New Delhi: Battling declining volumes and loss in market share over the past six quarters, the country’s largest consumer goods company by sales Hindustan Unilever Ltd (HUL) has begun a damage control exercise that includes cutting prices, increasing grammage, running attractive promotions and boosting advertising spending.
Click here to watch video
These moves could mean the firm will focus on protecting market share rather than margins in a slowing economy. “We have begun to see the pressure of downtrading...between competitive growth and profitable growth, the attention would be won by competitive growth,” HUL chairman Harish Manwani said at an analyst conference on Monday.
Downtrading is the process through which consumers shift to cheaper brands, especially in times of economic trouble.
In the same conference call with equity analysts, Nitin Paranjpe, managing director and CEO of HUL, said the company has put in place a strategy to identify areas of concern and take corrective action. “We are working internally to improve competitiveness and (have) put 30-60 day plans in place,” he said.
The company that owns market leading brands such as Lux, Wheel, Clinic, Close-Up, Lifebuoy and Sunsilk has identified “right pricing” as a primary tool to increase its competitiveness in a market where most of its brands were losing customers to their rivals. The loss in market share was a result of a steep average 15% price increase undertaken by HUL across product categories in the last 18 months
“...right pricing across segments will be the key...We are determined to make sure that we are ‘right priced’”, said Paranjpe.
Identify concerns: Managing director and CEO of HUL Nitin Paranjpe. Ashesh Shah / Mint
Though most consumer goods companies increased product prices during the past two years to fight rising input prices, analysts say HUL’s price increases were the steepest. “In case of soaps, the company hiked prices much before and more than the competition,” said Sameer Deshmukh, an analyst with Mumbai-based brokerage Tata Securities Ltd.
Some of HUL’s rivals such as Godrej Consumer Products Ltd, Dabur India Ltd and Wipro Ltd did not resort to any price increases. A report by Mint on 7 May had noted that HUL lost market share in terms of value across key categories, including soaps, shampoos, toothpastes and skin creams, even as the broader market expanded. The decline, ranging from 2-6 percentage points, was mainly because consumers switched to cheaper products made by the rivals even as HUL increased prices.
Talking to analysts, Paranjpe admitted that consumers were trading its brands in favour of cheaper products and underscored the steps the company will take to check the trend. “We have begun to see the pressure of downtrading...to regain consumer confidence, it takes lot of interventions such as pricing, promotion and others to drive consumption,” he said.
The company began the process of cutting prices and increasing pack sizes in the beginning of this year. In the quarter ended March, the company had reduced the price of its detergent brand Wheel Active Powder from Rs75 to Rs67 on a 2kg pack. At the same time, grammage of certain stock keeping units, or unique products, was raised. The price of its mass soap brand Lifebuoy was reduced from Rs13 to Rs12 on 90gm and from Rs15 to Rs14 on a 150g bar. The price of the mini pack of Lifebuoy was recently cut from Rs6 to Rs5.
The government, too, reduced excise duties on various consumer products as part of its efforts to boost consumer demand in a slowing economy. But, say analysts, the price cuts by HUL are more of a strategic decision to check volume decline. “HUL pays about 9.5% of its sales as excise duty. After duties were brought down to 8% from 14%, the maximum benefit which HUL has got is about 2-3% of net sales, so it’s not significant enough to encourage the company to take such price reductions,” Deshmukh said.
“We will be more aggressive on other brands such as Rexona, Hamam and Liril...,” Paranjpe told analysts. Talking about the oral care category, he added that “...in case of Pepsodent, the Rs13 pack has been reduced to Rs10, while Rs6 pack will now be available at Rs5.” In case of Lux, new packs with increased grammage from 100g to 125g are being introduced.
The company has also launched an attractive multi-pack promotions offer “across brands in Delhi, Punjab and Harayana”, said Paranjpe. He added that the company will boost its marketing and advertising spends to supplement the efforts taken to consolidate market share. “The spends on advertising and promotion will not come down, it might only go up in the current fiscal,” Paranjpe added.
HUL’s finance director and vice-chairman, D. Sundaram, added: “Efforts are focused towards aggressive play in every segment including mass personal wash, oral, mass hair, premium skin.”
Analysts, however, are divided on whether the strategy of price cuts will yield desired results. “Price correction is one key stimulus that companies revert to drive growth,” said Nikhil Vora, managing director, IDFC-SSKI India, a Mumbai-based brokerage. “But besides price corrections, HUL will have to take a lot of other material actions to drive volume growth of 6-7%, like flogging its key brands such as Wheel, Surf, Lux and Lifebuoy through effective marketing and communication.”
Pointing out that pricing has been a key element of consumer products firms’ market strategy, Deshmukh said: “The pricing strategy has to be seen in the context of the fact that it is for the first time the company management is talking about competitive growth and driving volumes by focusing on margins only.”
Another analyst said the success of HUL’s new strategy will also depend on its competitors’ response. “In case of soaps and oral, there is competitive pressure from rivals such as Godrej, Wipro and Dabur, and Colgate Palmolive. HUL will gain share only if these rivals don’t reduce their prices in response,” said Anand Shah, an analyst at Mumbai-based brokerage Angel Broking Ltd.
HUL reported a 6% increase in sales and 3.68% increase in stand-alone net profit to Rs4,035.37 crore and Rs394.99 crore, respectively, for the quarter ended March. According to a report by IDFC-SSKI, the company’s volume declined 4% during the quarter.
For the 12 months ended March 2009, HUL’s sales and profits grew to Rs16,445.39 crore and Rs2,115.5 crore, respectively against Rs14,327.37 crore and Rs1,913.53 crore in the same period ended March 2008.