Starting today, we will increase our wholesale price premium per litre by another 2 Rs from existing 3 Rs to make it 5 Rs. I owe an explanation to various stake holders like company sales force, distributors, wholesalers, retailers and consumers about the move.

While talking about each other, a friend casually asked if Cocoguru was the ‘Apple’ of coconut oil. That was 2 years after we started the business, struggling to stay afloat with various operational issues and struggling to find our feet in the market. I couldn’t tell a lie and say ‘yes’; shy to say ‘no’ either. I couldn’t give a proper answer, but I started imagining what an apple of coconut oil would be. With cut-throat competition and price sensitivity in the market, I didn’t think it was possible.

Coastal Karnataka market has major 2 types of coconut oil suppliers: small millers and re-packers. Small millers have a couple of rotary machines, do job work service and cater to small local areas. Re-packers bring coconut oil in tankers, pack it in small consumer packs, and distribute it at competitive prices to all wholesalers and retailers. Each one tries to undercut their price compared to others. There are also a few age-old mills (between 50 and 100 years old) that sell their brand to a small niche market at a premium price. They have no fixed costs like bank loan interests and repayments and salaries to professionals. They don’t even have a hunger for growth, as they will be battling with succession plans.

In a market like that, for a new comer like us, with large fixed costs, loan repayment pressures, with foot barely set in the market, increasing price is the hardest decision to make. There is a huge risk that traders will alienate us, but consumer demand is what we can cling on. It is a path less travelled, but we are here to make a difference.

Higher price automatically leads to more profits is far from truth here. If short term profit is the motive, reducing price should build volume and compensating lower price by slightly reducing quantity, lowering quality, adulteration and tax evasion gives far better margins. Brands that provide full value of coconut oil to consumers have around 20% premium to mass brands. So, our 2 rs price increase now is just a means to end.

Till now one rupee was increased every 6 months, so as per plan the next increase was due in January. But we are doing it now because of the adverse circumstance we find ourselves now. Despite association being formed in coastal Karnataka, millers are resorting to short-cut routes to earn a sale by undercutting their rates below the agreed base price. Countering to that the price deciders in association have resorted to deep price cutting.

Complaints of manufacturers selling oil at below association base rates prevail. We would like to warn that prices will be dropped further and will be dropped deeply if this trend continues and will be kept lower until all undercutting stops.

Undercutting will never stop, we don’t have deep pockets to survive, we don’t want to compromise on our quality and value to alienate our consumers.

We have been trying to deliver more value to our consumers and will continue to keep the promise, which I would like to highlight a few here

• Sweet taste, aroma – This means purchase of good quality copra whose FFA is less than 0.5%. Such copra costs about 5% higher than ordinary copra with FFA of about 1%.
• Long life – Once the raw material quality is ensured. Each stage of the manufacturing process must be strictly controlled to deliver the right product to have a long shelf life of 6 months to 12 months.
• Availability – Regular availability of stocks, irrespective of season, market price and demand fluctuations. Also availability in wider geographical region, rural/urban areas, wholesalers/petty shops. This requires maintaining adequate stocks and effective supply chain management and distribution networks.
• Branded – A brand has the responsibility to stand for something and exceed customer satisfaction relentlessly. It should be well-known and liked. Demand should be driven by consumers instead of being pushed by traders.
• Food Safety – Coconut Oil is recognized as a food product and is given the respect it thoroughly deserves. It means maintenance of purity, necessary hygiene and safety standards.

Copra prices change daily and multiple times within a day, but association coconut oil prices are changed weekly. That itself is too short a cycle for a smooth trade along the channel from manufacturer to consumer. That is how commodities are traded not how branded consumer products are distributed. We intend to raise the price sufficiently high so that price comparison stops and when we have full control over our price we like to change prices at a much lesser frequency like monthly or quarterly.

To summarise, the intention of increasing price is not to increase profit but to increase customer value. Thanks everyone for your kind cooperation.

One thought on “Another Price Increase.”

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Recently, nine coconut oil brands have been banned by the Food Safety Department in Kerala.

The department has banned oil brands Kera Plus, Green Kerala, Kerala A-one, Kera Super, Kera drops, Blaze, Pulari, Coco sudham and Kallada Priyam from the state on Wednesday, 8 April, reported Asianet News.

