As competition heats up, India’s top consumer-products company woos affluent shoppers with global brands like Dove, while cooking up its foods biz
by Nandini Lakshman
The middle-aged Briton strolling the aisles and checking out the products doesn’t attract much notice from other shoppers in Mumbai’s Hypercity, the India hypermarket chain. That’s how Douglas Baillie likes it. Baillie, the managing director of Hindustan Unilever, India’s premier consumer-products company, wants to see how his products are stocked, what consumers are buying, and how shoppers are reacting to competitive brands. It’s primary market research at its most elemental, and it’s best done incognito.
Hindustan Unilever has traditionally relied on small traders and mom-and-pop corner stores to retail its products. But India’s recent retail boom has created large stores and malls, so the company wants to make sure it’s in with the new marketing crowd. Hence Baillie’s Hypercity visits, and the calls he makes on the headquarters of the big retail chains.
This is quite a change for Hindustan Unilever, whose executives used to have emissaries make obeisance at Lever house in downtown Mumbai. “I can’t imagine any head from Lever House ever visiting other company offices like this,” says an amazed Damodar Mall, chief executive of innovation and incubation at Pantaloon Retail, India’s largest retailer, and a former manager at Hindustan Unilever.
Facing Competition from P&G and Others
The reason for this newfound egalitarianism is that the $3 billion Hindustan Unilever is facing serious competition. The company, which is practically synonymous with India, makes everything from detergents, soaps, and shampoos to soups, sauces and tea, and dominates most of those categories. Yet early this year, Finnish handset maker Nokia (NOK) dislodged it as the multinational with the highest revenues in India, after ringing up India-based sales of $3.5 billion.
Now Hindustan Unilever is under siege from aggressive Indian and foreign competitors such as Procter & Gamble (PG), Nivea, and L’Oréal. In the last year, ACNielsen data shows, Hindustan Unilever’s lead in hand soaps, including the popular Lux, is down from 55.2% to 54%. Favorite detergent brands like Surf Excel and Rin are barely hanging onto their 37% share. Hindustan Lever tea brands like Brooke Bond and Lipton have dipped from a combined market share of 29.2% to 24.3%.
All this has taken a toll on Hindustan Unilever’s operating margins, down from 21% a few years ago to just 11.84% now. That’s why the company is wooing consumers in big retail stores. These newly affluent shoppers present the best hope for the company’s future in India. According to retail consultant KSA Technopak, organized retail, currently just 3.5% of India’s total $336 billion retail market, will grow to 28% by 2017.
In Sync With Unilever’s Global Realignment
Hindustan Unilever’s managers hope their revenues from big retail will increase from 5% today to over 25% in 2012. “It is a big game for us,” says D. Sundaram, Hindustan Unilever’s finance director. Hindustan Unilever’s strategy is to market its premium products through the hundreds of megastores springing up across India.
That dovetails with parent company Unilever’s new global realignment of products. Parent Unilever will develop the brands and streamline product offerings across the world, while its subsidiaries will sell the products.
This means that all of Unilever’s brands will be available across global markets, fitting in quite nicely with India’s turn towards more international products being sold in supermarkets.
Yet this is still a dramatic change for Hindustan Unilever which, not long ago, was the most successful and profitable company in the Unilever group, the crown jewel whose managers had free rein to develop and build brands suitable for the local market. The takeover of Hindustan Lever by Unilever became evident in March, 2006, when Baillie, a Zimbabwe-born British national, became the first foreigner in four decades to head the Indian company.
From Local Player to Multinational, Overnight
The change sent shock waves through India. For many decades most Indians thought Hindustan Lever was a local company, not a multinational, and the cream of India’s management graduates made their careers there. Then in February, 2007, the company, then known as Hindustan Lever, was rechristened Hindustan Unilever to reflect its parentage.
Baillie first had to sort out some past problems. For instance, in 2002 the company adopted Unilever’s global strategy of focusing on just 30 power brands instead of the total basket of 110 more local brands. While the strategy aimed to conserve management energy, it also left the field wide open for competitors to attack Hindustan Unilever in the niche soap and detergent markets where its smaller brands held sway.
And there was some stiff competition from rival Procter & Gamble; a 2004 price war with P&G in the detergent business forced Hindustan Unilever to slash prices on its premium brand Surf Excel. The effect: The company’s sales and operating profits stagnated at $2.5 billion for five years while operating profit plunged 37%, to $274 million in 2004. Last year operating profits reached $357 million, thanks to price increases. But the rich margins of the past have not returned.
Tougher to Hold On to Market Share
Baillie says he intends to get the company back “into the competitive growth zone and do this in a manner that we can consistently deliver.” He also wants to expand the foods business in conjunction with the parent, where foods bring in half the revenues globally. In India, the company’s home and personal care businesses account for 80% of revenues and 85% of profits at Hindustan Unilever, while the company’s track record in foods has been dismal. Indeed, it has phased out more food products—wheat flour, confectionery, frozen bread—than it has launched.
Hindustan Unilever executives are realistic about the new era in which it now operates. Nitin Paranjpe, executive director in charge of the home and personal care business, admits that it’s now “tougher to hold on to market share. If India is a great story, we aren’t the only ones seeing it.” Rivals like P&G and Nivea have also copied Hindustan Unilever’s best innovation: the small shampoo sachets it pioneered in the 1980s, which sold for less than 2 cents each and which expanded the market for Hindustan Unilever products among India’s rural masses. Currently, 80% of Indian shampoo sales come from sachets. But today even L’Oréal has sachets of its Fructis shampoo.
In June, the Tata Group’s beverage company Tata Tea overtook Hindustan Unilever as India’s largest selling tea brand. According to ACNielsen, Tata Tea’s market share increased from 16.7% in March, 2006, to 19.9% in July, 2007, while Hindustan Unilever slipped from 26.1% to 19.5%. Tata Tea is exultant. Managing Director Percy Siganporia says the gain is “a dream come true for us.”
Bringing high-end Dove to India
Baillie is fighting back. Over the past six months, Hindustan Unilever launched a high-end range of Pond’s skin care and Dove hair care products from Unilever’s international portfolio. These premium brands retail not in neighborhood small stores but in supermarkets and hypermarkets, where Indian customers love to touch and feel products.
Hindustan Unilever is also milking one of its top brands—Fair & Lovely, a hot-selling “fairness” cream, which promises a lighter skin tone for many of India’s complexion-conscious consumers. The advertising campaign, which suggests that regular use of the cream helps women gain confidence and makes them eligible for marriage, has made the brand a winner. That has spawned a host of competitive fairness creams, soaps, and sunblock lotions. But Hindustan Unilever’s brand is still tops.
Baillie is also getting aggressive on foods, focusing on the Knorr brand of soups and curry mixes—ideal for the Indian market. Analysts believe the company’s current strategy of concentrating on premium products and marketing them in the large retail stores is a winning one. Sumeet Budhraja, consumer analyst at Mumbai brokerage First Global Securities, says that Hindustan Unilever “could have addressed a lot more categories, but they are more focused and regaining their aggressiveness.” He points to the demand for safe drinking water in India, which Hindustan Unilever exploited with the launch of water purifier Pureit in 2005, at one-third the price of established Indian brands such as Aquaguard.
These efforts have delivered some promising results, and Baillie is pleased with the modest turnaround. In the quarter ended June, 2007, the company’s sales grew 13%, with net profit up 29.6%. Reason enough to keep patrolling those store aisles.
Lakshman covers India business for BusinessWeek.