BUSINESS WITH CLEAN HANDS
SANITELLE: A WINDING ROAD TO STORE SHELVES
Translated from Russian
BUSINESS WITH CLEAN HANDS
The history of disinfecting hand gel Sanitelle® by Bentus Laboratories entering Russian markets is worth of being published in business text-books. Company’s founders persistently went through all the stages of creating and introducing their innovative product to the market: as a result of brain-storming they have arrived at a promising idea, developed product formula, organized a production line and built a distribution network for Sanitelle® products. Following this competent approach the company established the control over 85% of market for consumer sanitizers. The company has no comparable competitors, and in order to continue its growth Bentus Laboratories started developing the market for antiseptic gels for professional use.
Company’s current Director General Mr. Gaik Simonyan initiated the establishment of Bentus Laboratories which is more known for its trademark Sanitelle®. Starting from the end of 1990’s Mr. Simonyan was engaged in supplying by-products of cotton raw materials to Russia, which are used for the production of fabric, paper, gunpowder, etc. “The process was running smoothly, and I had a lot of free time on my hands. So I was thinking about starting another interesting project in another area,” – remembers Mr. Gaik Simonyan. He shared his idea with his cousin Rouben and his partner in distribution business Mr. Mikhail Egiazaryan. Mr. Rouben Simonian had a degree in physics, and he was residing abroad: in 1993 he signed a contract to work in Italy, and later moved to the USA where he received his MBA degree at University of Texas Business School (Texas A&M). In 2003 Mr. R0uben Simonian established his own consulting company Simonian & Associates Consulting, Inc.
Future partners agreed about their participation in this project; however they did not have an exact idea for their business. So one week-end they all went to a recreation resort located near Moscow, rented a quit place for discussion and started searching for promising ideas. “We knew that there were few vacant niches in Russian market, - remembers Mr. Rouben Simonian. – We had no interest in established markets since we would have had to spend great financial resources to enter this type of markets”. Every participant of the future project had some starting capital which he was willing to invest in their common business. However, there was not enough money for establishing in highly competitive markets.
We conducted our brain-storm quite properly – Rouben’s business training was of great help. First we have drawn a list of products and services which we saw abroad and which were absent in Russian market. After we had excluded all obviously ill-suited ideas, we came up with a list of ten items such as jerked meat, payment cards and transportation services. While we continued our discussion we noticed a bottle of sanitizing gel covered by all the papers. “Once I moved abroad I developed this habit of carrying a bottle of sanitizer with me at all times, - says Mr. Rouben Simonian. – In Russia this type of hygiene products were unavailable, the niche was vacant. Therefore we included gel into our list as one of possibilities for future business”.
Once the entrepreneurs analyzed their short list using a matrix which gave the estimates for the innovative potential of the product, its business potential, the positioning, the budget, the demand, and the payback period they realized that skin gel sanitizer is a complete winner, and it was in high demand in the USA and other developed countries. “Obviously every national market has its own distinct features. However, the fact that the product was successful in other countries gives us a “road map” which we could use to analyze and evaluate the general trend of product development, - notes Mr. Rouben Simonian. – Moreover, gel is relatively easy to produce and it has a clear purpose, which is quite straightforward for the customer”.