Having experienced 3.5 years in this coconut oil market, this is no news; it has been quite rampant. Here are a few relevant points –

• A famous entrenched brand of Coconut Oil, the market leader in Dakshina Kannada and Udupi is adulterated. It is a great case study of building market leadership by satisfying traders rather than consumers.
• If the brand from Dakshina Kannada has a name ending with the letter ‘A’ it is definitely adulterated. A market leader will create many followers, who unfortunately have picked up the same bad habit.
• Coconut Oil brands from re-packers are more likely to be adulterated than those from oil manufacturers.
• At the Indian level, a famous brand from the east, having a 5% national market share with the tagline “Mera Pyar …” is not pure coconut oil. Legally speaking, they have never claimed it is pure coconut oil, but they have not let the consumers know it is not pure either.
• KLF, a major coconut oil manufacturer, in a bid to take on adulterated coconut oil with price, is introducing blended coconut oil with sunflower oil
• Oil Millers from Kerala are best friends of coastal Karnataka traders, as they sell coconut oil at a lower price and buy Copra from them at a higher price. How is that possible?
• Consumers have lost faith in coconut oil. This is not because coconut oil is bad, but because the coconut oil that they get is so bad. An example of how an industry can devalue the product they sell
• In the midst of all this, genuine oil millers are getting badly affected, and traders measure brands only by price. So, a forum was started in Kerala to save coconut oil.

Palm Kernel Oil
Palm Kernel Oil, among oils, is the closest to coconut oil in terms of chemical characteristics, especially fatty acid saturation level. It blends easily with coconut oil, and the price is only about 60% of that of coconut oil. So, mixing makes perfect sense. As I observed in the North Karnataka market, especially Belagavi, 90% of the Oil that is traded as coconut oil is actually palm kernel oil. I met a witty trader who said, “Your coconut oil prices change with copra prices, but here it doesn’t; it only varies with palm oil prices”. I couldn’t control my laughter. At the time I visited Belagavi, the price of so-called coconut oil was lesser than that of its raw material, i.e. Copra. Their defence is people in villages like to purchase hair oil at a lower price; after all, it is still a vegetable product.

Chips/Paring Oil
While manufacturing Desiccated Coconut Powder, the black skin in the coconut is removed, and only the kernel is powdered and dried to make the final product. This skin is a byproduct. It is dried and sold at about 65% of the cost of Copra. Like Copra, it is also rich in oil content. However, the quality of Oil is inferior to that of Copra. Most manufacturers mix these chips with Copra for oil extraction. Sophisticated manufacturers extract Oil separately, refine, bleach and deodorize it to remove excess FFA, dark colour and bad odour. This is later mixed with pure coconut oil or packed as it is. There is a large unit in Tiptur that makes “Kasadinda Rasa,” as we say in Kannada, turn waste into a useful thing. A possible defence is that Oil is extracted out of coconut, hence coconut oil. That unit is not to be blamed (legally) as this Oil can be used to make soaps. However, the re-packers who buy this Oil for marketing as edible Oil are to be blamed.

The above two forms of adulteration can be detected easily by testing for Iodine Value. Iodine Value indicates the degree of saturation in Oil; in fact, Iodine Value is equal to the degree of unsaturation in Oil. Coconut Oil, being highly saturated (92%), has an IV of about 8. All other oils have an IV that is much higher. Due to variations in Copra, the allowed range for IV is 7.5 to 10. Paring Oil will have an IV of about 20, and Palm Kernel Oil about 25. So, coconut Oil tested to have an IV of above ten is definitely adulterated.

Second-grade Oil
Best Copra is white in colour and has a pleasant odour. Rotten Copra will be darker and have a pungent smell. Due to inferior quality, they are available at a lesser price compared to superior grade. This Copra can be mixed with good-quality Copra during oil extraction. The resulting Oil will appear good but will deteriorate quickly. Copra manufactured from CoconutCoconut comes in all grades. Edible grade sells at the highest rate, and it is separated. Of the remaining, ideally second, quality copra should be segregated, but many millers don’t.

This can be detected by just checking the FFA/Acid Value. Lower the acid value better the quality. Good quality oils have FFA of less than 0.7. Allowed is up to 2.0 for edible use.

Refined Coconut Oil
Excess of FFA (Free Fatty Acids) in Coconut Oil can be chemically removed by neutralizing with a base; this is called refining. Coconut Oil extracted from second-quality Copra or that solvent extracted from coconut oil cake is refined. This refined Oil passes all the chemical parameters of food safety, but the consumer is deprived of its taste, aroma and quality. We sell our coconut oil cake to a major solvent extractor in Kerala. I just asked him where he sells coconut oil, and he said it is in major demand among re-packers. Re-packers buy inferior quality coconut oil and mix it with refined coconut oil to balance FFA. Surprisingly, refined coconut oil is cheaper than filtered coconut oil.

Use of refined coconut oil can be detected by again checking for FFA. Even the best quality coconut oil will have FFA not less than 0.4. Refining brings FFA down to 0 also. So, if the FFA is abnormally low, it means it has refined coconut oil.

I have learned these things recently, as I was forced to think and find out how other brands are able to sell their coconut oil at a lower rate. Initially, I used to think.

• They are getting Copra at a lesser price
• Their manufacturing and overhead expenses are lesser
• Their oil yield might be better
• They know how to time the market and buy Copra when it is at a lower price
• They are satisfied with lower margins
• They are just doing it for the sake of brand-building

But now I understand the various malpractices that are in vogue. I will write a detailed post later about other malpractices.

