The Big Boost

For a long time now, Hindustan Unilever (HUL) has been flirting with malted food drinks. It launched Kissan Amaze in 2008 in its maiden foray into the business. A high decibel advertising and marketing effort came a cropper before Amaze was eventually cast away.

Marking a clear departure from trying to grow its own brand, HUL has now decided to merge GSK Consumer Healthcare with itself in a transaction worth a whopping Rs.31,700 crore or 7.5x revenue. GSK Consumer shareholder will get 4.39 shares of HUL for every one share held and stake of Unilever in HUL will come down to 67.2% to 61.9%. In comparison, the recently announced Zydus-Kraft Heinz deal was valued at Rs 4,600 crore was closer to three times sales.

Boost, Viva and Maltova will be owned by HUL and the Horlicks brand will be owned by Unilever. HUL will pay royalty for its use in India.  Sagarika Mukherjee of Elara Capital, while admitting that the valuation does look a little high, the growth potential in the “super premium” category cannot be ignored. “The market is evolving from one that is around micro nutrients deficiency to lifestyle management products and general health supplements. Besides, there is also potential to create sub-segments to reach out to a larger base,” she says.  The foods business brings in 18.4% of revenue for HUL, and, post-merger with Horlicks, the contribution would go up to 27.8%. Post the acquisition with Horlicks, the margins would increase from a margin of 15.6% to 17.8%.

For HUL, the real attraction is Horlicks, with its 43 per cent market share with another 10 per cent coming from Boost. Viva and Maltova are relatively much smaller brands.  But both Horlicks and Boost are strong brands but stuck in a business, where growth has been hard to come by.  According to Sandeep Goyal, Chairman, Mogae Media, Horlicks has always been a two state phenomenon – Tamil Nadu and Bengal. Together, the south and east bring in at least 80% of its revenue. “The brand just ended up doing so well for many years, that nobody really bothered to do something proactive or innovative. “If Horlicks had entered newer markets, it would have 3-4 times larger,” he adds.

The margins for both Horlicks and Boost at a gross level are around 20 per cent, way more than what HUL makes in its foods business. Though this sounds attractive, growth for both these brands has been hard to come by over the last few years on the back of little innovation (those like Women's Horlicks has hardly cut any ice) combined with the lack of connect with the younger audience. This will surely necessitate a complete relook at GSK's brand portfolio and give it the once over. Given that 90 per cent of Horlicks' business comes from India, it opens up the opportunity for HUL to take it to other emerging markets.

Ambi Parameswaran, Founder, Brand-Building, probably sees an opportunity to make Horlicks the Lifebuoy of beverages – mass, economical and pan-India. That promises to be interesting since Pediasure, he thinks, is more seen as a niche brand. “To handle the impending upward migration of consumers, Horlicks will need to become an even more mass market brand, which means smaller pack sizes and enter more product categories.”

Goyal anticipates HUL to leverage on its distribution to get the brand to reach newer markets, which could change the game from just being dependent on two states. Given that HUL’s distribution is three times bigger than GSK’s, it has the potential to improve sales growth in the North and the West.

In spite of an aggressive inorganic story that had the buyouts of Kwality, Dollops and Milkfood in ice-cream apart from launching the Annapurna range of atta and rotis, the foods and refreshment business  accounts for less than a fifth of HUL's  revenue. The failure of Annapurna or the inability of Kwality Wall's to successfully take on Amul or regional ice-cream brands has been a sore point for HUL.

In the midst of all this, its other brands such as Knorr and Kissan have hardly grown.

It is this compulsion for growth, which has convinced HUL's management to go for a big-ticket deal. Nestle, which runs hugely successful food brands such as Maggi noodles and Cerelac baby food was kept at bay by HUL's aggressive bid. It is learnt that it was at least twice that of what Nestle offered to pay for GSK's business. With Nestle's Milo brand not making any headway in India, HUL's deal to acquire GSK Consumer effectively shuts the door on Nestle's plans for the malted food drinks space.

On completion of the deal, according to analysts, HUL earnings could perk up by around 6% but the task on hand for HUL is anything but easy. With competition from Pediasure, an increasingly preferred choice among the millennials and beyond, showing no signs of abating, Horlicks and Boost will need to do something very special  like entering new product categories for the former, while Boost looking at options like ready-to-drink. How HUL with its limited success in food, will do that remains to be seen.