Hindustan Unilever Ltd (HUL), India’s largest and most spread out non-durable consumer products company, was a Rs11,392 crore venture in 2000. Five years later, in 2005, it was still hovering around the same level, with gross sales of Rs11,976 crore.
Macroeconomic reasons and the company’s individual problems both contributed to the slow growth or, rather, stagnation.
On a broader level, rural sector demand had almost died down because of poor farm sector growth and urban consumers, thanks to a steep decline in interest rates on loans, were all of a sudden spending more on durables such as automobiles, washing machines, refrigerators, mobile phones and also, housing. Then, HUL’s own strategy of snipping its brand portfolio to focus on what it called its power brands led to a decline in its market share in many key segments. Put together, these factors saw HUL struggling for growth.
But the past 15 months seem to indicate that the worst is over for the fast-moving consumer products behemoth. In 2006, the company’s turnover grew 8% to Rs13,035 crore and net profits were up 32%. The first quarter of the current year also seems to be encouraging, with the topline and the operating profits each having registered a 15% growth. The company that was losing market share to many of its big and small rivals got back into the leadership position in most of the segments it is present in.
According to market research firm The Nielsen, in the quarter ending December 2006, HUL was the market leader in fabric wash, personal wash, dishwash, skin, shampoo, jams and talcum powder categories, commanding 20-70% market share, and was a strong No. 2 player in categories such as toothpaste (30% market share against the leader’s 48%), instant coffee (44% against 56%) and ketchups (28% against 34%).
The apparent turnaround is part of a larger growth strategy it embarked upon about 15 months ago, according to senior executives who recently left the company and industry experts. During the period, there have been two significant changes in HUL—one, in its business and market strategy and two, in its internal management structure. This transformation has been orchestrated mainly by Harish Manwani, who took over as chairman last year.
To start with, the company merged the foods and home and personal care (HPC) divisions and replaced the dual management structure (two divisional management committees for HPC and foods headed by two MDs and a national management committee) with a single management committee. Insiders point out that most of the new faces in the new committee are Manwani’s confidantes, including Douglas Baillie, the new CEO and managing director.
Former officials say that before the merger, the foods division was headed by Devendra Kishore, who was expected to continue even in the changed scenario. But, after the merger, the division was handed over to Sanjiv Kakkar, an old HUL hand who had worked closely with Manwani in the HPC division some years ago. Kishore subsequently left the company. Last fortnight, Kakkar was appointed executive director, sales and customer development, and Shrijeet Mishra was brought in from Singapore to head the foods division.
The new team, meanwhile, has worked on phasing out the fringe interests and focusing squarely on the core business. The divestment of 51% controlling stake in Unilever India Shared Services Ltd to CapGemini SA, the sale of non-core brands such as Nihar and Cococare, and the amalgamation of Modern Foods Industries (India) Ltd and Modern Foods and Nutrition Industries Ltd with HUL were all steps in that direction.
The core-business focus has been in tandem with Manwani’s strategy. Unlike his predecessors, who worked on a margin-driven profitability model, Manwani opted for volume-driven growth. The argument was that profitability shouldn’t be pursued at the cost of growth. Yet, while pursuing growth, Manwani has managed to protect margins.
A report on HUL by Citigroup Research, a division of Citigroup Global Markets Inc., says, “(The company’s) sales growth is picking up and more importantly, the quality of sales is improving, with high-margin businesses growing faster. The company’s sales and profit growth have picked up strongly, following an aggressive price-led market share battle with P&G (Procter & Gamble) in 2004. HLL’s (Hindustan Lever Ltd, as HUL was formerly known) operating parameters now fare much better than five years back.” At the operational level, Manwani and his team seem to have adopted a three-pronged strategy for growth— leveraging the brand portfolio across the diverse consumer pyramid, with a thrust on innovations and consumer engagement through novel marketing and branding initiatives.
Analysts say that when the company was stagnating in the late 1990s, it had shifted its focus to pricing and had stopped paying much attention to innovation. In the past 15 months, however, there has been a thrust towards innovations. Almost the entire home and personal care portfolio either saw relaunches (right across Lifebuoy, Breeze, Wheel Active, Surf Excel, Sunsilk, Clinic Plus, Clinic All Clear, Pepsodent) or introduction of new or niche variants (in Lux, Dove, Ponds, Fair & Lovely, Menz Active, Ayurvedic Sunblock, Sunsilk, Surf Excel Gentle Wash and comfort fabric conditioner ranges). In the foods business, too, the entire range of Taj Mahal and Taaza tea and Kissan range of jams and ketchups, along with ice creams, were relaunched. Then, HUL also launched Pureit, a water purifier that was test-marketed in Tamil Nadu last year and is likely to be rolled out this year.
These initiatives were backed by an aggressive customer activation and marketing programme. The advertising budget went up more than 27%, denting its bottomline. HUL, however, sees it as an investment in its long-term strategy. Manwani, in his note to shareholders in the annual report for 2006, said, “Consumer-relevant innovations, brilliant activation and outstanding execution were key drivers for our growth (last year). Our brands have also been strengthened by competitive levels of advertising and promotion spend, which has increased by Rs450 crore over the last two years.”
While equity analysts feel the company will have to curtail its ad spends if it wants to ease the pressure on its margins, his team members seem one with Manwani. “Brand innovations and advertising and marketing initiatives are a must for an FMCG company with such a diverse portfolio as ours. These initiatives become all the more important in an overly competitive market,” says S. Sundaram, director, finance, HUL.
The brand building efforts have not been superficial. HUL has conspicuously changed its marketing and media focus. According to a media buying executive who handles one of the HUL brands (he requested anonymity), the company is shifting its focus from television to new media and on-ground initiatives, and has clear plans for consumers in different categories. ‘Sunsilk gang of girls’ on the Internet was clearly aimed at the top end of the consumer segment, while Lifebuoy Swasthya Chetna, an on-ground initiative, was meant for those at the lower end, he says.
An interesting development has been HUL’s focus on corporate branding. “HUL has been through the throes of branding exercises. It moved from primary branding (individual products) to mother branding (brand extensions) and now, it has started focusing on corporate branding (all commercials for all products have HUL branding in the background), which was the need of the hour,” says Harish Bijoor, CEO, Bijoor Consults, a marketing communications consultancy. He says corporate branding will help re-establish the umbilical connect of the diverse brands with HUL.
Manwani and his team are confident of maintaining the tempo. “A fast growing economy, increasing per capita incomes, a large differentiated set of consumers, opportunity to grow consumption and drive penetration (see graphic) across income levels will help us in pushing growth further,” says Sundaram.
Going forward, the company plans to strengthen its foods business. Apart from consolidating Kissan, Knorr and Annapurna, and the tea brands, it is likely to expand its packaged food portfolio this year. Globally, foods and beverages comprise about 50% of Unilever’s sales, but in India, the segment contributes only about 20%. Market analysts say the portfolio has immense potential to grow, especially in the backdrop of growing organized retail. Citi Research, in its report, says, “We believe that there are three options that HLL has to aggressively expand its foods portfolio—tap international foods brands, which have relevance to India, expand the product offerings under the current brands and acquire foods companies and brands in India. We believe that HLL is likely to follow a combination of all the three options.”
HUL is hopeful of closing 2007 on a more positive note. While the market has expressed concerns over rising marketing spends and raw material costs, the company says it will look at increasing prices. “There will be judicious price increases,” says Sundaram. He says the company is focusing on the supply chain and logistics across both the general and modern trade, driving a better product mix for the upper, middle and lower end consumers, innovation and activation of products and consumers and a proper pricing strategy.