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A business friend gave me a book “The 80:20 Manager“, I didn’t read it for 6 months thinking it is just another self-help book that is good to read but tends to be forgotten after a week. But this was something that was inline with my established beliefs and it was not hard to follow. It rather, gave me confidence to implement what I believed.

In essence, book is about Pareto Principle applied to management. 20% of selected inputs leads to 80% of outputs. For business, 20% of customers can give 80% business and profits.

Since starting 3 years back, business has been journeying in various ways. Here are a few ways in which we got back our focus in the last 3 months.

Other edible oils trading
With coconut oil getting dearer, consumers were shifting from coconut oil to other edible oils. So, our business within the existing market was getting reduced. Demand was shifting from bigger SKUs like 1-litre pouches to, say, 500, 500-ml pouches. So, we started trading in other edible oils like Refined Palmolein Oil, Refined Sunflower Oil and Lamp Oil. With this, we could

• Provide our existing Coconut Oil customers, i.e. Retailers, with a full range of edible oils so that they can source more from a reliable vendor
• Get more income from the same customer at the same distribution expense and more sales turnover
• Use vehicle load fully, keep a better tab of fluctuations in other edible oils

But with it,

1.The focus started shifting away from our core business of manufacturing and marketing coconut oil.
2.Adequate service could not be given to our customers because of supply disruptions from our vendors.
3.Lot of works were to be done in transportation, unloading, loading, accounting, leakage processing, payment, selling in credit, managing working capital etc.

What seems like busy work and turnover was actually not contributing towards building Cocoguru brand or increasing bottom-line. So, we just stopped them altogether. That provided a lot of relief and we closed Sullia godown, released a rented vehicle and saved on a few resources.

Distribution
Wholesalers/Retailers were given a supply of coconut oil through our Sales Van. For this, we had to arm the vehicle with a driver and salesman. To account for those transactions, an accountant was required, and an officer was required to manage the delivery team. These are unrewarding work for a manufacturer but had to be done initially to sell our products. The cost was very high, 40% of our company expenditure was going towards sales and distribution. We had five delivery vans to supply all over Dakshina Kannada district.

I always had a dream to stop doing line-sales ourselves and get distributors to do it for us. However, distributors will take it up only when the brand is popular, and they are confident about selling it. The margins should also be sufficient to sustain their business by only selling coconut oil.

The tough decision of increasing our selling price has made it possible and very soon. We left out less productive salespeople, made enthusiastic salespeople as distributors, and gave away our existing vehicles to them at a reasonable price. With this, we could leave out about 12 people from our payroll, stop renting two vehicles, sell 2 of our own vehicles, and save the work of 2 accountants, a Logistics officer and Top Management. Expenses are very low and under control, and the selling price is predictable. When the distributors have to sell to earn their living, their performance is even better, and sales improve.

Leave Customers
With the eagerness to sell more and acquire as many customers as possible, we tend to serve any customer at any cost. But some customers are not worth our attention. Some need discounts, credit, or pampering, are difficult to supply, need a different quality, put restrictions on us, and still never get satisfied. Bolding and leaving them out is a win-win situation for both the customer and us. We can cater to profitable customers better; others can get their desired service from a competitor. For every customer lost, there are a couple of them to be gained.

Piece Work/Contract Labour
If we believe in Theory X, labourers are lazy, they tend to take away maximum wages for minimum work. While employers looks to get maximum work for minimum wages. Mostly the labourers have their say. It is cumbersome for supervisors to get maximum work with quality from them always.
So, to align their work output with their income, we have made a piece work system, where they get paid only for the units of work done and not on attendance. This is system is fair for all workers, they are not paid on seniority, experience or any prejudice, only on output they produce.
In any annual appraisal discussion their only focus is on the revised salary, without any regard to their past performance or skills to be developed, responsibility to be assumed in future. For such people giving instant reward is the way to go.

After doing this their performance have increased multiple folds. Example, for a 5 member team segregating 6 tons of copra a day was very difficult, now 3 members are doing it very comfortably and with better quality.
For bulk quantity loading and unloading, in house labourers weren’t willing to do, so external labours had to be called. Now for 10 paise per kg, they are willing to do.
In packing section, where 9 people couldn’t finish all packing jobs, now after leaving 3 people, the 6 people are having enough time to go for other jobs.

Overall, we could leave about eight fewer performing people, and better-performing people are getting handsomely paid. Form 30 labourers, we have brought down the count to about 20; work is getting done faster and better, and existing labourers are fully engaged and satisfied.

With all these steps, the amount of administration work has come down drastically. Again, a couple of people who have become redundant were left out. With this lean an organization, it is possible to even double the business without having to add any headcount. Any decline in business can also be managed with minimum overheads. With operations focused and streamlined, the way forward is to grow sales through advertising and appointing distributors to cover more areas. From accumulating losses for 2 years and not knowing the way forward, this is a very pleasant situation to be in.