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Ethnic drinks: How Paper Boat plans to keep its lead

After a couple of unsuccessful attempts, Hector Beverages hit the nail on the head with Paper Boat. It's now ready to take new and established players in the ethnic drinks category head on

Shruti Venkatesh
Published: Sep 7, 2016 06:53:21 AM IST
Updated: Sep 2, 2016 04:39:20 PM IST
Ethnic drinks: How Paper Boat plans to keep its lead
Image: Bmaximage
Hector Beverages CEO Neeraj Kakkar holds an MBA from Wharton University in the US. He had always wanted to make a brilliant beverage

It was March 2012 and Neeraj Kakkar and his Hector Beverages co-founders, Neeraj Biyani, James Nuttall and Suhas Misra, were gathered around a large roundtable in their Gurgaon (now Gurugram) office. After one failed and another sub-optimal venture, they knew they needed a major overhaul of strategy.

Worldwide, carbonated beverages had not been growing as significantly as those in the functional space (beverages—energy, vitamin or health—that do more for your body than simply quench your thirst or provide taste). Accordingly, when they had founded Hector Beverages in 2010, their first drink was a protein-water drink called Frissia. It didn’t do well and was phased out in a few months. Within a year, in March 2011, they launched an energy drink, Tzinga. But the category was already dominated by existing players like Cloud 9 and Red Bull.

It was time for another rethink. Their office was small, there was no air-conditioner and power cuts were frequent. During lunch, it was common practice to reach out for the aam panna that Misra brought in a steel flask every day. That day, something clicked. “We have this thing every day, we love it and it’s not available anywhere. So why not launch it?” asked Kakkar. “Functional beverages are growing and will grow in India also. But instead of replicating the West, Indian functional beverages are the way to go for us,” he added.

In March 2013, they began test-marketing the product and have not looked back since. Paper Boat’s well-recognised aam panna, aamras, jaljeera and kokum packages adorn the shelves of retail stores and local kiranas in several key metros and small towns; they are offered as a beverage option on flights and trains too. The company has been consistently growing in three-digit percentages and is today valued at over $100 million. In the last round of funding, in July 2015, it raised a total of $30 million from Sequoia, Catamaran Ventures, Hillhouse Capital and Sofina. There are currently 935 people, with an average age of 25, employed by the startup that has offices in the country’s major metro cities. Paper Boat constitutes 95 percent of Hector Beverages’ revenues while Tzinga makes up the rest. (The company refused to share revenue figures.)

The founders too were surprised at their success initially. “When we launched, if somebody had told us that one day you will be selling 95 percent Paper Boat and 5 percent Tzinga, we would have laughed,” says Kakkar, 40, who is also the CEO, as he settles down in his office in a quaint bungalow in one of the bylanes of Bengaluru’s Whitefield area—their office since 2014. “When we started out, we didn’t know the product would do so well. Every single day we see the brand growing and we are quite happy,” says COO Biyani, 36, on the phone from Delhi.

“Worldwide, the value in the food and beverage industry has been created by single-serve [typically for one-time consumption] premium packages. In India, whatever growth is happening in the single-serve category, we provide a majority of that growth. We are the ones driving that category,” says Kakkar. “And we think innovation is at the core of our product.”

Investors seem to agree. “In 2010, when I asked Neeraj [Kakkar] why he wanted to do a startup as he had just completed a Wharton MBA and already had a very successful career as one of the youngest general managers in Coke, he said something I had never heard before. He said, ‘I want to make a brilliant beverage’. I’ve been drinking beverages all my life, but I had never thought of them as ‘brilliant’,” says Arjun Narayan, MD of Catamaran Ventures, which had invested in Hector Beverages even before it was incorporated. (Catamaran Ventures is Infosys co-founder NR Narayana Murthy’s private investment firm.)

“The time when they launched was perfect. The awareness of ethnic stuff was not there and that’s where you create the differentiator. They created the awareness and it has reached where it has reached,” says Anil Talreja, partner, Deloitte, who leads the consumer business industry vertical.

