What has happened to Hindustan Levers? For a company that is renowned for creating superstars, the last few quarters of weak performance seems to prove otherwise - it's a giant soap-opera which has lost its sense of direction.
The company, which is supposed to be the barometer of the economy, is in its toughest spot. HLL has been facing falling sales and declining margins for some time now. Most often it is the lack of rural demand and bad economy that has been blamed.
But the economy is doing well; at least that is what statistics show. And there are other companies who have built market share from scratch in recent years, like Cavin Care, and that too at HLL's cost. Others like Godrej Consumer Products (GCP) have reported a 29 per cent increase in profit before interest and tax and a 6.7 per cent increase in sales in its soap business in the quarter ended March 2004. Compare this to HLL, which reported an over 20 per cent drop in its net profits in the same period. So why is it that HLL is not able to make the cut?
It has a portfolio of good brands - Surf, Rin, Lux, Lifebuoy, Sunsilk, Fair & Lovely to name a few, a great distribution network, HLL's brands are present in more than three million retail outlets, and a great understanding of the Indian market. It is a mystery that companies who have less than 10 per cent of HLL's overall turnover are doing better than HLL. So is size a problem? Or is it the quality of decisions that have been made?
Take the 'on-the-spur-of-the-moment' decision to chop detergent prices, which analysts estimate, cost HLL at least Rs100 crore in operating profits. Why? Because P&G did it.
Industry analysts even question the businesses that HLL has entered such as the fragmented Rs1,500-crore confectionery market through its Max brand. Such businesses do not add any significant value to the company's topline but requires a different distribution skills-set, frittering away its energies, often at the cost of its core businesses.
Take, for instance, the decision to offload the Dalda brand in September 2003. HLL did not see any potential in the brand and wanted to focus on brands with higher margins and growth potential. In a way it would make sense.
Health consciousness among urban Indians who would not want to eat vanaspati is surely on the rise, though that's a miniscule proportion of the population. The other 'not so health-conscious segment', forms at least 50 per cent of India's population and in marketing jargon, is also known as the 'mass market'. That's not a small number by any standards. And the fact that the company that bought the Dalda brand - $22-billion US-based Bunge Limited - sees the brand's potential and will re-launch it in India makes one wonder about the wisdom of HLL's decision to offload the it due to its perceived 'low growth potential'.
This brings one to question the method in which the portfolio of brands were trimmed especially since HLL's motive was to increase its attention span to brands which were cash cows and had more revenue generating potential - the Power Brands. But it does not seem to be working. HLL's Power Brands, which accounted for 93 per cent of the company's domestic consumer business in June 2003, today, do not seem to be bringing in the money.
Globally too, the parent company is facing similar problems. In 1999, to improve the company's performance globally, Unilever set an ambitious target to increase revenue growth to 5 per cent by 2004. Future promotional and development efforts were to be focused on 400 key brands out of the company's stable of roughly 1,600. Its 2004 and in the March quarter, Unilever has posted only a 1.3 per cent rise in the sales of its top 400 brands (source: Reuters). Unilever plans to take action to address this. And maybe it already has done so in India.
The decision to bifurcate home-grown HLL into two independent entities - home products (HPC) and Foods has been long overdue. Way back in 1999, K B Dadiseth, then the chairman of HLL, had predicted that with growth in size, HLL would find it difficult to sustain growth levels in years to come. As such, this move will enable the company to provide proper focus to both product categories. Decision-making will be more decentralised thus enabling it to become more proactive than reactive to competition and customer needs and succession planning will be faster and more effective.
And that is what the company needs. Separate teams looking after its personal care and food portfolios and providing customised direction and vision to both, individually. A related advantage of his separation would be that this division would stop the food business from feeding off the profitable personal care business. While soaps and personal products provide positive margins to HLL's bottomlines, processed foods and ice creams do not.
There is no doubt that HLL could not have become what it has, a Rs10,000 crore giant, without the calibre of its people and strength of its vision. But whether this division will bear fruit remains to be seen.
What the company desperately needs now is innovation - in thought and execution. By leveraging on its multi-billion dollar technology division, HLL did create products like Surf Excel, which reduces the housewife's time spent in rinsing, and water consumption by 50 per cent. This can be a great seller in water-scarce markets. But is it? Additionally HLL also needs to get creative in generating a series of 'conceptual' breakthroughs, on the lines of the 'sachet', that can improve its topline performance in the next one-year.
Maybe this is very short-term focus. But may be it is what the giant needs - short term goals and not long term hopes.