using GPS for tracking the movements of their trucks. And the result?
In 1980, the Bhandup plant used to operate with 1600 workers, but Ankhleshwar started production for the same capacity with only 250 workers. By 1985, the same thing was done with less than 100 workers. So you see, in less than five years, they were able to improve their efficiency to such an extent that now they were able to operate at the same capacity with 1/16 of the workforce. All of this was done because of insanely superior technology.
No Distributors & Middlemen
From the 1970s onwards, Asian Paints removed all middlemen like distributors and wholesalers from its distribution channel. This meant that they were supposed to supply directly to the dealers and because of this today, Asian Paints the manufacturer reaches 70,000 paint dealers without any channel intermediation. Therefore, with only a 3 to 5% average margin for the dealers, Asian Paints is able to keep 95 to 97% of the margins for itself.
Meanwhile, the extraordinary levels of efficiency have taken Asian paints to such heights that even today with 125 depots in its supply chain, while Nerolac generates a revenue of Rs 40 crore per depot, Asian Paints generates revenue of Rs 100 crore per depot. Similarly, the revenue per factory for Nerolac is at Rs 700 crores, whereas Asian Paints stands way ahead at a revenue of Rs 1500 crores. This is the level at which Asian Paints operates. And this brings us to the second critical factor and that is a relationship with dealers.
2. Relationship with Dealers
Distribution of Tinting Machine
A classic example of the same was the distribution of something called tinting machines. For those who don’t know, 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. And today, you can produce 1000s 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 what blew my mind is that today, while Nerolac and Berger together deploy 46,000 tinting machines through their dealer network, Asian Paints alone has 50,500 machines. The question is, how is there such a stark difference between Asian paints and others?
Well, that is 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. Because 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.
Easy Financing for Dealers
Furthermore, after some time, Asian Paints orchestrated a three-way agreement wherein banks funded the dealer and then the dealers repay the loan to the banks over time. This way, the investments were not reflected in the company’s balance sheet and at the same time, financing was made easy for the dealers.
Extensive Support team & Logistics
Even today when I spoke to a few dealers in my circle, they told me that the Asian Paints portal is so amazing that their queries get answered usually within just 24 hours. And regardless of whatever problem the dealer faces, the company has an extensive customer support team to help them out with extreme care. And even in tier four cities, if you order products in the evening, they will be delivered to you by noon without fail. In tier-one cities, the Asian Paints logistic system delivers goods two times a day, and in some cases, even four times every single day. The cherry on the cake is that Asian Paints has always gone beyond its call of duty to help its channel partners in case they faced any unexpected problems. As Jalaj Dani, an Asian Paints executive stated, and I quote, “Dealers are a part of our family, if we find that they’re affected due to unforeseen events like riots, floods, earthquakes, etc, we ensure that the best support is provided to them in every possible manner, including expanding the credit period, so as to help them get back on their feet.” This is a reason why Asian Paints has the largest number of dealers and an extensive network that is far, far superior to its competition.
3. Incredible Levels of Consistency.
I don’t know how many of you see this, but then in the past 50 years, the stakes of the founders have changed. And just like any other giant company, even Asian Paints had some conflicts within the company. But even then, they have been remarkably consistent with their adoption of technology. They’ve been recruiting the same grade of talent since the 1970s. Their marketing has constantly evolved with changing trends in Indian culture.
4. Independent Board of Directors
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 independent directors. But Asian Paints is among the rare breed of companies whose boards are truly independent. Out of 14 directors, Asian Paints has seven independent directors who are credible individuals with extraordinary backgrounds, and who always make sure that the company is always a notch ahead of its competition.
And this brings me to the last part of the episode and that is since the past 54 years Asian Paints has been a market leader that’s fine.
What are Asian Paints Strategies to stay ahead of its competition in the next 50 years?
To understand this, you will first have to look at the megatrend in the paint market. If you see the cost of labor involved in painting a home has increased from just 10% of the project cost in 1980 to 65% of the project cost. This is because from 2006 to 2015, the labor costs in India have grown at a CAGR of 9% to 10%. Whereas the paint prices have increased at a mere 3% CAGR. So in the next 10 to 15 years, labor costs are expected to be around 90% of the overall paint project cost. And when this happens, it will make more sense for you to buy paint from a store and paint a home yourself rather than employing painters and laborers. And once this happens two consumption patterns are likely to emerge.
1. Customers will be willing to pay for labor involvement only if there is service-oriented value addition, which can not be done without expertise. This is a reason why Asian Paint has already started trying several service-oriented models. They’ve been opening experience stores in Mumbai, Delhi, and Kolkata. They’ve opened color ideas stores, which provide color consultancy in mom-and-pop stores. They have home solutions painting service, which currently executes 20 to 25,000 projects a year. And then we have Royale Play which is high-end textured paint. And apart from that, they’ve even started laying the foundations into kitchenware, bathroom fitting, furniture, and even interior decoration. So to put that straight Asian Paints doesn’t just want to paint your house, they want to build and sell everything that is inside your house. This is the first trend that is the evolution of a service-oriented industry in the paint market.
2. The DIY model is expected to emerge. Currently, households do not adopt a DIY approach because of the lack of sophisticated tools, and number two, at 60% to 65% of the project cost, labor involvement is still affordable for many households. However, with sophisticated tools being introduced in the market, and with the labor cost shooting up to 90% of the project cost. both these factors are expected to change the trajectory of the paint industry. This is the reason why Asian Paints is now venturing into building user-friendly DIY tools in order to empower ordinary people like you and me to be able to paint our houses. This is what Asian Paints is doing to prepare for the future.
Business Lessons From Asian Paint Business Case Study
1. Identify the gap in the market
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.
2. Efficiency can change the game
This is something we’ve seen even in the case of Toyota and Ford, that efficiency is one of the most powerful yet the most underrated aspect of a business. And in the race of scaling up, companies often overlook the inefficiencies in their system. A classic example of the same was Ford and even Gillette. Whereas on the other side, they’ve got companies like Asian paints, who deploy incentives in the form of regular payment discounts and invest heavily into next-gen technology like a supercomputer to reach unthinkable levels of efficiency.
3. Your employees are your family member – (Don’t Exploit in the name of efficiency)
While 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 slack time, to resolve their queries with utmost care within 24 hours, and most importantly, to go out of the way to help them out during a calamity saving them from an unimaginable amount of pain and suffering.
4. Develop a good Culture in your organization
While good brands have a legendary leader, a 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 the wise marketers of Asian paints, who have kept the legacy of the company not for five, not for 10 but for 70 consecutive years. If this isn’t the epitome of greatness, I don’t know what is.
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Study Material
Please read this book called ‘The Unusual Billionaires‘ because I found some fascinating insights about Asian Paints in this book for this case study, and if you learned something valuable, please do comment below.
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