At the beginning of 2000 when we decided to launch Sanitelle® the consumer market for skin sanitizers in western countries did not reach its saturation point yet. The idea belongs to American company Gojo Industries which in the middle of the 1990s proposed ethanol based gel Purell. Initially the gel was positioned as a means for professional hygiene in medicine. One of the advantages of Purell was its easy application: after being rubbed onto hands alcohol evaporates, and hands become clean and dry. What is important it is the fact that 99.99% of pathogenic bacteria are killed as a result of this operation (or that is was the advertisement said). Purell and other sanitizer brands which followed Purell help fight nosocomial infections. The data published by World Health Organization demonstrates that every year millions of hospital patients from all over the world are at risk of getting a new disease. The reason is the hands of medical workers and improper sanitation. Russian statistics provides the evidence for the fact that up to 15% of newborns and up to 16% of post-surgical patients are exposed to nosocomial infections. However, once doctors and nurses start using antiseptic gels on a regular basis the risk of infection is greatly reduced. In 2003 Purell and similar products were unavailable both in Russian medical institutions and in retail stores. It was all to the benefit of the founders of Bentus Laboratories. “We brushed aside the option of importing gel or outsourcing its production at once, - says Rouben. – In this case we would have been dependent on foreign product, we would have had no impact on its quality, and we would have failed to establish our own intellectual property and our own brand which constitutes a sizeable share of any business. We were seeking to build a production line, and we had no interest in creating a distribution company”. The partners set their goal to create a fresh product, open their own market niche, gain leading positions, establish strategic partnerships with global players and potentially go out of business in the long run. At that point the market volume for sanitizers in the United States (the largest of all national markets) was around 160-180 million US Dollars, and Gojo Industries held a 40% share of that market. These figures were impressive, so Rouben and Gaik Simonyan together with Mikhail Egiazaryan decided to replicate the success in Russian market and in adjacent markets.
Mr. Gaik Simonyan
Received a degree from Energy Department of Erevan State Polytechnic Institute. Worked as Power Engineer at iron foundry. In 1987 became the founder and Director of the company specializing in the manufacturing of ceramic products. Following the completion of his studies at Moscow Extramural Institute of Food Processing Industry he held upper management positions in companies which supplied cleaning products to b2b market. Starting from 1996 and up to 2005 was Commercial Director of BentUz company which supplied cotton byproducts. Starting from 2005 Mr. Simonyan is the founder and Director General of Bentus Laboratories.
The launch activities took almost a year: during this period the work was directed at studying customers’ preferences, at the development of gel formula, at the preparation of technical documentation and the production site, and at obtaining the licenses. The responsibilities were assigned accordingly: Rouben was responsible for product positioning, Mikhail was in charge of technology, and Gaik was working on organizational issues. The partners did all the routine tasks together working in a one-room office and exchanging the information with each other.
A group of chemical engineers was assigned the task of product development. The specialists were to develop ethylene-based gel with certain characteristics (primarily – disinfecting qualities) and patent clearance. Company’s owners do not intend to share any other information about their “secret formula” claiming it is a trade secret. Although Sanitelle® is Purell analogue Mr. Rouben Simonian is cautious that other national producers of sanitizers (which have already appeared in the market) may want to find out more about his secret know-how: ““In most cases the main component of the gel produced by our competitors is isopropyl alcohol – pure chemically derived agent – rather than food ethanol, - explains Mr. Simonyan. – Ethyl alcohol is the most effective, rapid and safe disinfectant for humans. It is non-toxic and it is suitable both for adults and children”.
The selection of ethanol as the base for the production of Sanitelle® resulted in certain difficulties in the search for production site. The vapours of this compound tend to concentrate, and under certain circumstances the compound may explode. Therefore the production of products containing ethylene could be conducted at special category A production sites (“exhaustible production sites”). The production line was to be located in a building with 40% of the wall area covered by glass – in case of emergency this type of building will not be destroyed. Other compulsory requirements included appropriate ventilation system and gateways serving as protection huts for employees in case of emergency. It took several months to find suitable building in Moscow. The equipment also had to be explosion-proof, and it was imported from abroad; the equipment was delivered from Italy, Germany, Poland and Spain. There are just a few Russian machines, and for the most part these machines are small apparatuses for manual filling. The whole production line occupies the area of 1000 square meters, and it is designed to produce 100 thousand dL of product per year.
