Not new, but improved

As you stand in queue for your entry pass into Hindustan Unilever’s (HUL) headquarters in suburban Mumbai, your eyes turn automatically to the posters lining the walls on either side — these are ads for some of HUL’s most prominent brands, some of them over 100 years old. Walk past these posters of a different era and you enter what looks like a mini-mall. The large, open lobby has small stores on either side — Lakmé Salon where employees can get their hair cut and regular beauty treatments; U Shop, which stocks all HUL products (no, there’s no discount); Bru Café, where small teams discuss anything from creatives to budgets; and a Kwality Walls ice cream parlour. In between, there’s a counter where all new products, from soups to skin creams, can be sampled — yes, employees are the guinea pigs.

There’s also a sort of phone booth where you can pick up a receiver to hear live conversations with customers calling with feedback or complaints. And, of course, there is the ubiquitous whiteboard where employees scribble everything from tips on how to cook up a tasty dish using Knorr masala to critical feedback on products. It’s buzzing. It’s anything but the office of a 128-year-old manufacturing company that has been in India since 1888.

It’s been two years since the FMCG giant moved to this swanky building from its earlier headquarters in south Mumbai. The relocation from that hierarchical closed office to one that is more open and informal has certainly created room for creativity and innovation. And that change is visible in HUL’s numbers. In the past three years, the company has seen its sales accelerate by nearly 15% per annum (See: Second wind) on the back of an overhaul in portfolio triggered by a host of internal changes it implemented with renewed rigour. The new buzzword for CEO and MD Nitin Paranjpe is “customer centricity”. Not that it had been forgotten earlier. But, explains Paranjpe, “In the past two years, the consumer-centric focus has been ingrained into every one of our employees.” 

The result is a company that claims there is only one goal behind all its numerous launches, and that is to delight its consumers. From the grandiosely-named Mission Bushfire, which makes it compulsory for all employees to spend a day in the market so they know what customers like about HUL brands, to getting sales staff to convert at least 60% of the stores in their locality into “perfect stores” (with help from the sales personnel, the kirana store will re-organise itself to make it more appealing to the customer, with the unsaid intention of making HUL products more prominently visible than competition), and real-time feedback on stock availability through a patented platform called Point Of Purchase Eye or Popeye, HUL has rediscovered ways to become better and faster.

On its way up

Not so long ago, the odds were firmly stacked against HUL. Even Unilever Plc CEO Paul Polman had declared the Indian arm an “under-performer”. The company’s marketshare across segments tanked and regional players such as Ghadi were challenging its longstanding supremacy in detergents. Indian FMCG companies such as Godrej Consumer and Marico were growing at a healthy 20-25%, and HUL — which was trudging along in single digits — was blamed for being complacent. Paranjpe brushes aside that charge. “In an organisation there could be periods where you do things to re-invent and, during the journey, experience turbulence. We did recognise that the rate of change of consumer expectations was high and, hence, we needed to up our ante.”

The year 2009-2010 was the inflection point. “It was a challenging year,” admits Leena Nair, executive director, HR, HUL. “We were not as connected as we could be,” she says. The U-turn started there with a clarion call, ‘Winning Today, Winning Tomorrow’. “The strategy has been to future proof the organisation, understand the changing aspirations of consumers and offer them products that are relevant,” says Paranjpe.

The key questions asked were: what would work tomorrow, and how could HUL protect its existing strongholds? For instance, what was the company doing to grow the liquid body wash market — which may have minuscule marketshare today, but has the potential to be a winner — as it grew its existing bar soap business? Similarly, modern trade today comprises just 15% of HUL’s distribution chain, but will grow to 25% in five years. Was the company gearing up to cater to this segment even as it protected its share in traditional retail? 

To get answers to these, HUL first had to get everyone in the organisation on the same side of the table. “Earlier, we had a mismatch of goals. Some were chasing customer centricity, others profit margins,” points out Sridhar Ramamurthy, CFO, HUL. Now, improving marketshare and customer development is as much a goal for people in the finance function as it is for the marketing and sales teams. “Today, we are all pulling in the same direction. The goal is to grow competitively and responsibly,” he adds.

