Growth is in rural India, but it’s a complex market: Harish Manwani
Non-executive chairman of Hindustan Unilever and president of Unilever’s Asia, Africa, Central and Eastern Europe, in the 33 years of his working life, Harish Manwani has served just one company --- the $76.2 billion (Rs 374,000 crore) Unilever. Based out of London, Manwani while passing through India spoke to Hindustan Times and was optimistic about the country’s rural markets. Listen to podcast 1| 2|3| 4business Updated: Sep 03, 2009 09:02 IST
Non-executive chairman of Hindustan Unilever and president of Unilever’s Asia, Africa, Central and Eastern Europe, in the 33 years of his working life, Harish Manwani has served just one company --- the $76.2 billion (Rs 374,000 crore) Unilever. Based out of London, Manwani while passing through India spoke to Hindustan Times and was optimistic about the country’s rural markets. Excerpts:On rural initiatives in India
I think the biggest white space in the world is India rural. We ain’t seen nothing yet. If you see how big the population is in rural areas, we’re talking about 700 million people. The kind of growth, the kind of penetration, the kind of consumption in rural areas is an absolute fraction of what you see anywhere else in the world. Without a doubt the game in the next 10 years is going to be how you get better in serving the needs of the rural consumer. Listen to podcast
On rural penetration
Look at project Shakti. It was a major disruption in the way we looked at rural penetration. But there are rich and poor consumers here. So, this is a little more sophisticated segmentation. There could be a person in rural India whose lifestyle could be middle income. There are more similarities between Maharashtra urban and rural than between Tamil Nadu rural and Maharashtra rural. Rin is a very strong brand in Tamil Nadu --- in urban and rural areas. Hamam is a blockbuster brand in Tamil Nadu rural. So the strategy for developing Hamam or Rin must have a specific emphasis around these states. So, for the low-income consumer in the state, we have a small pack, for others we have a big pack, for wealthier we have multi-packs. The concept of value in Gujarat is to buy large, in UP it’s small. It’s a very complex value.
On NREGA visibility in Unilever balance sheet
I would be surprised if it doesn’t. Putting money in the mass end of the market in rural is how you spur consumption. What we have seen in the past three or four years is a momentum in rural markets. The critical time is this year because of drought. And here’s where the impact of this scheme will show up. Whether it will compensate for the drought, only time will tell.
On the scale of emerging economies on Unilever’s business
On a global basis, of course, it is large enough. If you have more than two-thirds of the entire global growth coming from developing economies and 40 per cent is going to come from India and China that’s growth.
On the potential of emerging markets
All the trends I’m talking about are in a longer-term trend line, not what is happening in the last one or two years. Firstly, emerging markets are big enough to make an impact, there is no question about it. Are they big enough to kickstart the global recovery? Answer is that we are getting to be an interdependent world and by the sheer math of it, I do believe having developing markets as more resilient in this crisis are showing the first signs of recovery will definetly hel p in world trade.
On them being engines of growth
In the case of our company there is absolutely no doubt that they will become engines of growth. More than half, 51 per cent, of our turnover in quarter one of this year and the first half of this year, came from the developing and emerging world. It is something people get a little surprised by. For the first time, the turnovere of the developing world hass overtaken that of the developed world. And that makes our company and our portfolio more resililent as we have a greater weightage towards a faster-growing markets and lesser exposure to slower-growing markets. Having said that, is our growth agenda to only grow in emerging markets? The answer is “No”, because you can’t have a situation where one part of the world doesn’t grow. We want to grow everywhere. Within that, we have markets of the developing world that obviously have got the bulk of the humankind living there and we want to make a bigger play for it.
