Berger Paints: 250 Years In The Making
The chapter begins with an interesting history of Berger Paints, which very few of us were aware of. Berger Paints was established in the year 1760 by Lewis Steinberger. Since then, the company has changed hands thrice till it came to the hands of Vittal Mallya, the father of liquor baron Vijay Mallya. Vijay Mallya, after the death of his father, acquired the overseas operations of Berger Paints, except Australia, Europe and UK. The final take over of the company’s ownership happened in 1991, when Mallya sold the stake of Berger Paints to the Dhingra brothers, namely, Kuldip Singh and Gurbachan Singh.
The author has divided Berger Paints corporate story into three phases.
Phase 1: 1972-91
As many of you might be aware, in the Indian FMCG industry, HUL is considered the CEO factory. This means, many of the HUL employees have gone ahead and become successful CEOs of other FMCG companies. The HUL of the paints industry is Asian Paints. Many Asian Paints’ employees went on to lead other paint companies and changed their fortune. The case of Berger Paints was no different. Berger Paints of today would be a lot different if Biji Kurien did not join the company from Asian Paints in 1972. Kurien is titled with two major achievements at Berger Paints. They are:
(a) Changing the work culture at the firm.
(b) Shifting the focus towards decorative paints from industrial paints.
Kurien hired high quality talent and encouraged a culture to give full autonomy to employees.
For developing the decorative paints division, the company hired the Lintas Media Group, which at that time was India’s largest advertising agency. Berger also pioneered the concept of contract manufacturing to improve operating efficiencies. Also, during this era (1972-91), supply chain efficiency, productivity and operational excellence were initiated. These strategies led Berger Paints to gain market share and become the fourth largest player by 1980.
This phase ended with the change of ownership from Mallya’s UB group to the Dhingra family. The Dhingra family was already running a paints business where they majorly exported to Russia. They thought acquiring Berger Paint’s global business was a strategic fit.
Phase 2: 1992-2010
Unlike Asian Paints, the expansion into the decorative segment had dented Bergen Paints balance sheet. This was the likely reason for the sale by UB group to the Dhingra family. There were working capital issues and delays in salaries to the employees. The company had just one manufacturing unit in (1992), from where they used to cater to the whole of India and subsequently faced supply chain issues as demand rose. However, Kuldeep Singh Dhingra is said to be confident of Kurien’s capabilities and hence retained him. He also identified liquidity bottlenecks and pumped funds into the company through short term loans, convertible debentures and preference issues to help unleash Berger’s potential.
The company stepped into another innovation with the launch of color tinting machines, thereby increasing color shades from just 125 to 5000+.
By 1990, Berger became the number 3 player in both the decorative and industrial paints market.
Post Kurien’s retirement in 1994, the company was led by Subir Bose who had a decade long association with Berger already. He is said to lead the transformation of the company from industrial segment to decorative segment. Bose, also ramped up the rural presence of the company.
In order to solve the supply chain issues, Bose supplied a tinting system to more than 1000 outlets and also acquired manufacturing units in Nepal.
Phase 3: 2011-15
This phase, according to the author, began with the appointment of Abhijit Roy. Coincidently, the change in management also saw the rise in Berger’s revenue growth relative to the market leader, Asian Paints.
Roy had spent 16 years with the company at different capacities. Under Roy, Berger was able to raise the aspirational value of Berger’s brands, improved internal inefficiencies using IT, increased advertising spends, among others. These were combined with a constant cost reduction, increasing operating margins.
Among the notable improvements, were the rising gross margins of the company during FY10-15, by 450bps. This rise was despite no significant input cost reductions over the period. This was also not an industry-wide factor, as even Asian Paints margins were quite stable during this period. The author also noted that contrary to the belief that premiumization raised the gross margins, it was actually higher volumes with increased economies of scale that actually helped the company reduce the cost of goods sold. Efficient working capital management also contributed to the margin rise.
Let us now look at the IBAS framework to understand the competitive moats of the company post Dhingra’s acquisition.
According to Mukherjea’s, Berger Paints’ innovations were across three fronts:
1. How promoters managed the firm.
Dhingra's, although one of the richest families in India, maintained a low profile with rare press interviews. The author also notes that his personal encounters with the Dhingra brothers left him with the notion that they were very grounded. Like Asian Paints, Berger is also professionally run, with little interference by the promoters.
2. Introduction of tinting machine to the dealers
For paint dealers, tinting machines did away with the need to stock a large number of SKUs. This reduced the space requirements and improved inventory management. During the 1990s, one tainting machine cost INR 8,31,000. This was a very high price of any dealer to pay upfront. However, with aggressive marketing, Berger was able to sell this to the dealers as a cost saving and space saving device. This was to that extent, whereby during 1999, 33% of the tainting machines in India were with Berger’s dealer network.
3. Introduction of innovative products
Berger has made sure that each of its products have some or the other special characteristics which have allowed it to create and sustain competitive positioning in the country.
Brand and Reputation
Berger has been able to create a strong brand in both the economy and premium segment. Berger’s advertisements were quite different from what was prevalent during those times. Some of them like “When the Piano is Steinway, the walls are Luxol Silk”, “Luxol Silk – the only emulsion paint you can tell with closed eyes”, etc. tried to enforce in the minds of people that Luxol was the brand that every premium household should have and can even increase the value of your expensive home accessories like Piano, Moghul miniatures, etc. Advertising spends actually took off for the company with the appointment of Abhijit Roy as CEO. They started spending about 6.6% of sales on advertising, higher than Asian Paints (5.2%).
Berger has been able to recruit and retain great talent for a long time. Kurien used to say to the hiring manager, “Don’t recruit someone who is not able to do a job, just to fill a vacancy. Secondly, even if we don’t have a job, but you come across the right person, you must recruit him.”
The kind of autonomy that employees used to get at Berger paints, led them to attract talent even at a lower pay.
An all-India network of plants, manufacturing facilities and dealer-distributor network are the key strategic assets that build competitive moats around Berger Paints.