Hindustan Unilever Ltd (HUL) has been focusing on regaining volume growth and market share. In the December quarter, volumes rose but profitability remained a big concern as the operating profit margin fell by nearly 3 percentage points. Chief Financial Officer R Sridhar talks to Malini Bhupta about how the FMCG major is fighting back and the way forward. Excerpts:
At this point in time, you are being hit by margin pressure and hyper competition. How do you plan to deal with both?
The Indian FMCG market is attractive for all global players. Apart from them, there are local players as well, so competition is here to stay.
And it is good for everyone; it makes people strive for continuous improvement in terms of value to consumers.
As regards the prices of raw materials like crude and palm oil; their prices are at very high levels. Commodity inflation is so high that price increases are inevitable. We have undertaken some price increases and will carry out more going forward, but it needs to be done in a calibrated way. We have also raised the bar on cost effectiveness programmes (CEP).
Analysts are worried about HUL’s high advertising and promotions spend. Will this continue?
Currently the expenses are in a band of 13.5-15 per cent. The band is higher than around two years back as the level of competition is higher. Similarly, new product launches also decide A&P expenses. Going forward, the level of the spend will be determined by the competitive intensity as well as the pace of innovations that we bring to market.
In the face of intense competition in the FMCG industry, HUL seems to be fighting back. In the given circumstances, what is the company’s go-to-market strategy?
If you segregate the households in India by their incomes, it looks like a pyramid structure that has a large base and tapering as we go up in the income segments. This pyramid structure is morphing into a diamond. As per an NCAER report published in 2003, affluent households are likely to increase from 3 million to 11 million by 2013. And to cater to these segments of the affluent as well as the middle class, we have to develop capabilities and products that cater to the changing habits and needs of consumers.
Over time, smaller rivals of HUL have caught up fast and are not so small today. How does the company plan to deal with such competition?
If you look at 2005-08, we grew in double digits. I’d imagine that our aggregate business grew ahead of the market. Today, in 9 out of 11 categories we are market leaders. Since no other FMCG player has a similar portfolio, it is difficult to compare our growth with that of other FMCG players. In addition, our business is focused on India as Unilever has presence in most of the countries whereas some of the other FMCG players have a significant export business as well.
Yes, our performance in 2009 was disappointing but we learnt a lot from it. One of the reasons for the 2009 performance was the volatility in raw material prices between second half of 2008 and first half of 2009. As market leaders, we were taking price increases to offset cost increases, and when commodity prices fell, we had to unwind the prices and it took some time to get the lower priced products onto shelves. Growth was slow for a few quarters in 2009-10 and then it picked up on the back of various interventions and actions which we took. Consequently, in 2010, we achieved double digit volume growth in all 4 quarters. We have widened the gap with competitors in terms of direct distribution.
What new products and categories are you looking at launching?
That’s an ongoing process. In 2009, we test marketed Comfort a fabric conditioner in Tamil Nadu, in 2010 it’s a national brand. Another example is Cif, which is a specialist surface cleaner, it’s a category of the future. Noodles is an attractive new category (Rs 2,000 crore) that we have entered in 2010 with the launch of Knorr Soupy Noodles, a differentiated offering combining the fun of noodles with the health of soups. Keeping in mind the consumer of tomorrow, we are looking at different segments and categories.
