It's almost alarming to see how fast HUL is letting go of its consumers—the loss of share in toilet soaps, for instance, in July-August has been over 500 basis points.
What should Hindustan Unilever (HUL) be chasing, market share or margins? Right now, the FMCG firm seems to be in a bit of a bind, trying to figure out what to gun for. Shareholders may want to see profit margins expand, but it seems that arresting the loss of volumes and market share needs to be the top priority for the simple reason that if HUL continues to lose share, regaining it in an increasingly competitive market will be more expensive than ever. So, it’s perhaps better to postpone margins for some time.
HUL seems to be paying for some of the price increases that it had effected in 2008 to offset the higher cost of inputs. Although, in the past, HUL’s products may have commanded a premium to the competition, the marketplace has changed and HUL has simply failed to sense the changes. By the time it tried to make amends, it was too late and the damage was done. Despite attempts to recover the lost ground, the numbers just don’t seem to be coming through: the Nielsen retail audit data for July and August show that HUL has lost both volume and market share in toilet soaps, washing powder and packaged tea. Even SKUs (stock-keeping units) at lower price points aren’t doing the trick and players like Colgate are becoming bigger. For sure, HUL was not expected to cling on to its soap-market share of 60 per cent that it enjoyed in the early nineties; the consumer today is far more fickle, the competition tougher and household use in some categories is up at 70 per cent.
But it’s now almost alarming to see how fast HUL is letting go of its consumers—the loss of share in toilet soaps, for instance, in July-August has been over 500 basis points year-on-year, while for toothpaste, where it has a 28.5 per cent share, the fall has been 200 basis points. It’s not surprising, therefore, that the high command is cracking the whip. It must be agonising to stand by and watch the most promising of the Unilever subsidiaries being challenged by minnows and newcomers. Historically, growth in a category like soaps has always been price-led, but that can hardly work when price warriors like Godrej are around. Obviously, HUL needed to pay heed in a market where consumers were trading down, so the price cuts needed to have been far more aggressive. Also, for many years HUL didn’t launch enough products for the mass market, especially in categories like oral care. And, as a consequence of its shift to a 30-power-brand strategy at the start of the decade, HUL probably doesn’t have enough brands to guard its flanks and fight regional brands. But it cannot afford to stay away from the lower end of the value chain; in India, that is too big a market to ignore and where consumers upgrade themselves as they become more prosperous, one needs to catch them young.
Moving up the value chain with top-end products like Ponds or Dove has been a great idea—the Indian consumer is aspiring for more and willing to pay for quality. It’s simply that the cost of launching and sustaining these brands can strain the margins for a long time. But that’s the way it has to be. Right now, it’s only the top line that matters. After six long years, HUL was able to grow its top line in double digits in 2005, but slipped the very next year. The main reason why HUL’s quarterly revenue graph is more like a zigzag line is because of the inconsistent performance of its key personal products portfolio, which today fetches it around 28 per cent of its revenues and nearly 37 per cent of its operating profit. So, while this portfolio has scripted some big success stories—Fair and Lovely, or even Dove—HUL just hasn’t perhaps innovated and invested enough.
Let’s assume that HUL is looking to grow its top line at around 12 per cent. Soaps and detergents, which accounts for 49 per cent of its top line, should manage a growth of 10 per cent—that’s a growth of about 4.9 per cent in the overall company kitty. If foods, which accounts for 17 per cent, chips in with a growth of 15 per cent, that will mean another 2.6 per cent in the kitty, leaving a balance of 4.5 per cent, which means that given its 28 per cent share, personal products needs to come up with over 16 per cent growth.
That has happened just four times in the last 12 quarters. The 30-day action plan to push through product strategies is a good starting point. HUL needs to get its act together before private labels take over.