Former Britannia MD Sunil Alagh says that the biggest change in HUL over the past few years has been its move from being a macro, strategy-driven company to a micro, execution-driven one. “Earlier, the sales team and executives visited only their distributors. There was no focus on a go-to-market strategy.” That’s certainly not the case now. Apart from pushing even his non-sales employees to interact with consumers as often as possible, Paranjpe himself travels to remote villages and modern retail stores at least twice a month to get a feel of consumers. Indeed, the head of marketing at a leading retail chain claims that Paranjpe is the only FMCG CEO who visits his stores once a quarter. 

Today, HUL can take pride in its volume growth, a change from a few years ago when topline growth was a big, big challenge. For the past 10 quarters, the q-o-q volume growth has been a consistent 9-10%, although in the September 2012 quarter it dipped to 7%. HUL attributes the slide to a fall in discretionary spends due to the challenging economic environment. But having experienced the adrenaline rush after a long spell, Paranjpe would like to keep up the buzz. “Volume growth gives operating leverage, improves the P&L and gives money to re-invest in the business. That is the virtuous cycle we want to remain in.” The question is, has HUL really played its cards correctly to be in this virtuous cycle?  

Premium game 

Having recognised the products and categories of the future, HUL’s strategy since 2010 has been built on two key pillars — brand extensions and premiumising its portfolio. In a single year — 2011 — the company launched 30 new variants under different categories.  This included similar products under different brands and, many a times, at similar price points. Nirmalya Kumar, professor of marketing, London Business School, admires Unilever’s strategy. “Unilever has been very successful in brand extensions. Extending a brand is always easier — and less expensive — than creating a new brand,” he says. 

Now, both Dove and Sunsilk have products such as hair moisturising creams and high-end conditioners and are priced at par. Again, in the handwash segment, HUL has Lifebuoy, Hamam, Lux, Pears and Dove, while in the body moisturising category, its brands include Vaseline, Pond’s and Dove. “They are getting into a scenario of cannibalising their own brands, so that consumers remain with Unilever,” remarks Nikhil Vora, MD, IDFC Securities.     

That’s evident in shampoos where HUL has also launched products with different brand propositions at similar pricing. In its new avatar, Clinic Plus promises longer and stronger hair and is priced at ₹128. HUL’s anti-dandruff offering, Clear, and its most recent launch, Tresemmé, positioned as a shampoo that offers salon-styled hair at home, are also priced at ₹128. It is a smart way of ensuring that the consumer stays with HUL and does not migrate to other brands. The numbers bear that out. A Euromonitor report shows a decline in marketshare of Clinic Plus from 23% in 2009 to 19.3% in 2011. But during that period, HUL’s other brand, Clear, made considerable headway, growing from 3.9% in 2009 to 6.2% in 2012.

But, warns Kumar, brand extensions work only so far. “Brands are like rubber brands — you can’t stretch them beyond a point.” That’s a thought Vora seconds. “In the long run, HUL has to take a call whether it makes sense to have so many brands and extensions, because it is unlikely all of them will grow at the same pace,” he points out.

If varying customer tastes are the reason for an extensive brand portfolio, it’s the universal desire for upgrades that explains HUL’s premiumisation mantra. Of the 15-odd new launches in 2012, 13 were targeted at top-of-the-pyramid consumers. That includes super-premium products such as hair spa conditioners containing keratin under the Sunsilk brand (priced at ₹400) and Dove Colour Rescue shampoos that promise to repair damaged hair and help retain its natural colour (₹300). The premiumisation game has not just been about introducing new products with superior functionality, it’s a strategy HUL has played to the hilt, introducing premium variants for almost every single product.

So much so that it has upgraded even its bottom-of-the-pyramid offerings. For instance, now there’s Lifebuoy Clini-Care, a glycerine soap priced at ₹27 compared with regular Lifebuoy that costs ₹10. Most germ-fighting soaps — which is how Lifebuoy is positioned — are perceived to be harsh on the skin; the new variant promises to fight germs while being soft on the skin. “Our consumers are moving ahead even at the bottom of the pyramid and they need superior products,” points out Hemant Bakshi, executive director, home & personal care. “Some consumers who use Fair & Lovely also aspire to use Pond’s White Beauty. We will not win unless we invest at both ends of the market.”

