Hindustan Unilever Managing Director Nitin Paranjpe says the company is looking at every possible lever in its control to meet the challenges of severe commodity price pressures. In this interview with Shyamal Majumdar and Viveat Susan Pinto, he also talks about why downtrading, if any, will be temporary as the secular trend will continue to be premiumisation.
You put in an aggressive go-to-market strategy in place last year. How has it performed?
Early last year at an investor conference I had articulated clearly the ambitious goals we had for rural expansion. I had said we would reach over 500,000 outlets in two years. But we have achieved it in a year. We have taken our rural reach to three times the number we had when we started out in early 2010. That is an achievement. Let me also add here that rural reach per se was never an issue with us. It was the need to widen the gap between us and others that was imperative. We might be ahead but others could also catch up. So our objective was clear – create a clear source of advantage by widening the gap in rural areas.
How did you do it?
It started by conceptualising a model, which helped us find the right places to go. We then leveraged our scale and technology in a manner which was never done before. We digitized the whole thing. All the villages were put on an IT map. The name of the village, its total strength, the nearest distributors available, whether it has a school, a hospital, a primary health centre, all of this was mapped. Using this information we were able to determine the opportunity the village presented to us. The presence of a school or primary health centre told us of the level of social development that the place could see, and hence our need to be present there. We also took into account which villages were closest to the ones we were already covering. How could we access the place? What models of reach and access could be drive that could make it viable? Despite being the largest FMCG company, it wasn't easy to reach them. To take a vehicle from a large town and go to a small village and start distributing there incurs a lot of cost. There has to be an economic model in place to do that. So we innovated to stay ahead of the curve.
Give us some examples of the innovations undertaken?
Simple things. What is the size of the vehicle? What is the frequency of travel? What all will I carry in the vehicle? These were some of the things we looked at. Secondly, by using mass route planning can I reduce the distance of travel. The point is how do I achieve my objective of reaching the villages I want to without having to travel over 30 kms in a day? We found that in some pockets of the country, there were gaps. We didn't have a distributor to reach within 30 kms of the place we had targeted. The next question was: Does it make sense for me to appoint a distributor there? We looked at the Shakti amma channel we had? But there were limitations. Being a lady there is a limit to the stock she can carry around. We then focused on the family of the shakti amma. Particularly the male member of the family. In rural areas, you are not occupied on the fields for 30 days in a row. There are days in a month when you are without work. So we thought why not utilise these male members during those gap periods. So instead of Shakti amma, we called it Shaktiman. This Shaktiman was given a bicycle to improve his radius of coverage. The next part was how do we track whether the Shaktiman was indeed doing his job. We equipped our rural sales force with mobile phones. This helped. In short, there are many little pieces that came together. Expanding the whole thing about Shakti, the role of the Shaktiman, putting in a place a supervisory mechanism to make sure the Shaktiman gets sustained, reducing the van coverage to some of these villages by putting distributors in place. All of these started with the initiative of digitising the entire country, using a whole lot of indicators to predict the potential of a village and then making a choice.
Having trebled your rural reach in a year. Are you confident of achieving Rs 50,000 crore in four years as indicated in a presentation recently?
We don't give guidance even for the next quarter. There is no question of giving guidance for the next few years. What we want to deliver is growth, which is competitive, profitable and sustainable.
What is sustainable growth?
This has been articulated in the Unilever Sustainable Living Plan that was launched globally by Unilever including in New Delhi on November 15 last year. The goal is to double the business while reducing our environmental impact. We have three main sustainability ambitions. By 2020, we aim to halve the environmental footprint of our products, help 1 billion people improve their health and wellbeing and finally source 100% of its agricultural raw materials sustainably. Now these are significant commitments we are making. Sourcing from sustainable means, this has to be certified. For instance, we have worked closely with Rain Forest Alliance to get plantations in India, from where we source tea, to be certified. Nineteen tea estates in India are already certified 'Sustainable Estates' by the Rainforest Alliance™. There is work under way to get certification for 52 more tea estates. The other aspect is that from production, that is, from the time we source to the time the product is finally consumed, we will meet sustainable standards. So the commitment is for the total process. Its a big one if you ask me. Not only are we talking about sourcing from sustainable means, utilising best practices that will ensure products are sustainable, but also saying that we will through our brands shape and influence the way consumers act today, to help achieve a better tomorrow.
Commodity inflation has begin pinching FMCG cos hard. This was visible in the third quarter results declared recently. What is HUL doing to minimise the impact of commodity inflation, given that the favourable base effect, which began tapering in the third quarter, will wear off completely in the fourth quarter?
Inflation is a challenge for the economy in general. Like most other industries, the FMCG industry is also currently facing headwinds as a result of commodity cost pressures, which are severe. We therefore need to manage inflationary headwinds very carefully. In an inflationary context there can be pressure on consumers and we have to be vigilant and watchful to make sure that we address it appropriately. Thankfully for HUL, our portfolio straddles the pyramid and therefore is well-placed to address consumers across the board. We haven't seen any significant downtrading by consumers so far. Even if they do, we have a portfolio, which is ready. The larger point is that downtrading, if any will be temporary, the secular trend will continue to be premiumisation.
