How Asian Paints became a monopoly, acing inventory and supply chain!

Asian Paints, the largest paints company in India, makes 3x the revenue and 4x the profits of Berger Paints, the 2nd largest company. Here's their brilliant strategy!

3rd August 2022
5 min read

In a nutshell

Asian Paints is a business monopoly for 55 years!
Berger Paints, the 2nd largest paint company in India after Asian Paints, earned ~INR 7800 crores in revenue in FY 21-22, and a profit of ~INR 750 crores.
During the same period, Asian Paints earned ~INR 25,000 crores in revenue (>3x), and a profit of ~INR 3200 crores (>4x)!

How is Asian Paints able to get these amazing results and is so far ahead of its competitors?
Well, it's because of their commitment to perfecting their inventory management and supply chain.

A) Inventory Management
- For any manufacturing company, excess inventory can be a headache. So, the goal is always to sell off all inventory as quickly as you can.

You measure this using a ratio called "Inventory turnover ratio". Inventory turnover ratio is simply the number of times you can sell off your inventory in a year.
So, if you can sell your inventory every 60 days, so in a year you'll be able to sell off all your inventory 6 times.
So the inventory turnover ratio is 6.

Now, Asian Paints has an inventory turnover ratio of 3.4, while Berger Paints has a turnover ratio of 2.58. So, they are able to sell off their inventory in 107 and 141 days respectively.
But, what impact will a small 0.82 difference in inventory turnover ratio have?

Well, if you consider:
Berger Paints yearly production capacity => 610,000 KL
Then they can produce and sell = 1671 KL in a day
Asian Paints, on the other hand, can sell = 2202 KL in a day

So, Asian Paints is able to sell 521KL more every day. The average price of 1 KL paint is INR 10 lakh. So, Asian Paints makes 53.1 CR more in revenue every day than Berger Paints.
Let's say the Asian Paints plant runs for 22 days a month. So, in a year, they make ~INR 14000 Cr extra revenue.

B) Supply Chain - Secondly, Asian Paints has adopted a direct-to-dealer strategy, where they remove all the middlemen and directly supply paint to dealers who sell to customers.
But, here the problem is that dealers have limited storage space. So, Asian Paints very cleverly restocks all dealers 3-4 times a day.

Compared to the traditional model with wholesalers, Asian Paints gets a margin (post-distributor) of 95% as opposed to the usual 75%. That is in spite of the added transportation cost. The 20% edge in margins saves Asian Paints INR 5000 crores!

“Monopoly is the condition of every successful business” — Peter Thiel

In essence, Peter Thiel says that if you want to buildd a successful business, you need to solve a unique problem and aim to create a monopoly.

Now, when you think of monopoly businesses, Asian Paints will be one of the first names to cross your mind. After all, it has managed to stay the market leader for a whopping 55 years and by a huge margin!

Berger Paints, the 2nd largest paint company in India after Asian Paints, earned ~INR 7800 crores in revenue in FY 21-22, and a profit of ~INR 750 crores[1]. During the same period, Asian Paints earned ~INR 25,000 crores in revenue (>3x), and a profit of ~INR 3200 crores (>4x)![2]

So what exactly goes into the making of such a huge monopoly business, and what are the secrets to Asian Paints staying at the top for so long?

Let’s deconstruct the monopoly of Asian Paints and dig deep into the making of a truly successful business.

Firstly, a bit of history about Asian Paints

The history of Asian Paints goes back to the second world war. During that period, there was a temporary ban on the import of paints in India.

So, four friends started their own paints company in 1942, and in 25 years, Asian Paints became the largest paint company in India.[3]

Interestingly, Asian Paints only had 2% profits before taxes on a revenue of INR 23 crores in 1952. So, a modest INR 46 lakhs profit in their pockets. From there, Asian Paints has scaled to a revenue of ~INR 25,000 crores now, with a profit (before taxes) of INR ~4200 crores!

So, what is Asian Paints’ secret to success?

Asian Paints has a strong line of products. Of course, you can’t be a monopoly for 50+ years with mediocre products.

But its closest competitors, Berger Paints & Nerolac, also bring in the same innovation & quality in their products. So clearly, product is not the differentiating factor here.

What sets apart Asian Paints is the innovation it brings in inventory management and supply chain.

Wait, these are possibly just a bunch of jargon. So let me explain each of these aspects in detail.

Inventory management: Selling paint as quickly as they can!

Firstly, let’s break down what we mean by inventory management.

For any company involved in manufacturing, excess inventory can be a headache. Storing stock requires warehouse space and extra people. Moreover, the excess stock simply sits idle and does not bring in any revenue.

So you’d want to sell off all your inventory as quickly as you can. Typically, you measure this through a ratio called “Inventory turnover ratio”. The inventory turnover ratio is simply the number of times you can sell off the inventory in a year.

Let’s understand how this ratio works with a simple example.