Whichever way you look at it, the rush to go premium is understandable. Typically, premium categories have margins upwards of 50%; in some cases such as skincare, they go up to 60%. Although Paranjpe declines to share details on how much the premium category contributes to the overall revenues, he does say premium products are growing faster than their regular counterparts. “Sale of premium categories is growing by 20%, while the value segment is growing at 10%,” confirms a large modern retailer. 

Some observers suggest premiumisation is the easy part. Every company, from mobile phones and automobiles and real estate, is playing the premiumisation game. And in the consumer space, it is much easier for large multinationals to do business at the top right now, as there are fewer players in that segment. But success there may just be short-lived. “As every player in the segment tries to chase premium products, competition will intensify and make it very difficult for companies,” agrees A Mahendran, MD, Godrej Consumer Products.  

In Q2FY13, volume growth at HUL fell to its lowest in the past 10 quarters. While soaps and detergents grew in the September 2012 quarter at 22%, growth for personal products has been at 12% compared with 14% in the previous quarter. “The challenge will be volume growth, because 90% sales come from these the bottom and middle segments,” says Mahendran. And getting the volume growth in the middle and bottom of the pyramid will not be easy as even local players are doing extremely well. “Earlier, MNCs had a quality advantage over Indian companies. Today, the quality of products from Indian companies is as good as or even better than the MNCs,” he adds. 

Bakshi vehemently denies that HUL has not been innovating enough at the middle and lower segments. “Our strategy is to win in all segments. Two of our biggest re-launches in 2012 have been in middle and lower segments — Clinic Plus and Fair & Lovely,” he says. HUL launched Fair & Lovely Advanced Multivitamin, based on the insight that 80% of Indian women believe that the best possible fairness results can be obtained by a fairness treatment from a skin expert. 

However, Vora feels the same reasons that conspired to bring success for HUL in the past couple of years may now come to haunt it. “HUL believes there is still much to be milked in categories where it already has a marketshare of 40-50%. Going forward, marketshare will only drop as there are several smaller players giving tough competition,” he points out. Not surprisingly, Bakshi doesn’t agree. He points out that per capita consumption of skincare products in China is 5.6 lbs (2.54 kg), 3.9 lbs in Indonesia and 0.6 lbs in India. “That is the kind of opportunity that is present in India. How long will it take for India to reach the level of Indonesia? Not in my lifetime for sure,” he smiles. 

At P&G’s expense?

HUL’s turnaround in the personal segment has undoubtedly been remarkable. But at least part of the credit should go to its archrival P&G and its non-performance in the past few years. “P&G’s own issues in India have worked to HUL’s advantage,” says Abneesh Roy, associate director, institutional equities research, at Edelweiss Securities. Roy says that P&G’s competitive intensity has reduced in India since its strongholds, China and the US, are struggling. “When your main markets are in pain, you tend to focus on them more. India is a small market for P&G.”

Marketshare data also shows that HUL is far ahead of P&G in most of the categories in which the two compete. For instance, in detergents, while P&G’s Ariel has a 5.6% share, Surf is way ahead at 14%; overall, HUL has a marketshare of over 40% in the detergents space. Similarly, in shampoo, P&G has two shampoo brands, Pantene and Head & Shoulders, while HUL has six. While Clinic Plus, Sunsilk, Dove and Clear have marketshares of 19.3%, 10.8%, 9.5% and 6.2%, Pantene and Head & Shoulders hold 9.5% and 11.1%.   

If HUL did gain marketshare at P&G’s expense, it only means HUL has little room for complacency. P&G has announced a ₹2,000-crore investment for market development in India. “2013 could well be its year of growth. P&G could reduce prices and hit HUL at the mass end,” says Alagh. Is Paranjpe prepared for such an onslaught? “Our strategy is based on consumers and not our competitors,” he retorts. 

Opportunity lost? 

While HUL seems to have perfected its strategy for personal care, it’s missing a crucial part of the puzzle — foods. India’s organised foods market is estimated at $25 billion and although it is the country’s largest FMCG company, HUL’s presence in this segment is nothing to write home about. Worse, the contribution of foods and beverages has steadily declined from 30% 10 years ago and 22% five years ago. Last fiscal, it stood at 18%, while soaps and detergents constituted 48.1% and personal products made up 31.6%. Compare that with parent Unilever, which derives nearly 45% of its revenues globally from foods. 