Innovation was key when they got into beverages, when they came up with Paper Boat, and it has continued to be at the heart of whatever they do: Be it discovering unique flavours or finding ways to ensure that these are as authentic as possible. Think sattu, chilled rasam, golgappe ka paani and chilli guava among others: Flavours that are a part of most Indian kitchens but have hardly ever been packaged and sold on a large scale.

Ethnic drinks: How Paper Boat plans to keep its lead
Image: Bmaximage
Neeraj Biyani, COO of Hector Beverages, says they’re not afraid of competition

Process is king
When creating a product, the makers have two things in mind—to keep it ‘authentic’ and ‘alive’. “We get very excited about getting the best mango and jamun fruit and [finding] ways of processing it. That gets this organisation moving,” says Kakkar. For instance, a consumer from Odisha recently wrote, requesting the makers to make a drink from bael fruit. The team immediately started speaking to Odiya families to get the right recipe and looked for ways to procure and process the fruit. “Similarly, a lot of people make mango drinks in India. But we want the taste to be as close to the original as possible, so you can’t ripen your mangoes in an ethylene chamber,” he says. Instead, they keep the mangoes in a shed with hay on top, turn it every two days and wait for the reaction to complete on its own. This takes 10-15 days more than if they were to be ripened artificially. They also don’t add any preservatives to the drinks—this means a shorter shelf life and limited scope of catering to global demand. But Kakkar says they don’t mind that as quality is paramount.

The packaging was also kept innovative and fun, with a curvy bottle-shaped pouch to hold the drink, says Kakkar. In fact, he adds, that also applied to the genesis of the name Paper Boat itself—an amalgamation of old-world charm and new-age thinking.

Know my name
The ‘authentic and alive’ strategy was carried forward in its advertising, which the company launched last year with Lowe Lintas. The campaign centred around simple memories like sailing a paper boat, flying a kite or just walking home from school. Recalls Rajesh Ramaswamy, executive creative director, Lowe Lintas: “Our aim was to make the memories as simple and neutral as possible. We wrote a poem in English and sent it to Gulzar saab, requesting him to write a poem for us in Hindi on the basis of the situations or memories we suggested.” The veteran lyricist was happy to take up the project and even gave the voiceover for the ads. The ads, launched through 2015, used the iconic Malgudi Days tune and accomplished what they set out to do—etch the brand in the minds of the consumers.

They ended the year on a contemporary note, on New Year’s Eve, where startup founders like those of Chumbak, Chai Point, HolidayIQ and Big Basket spoke about what ‘we wish’ to achieve to a background score of singer Sunidhi Chauhan singing ‘Hum Hongey Kamiyab’. “It was the first time a lot of brands came together to promote one thing,” says Ramaswamy.

The company’s marketing team has also been active on digital platforms. “There are stories that we put up on Facebook, Instagram and Twitter every day and we keep doing films that are hosted on YouTube. A lot of it is done in-house with some exclusive partners who help us create those ideas,” says Parvesh Debuka, head of marketing, Paper Boat.  

A drink for everybody

It’s not easy building a profitable business in this sector, because FMCG, as Narayan points out, is an offline business and beverages, especially, are low-priced, bulky and operationally/competitively intensive to manufacture and take to the market. “The beverage business is not like an app, or ecommerce [sites] where it is easy to get customers with discounts.”

To tackle the distribution challenge, Hector Beverages entered into strategic tie-ups with airlines and outlets to ensure their drinks were available everywhere. Today, they are sold across 120,000 outlets of which 30,000 are catered to directly by the company; the remaining are taken care of by Japanese food giant Indo Nissin Foods through a partnership that helps the firm increase its pan-India presence, especially in tier II towns and cities, leveraging their partner’s robust distribution network, courtesy brands like Top Ramen and Cup Noodles. Most of the demand currently stems from markets like Delhi, Bengaluru, Pune, Hyderabad, Chennai, Mumbai and Kolkata as well as states like Odisha.

