Can this FMCG giant regain its zing? - Views on News from Equitymaster

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Can this FMCG giant regain its zing?

Apr 21, 2001

At a recent analyst meeting of India’s No. 1 fast moving consumer goods (FMCG) company, Hindustan Lever Limited (HLL), chairman Mr. M. S. Banga observed that the company is looking at pruning its 110 strong portfolio of brands to around 30 in the next few years. The news did not go well with the analysts and investors. After all, HLL was a pioneer of brand differentiation in India. It had perfected this policy to its advantage in the last four decades and entered different product categories. So why did HLL need to prune brands? This was because only around 30 brands contributed more than 100 percent to its bottomline. The other 80 odd brands infact ate away at its profits.

FMCG Pie
  1999 2000 Growth
Sales (Rs bn) 396 427 7.8%
Per capita consumption (Rs) 394 415 5.3%
source: ORG-MARG

HLL has been one of the fastest growing FMCG companies in India. Over the last decade it has clocked an impressive 22 percent compounded annual growth rate (CAGR) in turnover and over 32 percent CAGR growth in net profits. And regular introduction of new brands has been one of the cornerstones of its success.

During the 1990’s, HLL grew from strength to strength backed by a three-pronged strategy. First it bought over existing companies/brands to gain entry into new products. For example, it took over the Kissan range of culinary products (jams, sauces etc.) and bought over TOMCO (hair oil) and Lakme (cosmetics) from the Tata Group.

Secondly, it gave tough competition to the incumbent market leaders by placing its products at cheaper price points and by introducing more than one brand in that category. For example, in oral care Colgate was the undisputed market leader with over 70 percent share. At the start of 1990 HLL was not even present in the oral care market. But by 1998 HLL overall cornered over 25 percent of market share and Colgate’s share shrunk to less than 55 percent. This it achieved by placing its brands, Close-up and Pepsodent, either cheaper than the Colgate brands or by pushing its brands through freebies and incentive schemes such as ‘buy one get one free’. Another example is its competition with edible oil major Marico Industries. Marico’s brand ‘Parachute’ is the No. 1 brand in coconut oil. To give ‘Parachute’ a run for its money, HLL not only pushed its own brand ‘Nihar’ but also bought another brand ‘Cococare’ from right under Marico’s nose. Soon, HLL was breathing down Marico’s neck backed by its strong distribution and marketing machine. Today HLL commands nearly 22 percent of the branded coconut oil market.

Distribution strengths
  Urban Rural Total
Dealer base (in m) 1.5 3.6 5.1
Zonal Break-up
North 29% 31% 31%
East 21% 30% 27%
West 25% 18% 20%
South 25% 21% 22%
source: ORG-MARG

Finally, it was one of the first companies to realise the immense potential of rural India. It spent a large part of its energies in developing its rural distribution infrastructure. It was one of the first companies to connect with rural India and introduce brand names based on the regional platform. Over the years its marketing efforts became more regionalized and so did its media plans.

Together this three-pronged strategy evolved HLL as an FMCG marketing monolith, both feared and revered by its competitors.

But the scenario changed over the past couple of years. Though HLL maintained its net profit growth at over 20 percent, its turnover began to stagnate. This was because rural India, which contributes over 50 percent to its turnover, suffered from difficult monsoons and draught situation. Purchasing power of rural India suffered and so did HLL’s volumes. Added to that, competitors started to fight back. Colgate got its act together and focused on rural India. It slowly started to nibble back the share it surrendered to HLL. Marico in hair oil and Tata Tea in the tea business too fought back and made things difficult for HLL.

HLL managed to keep its bottomline growth backed by strong treasury operations that kept its other income levels high. Also it successfully implemented the supply chain management plan to improve its cost efficiencies. But the HLL management realised that the company needed more than this to get back on its growth path. On a background such as this Mr. Banga and his team decided to prune HLL’s brand portfolio.

The team went one step further and identified five new growth areas to give a fillip to HLL’s sagging turnover. These are confectionery, consumer healthcare, bottled water and business through the Internet, while continuing to focus its energies on rural India. Ice-creams and frozen desserts form another important part of its turnover growth.

HLL’s initiatives are showing results. The company has managed to turn around the sick Modern Foods, which it took over last year. Modern Foods turnover zoomed 100 percent in fiscal year 2001 over last year. It is giving final touches to its media push strategy both in confectionery and consumer healthcare. In the next few months HLL is likely give sleepless nights to the likes of Britannia (in confectionery) and Dabur (in over the counter healthcare products).

Considering HLL’s track record of bull dozing into new product categories, it is likely to create a critical mass and hence add to its volumes. But this time around it might find the going a shade difficult considering that its rural markets are low on purchasing power.

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