HUL has some well-known brands in its kitty: Kissan jams and ketchups, Lipton, Brooke Bond and Bru for tea and coffee, Knorr soups and noodles and Kwality Walls ice cream (technically, frozen desserts). Of these, Brooke Bond and Lipton (24% marketshare) and Bru (30.3%) are leaders in their respective categories, as is Kissan jams (71.8%). But when it comes to ketchups, Nestlé’s Maggi is the undisputed leader with over 50%. Maggi is also No.1 in noodles with 62.6% share against Knorr’s measly 3.5%, according to Euromonitor.

But walk into any modern retail store and HUL’s dismal presence in food is immediately obvious. Food Bazaar, the country’s largest food retail chain, typically has around 10-12 shelves dedicated to various brands of noodles. Nearly five out of these are occupied by Maggi, the rest shared by the other brands. In many stores, Knorr is hardly visible, at best tucked away in a bottom shelf. Ditto for ketchup, where Maggi variants clearly outnumber Kissan. “HUL has an unfortunate track record in the food business, Kissan was No.1 in ketchups and jams when they bought it but now, Maggi is the market leader. Even Modern Bread was outselling others, but it is nowhere to be seen now,” points out Alagh.  

A former CEO of a foods and beverages company points out HUL’s error: there’s no ‘centre-of-plate’ offering, that is, a product that is essential to the meal. He cites Knorr as a case in point. It’s viewed as a convenient snack, not a replacement for soup. “If I am ill, my wife will give me homemade soup, not Knorr as she doesn’t consider it a healthy option. That’s the challenge — to convert packaged soup consumption into a habit.”

A common complaint against HUL’s food strategy is that it hasn’t invested enough time or money in the business. Products have been launched and withdrawn all too frequently. That’s what happened with Kissan Annapurna Atta, which has been sidelined after its lacklustre performance. More recently, it launched soya-based fruit juices under the Kissan brand, which bombed and was withdrawn from the market. In sharp contrast, Nestlé kept investing in Maggi, which made losses for over two decades after its 1984 launch, introducing new flavours and brand extensions, and is now reaping the rewards. “HUL has never had the patience to build its foods portfolio. Which HUL food brand can you remember off the top of your mind? None. If you say biscuits, it is Britannia; you say noodles, it is Maggi. HUL has not got into that space yet,” says Alagh. 

The former F&B CEO, on the other hand, lauds the investment made by ITC in the foods segment, especially its decision to launch products such as atta and salt, which build volumes. “I am sure Aashirvaad is a loss leader, but it became the backbone of ITC’s supply chain, on the back of which it got into categories such as biscuits, snacks and noodles.” In fact, ITC’s Sunfeast Yippee noodles has a higher market share (8%) than Knorr, even though it came to market later. 

Geetu Verma, who took over the foods business at HUL lin 2011 after a long innings at Pepsi, admits that innovations in foods has been a mixed bag for HUL, with some launches working well and others not at all. While it is loud and clear that HUL hasn’t shown the required risk appetite to invest for the long-term in the foods business, the executive director puts it mildly. “We have experimented boldly and have rich learnings; needing to stay the course and be patient with categories needing habit change is one of them.”

Meanwhile, HUL’s strategy for Modern Bread — the public sector company it acquired in 2000 — doesn’t find too many supporters, although Verma claims it is doing extremely well. The company is focusing on select regional pockets for Modern Bread and has launched products such as idli-dosa batter and dry mix powders under the brand. “People may opt for ready-to-use batter once in a while, but Indians intrinsically believe that nothing can replace home-cooked food,” declares the former F&B CEO. “HUL needs to come up with options that will change food habits.” His suggestion: more bread. “Bread in India is popular only as breakfast, unlike internationally, where it is consumed during dinner. Why can’t bread replace chapattis?” he asks. 

Paranjpe says the assumption that HUL is not doing enough in foods is unfair. “I am as committed to the foods business as I am to the others,” he declares, pointing out that packaged foods is just 5% of the overall foods market. “It would be wrong to assume that we have lost it, because it has just begun.”  

Why so long?