Which is why you are focusing on newer, emerging categories with a pipeline of innovative products?
Yes, but we are not ignoring the core. There is still growth within the core categories. But as affluence grows, people will want to uptrade. Combine this with changing habits, and what you are seeing is newer areas of growth within the existing areas. Let me explain, in laundry, fabric conditioners will emerge. In hair care, it will be hair conditioners. In skincare, it is anti-aging, premium skin lighting, deodorants, sophisticated hand and body products among others. Besides these, even packaged foods will take off.
But apart from Knorr, and Kissan, to a certain extent, foods in general has not made much headway for you. Why is this so?
We want to participate in those segments where Unilever has an understanding and where we will able to establish leadership over a longer period of time. We don't want to be tactical in Foods. But just to reiterate, the tipping point in Foods will come soon. Most think that the foods game has been played out. The reality is that less than five per cent of the foods opportunity has got converted. The game hasn't been played out, the game will be played out. There's a huge opportunity there. Take icecreams, for instance. It has been growing at 20 per cent over the last few years. We have set up over 125 Swirls parlours so far. We are expanding this rapidly.
But will you spin off foods into a subsidiary?
I see no purpose of doing this. There is nothing that is coming in the way of dedicated focus towards the business because it is run by a separate person with a separate team. Let me tell you that there are benefits of being attached to the overall business because it provides you the reach, the size and scale that you wouldn't have if you were spun off into a subsidiary. We don't see the need for a subsidiary in foods at this stage.
Do you see that a platform has been set for more global food brands coming into your portfolio here?
We already have global brands like Knorr, Cornetto range in Walls in our food portfolio. And I think over the coming years there is a huge opportunity in building Kissan and Knorr as master brands, addressing many segments and opportunities that we see out here and the ice cream business as a separate brand. So it is not about getting more brands. We have got plenty of brands in the market and we should not underestimate the value of our existing brands. Through Knorr, we are into soups, we are into meal makers and now we have got into noodles. Through Kissan we are into jams and ketchups. We have got into new opportunities through Kissan. We have just launched Kissan Nutri Smart which is an MFD, which we have put in two states in the south for test market. So we have got a lot of things which are happening. More will happen.
Give us an update on Lakme Lever? That was spun off into a subsidiary two years ago.
Yes, it was. There was need for that. There was need for a company, a management and team with a service mindset. It has worked well for us. There are over 125 Lakme salons at the moment. We have very aggressive plans for it. We are going to open one salon every week in 2011. Some will be company-owned, some will be franchisee-led. Plus we have already started introducing some of the products from the global acquisition TIGI (made in 2009) into salons here. TG has a fabulous salon range of professional products for hair. We have begun the introduction of these products here.
Which other global products are you planning to introduce into India?
We are exploring if there is anything that can be relevant to us from two recent acquisitions - Alberto-Culver and part of the Sara Lee portfolio. Unilever as you know acquired the two last year. Alberto-Culver is an American skin and hair products maker, while in the case of Sara Lee, the company acquired the personal care and European laundry business. We are looking at what we can introduce here from the two. Ofcourse, regulatory approval for Alberto-Culver is yet to be received.
Are you not looking at acquisitions in India?
When the time is right. We will look at it. It has to make strategic sense.
Unilever global CEO Paul Polman described the Indian subsidiary as an underperformer last year. Have you managed to change his perception in the last one year
Unilever and Paul Polman see India as a very important market. They see India as a significant contributor to Unilever, and hence are deeply committed to it. The Unilever strategy of doubling business is predicated on a greater share and role that the developing and emerging (D&E) markets will play. That's where growth is going to be. Within that India has an important role to play. Emerging markets, let me tell you, already contribute 50 per cent to Unilever's turnover.
Will volumes continue to drive your business?
We will continue to focus on growth which is competitive and has a strong volume component within that overall mix. How the markets evolve over the next few days and months will need to be watched carefully. We want to be better placed than others and we want to continue to drive growth which is competitive with a strong volume component because it starts giving a good leverage in the overall business.
The second question is on margins and profitability. I think these are challenging times for the industry. Challenging times in the context of commodity inflation which our categories are likely to face and therefore we have to be very vigilant. And as we look at this we have to look at every possible lever in our control. We will have to be tight on cost. We will have to be tight on fixed costs. Discretionary spends and all such costs will have to be tightened. We will have to drive efficiencies in everything that we do. We have got a very well run cost effectiveness programme. Every year we pull out a large amount of money by just rigorously scrutinizing the value chain and asking these questions. What element of this cost the consumer may not want to pay or which is not adding enough value to the consumer. How could I do it differently. And through the process of rigorously asking this question we find opportunities to eliminate cost and find smarter ways of doing this because the cost required for a certain piece may not be proportionate to the value which a consumer sees out of that. And when you approach cost effectiveness in this manner, then it’s great because then you are not cheating the consumer, you are not diluting the quality , that is really important. Because if you dilute value or quality, you get punished hard by the consumer.
