Domesticity in colonial India

If discounting the future is what the stock market does best, the worst should be over for Hindustan Lever Ltd (HLL). Its share price actually jumped 4 per cent on the day the company announced a steep 27 per cent drop in net profits for the quarter ended September.

Sections of the market obviously believe the dent in profitability is on account of the bruising price wars in detergents and shampoo, which could now be moderating. The coming quarters will tell whether the markets are right or wrong.

Meanwhile, the picture actually looks worse if one were to juxtapose Lever's recent performance with that of some of its smaller competitors, like Godrej Consumer Products, Marico, and Dabur.

All three posted healthy growth in both top line and bottom line in the September quarter, with net profits growing in the range of 20-30 per cent.

One possible conclusion from this contrast is that Lever's smaller rivals are more focused and entrepreneurial. This is true not only of listed companies like Marico and Godrej but also the scores of regional players that sell low-priced brands like Ghari, Chik, and Anchor.

The latter have built strong businesses around distribution strengths, among other things. Lever has tried to fight the price warriors with power branding, which is effectively an 80:20 strategy that calls for withdrawing support from smaller brands and concentrating management bandwidth and ad spend on the big brands.

This strategy is still to prove its worth in the case of Lever, but it has effectively been validated by Lever's rivals, all of whom have been following their own variants of power branding.

In an age of growing media fragmentation and ever-rising brand-building costs, less means more. Fewer brands should mean stronger ones, too.

But power branding can be only one part of the strategy. It cannot deliver all by itself, for all it can do is focus resources in some areas when the market is actually segmenting sharply.

NCAER's latest survey of consumption patterns shows that the Indian middle class is not one solid mass. Several segments are opening up simultaneously, indicating that marketers have to be both innovative and value-focused to be successful.

In Marico's case, new products account for more than a third of current turnover, and this share is expected to double over the next two years. Godrej's big growth driver in the last two quarters has been its new soap brand Godrej No 1.

Lever, in contrast, still seems to be playing the volume and market share game, with no new product launches. It is still fighting Nirma and P&G, with the former reporting almost an identical drop in net profits as Lever.

Perhaps the lesson is simple: growth and margins are available in various customer segments at varying levels. The middle class is in effect several middle classes, and it cannot be effectively served any longer with mass marketing and cheap products alone.

From the mass affluent at one end to the emerging consuming classes at the other, marketers have to learn to deliver customer value differently.

To tap into this rich vein, companies need to certainly watch costs, but they need to watch consumers even more closely. Lever's mistake was probably that it took the consumer for granted, and sought higher profits by downgrading products while raising prices. Rivals quickly seized the opportunity. And Lever may only now be getting its act together.