  1. Suppose company X produces 1200 pieces of pens in a year.
  2. On 1st January, it produced 200 pens and started selling them.
  3. In 60 days, it sold off the batch completely.
  4. By then, another batch of 200 pens was available for sales. It again sold off the batch in the next 60 days.
  5. The cycle repeated 4 more times, till it was the end of the year and 1200 pens were sold.

In other words, the inventory of company X was sold off completely every 60 days or 6 times in a year. So, the inventory turnover ratio of company X is 6.

Now, a higher inventory turnover ratio implies that you can sell off your inventory quickly and it’s a good measure of how streamlined your company’s operation is.

Inventory turnover ratio: Asian Paints vs Berger Paints

Asian Paints has an inventory turnover ratio of 3.4[4], while Berger Paints has a ratio of 2.58[5]. Now, on the face of it, these numbers may seem very close to each other. But in reality, they cause a huge difference in the revenue generated.

Let’s do some math to figure out the revenue difference!

  1. Number of days taken to completely sell one batch of paints = Days in a year / Inventory turnover ratio.

    For Asian Paints, it is 365 days/3.4 = 107 days

    For Berger Paints, it is 365 days/2.58 = 141 days

  2. Berger Paints has a production capacity of 610,000 KL of paint every year[6]. So, quantity of paint produced & sold by Berger in 1 day = 610,000 KL/365 days = ~1671 KL
  3. Now, let’s say Asian Paints does everything the same as Berger Paints, except having a better inventory turnover ratio.

    So, quantity of paint produced & sold by Asian Paints in 1 day = 1671 KL * (141/107) = ~2202 KL

  4. Asian Paints is able to sell 2202 KL - 1671 KL = 531 KL of extra paint every day because of a better inventory turnover.
  5. The average price of 1 KL of paint is ~INR 10 lakhs. So, Asian Paints makes 531 * 10 = 5310 lakhs or 53.1 crore revenue more than Berger Paints.

Let’s say the plant runs for 22 days in a month and 22 * 12 = 264 days in a year.

So, in a year, the better inventory turnover ratio of Asian Paints (3.4 - 2.58 = 0.82) translates to 53.1 * 264 = ~INR 14,000 crore of extra revenue!

Lean supply chain (direct to dealer) = More money for Asian Paints!

Asian Paints has a huge network of 70,000+ dealers across the country, who sell directly to customers. By reducing the number of players in their distribution network, Asian Paints aims to save on the margin and make more money in the process.

But there is a huge risk in this model. The dealers have limited storage space and they cannot stock large quantities of products on their premises. Chances are that they will not be able to cater to customers properly.

So, Asian Paints uses a unique method to mitigate this risk.

They restock each dealer 3-4 times every day. So, the dealers don’t have to worry about storing paint.

Now that’s easier said than done.

Restocking the huge number of dealers, on an average 3 times a day, is a gigantic feat. There are multiple complexities to the task like catering to demand precisely and charting out routes which are most viable.

So, I was curious to know whether it’s even feasible from a cost perspective to consistently restock the dealers and how much extra money they are able to make through this lean supply chain. I did some quick math to find out the numbers.

Cost of delivering 1 tin of paint to a dealer

  1. Say, a vehicle covers 300 kilometers on average in every trip. The vehicle can travel an average of 17 kilometers with 1 L of fuel (assuming diesel).

    So, total fuel needed for 1 trip = 300 / 17 = 17.65 L

  2. The fuel cost is INR 93.5 per liter.

    Total fuel cost for the trip = 17.65 * 93.5 = INR 1650

  3. Now, each vehicle carries 200 tins on every trip.

    So, cost of delivering 1 tin in every trip = INR 1650 / 200 = INR 8.25

  4. Finally, we assume that ~10% of the cost of running a trip will be miscellaneous charges like driver/helper salary, toll charges etc.

So, the cost of delivering 1 tin of paint to a dealer = INR 8.25 * 1.1 = ~INR 9

The average price of 1 tin of paint (20 L) is INR 20,000. So, the cost of delivering 1 tin of paint to a dealer is just 0.05% (9 / 20,000 * 100) of the tin’s cost.

Clearly, the delivery cost is just a fraction of the cost of the tin.

How much more money does Asian Paints make with a direct-to-dealer model?

In the direct-to-dealer model,

  1. Asian Paints has to share a commission of 5% with dealers
  2. So, for 1 tin of paint, the cost for Asian Paints is dealer commission + transportation cost = 5% of INR 20,000 + INR 9 = INR 1009
  3. Margin (post-distributor) for Asian Paints = (20,000 - 1009) / 20,000 * 100 = ~95%

In the traditional distributor-wholesaler model,

  1. Asian Paints will have to share a commission of ~25% with all the middlemen
  2. So, for 1 tin of paint, the cost for Asian Paints is commissions + transportation cost = 25% of INR 20,000 + INR 9 = INR 5009
  3. Margin (post-distributor) for Asian Paints = (20,000 - 5009) / 20,000 * 100 = ~75%

For a revenue of ~INR 25,000 crores, a saving of 20% margin means Asian Paints saves 25,000 * 20% = INR 5000 crores via the direct-to-dealer model!

