On a Sunday evening around three weeks ago at Lever House, the headquarters of Hindustan Unilever Ltd, or HUL, Harish Manwani, chairman, D. Sundaram, vice-chairman, and Nitin Paranjpe, managing director and CEO, were present to explain the performance of India’s largest consumer goods company for the 15-month period or, more importantly, for the three months ended 31 March. “Sundaram and I in our long careers have never seen such volatility in commodity prices,” said Manwani.
But it is not volatility in commodity prices alone that raised eyebrows. HUL has
been steadily losing market share in some key categories. The two HUL veterans, Manwani and Sundaram, and their teams are, however, not just waiting and watching, allowing markets to dictate trends. At Lever House, work is in progress to reverse the trend.
“2009 is the year when we are absolutely and relentlessly driving UVG, or underlying volume growth. It’s even more important than ever before,” says Gopal Vittal, executive director, home and personal care, emphasizing how important volume growth is in the current context. The home and personal care segment accounts for Rs12,019 crore of HUL’s Rs16,345 crore business.
What happened during the March quarter that made the HUL brass sit up?
For those who came in late, volumes declined 4%, year-on-year in the March quarter, primarily because wholesalers cut back on their purchases as product prices dropped so they could exhaust higher-priced inventory before buying fresh stocks. In times of frequent price changes, wholesalers tend to reduce stock levels to get the full benefit of lower pricing. The smaller inventory held by wholesalers in the intervening period and the closure of about 1,200 organized retail outlets during the year affected HUL in certain categories. Some valuable market share was lost as consumers began to buy cheaper products from HUL’s competitors.
Driving growth: Gopal Vittal, executive director, home and personal care, Hindustan Unilever, says 2009 is the year when the company is absolutely and relentlessly driving underlying volume growth—it’s more important than ever before. Abhijit Bhatlekar / Mint
The deceleration in volume growth occurred as low-end products for the masses lost market share even as premium products showed volume growth. Overall, stand-alone net profit in the January-March quarter increased by a mere 3.68% to Rs394.99 crore, from Rs381 crore a year earlier, while sales increased 6% to Rs4,035.37 crore, falling short of analyst estimates of Rs4,360 crore.
Learning to be nimble
Vittal believes HUL can be more flexible. “The paradox that we are imbibing in all we do is to leverage our scale, yet retain the flexibility of a small company,” he says. “We need to experiment. We need to be agile, we need to move fast but at the same time, we need to leverage our scale.”
The company, which has one of the largest distribution networks in the country, is learning to be nimble and agile to keep pace with the highly volatile commodity prices and changing consumer demand witnessed in the last few quarters. The spike in commodity prices in early 2008 was followed by a rapid surge and then a dramatic collapse in what was a nerve-wracking year for many companies, particularly HUL, because of its size. It is now learning to leverage that size in a different way by tweaking its distribution strategy.
“What we are doing is to move the distributor to zero inventory. The distributor is getting larger because we are consolidating them,” explains Vittal. The company is replicating a pilot project called Go To Market, or GTM, which it had executed in Mumbai earlier, across urban markets that account for almost 50% of its revenues.
The aim is to reduce costs, optimize inventory levels to zero or, at the most, a one-day stocking level. This means that the frequency of despatches to the distributor will increase, enabling him to stock less and use the benefits to build scale and superior talent. “We need to drive efficiencies in the back end of our supply chain and equally at the front end, where we are now going for large distributors,” says Vittal.
The success of the pilot project could prevent a repeat of what happened last quarter. In 2007-08, the project helped HUL reduce the number of distributors in Mumbai from 22 to just five.
As Vittal says, “When commodity prices eased, we were among the first in the industry to pass the benefit of both cost and excise reduction (6% excise duty cut) to stimulate volume, but it took us 10-12 weeks to get the same landed with (reaching) our consumers.” All this is expected to change once the supply chain constraints are addressed with the new distribution strategy.
The new theory within Lever House is to act like a small regional player.
“Increasingly, we are not looking at everything from a national perspective. It is now about winning in every state. For each category, we have identified the critical states and we have trigger points for every state,” Vittal says.
Thus, a regional detergent brand in Punjab called Chokra, which is present in two or three districts in the state, is no longer being ignored. Similarly, Arasan, a regional brand in Tamil Nadu, is being viewed as a serious competitor in the local market. For HUL, these, and not organized players, are the ones which emerge from nowhere and corner market share. “What we are now doing increasingly is identifying each state and being far clearer about how we will win in that state,” says Vittal. Whether HUL’s strategy will be able to prevent companies such as Nirma Ltd, whose flagship low-priced detergent brand took away significant market share from HUL in the 1980s, and CavinKare Pvt. Ltd, a Chennai-based company which has garnered a sizeable share of the rural market with its Chik shampoo brand sold in sachets, from eating into its market share remains to be seen.
Diverse product teams within HUL are trying to learn from each other’s experience. For instance, the team handling mass laundry products, such as Wheel, operates very differently from the rest of the organization, as the product is targeted at the lower end of the market. The Wheel team has its ears to the ground, keeping tabs on competitor prices in the Varanasi, Agra or Guwahati wholesale markets, says Vittal. HUL has moved Breeze soap into the Wheel team’s basket, spotting synergy as the customer profile for the two products is the same.