To meet rising demand, they also set up a second manufacturing facility in Mysuru in 2014 (the first is at Manesar in Haryana). “We chose Mysuru because at some stage, we want to do coconut water [beverages] and be near coconut-producing areas. Bengaluru was then an obvious choice to have the head office,” says Kakkar. The new plant has a production capacity of 380 bottles per minute; in Manesar, it’s 80 bottles. “People see and talk more about the brand and the product, but we are very proud of our supply chain,” says Kakkar.

As Kakkar talks about the changes in the organisation (two co-founders, Misra and Nuttall, left in 2014 and 2015 to pursue further studies in anthropology and launch a new startup in Argentina, respectively), his dogs Hector and Beverages walk in. This is when he tells us about the origins of the company name—after a dog called Hector. Though he died, the co-founders named the two dogs—who live in the office—that replaced him after their company.

It’s getting crowded
Changes are not restricted to the company alone. Since Paper Boat set sail, the competitive landscape has changed, with startups like Rakyan Beverages and veteran players like Dabur entering the segment.

“In the non-carbonated market, juices form broadly a Rs 2,500 crore market, growing at 10-15 percent per annum, while the ethnic beverage market is at about Rs 100 crore,” says Ajay Motwani, general manager, marketing-culinary and confectionery foods, Dabur India Ltd. He adds that the ethnic beverage market is doubling every year and is pegged to be a minimum of Rs 500 crore in three years. Little wonder then that Dabur too is looking at a slice of the pie, or a taste of the beverage, in this case. Dabur launched a beverage brand, Yoodley, last year, an extension of their popular product Hajmola.

“We drive growth organically in the existing brands through line extensions and we also keep mining adjacent categories into which we can extend our brands. The drinks format allowed us to be relevant to the youth segment which we weren’t tapping through our tablets and candies,” says Motwani. They also aim to launch two new flavours every six months. “It is a small category and we are into the expansion game. There is a lot of scope for more players to come in and grow in this category,” adds Motwani.

The segment is only going to get more crowded, says Deloitte’s Talreja. One of the key drivers for this category, he says, is the antipathy towards fizz-based drinks. “Health conscious and ethnic drinks are preferred as they are not bad for your health. At the same time, they provide good taste. So that’s where you play.”

Anuj Rakyan, who founded Rakyan Beverages Pvt Ltd in 2013, which makes organic cold-pressed juices— available in 10 cities across India— under the brand RAW Pressery, agrees. “The use of Indian ingredients is incredible because we live in a beautiful agricultural country and farmers aren’t supported much,” he says. Though RAW is slightly more premium at Rs 60 to Rs 150 apiece, it does signify that Indian startups are warming up to the beverages market, largely dominated by larger MNCs until a few years ago.

Dabur has a strategic advantage not only considering its vast experience in the beverages industry but also its deeper pockets. It has been present in the juices category since 1998 with Real Juices and enjoys a 55 percent market share. “The last mile visibility, availability and relationship in the entire modern trade and grocer channel make us poised to become leaders in this segment,” says Motwani.

Ask Kakkar how this makes it a bigger challenge for Paper Boat and he replies: “Dabur launched a similar set of products in October last year and we were able to hold on in that onslaught because we had the ad campaign going before they launched. We were less scared because, by then, everyone knew Paper Boat.”  

They also have a game plan in place: Launching new variants for every season and around festivals. They are experimenting with larger packs, of 500 ml, in the aamras and anar flavours. A new drink, enigmatically called Top Secret, is being test-marketed with select McDonald’s outlets as part of their Happy Meal programme. This will mark their foray into the ‘kids’ beverages’ space. They aren’t ruling out forays into the food vertical, expansion into international markets or launching a hot drink for winters, when sales of their products are slightly lower.

The more the competition, the better, says Biyani, as it will only push them “to be better in what we are doing and not be complacent. Right now, only Dabur is a serious player and they have not been able to make a dent. There is enough room for everybody to grow and may the best product win.”

(This story appears in the 16 September, 2016 issue of Forbes India. To visit our Archives, click here.)