HLL and the big brand theory

The December 2001 numbers of the most sought-after profit and loss account in the fast moving consumer goods (FMCG) sector "" that of Hindustan Lever Ltd (HLL) "" are the proverbial tea leaves with a message. The numbers suggest that the chairman of HLL, M S Banga, will be a worried man.

With only a 3.5 per cent growth rate in sales in the year 2001, he has squeezed the last buck out of his internal inefficiencies to generate a 25-odd per cent growth in net profit. The modest first-quarter results "" a 10 per cent drop in net sales, though profits rose 26.2 per cent over the year ago quarter "" confirm the assumption that this is an inflection point for the company.

Will HLL ever regain its growth rates and profitability ratios? Do the results herald a significant change in the Indian economy? As eyes focus on HLL at this inflection point, for Banga the next challenge is preparing his company for the end of its earlier glory days. The earlier growth rates and profitability stories are unlikely to be repeated. Thus, he will have to lead his company into a new era and buckle down to a new braver, fitter, different, "Indian" world. Banga's next challenge is also the result of the success of liberalisation of the nineties and the coming of age of the Indian entrepreneur. It is a market where the end of the phoren brand is in sight as also a time where the "Indian" brand is set to rule.

The symbol of this changing paradigm will be the battle between HLL and Amul in the ice-cream market. It is a fearsome battle which will be fought by Amul on its own terms. Amul is the Indian company and knows the larger segments of the Indian middle class and poor class much better than HLL.

Amul is using its core competencies and a great brand to create shareholder value with high-quality products for the consumer. It has alreadt combined its knowledge of India, its brand name and its inherent Indian entrepreneurial panache to deliver a major challenge to HLL in the business. It utilised its milk procurement strength and leveraged its dealer network along with its brand name and, presto, it has been successful enough for HLL to rethink its ice-cream strategy in India.

If Amul were an isolated success story, the danger for HLL or other foreign FMCG companies would not be pronounced. That is hardly the case. The same mantra can be repeated by other Indian brands and many are waking up to this possibility. Liberalisation has brought many benefits to the Indian company. The marketing strategies of HLL are no longer proprietary technology. The Indian entrepreneur can also hire the best minds from India and abroad to fine-tune his marketing strategy. He can package his products well and advertise effectively. His knowledge of the Indian market gives him grassroots knowledge of products for the grassroots market.

Thus, while Amul did it, so did Nirma. Velvette actually created a revolution with its novel ideas about packaging. Haldiram rules over Pepsi in snack foods. Anchor toothpaste is a success as are a host of other similar success stories.

There are other domestic companies that will inevitably wake up to the local power of their brands and the lack of entry barriers. GoodKnight, Asian Paints or Pantaloon are extremely strong Indian brands and can spin off into new FMCG products. If this does happen, as it most certainly will, a new segment in branded FMCG goods is likely to emerge.

For a company to do well in India, C K Prahlad has suggested that the emerging Indian market will need high quality, branded ten-rupee chappals, hundred-rupee shoes, fifty-rupee branded dhotis and so on. Such products will have a larger market than the current branded FMCG products of foreign companies. Consumer product companies that have focused on affordable and quality products for the Indian consumer have done very well, especially when backed by effective marketing "" as The Strategist, Business Standard's weekly management and marketing section, showed with several examples a couple of months ago.

The emergence of this trend will see a new market segment growing in which HLL may be completely absent. At the same time, companies will grow as they create and expand this market segment. Witness Nirma, which now has a turnover of Rs 2,300 crore. Thus, Amul will create new segments and new sales streams which will add to their profits.

In the battle of HLL versus Amul, a telling point is the failing attraction of a foreign brand. Who pesters his cousin to bring Johnny Walker from a duty-free shop? The international "shirt" or chocolate neither command premiums nor do they influence Indian taste buds. Wall's, the international flavour ice-cream, is tame in comparison to Amul.

HLL has another issue to tackle. HLL entered the toothpaste market and it put an end to the FMCG status of Colgate. Colgate has recovered, but at lower growth rates and much smaller margins. Now HLL is reeling from the attack by Colgate. Its margins and market-share from toothpastes are under attack. Its FMCG status in that category has ended. Adding to the woes of HLL and all the companies in this segment is moves like that of Nestle, Britannia, P&G and Henkel Spic to offer each and every product in the premium segment. In the branded atta segment within two years HLL is suffering from a 10 per cent loss in market share.

This kind of competition is going to kill all the main multinational players. HLL, Colgate, Reckitt, P&G and others are not going to be the same any more. They are going to snap at each other's market share and they'll show a diminishing trend in all ratios and numbers. The market may eventually even grow bigger and sometimes at a faster rate, but the ratios and growth rates for these companies will be lower compared to the glory days in the last two decades.

With this, the tea leaves suggest that the future is positively exciting for a consumer. Indian brands like Amul, Nirma, Titan, Asian Paints, Haldiram will get aggressive and take the upper hand. They will deliver cheaper high-quality products. The existing premium brands will get cheaper or their priceline will stabilise due to competition. Soon it will be a mature market with quality goodies available at affordable prices.

Thus, to read the tea leaves a little into the future, at the stock markets it looks like bloodshed rather than a glorious FMCG multinational time. For some length of time to come it may not be worthwhile to study the strategy of HLL or Colgate nor attend to their analyst meets. They have to restructure, strategise and experiment. HLL will face what Colgate went through for the last five years. Thus, for the next few years their balance sheets are likely to be modest in terms of growth rate. Eventually, they will attain a steady 10 per cent growth and 12 per cent market share each like their peers overseas in mature markets.

Thus, it's time to analyse the new emerging companies, the emerging Nirmas or, if you will, the HLLs and Colgates of tomorrow. These are going to be the future darlings of the Indian stockmarkets. In the FMCG segment we have many Haldirams emerging and it is these companies that will do an Infosys in the domestic market. It is a growth with twin engines on a very low base because they have just started. Phew "" what a recipe for the stock markets!