“Breeze is now totally trade competitive, and we will follow this up with more fundamental work on the brand to redefine it for the latter half of the year,” Vittal says. Breeze is among bath soaps such as Liril, Rexona, Hamam and Pears that have lost market share in recent times. The company is increasing investments in these brands with new advertising campaigns expected to begin shortly, he adds.
HUL’s focus on power brands in the past also resulted in some of these brands, which were leaders in specific regional markets, losing lustre as rivals increasingly closed the gap. For instance, in the soap category, Hamam is a leader in Tamil Nadu, Rexona is a leading brand in Andhra Pradesh and Sunlight detergent is a leader in West Bengal and Kerala.
This is changing with HUL’s return on marketing investment, or RoMI, tracking which has enabled it to “deploy and plan dynamically across the portfolio and across markets” in the last few months, says Vittal. “There may be other brands which may be national brands or global Unilever brands, but Hamam will get its pride of place in responding and dealing with the situation there (Tamil Nadu),” he says, explaining the benefits of RoMI.
The new thinking is not confined to HUL’s marketing or distribution strategy alone. Parent company Unilever’s new compensation policy is also expected to spur volume growth. The policy that Unilever chairperson Michael Treschow talks about ensures that compensation will be based on the new metrics of one-third volumes, one-third margins and one-third working capital. Earlier, Unilever and officials from its Indian subsidiary were compensated on two key measures—growth in revenue and profit.
This time, through a subtle shift, the quality of the revenue is measured against underlying volume growth. As Paranjpe explained during the earnings call for analysts: “In this particular year, we have a new dimension which measures the quality of the top line (revenue) coming through underlying volume growth and that’s the subtle shift which has been built-in into the plan of compensation we’ve got.”
To be fair to HUL, unlike international and local competitors such as Nestle India Ltd or Godrej Consumer Products Ltd that are focused on one or two categories, HUL straddles several sectors. “We are addressing the entire pyramid. There are complexities involved that other companies don’t face by virtue of their size,” Vittal points out. For instance, Ponds, a premium HUL brand, has 45 stock-keeping units (product variants of different grammage). While some Ponds products in the skincare segment are available only in 1,000 outlets, the rest would be available in 400,000 outlets across the country.
“It is not that we are slow to respond. Our pipeline moves from Kashmir to Kanyakumari, from urban to rural, with 12 product categories to a million retail outlets,” Manwani said when the financial results were announced in May.
Vittal and his team are now relying more on tried and tested marketing models such as the 6P model, which focuses on getting right the product, price, package, proposition, place and promotion to attract a consumer, to expand the market and outpace competitors. “In the past, we did a thorough brand audit once in six or 12 months. What we do now is look more frequently at this data and act quickly on what the data throws up,” says Vittal.
According to Vittal, in a volatile cost and consumption scenario, there are far quicker changes in the way consumers respond to pricing, place and promotion, while changes to product and proposition typically have a longer cycle time. Recent trends show that niche and discretionary categories are no longer making it to the shopping basket. An Indian consumer averaged 130-140 shopping trips a year—the economic slowdown took a toll on this also as she was forced to make the packs last longer. But at the same time, data crunching at HUL threw up some paradoxical trends. “We are equally (at the same time) seeing some explosive growth in certain niche categories such as deodorants, surface cleaners, etc.,” Vittal says.
The paradox is further accentuated for a national player such as HUL, with the northern and eastern regions showing signs of downtrading (a trend whereby consumers switch to cheaper alternatives in a difficult economic situation), while the south shows few signs of this. “And we are being far more nimble at the speed and pace at which we are acting on that information,” says Vittal.
The complexities are reflected in the contrasting views of analysts tracking HUL.
Analysts Mahesh Nandurkar and Vivek Maheshwari of brokerage firm CLSA Asia Pacific Markets, in a research report immediately after the results were announced, had announced an outperformer rating. “Anecdotal evidence suggests that restocking (as opposed to destocking) has already begun in categories where price cuts have been taken, which could improve revenue growth in FY10,” the report said.
Others don’t share this view. Analysts Shirish Pardeshi and Aniruddha Joshi of brokerage firm Anand Rathi Financial Services Ltd said in a 12 May report with a sell rating: “Hindustan Unilever’s volume growth continues to decelerate. Though premium products show volume growth, low-end products are losing market share. In a stuttering economy, we estimate price hikes will not help as losing volume is a revenue growth dampener.”
Credit Suisse Securities (India) Pvt. Ltd is also bearish about HUL and the consumers goods market in India. In a research report on 11 May, their analysts Govindrajan Chellappa and Rajasa K. wrote, “The FMCG (fast moving consumer goods) market is likely to slow down from high teens growth to low teens (it probably has already). HUL’s core categories (soaps and detergents) will likely slow more than the rest due to higher penetration levels. In this context, we are most concerned about HUL’s share loss in PP (personal products). Unless HUL manages to stem the loss, especially in oral care and soaps, deceleration in sales growth could be significant.”
That is what HUL aims to address in the coming quarters. As Vittal says: “I think it is less to do with competitors because that is always good for stimulating categories. It is much more about how we will make this market grow. If we were to pretty much hold on to our market share in the next 8-10 years, that would be terrific because this market is going to grow. Our job is to grow the market much more than just responding to every competitor.”
Graphics by Sandeep Bhatnagar / Mint
Imaging by Monica Gupta / Mint
Source: DSP Merrill Lynch Ltd
Report quoting: A.C. Nielsen