Changing levers

The elevation of M S Banga and Harish Manwani to the Unilever executive even as Hindustan Lever continues to under-perform, sends two important messages.

One is that the top line and bottom line sluggishness of the Indian subsidiary has more to do with FMCG market dynamics than anything else; and two, Indian managers will have a crucial role to play in Unilever's own road to revival.

The emphasis on change has been reinforced by Unilever's reorganisation, replacing the old double-headed structure invented decades ago.

Equity analysts in India, who have not been impressed by the performance of Hindustan Lever under Mr Banga, may wonder why he should have been elevated to the post of president (foods) at Unilever.

On Friday, Hindustan Lever announced a steep 32 per cent drop in both quarterly and annual net profits for the year 2004. Coincidentally, Unilever too disclosed a 32 per cent drop in 2004 profits.

Even without such uncanny congruence, the challenges faced by both the parent and subsidiary are similar.

For one, both companies face tougher competition from P&G, now rejuvenated by a merger with Gillette. In India, the proximate cause for Hindustan Lever's nosediving profitability has been P&G's decision to launch a price war in detergents.

Two, both companies appear to have got key elements of their takeover strategy wrong in the recent past. Unilever bought weight-loss maker Slim-Fast just when North America was going ga-ga about the Atkins low-carb diet.

Hindustan Lever, for its part, didn't show great savvy in some of its acquisitions, especially Modern Foods, for which the company has taken a Rs 87 crore hit in the last quarter.

Barring Lakme, few of the other acquisitions ""Kwality and Brooke Bond, among them""appear to have delivered much by way of top line growth.

To be sure, Hindustan Lever made things distinctly more difficult for itself when, in the mid-1990s, it opted for a high top line and bottom line strategy based on supply chain efficiencies rather than product enhancements.

The high-margin strategy foundered when consumers started allocating a larger share of the wallet to home and durables purchases, squeezing monthly FMCG budgets.

Meanwhile, changing demographics was creating a new consumer class for whom price was the main driver of value in categories like detergents and shampoo.

Regional brands spotted these signals earlier than Hindustan Lever. In foods, Hindustan Lever's flawed strategy on branded staples and ice-cream is now too well known to bear repetition.

The revival plan for both Unilever and Hindustan Lever has been similar. Both have bet heavily on investing in big brands while withdrawing support to smaller brands.

Organisationally, the Indian company has brought back focus to its various product lines by putting HPC (home & personal care) and foods under separate managing directors.

This change seems to be yielding results, with HPC especially reporting improved volumes and value growth. The Unilever assessment is possibly that Mr Banga's clean-up act is beginning to work.

He now gets to wear a crown of thorns at the global level, where Unilever's foods division, which accounts for 56 per cent of revenues, saw both revenues and operating profits decline in 2004.