A key industry observation is that HUL never had the right person to head the foods business. In fact, Verma is the first foods business head who comes from a foods background. “HUL has always had veterans in the personal and home care segments, but they didn’t understand the nuances of foods,” says the beverages CEO. Paranjpe goes on the defensive again. “Be it foods or other businesses, our leaders have been the best. This is an emerging business and we are committed to growing it.” Nair seconds that. “All parts of our business are equal for us and have got similar attention. I don’t agree with the perception that our best talent only understand personal and home care and not food ,” she adds. At a recent meeting, for instance, everyone was asked to cook a dish using HUL food products, and a chef brought in to evaluate the dishes. The idea was to see if HUL could eat its own cooking!

As it turns out, at the heart of HUL’s failure to take big strides in the foods business is a mindset issue. In the personal care segment, launching new variants each with the promise of making you look more beautiful or fresh definitely sells. In foods, on the other hand, from getting the right products that cater to localised taste buds to handling distribution, all of it requires a completely different approach. “The shelf life of a food product is three months to a year, unlike a personal care product that stays good at least three years. Making that switch can be a nightmare,” says the CEO of a personal care company who attempted an unsuccessful foray into the healthy snacks segment a few years ago. “One reason our snack brand bombed is that we failed to understand these nuances. We ended up with surplus inventory as there were no takers. We really didn’t have the deep pockets to keep investing and bear huge losses.”

The need for localisation, too, can’t be overemphasised. In personal care, it makes sense to innovate and market a product across the country, but food preferences are individualistic and tastes vary immensely. PepsiCo, for instance, has successfully Indianised its food offerings, be it Lay potato chips (variants include Mango Mastana and Magic Masala) or Quaker Oats (lemon veggie and kesar flavours). HUL, on the other hand, has been slow when it comes to localising foods. Even a product such as Knorr, which the company claims to be investing in for the long term, has just four basic flavours. 

As in personal care, in foods, too, HUL is focusing on the premium segment. Last year, the company launched sandwich spreads under the Kissan brand, which is available only in modern trade stores. It has also introduced the Bru Exotica range of single-origin coffees, which again is targeted at the higher end of the market. Expectedly, these premium products are not large enough to drive volumes for HUL. Besides, food tends to offer lower margins compared with personal care. While personal care offers gross margins of 40-50%, foods can be much lower, depending on the segment you choose. For a hardcore personal care company such as HUL to come to terms with lower margins can be difficult. Admits Sridhar, “We will look at a segment if we see gross margins are 35% or higher. Otherwise, it may really not make sense.” 

Cracking the foods business isn’t easy — and it’s not just about margins. Global experience shows that very few companies make money out of foods because private labels of retailers tend to dominate in several categories, says London Business School’s Kumar. India is no different because not just modern retailers but even kirana stores sell unbranded staples. The retailers usually have a structure — they stock their own labels in the value segment, the middle will be a combination of other brands and private labels and at the top will be premium brands.

“Only companies that are marketshare leaders or sell premium products make money in foods. If you are in the middle, you will not be able to match the absolute ad spends to make your presence felt in the market, and then you may not have a differentiated product either,” Kumar adds. Retailers can’t afford to not stock the market leader but for the rest, they will opt for brands that give them the best margins. That also explains why ITC had to bear losses for years before it cracked the biscuits market. Innovations are costly too, because as percentage of sales, the leader will always have better economies.

For the critics, the worry is about future growth. IDFC’s Vora, for instance, strongly believes that it is food and food alone that will decide HUL’s future growth. “Food is the largest category and there is not a single player who has a marketshare of more than 5%, not even Nestlé. HUL holds 15% of the consumer’s wallet, hence, the onus is on them to grow,” he says.  “Unless they push foods, their growth will plateau. HUL will not be able to protect its bastion of being a formidable player in the personal and home care space.” 

It depends whose prism you look from. Paranjpe has been cited saying there are still millions who don’t soap themselves when they bathe and are yet to graduate from a detergent bar to powdered detergent. He cites an anecdote from a recent visit, when he saw HUL’s fabric conditioner brand, Comfort, in a village in Tamil Nadu. Paranjpe was worried that the lady of the house had mistaken it for shampoo, but was surprised to learn that she knew exactly what a fabric conditioner was. “The bottom of the pyramid customer is as eager to upgrade as the top of the pyramid. I don’t see any reason why volume growth will not happen.” Now, that’s some food for thought.