R Jagannathan: Are two HLLs better than one?

MICROVIEW

What is one to make of the reorganisation of Hindustan Lever last week "" the one which left the company with two chairmen, two businesses and two difficult choices for the future?

Quite obviously, a situation where there is one non-executive chairman and another (executive?) chairman of a "national management" committee can't continue forever. Companies like HLL need a proper CEO; they can't be run by a committee. A non-executive chairman is not a CEO.

A committee, on the other hand, cannot be anything more than a discussion shop for inter-business issues and synergies, if any. Following the reorganisation, real power will probably devolve to the heads of the two main business units "" HPC (household and personal care) and foods, which will now have CEOs (managing directors) to run them.

This, of course, makes great business sense since focus almost always leads to better management decisions. If anything, this is a belated recognition that the mid-1990s merger of a foods company (Brooke Bond Lipton) with an FMCG-to-fertilisers company (the pre-merger HLL) was not such a great idea.

The two choices that remain to be made in the future are the possibility of demerging the two businesses altogether (if that happens abroad) and/or abandoning the idea of a national company determining its own strategic directions in India.

As markets globalise, companies like Unilever need to plan investments and resource allocations globally. It makes little sense for subsidiary companies to seek purely national business opportunities "" as HLL did in the past by getting into unrelated areas like chemicals and footwear. Such businesses will now be in exit mode "" if they haven't already been dumped or hived off.

The moot point is: why now? Since most HLL spokesmen are keen to downplay the timing of the event, it leaves us free to speculate about it. The reorganisation comes soon after the launch of dramatic price cuts in the company's main detergent brands (thanks to the price war launched by P&G), and against the backdrop of several quarters of topline stagnation.

It is difficult to believe that HLL's recent performance has nothing to do with the reorganisation. It may not be a rap on the knuckles from Unilever headquarters, but quite clearly the coming decline in HLL's profits margins will make it less of a standout performer among Unilever's subsidiaries.

This could be one reason why it is being aligned with Unilever's priorities rather than being left free to go its own way.

In future, the reporting relationships of the HPC and foods businesses will probably be stronger with the global or regional business heads than with any local management.

It may also work better that way because HLL was becoming unwieldy anyway. It is a tribute to the quality of HLL's management that it has consistently managed to show healthy bottomline growth despite running so many unrelated businesses and facing a severe slowdown in volume growth.

This has been the result of HLL's extraordinary competence in tapering down costs through supply chain efficiencies and factory-floor initiatives like TPM (total productive maintenance). But to rely so much on costs to deliver performance can be myopic.

What HLL really needs is a clear focus on new products and market innovation that will help grow the topline "" but there's been little of that in recent years. Initiatives such as brand rationalisation and M&A activities are important, but they are obviously not enough to grow the topline.

My personal view of HLL's merger with Brooke Bond Lipton has always been negative. When it was announced, the then chairman had explained it as an alliance of beauty and brains: HLL was surplussing cash and didn't have any growth business to invest it in (or, at least, it thought so); Brooke Bond had a growing foods business but little cash to bankroll it.

It was marrying HLL for money, not love. The merger may have helped reduce some overhead costs (administrative, sales force, etc), but it actually achieved very little. On the contrary, it probably defocused the two businesses. In the years since the merger, the HPC business has, more often than not, been losing volume shares to regional brands due to its failure to exploit the explosion of demand at the bottom end of the market.

As for the foods business, it is yet to show great results, and has even managed to lose marketshare in areas where it had great brands. In ice-cream, for instance, HLL bought Kwality's and merged it with Walls for less than sensible reasons. Amul and regional players have now pushed Kwality against the wall.

After the merger, neither HPC nor foods showed any great hunger for growth. This can come only from entrepreneurial thinking in two businesses run by separate management teams. The logical and only sensible way to achieve that is by a virtual demerger "" as HLL seems to be attempting now "" if not a full demerger. Two HLLs are better than one.

rjagann@business-standard.com