Will Hindustan Unilever Ltd (HUL) emerge unscathed from the latest bout of cut-throat competition? Investors are already worried as its soaps and detergents business has been hit by lower volume growth and market share losses. To combat that, it had cut prices to become more competitive. Now, Procter and Gamble Home Products Ltd’s (P&G) bid to increase its share of the detergent market is bringing back painful memories. Six years have passed since P&G cut prices of Ariel and Tide by 28% and 47%, respectively, forcing HUL to respond likewise. But investors would not have forgotten its impact on HUL’s performance and share price. That episode ended with HUL managing to protect its share, even as rising raw material prices forced a hike in prices.
Detergents continue to be an important category for HUL. In fiscal 2009, it contributed to nearly one-fourth of total sales. Though a separate margin figure for detergents is not reported, the combined segment margin for soaps and detergents was around 15% in the nine months ended December 2009. P&G’s interest in this business has taken on a new urgency in recent years. Emerging markets have become an area of focus for P&G, as for other global consumer firms, with expanding share and entering new categories being the key sub-themes.
P&G’s approach this time is different and does not threaten HUL’s entire detergent franchise, like it did last time. That explains why the impact on its share price has not been as drastic. Explaining the Tide Naturals pricing strategy to analysts, P&G chief Bob McDonald said that in India, 75% of all detergents were sold at this or a lower price point. This product was launched to tap this segment.
Graphic: Yogesh Kumar/Mint
P&G’s strategy is thus quite different from its previous one. The product is backed by smart advertising, which has recently been supported by further volume discounts. But HUL is seeing a danger perhaps unseen to many. While premium detergents provide margins, the lower-end segments offer scale and very good return on capital, which is what HUL found out when it launched Wheel in response to Nirma’s entry into the market. If Tide Naturals gets a large market share in the lower-end of the category, it may just give P&G scale benefits.
For HUL, formulating an appropriate response is made difficult by the timing. Its efforts at correcting prices and spending heavily on advertising are seeing some results, but volume growth and market share trends are yet to reach satisfactory levels. Further price cuts or hikes in advertising spends would hurt.
To make matters worse, the market itself is slowing, with consumer non-durables showing a 3.1% decline in the Index of Industrial Production data for January. A poor external environment is a limiting factor when combating competition. P&G seems to be digging in for the long haul, not just in detergents, but other categories as well. HUL needs to reconcile itself to this shift in its competitor’s approach. The best outcome it can hope for, as things stand, is that P&G takes its share away from other brands, including the regional and local ones.
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