On special challenges these markets bring
All challenges of emerging markets are in the context of opportunity first. The first big challenge, therefore, is that they are relatively more volatile and less predictable than mature markets. There lies the excitement and opportunity for companies that know how to manage these markets because this is a volatility that can be managed. The bigger opportunity is market development. It’s not about marketshare, it’s about market development. So if you happen to have built brands and positions, then your challenge is how do you get people to use more, buy more, pay more, which is uptrade. And in order to do market development, you have to understand all the levers of market development. One of the key levers of developing emerging market is affordability and value. How do you provide consumers the right level of entry points into categories. How do you ensure that you are able to do so and make money doing it. I think Hindustan Unilever in India and Unilever in large parts of developing markets has codified how we can go about doing market development and cater to a large number of heterogeneous consumers. How do you take care of consumers whose incomes are $2-5 a day and those whose incomes are maybe $100,000 a day? How do you build portfolios that meet the needs of a heterogeneous population?
Take the laundry market. At the mass end we have Wheel which is the largest-selling detergent in India. In the middle we have Rin and at the top end we’ve got Surf. And the price index is 100, 300, 500, allowing consumers from different portfolios to buy brands from our portfolio. The important thing is not just to create a portfolio but to create a business system that allows you to make money. Call it reverse engineering. When we developed the shampoo market in India, we used to sell small sachets and we had a price, when we launched it 20 years ago, was close to Rs 2. Because the model was cost plus margin is equal to price. And then we found that the market wasn’t growing. So, we went back to the consumer and said what price are you wiling to pay. She said Re 1. And then we questioned, how do we make a Re 1 sachet and make money on it? Then we did some R&D. When we gave the consumer a shampoo formulation that is sold in the West, she gave you pretty modest scores for the performance. Till we discovered that we were using very high conditioning levels in the shampoo. In India, women oil their hair before they wash it, so their hair is already very heavily pre-conditioned and if you put more conditioning in the shampoo you don’t get that good a cleaning. So we optimised conditioning and cleaning and there was a wow factor for her, the cost we could deliver was cheaper so we priced it better and we got a brand that suddenly took off. Clinic Plus blew open this market.
The other bit was manufacturing. Because we knew we were going to scale this up, we partnered with a lot of sachet machine makers to develop high-speed machines and multi-lane machines. We funded them and bought all they could produce. And began a virtuous cycle of scale, value and affordability. Ditto on Wheel.
The third big challenge of emerging markets is ‘go to market’. Your ability to create distribution systems that can take your products across the length and breadth of the country. To take the India example, there was a time when I joined this company that we had to travel selling soaps in rural areas and run cinema vans. In the day we would sell and at night we would show our advertising and movies in deep rural areas. This was because Hindusatan Lever’s distribution reach then was deeper than the media reach. So, the go-to-market model was being used not to put our product on the shelf but to create brands in the rural markets. But today you have a greater media reach but it’s still a complex task of putting products to reach 7 million outlets with direct distribution to 1 million outlets instead of selling the product to 2,000 modern trade stores. There is a different level of challenge here.
The fourth challenge, very importantly, is talent. Because these are hot markets, growing markets. Emerging markets are the darlings of the world. So, to use a cliché, there’s a war for talent here. And you have to make sure you attract the right people, you retain the people and more critical, you actually develop capabilities. What is the biggest challenge in China? Talent. And it’s a very high turnover market. The challenge is how do you create depth of capability in organisations? So you have to be business as usual on growth and business unusual on costs.
On emerging markets trends
There is a distinct trend and that is the shift in the centre of gravity from the developed world to the developing world. It is as tectonic, you can feel it, and the numbers bear it out. If you see, for example, per capita expenditure, or consumer spending in PPP terms, it is pretty much shifting to the developing world, where by 2010, it could be half and half. Asia is emerging as a powerhouse which is going to take over North America in consumer spending in PPP terms in the next year or so. This is something I can see everywhere, across the length and breadth of emerging markets with varying degrees, but it’s a common aspect.
The second big theme in these markets is that they are getting far more resilient than we have seen in the past. And that is due to a combination of reasons. One, the macroeconomic management of these economies is far more robust than it used to be when we had the Asian crisis, the Latin American crisis and so on. It’s a far tighter management.