Closing thoughts

Clearly, Asian Paints has aced inventory management and supply chain, which are the primary reasons for it to stay on top for so long.

Of course, competitors like Berger Paints & Nerolac are catching up fast.

It’ll be interesting to see if Asian Paints is able to retain its crown of glory in the future as well. But for now, there’s no beating this monopoly in the paints industry!


Test your knowledge through a fun quiz!

Play quiz
You'll love these articles too!
Facebook loses 250 billion in a single day!
Facebook loses 250 billion in a single day!
NoBroker battles COVID-19 to become India’s first property-tech Unicorn
NoBroker battles COVID-19 to become India’s first property-tech Unicorn
How did Spotify beat Apple, Google & Amazon in music!
How did Spotify beat Apple, Google & Amazon in music!

Facebook loses 250 billion in a single day!

Last week, Facebook's parent company Meta lost $250B in a single day. Consequently, Meta's shares dropped by 26% & Zuckerberg's net worth fell by $31B.

Over the years, Facebook has always seen steady growth in the number of users. Until the 4th quarter of 2021, when its daily global users fell by 1M. In the bigger scheme of things, that's just a 0.05% drop for Facebook, so why fuss about it?

Well, this drop could probably mean a beginning to continuous decline for Facebook OR it could just be a regular up & down all companies witness.

Now, one reason behind these events could be Apple's new privacy policy. According to the new policy, users have to opt in to getting tracked on their phones. Of course, over 60% of users opted out. As Facebook relies on Ad money, this was a major hit. They lost $10bn in 2021 because of the policy alone.

Additionally, apps like TikTok & YouTube are growing each day to challenge Facebook's once help lead in the social media. Even advertisers have more options to air their advertisements.

With growing competition & Apple's privacy policy, it'll be interesting to see how Facebook tackled these issues. But for now, they have placed their bets on the Metaverse.

Metaverse is a high-risk high-reward scheme and the only other major tech company operating in this space is Microsoft.

Facebook lost over $10 billion on this last year, but it's all insignificant if Facebook's bet plays out well. Of course, only time will tell if the Metaverse becomes a reality and who wins the race. For now, though, Facebook has a bumpy ride ahead.

NoBroker battles COVID-19 to become India’s first property-tech Unicorn

NoBroker began in a crowded yet large industry, to build a tech-based, brokerage-free real estate platform.

Like its competitors, finding profitability has been tough - while it has tripled its revenue each year, even in FY20 its losses were almost 3 times its revenue!

Yet, the company raised $210 million, last week, raising its valuation from $350 million (in April 2020) to $1 billion, becoming India’s first prop-tech unicorn.

VCs have still shown interest, likely due to the general positive funding climate, but also because of NoBroker's foray into gated society software, NoBrokerHood, that shows potential for various business models to be laid on top of it.

The plans to aggressively expand into 50 cities and to build its software platform are interesting moves, but this remains a tough & competitive space. So, only time will unfold its future outcome :)

How did Spotify beat Apple, Google & Amazon in music!

Back in the early 2000s, you had 3 options to access music:
1) Buying physical copies of vinyl or CDs
2) Buying digital songs or albums
3) Illegally downloading music online
Over half a billion people were listening to music online & the majority of it was through illegal means. And because of this the music industry had already lost $12.5B by 2012.

David Ek realised that music streaming can be a possible solution to piracy. Therefore, He launched his small startup called Spotify in Sweden.

The idea was to create an extensive catalog of music that is accessible to people for free. So, they spent their early days legally licensing music in Europe. Only after establishing themselves in Europe, did they move to the US & then the rest of the world.

Since Spotify's very humble beginnings, the company has grown to a valuation of $32B. In 2021, Spotify made $11B US dollars. So, how does Spotify make money?

Well, they have two major revenue streams. The premium subscription service accounts for 85% of their revenue & advertisements that made $448M in fourth quarter of 2021.

Spotify also saved the day for the music industry. Today, music streaming accounts for 85% of music industry revenue! And, the space as a whole is going to grow to $37B by 2030. 🤯

The tech giants could smell the cash flowing from the music streaming space, so the trinity Amazon, Apple, Google all joined the game.

So, how does Spotify stack up against these giants? Well, let's look at the premium subscriber's split
1) Spotify — 32% (180M premium subs!)
2) Apple Music — 16%
3) Amazon Music — 13%
4) YouTube Music — 8%

Now, Ek has high ambitions of transforming Spotify from a music-centric platform to an audio-first platform via podcasts! Spotify plans to improve its profits margin by monetizing podcasts with advertising revenue.

But weirdly, Spotify's venture into the podcasting world is the very reason why it's facing so much backlash today.

I'll be covering in more detail Spotify's payout structure and why it's at the center of all controversies. So stay tuned 😁