Seeking to reveal a new niche and to maintain the leadership position, the founders of Bentus Laboratories conducted a full-scale market research once they have obtained the industrial prototype of their product. Their intention was to find out the attitude of Russian population with respect to hand hygiene and to determine the main customers for their product. “We assumed that our customer is a person between 15 and 55 years old with medium and above-medium income,” – notes Mr. Rouben Simonian. The study engaged 600 respondents from Moscow. On one hand the study results were disappointing: approximately 30% of the respondents indicated their need to use this type of product. However, we’ve got a positive result as well: following the introduction of the new product 45% of the focus-group participants said that they will be willing to purchase the gel for 50 Russian rubles per 50 ml. “We realized that there is some unsatisfied demand for the product, and we became convinced that if properly positioned the product may become popular in Russian market, - remembers Rouben, – It was then when we decided to enter the market. We have set up certain important markers for each of the preparation stages. Figuratively speaking, in case any of these markers had turned red, the project would have been terminated regardless of the incurred costs”.
It took some time to turn the pilot sample of the gel into final product: the company started working on bottle design, labels and perfume components which required some additional marketing research to determine the compliance of the final appearance and the composition of the gel with the requirements and the perception of the clients. Simultaneously, the company obtained patents and certificates from the Federal Service for Alcohol Market Regulation. The requirements for operations involving food ethylene-based gel were as stringent as if the company was going to produce vodka.
The company obtained its registration in 2003 and it was called Bentus Laboratories after medieval monk Bentus. The legend tells that he was the student of famous doctor Michele Savonarola who was the author of “De arte conficiendi aquam ardentem” (“On the art of producing fire water”). The name Sanitelle was proposed by one of company’s employees who studied French.
As a result company’s founders estimate their savings at 30 to 100 thousand US dollars. These figures reflect the cost of consumer brand development services. Altogether the partners spent close to 8.5 million US dollars during the preparation stage. It is reasonable figure considering their ambitious goals. Capital investment accounted approximately for 10% of the upfront capital commitment, setting up the production line accounted for another 20%, and 5% was spent on obtaining approvals. The rest was marketing and operational expenses.
In 1992 obtained his degree from Physics Department of Erevan State University specializing in quantum electronics. In 1994 moved to Italy and held various positions in telecommunications companies. In 1996-1998 was appointed as Vice President of ItalCom company. In 1998 in Italy established his own consulting and brokerage company which offered intermediary services to European and CIS companies. In 2000 he moved to the USA, and in 2002 received his MBA degree from Texas University School of Business (Texas A&M). In 2003 in the USA he established his company Simonian & Associates Consulting, Inc. . Starting from 2004 Rouben Simonyan became the co-founder and Marketing Director of Bentus Laboratories.
Starting in September 2005 Bentus Laboratories started serial production. Immediately the company faced the problem of obtaining store shelf space. Moreover, the gel was to be placed in checkout isles which are rather difficult to access. “Our product was quite new for the buyers. They could not understand at once the purpose of the product. Moreover, the name of the producer did not speak for itself,” – tells Mr. Rouben Simonian. The advertising campaign was launched, and it was directed at breaking through the wall of misunderstanding. “Several Moscow TV channels showed our ad video about Sanitelle®. Then we visited the stores and showed them our media plan: look, this is when our TV ads will be running, - explains Rouben. – The conversation, then, became more substantial. The buyers were convinced that our intentions were quite serious”. Additionally buyers were provided with printed study results detailing the characteristics of the product and describing “the portrait” of the target customer as well as trial samples. Gradually skeptic attitudes started changing, and the product gained appreciation. Initially Sanitelle® gel appeared on the shelves of the small chain of supermarkets “Alye parusa” and in drug stores “Doctor Stoletov”, and then we observed a chain reaction: the sales of the gel by one chain attracted other retailers who wanted to sell it too. Furthermore, following the accepted practice the company was acquiring the official “admission ticket” to each chain. The company had to pay as much as 110 thousand US dollars for the prerogative to work with one of the largest Moscow retailers.