Two, a large shift is taking place in terms of economies being driven by consumer demand. So, domestic demand is driving the big economies here --- India, Indonesia, Brazil. And slowly, that is the shift you can see in economies like China are getting ready to make. Because they recognise that ultimate sustainable economic development depends a lot on generating demand. Interestingly, what people don’t understand what we mean by growth is that African economies are growing by 5 per cent per annum, central and Eastern Europe economies are growing. Or you take the big ones --- Russia, India, China, Indonesia --- the shift is towards domestic demand.
Three, industry in emerging markets is coming of age. They’re developing competencies and capabilities that will make them far more competitive in the longer term.
And the biggest trend of them all is that the consumer in developing economies is far more optimistic and that makes a big difference. The slowdown has impacted it but in absolute terms, the common consumer in India, China, Indonesia or Brazil remains far more confident about the future than their counterparts in the developed world.
On developing developed country margins in dollar terms in India
Margins can be maintained because while prices may be lower so are the costs. But you can’t get this right by just pushing low-cost products. You have to get the business right, you need to have scale.
On Hindustan Unilever’s slower growth today
Between 2000 and 2004, business indeed did not grow. There were many reasons. For instance, as access to credit came into the consumer market, consumers began to get interested in creating fixed assets and were not channelling the money into buying better soaps, better soups. Secondly, competitive pressures started setting in, including price wars. As a result, we did not grow.
But 2005 onwards, we have consistently grown the business. The FMCG business, which is our largest, has grown in double digits. We made one big change, which is to say that we are committed to growing this business, be competitive and we will invest what it takes to keep our brands and categories strong. Out of the 11 or 12 categories we operate in, except for two, we are market leaders. We moved to a strategy which says, in each of the categories we will do what it takes to create a portfolio of brands --- Hamam or Lux, Lifebuoy or Rexona. In order to kickstart the process, we raised the level of our advertising.
So what has happened is that we have a topline growth of 10 per cent and profitability which is not at the earlier levels but year on year we have been improving our EBIT margins.
On Hindustan Unilever as an investment
You need to put all growth in context. In the late 1980s to mid 1990s there were two things that were happening. One, the competitive intensity was not so high. Two, acquisitions were going on --- Tomco, Lakme, Brooke Bonds, Ponds. Your question of growth should be judged on three things. One, is the growth you’re delivering in your industry consistent? Two, is it competitive growth? Three, can you do so profitably? We remain committed to these three things --- growth, competitive growth and profitability.
On specifics of Indian markets
Ideas that allow you to make more people buy your brand, or use more, or pay more, are all market development ideas that have their roots in what we have done in developing and emerging markets. One of our fastest-growing premium products in the US is Bertoli. It’s an expensive range of product. We are positioning it as restaurant eating at home. And in this downturn, it has expanded the whole market for premium foods. This transportation of ideas happens in many ways. We have an innovation cell now that helps us launch products across countries simultaneously. A classic example: Clear. We launched it in several countries in the last 18 months to two years with tremendous success. India, of course, had Clinic All Clear. We launched in China. In Philippines we launched and took leadership in six months. Middle East, Russia, Brazil. We went simultaneously into these markets. So we organised ourselves in terms of scale through innovation.
On doing this in food business
Packaged food is really a nascent and big opportunity in India and emerging economies. In these markets less than a quarter of the food consumed is packaged. We have a deep understanding of category drivers and these are fairly similar across markets, only the product has to be tailored.
On local markets
What doesn’t work is if you blindly transport products without local understanding, if you use communication which has no relevance. The essence of the brands works everywhere. When people talk about multinationals, the most famous line is: think global, act local. But that’s not the formula as far as Unilever is concerned. The formula is: think local, act global. If you’re in India think obsessively about Indian consumers, but act global. So find out the needs of your Indian consumer and then use global scale to provide the best solution globally --- not a global solution --- the best solution globally for the Indian consumer. Ditto for the Russian consumer. I don’t go on the street of Moscow and say I’m a global consumer. I say I’m a Russian. All consumers are local. Our ability to satisfy them by using our global scale and might brings us a competitive advantage.