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HUL gets real, goes premium

The giant has overhauled practices to arrest a fall in soaps. Food may be its next challenge. Tejeesh NS Behl and Rachit Vats report. Lever pullers: The people behind the brands | 'India an exporter of talent for us'

business Updated: Feb 18, 2012 02:23 IST

Sometime late last year, facing a rupee volatility not many of its senior managers had ever seen, the top brass at Hindustan Unilever Ltd (HUL) junked their normal practice of a monthly review of exchange rate movements to monitor the import costs of raw materials, which are used significantly in making soaps and detergents — HUL’s staple.

Instead, the managers meet once a week or simply dial in every Monday to take stock of how HUL’s products are affected by commodity prices. And, if need be, they suggest price increases that are effected almost instantly – thanks to online monitoring.

The mantra, as Nitin Paranjpe, chief executive officer and managing director, HUL, puts it: volatility is the new normal, so stop cribbing and get on with work, and life.

“We have made sure our business is geared to be dynamic, by making course corrections that are required and by putting in place processes and systems that will deal with the volatility,” he told HT.

“This is the new normal, so you can’t complain.”

The company’s shareholders, who have seen eight consecutive quarters of growth, are not complaining. The HUL scrip has outperformed the BSE Sensex by 10 times over the last two years of choppy trade — while the Sensex appreciated 4.5%, HUL’s shares rose 45% in the same period.

Part of that growth has also come from the stress on HUL increasing its portfolio of products in the premium category. So apart from a shampoo, for instance, HUL is targeting its consumer’s wallets through a hair conditioner, a fabric conditioner with a detergent, a mouthwash with a toothpaste.

“There is one secular trend that we will see in India, which is premiumisation,” Paranjpe said. “Aspirations are rising, incomes are rising, everybody wants to move up. Therefore, every brand must find a way to become contemporary, remain relevant. Every category must find a way to do so.” This premium tilt, said Hemant Bakshi, executive director (home and personal care), is not limited to megacities but has spread to smaller towns, deep in the hinterland, despite a lack of advertising.

“About six months back, during a trip to a village about 100 km from Lucknow, I was surprised to learn that young housewives in UP regularly used Dove (facewash), a product whose usage we tend to associate with high-income consumers,” Bakshi said.

Housewives had heard of the product in word-of-mouth communication. Now, HUL has put the product in its rural portfolio and is soft-selling it through village shopkeepers and local beauty parlours.

“Aspirations are homogenous, means are heterogeneous,” said R Sridhar, HUL’s chief financial officer. “In the short term, this trend (of moving towards premium products) might be happening with the population that is more affluent, but need not necessarily urban.”

The stress on premium category products, say analysts, also stems from HUL’s bid to recapture its lost market share, especially in soaps and detergents where rivals such as Reckitt Benckiser, Godrej Consumer Products, Wipro, Ghari detergent and Proctor & Gamble have gained at HUL’s expense.

“In the past five years, HUL has lost market share to the extent of 300-350 basis points (3 to 3.5 percentage points), which has also adversely affected its pricing power, especially in soaps and detergents,” said Naveen Trivedi, associate vice-president at Pinc Research, adding that profit margin had come down to less than 10% from 18% in 2010-11 in the category before improving a little over the past two quarters.

HUL is certainly looking up, but not all is hunky dory.

The company’s foray into soy-based fruit juices under the Kissan brand bombed. HUL is currently rethinking on the product line and may exit the category. “Food is a complex space, we have to get the model right we have to get the consumer logic right. And we have to get the business model right,” Paranjpe said. “Given the size and scale of our business, it is okay to have a few failures.”

The packaged food segment, in fact, remains HUL’s Achilles’ heel, as the company continues to incur losses. For the third quarter ended December 2011, its packaged foods segment reported a loss of nearly R6 crore.

Even the share of packaged foods to HUL’s topline has shown a marginal decline, from 5.9% in the quarter ended September to 5.2% in the quarter ended December.

“The core focus is going to be to take the work that has been done so far to the health piece,” said Geetu Verma, executive director (food). “The opportunity lies in taking many brands to the next level. These could be Kwality, Knorr and Kissan. Children’s snacks are an opportunity.”

With the packaged foods market growing at a rate of 20% annually, this could be HUL’s next growth area, said former COO of Dabur India VS Sitaram, now a partner at India Equity Partners. Sitaram, who earlier spent over two decades at both HUL and Unilever said the food and beverages market was about to arrive.

“For HUL it is an absolute priority as its other businesses have reached maturity,” he said.

However, given that the packaged foods market itself is less than 5% of India’s total foods market, it would be unfair to say HUL has not cracked the “winning formula” in it, said Paranjpe. “Most people don’t realise that the food market is yet to develop — they think the game is played out,” he said, adding that HUL had “brands positioned to win.”

That could be food for thought.

Lever pullers: The people behind the brands | 'India an exporter of talent for us'

First Published: Feb 17, 2012 23:13 IST