By summer of 2006 Sanitelle® was available in all of the largest retail chains in Moscow, and the founders of Bentus Laboratories started contemplating their regional expansion. They have conducted additional marketing research evaluating the potential demand and the preferences of provincial customers. However, at this point the entrepreneurs faced an unexpected and a serious problem which nearly forced them to close down their business. Legislative amendments which came into force in July of 2006 were directed at the circulation of food alcohol, but they also affected all the producers who were working with ethyl alcohol. The new version of the law “On the state regulation of the production and the circulation of ethyl alcohol” dictated both for the producers and for the distributors of products containing alcohol to be licensed. The distribution centers of retail chains automatically became distributors, - explains R0uben. – Since obtaining a license was a long-term matter, the distributors stopped accepting products containing ethanol, including non-food products. Previously we just delivered the product to a distribution center, and the chain distributed the products among the shopping centers. Suddenly we were incapable to sell our gel”.
The partners arrived at a complex decision – they agreed to establish their own distribution service. The new project was quite costly for Bentus Laboratories: the company had to lease transportation vehicles, hire merchandisers and trade representatives. Company’s owners decided to keep the price unchanged, but they have encountered overhead costs for creating their non-core division. The costs are estimated at 1.65 million US dollars. As a result regional expansion was postponed. After a year the controversial amendments were brought in line with common sense, and Bentus Laboratories following its sustainable losses signed a contract with an independent federal distributor. “Over this period we had a chance to obtain experience, we started to understand the functioning of logistics system, we have learnt all the fine points of merchandising in checkout isle zone and we knew what type of distribution partner we need,” – notes Mr. Rouben Simonian.
By that time Bentus Laboratories was a well-established company. The data published by Spark system demonstrates that company’s turnover in 2008 was close to 82 million Russian rubles, and independent experts declare a figure of 100 million Russian rubles. However, company’s own financial resources were not enough to start its regional expansion. The co-founders of Bentus Laboratories felt that it was the right moment to engage a strategic investor. Investment fund Rye, Man and Gor Securities became company’s first external partner. Open publications declare that in 2007 RMG acquired a 10% share in Bentus Laboratories facilitating the regional expansion of the company. Sanitelle® was sold all over the country. In 2009 the gel was available in 20 thousand stores, and currently this brand is being sold in 25 thousand shopping centers in Russia. The products of Bentus Laboratories are sold in Armenia, Kazakhstan and the Ukraine. The popularity of gel increased, and the company was able to increase the prices without hurting the demand. Currently a 50 ml bottle in Moscow costs 100 Russian rubles. Sanitelle® product line was expanded. New bottles of various sizes, with different fragrances and additives were introduced: products containing vitamin E, silver ions, macadamia oil and aloe extract. Moreover, the company developed antiseptic means which come in various shapes: sprays, hand mousse similar to liquid soap and saturated napkins.
However, Mr. Rouben Simonian believes that public culture of personal hygiene remains low. “People do not quite understand the mechanism of infection transfer. However, in 80% of the cases the infection is transferred by hand contact, - says Rouben. – And we continue implementing our incentive to provide information to the public”. However the promotion of hygiene is a global task. Although Sanitelle® trademark acquired the leadership position in the market (company’s own estimates show that Bentus Laboratories occupies close to 85% of the market of consumer sanitizers, and there are yet no independent studies of this group of products) the professional segment is more promising. At the same time entering the market of professional sanitizers requires large financial investments since all of the competitors including foreign producers pay close attention to professional niches, primarily to medicine and pharmaceutics.
In March 2009 Bentus Laboratories together with RMG fund acting as a financial consultant of the transaction have attracted another strategic partner – regional venture investment fund which works with small scientific and technical enterprises in the city of Moscow managed by VTB Asset Management company. RMG representatives noted that the new investor purchased a 30% share in Bentus Laboratories for 4 million US dollars. The resources were spent on the promotion of the existing line of products and on the introduction of new professional sanitizers. Bentus Laboratories became the participant of state contracts for supplying hygiene products to medical institutions. Moreover, the company seeks to attract other clients which are exposed to an increased risk of filth-borne disease – banking employees, rescue workers and public transportation employees.