In addition you will have to look at advertising, you will have to look at promotions, you will have to look at pricing. We will have to benchmark ourselves with the industry. We are committed to remaining competitive. . And last but not the least is pricing. Without doubt these levels of cost inflation will mean that there will be pricing action which will have to be taken. No question about it. We have already taken pricing actions. And more will be required.
But many say that pricing power is out of your hands?
This is a line which is used rather loosely. Of course we have pricing power. Every brand has pricing power. Every brand has differential pricing power. If you have no pricing power means you are a commodity. You are not a commodity. People pay for this and I can demonstrate to you across many brands. If the same thing was sold to you in different brand names; would you be willing to pay for it because it is a brand. A brand offers value to a consumer, reassurance to a consumer, beyond the functional delivery of what it’s got. And with every new innovation as we become closer and closer to our consumers and we understand them, we start adding value to our brands and consumers will be willing to pay. if you have misunderstood what that worth is and you have over priced it, then the consumer will not pay for it. So you have to be right priced. There is no brand power or no pricing power is a highly exaggerated notion of what is happening. You can say that the markets are competitive therefore you need to make sure that you have competitive offerings in the market place and make sure that your brand remains relevant, right priced and offering the right quantity. When you do so, you do have power.
HUL is also known to be too shifty in its strategy. Once you are talking about power brands, now you are talking about regional jewels, earlier you talked about profitable margins, now you talk about volumes. So the idiom is changing very fast.
Let me try and correct that. Our goal has always been to find a model which delivers growth that is competitive, profitable and sustainable. And over the last few years we have been doing exactly this. Our goal is unchanged. To deliver on that goal in the market like India requires us to straddle the pyramid and address the needs of consumers across the income pyramid. I don’t think that at any stage we have walked away from that or said that it is not our approach. We will do so by being closer to our consumers, by driving innovations harder and by remaining cost competitive. The other element of this is what is right for today and what is right for tomorrow. We would build a portfolio of capabilities which are relevant to this and will leverage our scale. This is strategy. In the execution of this strategy, in different points in time, there may be certain issues. We might have had a proliferation of brands which we felt a need to be pruned at a certain period . We finished that work at that time. Now every brand that we have got must grow. It doesn’t mean that we have walked away from anything. These are not inconsistent with each other but rather build on each other.
Like ITC which has e-choupal. Do you have plans to leverage technology to develop a similar platform?
Absolutely. Role of technology in our business, to drive execution, to drive quality, to drive growth, is unquestionable. I think, I only spoke about more stores in the beginning. I didn’t speak about better stores. Better stores programme is entirely dependent on leveraging technology using sophisticated information first. Over the last two to three years retailer-by-retailer details of purchases at a SKU level is available with us. That helps us model what is the appropriate assortment not for a channel, not for grocers as a channel, a kiosk as a channel but for each store. What does the Murugappa store want, what does the Prabhakaran store next to that want. And what does Bhaskar stores next to Prabhakaran stores want. And you will be surprised to see the varied assortment they keep because the shopper’s profile changes by store. That knowledge married with what he wanted the previous time and therefore what should I sell today. This is what we call ‘IQ’. No salesman can manage that without IT. Today, the salesman’s job has become even simpler. He doesn’t have to think. He should do what he is best equipped to do. Which is sell and build relationship. His job is not to remember that out of 600 SKU’s what did the retailer buy, how much quantity did the retailer buy. The computer will always do a better job than him when it comes to this. We issue mandates every month and a salesman job is simple. He has to execute all the mandates, shop by shop by shop. We have aligned everyone. Right from the incentive system, to the shop, to the salesman, to the distributor, everyone. Aligned around the delivery of the IQ mandates. When we achieve all this we call it IQ compliant. We have evidence to show that IQ compliant stores grow faster than stores which are not IQ compliant. Now our jobs is to convert more and more stores into IQ compliant stores.
How is Modern Foods doing?
Modern is a business that is quietly performing. A few years ago, we were struggling with it. It was a public sector purchase. We were struggling with the overall set-up – profitability, margins, etc. That is behind us now. We now have a model which is profitable and it is growing. The Modern equity is stronger than the amount of leverage we took. We have been doing little innovations around the Modern brand in Kerala. Be it rolls, cakes and other stuff. We are pleased with the way Modern is going. We are okay with starting small, experimenting, learning, and once taste success then rapidly roll out. We followed the same principle with water.
How is Pureit doing?
Water is going to be a very big business for us in the next few years. For the initial few years, people wondered what is going on, but we kept at it and see the results now. It is easily the largest selling water purifier in the country. Our volume share in the standalone segment will be higher than 50 per cent. It is growing strongly. We have four devices that straddle the pyramid from Rs 1,000 to Rs 6,000, and there is an active innovation pipeline going forward. We will continue with the strategy of straddling the pyramid with water like we do in other categories.
