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Case Study, MBA (Marketing): Market Diversification

Case study: MBA Marketing About VLCC VLCC has revolutionized the wellness industry to acquire the status of being the Number 1 Wellness Brand across South Asia, South East Asia and the Middle East, with a presence in over 300 locations across 121 cities and 16 countries with direct company managed operations in 11 countries including India, Bangladesh, Malaysia, UAE, Oman, Qatar and others. The company is widely recognized for redefining wellness by its scientific weight loss solutions and its therapeutic approach to beauty treatments. With a staff strength of nearly 6000, over two- third of whom are experienced specialists including medical doctors, nutritionists, psychologists, cosmetologists and physiotherapists and having served over 10 million customers since its inception, VLCC is the largest and most-preferred brand in the Wellness domain in the countries it operates in.The greatest reward that VLCC enjoys is the trust and faith that millions have in its name. The company’s founder & mentor, Mrs Vandana Luthra has received the Padma Shri Award, 2013 -- one of India’s highest civilian awards. Today, VLCC is a brand synonymous with Health and Beauty. It has the distinction of being the world’s first Health and Beauty corporate to be awarded an ISO 9001:2000 certification. According to a report on the wellness industry released by PwC and Ficci, the Rs 70,000 crore wellness industries will touch Rs 100,000 crores by 2015, with a growth rate of 15-17%. Challenges to growth include high input costs, talent crunch, high manpower costs, attrition levels, large investments due to change in technology & consumer preferences and high cost of branding. Reports also suggest that French cosmetic major -- L'oreal SA was planning expansion in India, by acquiring Ayurveda brand and opening more factories and innovation centres. To overcome these challenges and to keep pace with its rapid expansion spree, in order to maintain its position in this region, VLCC has chosen market diversification as its strategy Market diversification can be done through internal or external expansion. The former utilises product innovation as a means to achieve growth, while the later enables the firm to acquire resources immediately and in an organised form by acquiring another firm. Internal expansion may be preferred when the associated transaction costs especially concerning coordination and integration issues are expected to be lower. Conglomerate takeovers may be more attractive, if quick growth is desirable, R&D is too expansive in regards with expected product cycles, capacity expansion leads to undesirable price reactions and entry barriers restrict diversification into otherwise highly attractive markets. In the end the decision is often based on the overall transaction costs specific to each form of expansion. Diversification using FDI Foreign Direct Investment (FDI) are investments to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital and short-term capital. FDI is a natural extension of globalisation process by which countries try to access markets or resources and gradually reduce the cost of production and transaction by expanding overseas manufacturing operations in countries where certain ownership-specific advantages can help them to compete globally. Adoption of such strategies helps them to catch up with competing economies. VLCC has also used FDI for its market diversification. The acquisition In November 2012, VLCC had bought a majority stake in Wyann International, a slimming and beauty services provider in Malaysia. Being benefited from its external expansion strategy to expand its presence in the wellness domain in key markets overseas, VLCC acquired a majority controlling stake in Singapore-based Global Vantage Innovative Group (GVig), which owns and operates three companies that manufacture and retail a complete range of globally reputed beauty and wellness products and solutions worldwide. The Rs.180 crore (80% majority stake) acquisition is to be funded through a mix of debt and internal accruals. It is a strategic buyout and VLCC plans to take over the remaining 20% in GVig, held in the form of sweat equity within a year. About Global Vantage Innovative Group Incorporated in 2011, GVig is the holding company of the group that owns and operates through three subsidiaries across South Asia - BelleWave Cosmetics, Celblos Dermal Research Centre and Enavose Life Science Research. The group has revenues close to $60 Million. GVig provides wellness solutions through its subsidiaries BelleWave Cosmetics in the skin and hair- care category, Celblos Dermal Research Centre, which offers dermatological solutions, and Enavose Life Science Research, offers a range of Swiss-made skincare and body wellness solutions. BelleWave Cosmetics markets superior lines of professional skin care products professional skincare products under the BelleWave and SkinMTX brands and has a presence across 10 countries including Singapore, Malaysia, Vietnam, China, Hong Kong, Taiwan, Indonesia, Philippines, Cambodia and Korea. Distributed through more than 2,500 high-end beauty salons and spas, Bellewave is the No. 2 brand in the professional skin care industry in Vietnam, according to a recent independent brand awareness survey involving over 800 agents. Celblos Dermal Research Centre, with its in-house R&D laboratory and manufacturing facilities, is a one-stop professional skin care consultant and OEM manufacturer committed to developing skin care products that ride the latest technology and feature innovative breakthrough