Rural market key to HUL’s growth, says Unilever CEO Paul Polman5 min read . Updated: 31 Oct 2013, 11:41 PM IST
Polman says HUL can grow around six times by volume if it can successfully tap India's rural consumption potential
Mumbai: Hindustan Unilever Ltd (HUL), the Indian arm of Anglo-Dutch consumer goods company Unilever Global, has the potential to grow around six times by volume if it can successfully tap the rural consumption potential that India presents, according to Paul Polman, Unilever’s chief executive.
Polman also said, in a discussion with journalists in Mumbai, that the concerns raised by some investors about HUL paying a higher royalty to its parent company was “not a big deal" for him and the move was necessitated by a change in its business model.
On the policy and business environment in India:
We have been in this country for about 80 years. We have had challenging times and less challenging times. We have been able to build a very successful business by focusing on trying to solve some of the issues that India faces.
There are always opportunities to grow our business and make it easier to do business. At the end of the day, I think we have been around long enough to be successful in this environment as much as at other times. We have shown great confidence in the future of India. We have made one of the biggest investments in India undertaken by any company in the last few months, which was worth around $3 billion (Unilever increased its stake in HUL to over 67%). So you know what we think of the long-term prospects of India.
I was one of the first to mention that emerging markets were slowing down. There is no doubt about that. But we have always been able to grow ahead of the market, as we have in India. In India, the overall market is growing at about 4-5%; FMCG (fast moving consumer goods) is flat and yet we are growing. It’s the same situation for us in Brazil, Indonesia, China and other countries, in terms of volume growth. So we continue to find ways to develop the market for categories that we are present in. As I said to the Prime Minister (Manmohan Singh), any road to development has some bumps. It is never a straight line. But you have to derive strength from them. India is in the right position now. There is a healthy debate wherein the right questions are being asked. This is the process that stimulates progress.
On HUL’s strategy in the current economic situation:
When times are tough, we have always taken the decision to accelerate our investments to come closer to the consumer. This is why we are outgrowing the market. If you look at Unilever globally, in the home and personal care segments, we grew 6%, while our competitors grew at 1-4%. There is a very high rate of innovation at HUL and we continue to invest in that. On the other hand, we are also trying to ensure that we have stronger rural programmes as the government invests in building better infrastructure. So we are working on both sides of the value chain to ensure we keep growing.
We have to take cognizance of the fact that markets have slowed down and competitive intensity has gone up. These two are not new but when they come together you have to get sharper. The good news is 70% of our agenda has not changed because it is for the medium term. For example, in the last three years we have more than doubled our rural reach and we have stepped up our innovation drive with 30% of our portfolio getting renewed every year. These factors will not change. But we want to get sharper on managing costs and this year the focus has been on that—be it towards savings
in terms of supply chain,
improving returns on marketing investments, or reducing overhead leverage.
On investor concerns about HUL paying higher royalty to Unilever:
That should not be an area of concern. In fact, anything you do there is always someone who says it’s a concern. Since you now have the Internet, it looks like the whole world is saying this, but that’s not the case at all. What we have done as a company is to adjust our business model. One of the reasons behind the success of HUL that you see now is because it can benefit from the global scale of Unilever. There was a period from around 2000-2006 when HUL’s business was probably not growing at a desired rate because it was largely Indian-focused. Then it became part of “one Unilever" and the actions that Harish (Harish Manwani, chairman of HUL) and I have taken over the last few years at the global level have helped it become an inter-dependent company. We have achieved greater centralization in our R&D (research and development), manufacturing processes, and so on. So as a result some of the cost base has changed from one location to another. Obviously what you need to do is to be sure that in each of the markets, the right cost base gets reflected and that is why you saw the adjustments in royalty payments by HUL or the Indonesian business. We were probably a little bit behind the other companies (in terms of royalty payment) because we are publicly traded, have an independent board and you have to go and talk to the public shareholders.
The royalty payment is based on actual cost of services provided, which is calculated through a very rigorous process. Whether the timing of the decision was right or wrong is a very difficult question to answer, because it is always in hindsight that you can answer that. We have done it (increased royalty payments) in other countries as well because of the changing operating model. So it’s quite normal and not a big deal as far as I am concerned.
On consumption growth in rural India:
Rural growth in India has been stronger than urban growth. Government programmes help in achieving that. We certainly see rural India as a big medium-term opportunity. The investment we are making in building the rural marketing and distribution infrastructure has been one of our biggest investments. What we have achieved in the last couple of years is more than what we did in the previous 50. The big job to be done in rural areas is not about building market share; it is to develop the market. There are 650,000 villages and 750 million people living in India’s rural areas and that is an enormous potential for growth. The population is twice that of Western Europe. In Western Europe our business is $12 billion right now and if you just do a calculation on the basis of population, the opportunity in rural India is worth $25 billion. We are not close to this figure even as a total company yet (HUL ended 2012-13 with ₹ 25,810.21 crore in revenue). That means we can potentially grow our company 6-8 times.