HUL: Time for a different strategy?

Hindustan Unilever Limited (HUL) witnessed a revenue growth of 6% YoY for the March 2009 quarter. Although the March quarter is a slow one for the company and is coming off a high base with 18% growth recorded for March 2008 quarter, A C Nielsen data shows that this is due to loss of market share in key product categories. In the last year, HUL lost more than 600 basis points in market share in personal wash (54.3% to 48.2%), 340 basis points in skin care (55.4% to 52%) and 150 basis points in toothpaste (29.5% to 28%). This loss is attributed to HUL's focus on high-value products, consumers switching to cheaper regional brands, lack of product innovations and stable pricing by rivals.

In the face of slowdown, HUL's strategy to maintain margins was to focus on premium brands like Ponds and Dove since the demand for these products was perceived to be price inelastic. However, the consumers were hunting for value offers during this period.

The main competitors for HUL who have gained market share at its expense are Godrej and Reckitt Benckiser in soaps, Colgate and Dabur in oral care and Dabur in Shampoos.

Moreover regional companies like Chik in shampoos, Dyna and Santoor in soaps and Nirma and Ghadi in detergents gave incentives to trade by increasing trade margins and increasing the credit period, hurting HUL further.

HUL had stated recently that it is concentrating on regaining its market share going forward as it believes that without market share, profitability is impossible. The company has already started putting a strategy in place which includes grammage correction, pricing unit packs at lower price points and increasing promotions for value brands. Under the grammage correction, Wheel soap's Rs.10 pack was increased by 25 gms to 275 gms while Lux soap's Rs.18 pack now weighs 25 gms more than earlier. HUL also hiked retailer margins in some categories, offering 8% incremental margins. The company is reducing the prices of its detergent brands like Wheel and Surf and is investing heavily on brands like Rexona, Breeze and Hamam.

We believe that HUL's focus on market share will benefit the company as in the scenario of low inflation, growth will come from volumes. However, we would like to wait and watch how the competitors react to HUL's strategy.