active ingredients. Celblos has exclusive R&D collaborations with several renowned entities, including government bodies such as the Singapore Economic Development Board and the Agency for Science, Technology & Research, and reputable academic institutions. The third brand, Enavose, distributed through vibrant concept stand-alone stores and beauty counters, features a range of innovative Swiss-made skin- and body- wellness solutions that harness advances in cellular science research and their applications to nature’s purest ingredients to produce superior products for optimum and enduring beauty and health. Reasons for acquisition  Besides entry into 10 new markets — Singapore, Malaysia, Vietnam, China, Hong Kong, Taiwan, Indonesia, Philippines, Cambodia and Korea, the acquisition has strengthened VLCC’s portfolio with high-end luxury products.  Upon the completion of the acquisition, the company’s revenues are expected to grow up to US$50 million (Rs 183 crore) by 2015.  VLCC gains access to the GVig’s research and development (R&D) laboratory and manufacturing facility in Singapore that would enable the Indian company to come up with high-end wellness products and solutions at a faster pace. VLCC plans to sell the high-end products of the newly acquired company in India and push its existing products in the new markets through the distribution channel of the Singaporean firm.  VLCC will be producing most of the products in India using GVig’s technology that would allow them to sell Bellewave products cheaper by about 30-40% as compared to the imported ones  The company would position its product in the India’s US$5.7 billion beauty and wellness segment, to the masstige (mass+ prestige) category. Thus there will be a significant brand image boost to the VLCC brand with this acquisition.  VLCC will not just be in a strong position to offer the best in beauty and wellness solutions and services to customers in Singapore and Malaysia, but across the entire region. The company will also be on a very good footing to obtain market leadership status in more countries. Choice of country - Why Singapore Singapore is the ideal country for Indian FDI-outflow, especially after the signing of the India- Singapore (CECA) Comprehensive Economic Cooperation Agreement in 2005 both countries have strengthen their trade links. Given Singapore’s location and the growing Asia-Pacific market, Indian companies use Singapore as a springboard to tap on growth opportunities in this region. In fact, The Indian business community is the largest foreign business community in Singapore. Global multinational companies, including Asian enterprises also find Singapore an attractive location. Singapore brings together a strong ecosystem of players (design, innovation, market research, branding and marketing) that helps consumer businesses manage their regional and international brands. Singapore has vital supporting infrastructure, a highly skilled workforce, conducive business environment and stable taxation policies. A common legal system, a neutral location for arbitration, a strong IP protection regime (ranked among top five by the World Economic Forum since 2006), great business and flight connectivity are some other advantages the Indian business community find attractive. Given Singapore’s 69 Double Taxation Avoidance Agreements with many resource-rich Asian countries, many companies use Singapore as a base to invest and manage these upstream resources and tap Singapore’s financial infrastructure. Singapore is the top destination for outbound investments from India, with RBI data indicating that total Indian FDI into Singapore reached S$23.8 billion in 2011. Bilateral trade between India and Singapore also doubled to almost S$29.8 billion in 2012, with Singapore currently ranking as India’s 10th largest global trading partner and India’s largest ASEAN partner. Management & Board comments Mukesh Luthra, chairman of VLCC Group, said, “We are delighted to welcome GVig into the VLCC family, as it will allow us to leverage GVig’s strong brand equity and its excellent portfolio of wellness products and solutions to establish an even stronger footprint in important markets in Southeast Asia by complementing the existing VLCC Natural Sciences range of skin, hair and body care products.” Josephine Song, one of the promoter directors of GVig and now the COO of the company, said, “We are proud that internationally reputed wellness brand VLCC has chosen to partner us in our quest to offer customers best-in-class wellness products and solutions. We look forward to working closely with VLCC to become a global leader in providing innovative skin care and wellness products and solutions.” Economic concepts used 1. Transaction Cost 2. MP curve 3. Cost & Revenue 4. Demand 5. Supply 6. Economies of scale 7. External Economies of scale Sources: 1. http://www.vlccwellness.com/India/docs/press-room/Aug-2013/VLCC-GVig-coverage.pdf 2. http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/OV27022012.pdf 3. http://www.vlccwellness.com/India/ 4. rasheeda.bhagat@thehindu.co.in (article published date October 28, 2013) 5. http://finmin.nic.in/the ministry/dept eco affairs/dea.html 6. Data.worldbank.org 7. Economics by Lipsey & Chrystal 8. Modern Microeconomics by A. Koutsoyiannis 9. Managerial Economics by Peterson & Lewis This case study is prepared by Apurba Dasan MBA Coaching Expert on UrbanPro. He has in-depth knowledge of Management subjects and extensive experience of teaching management students and professionals. He holds a Master of Business Administration from IIPM, New Delhi.


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