Sanjiv Mehta, 61, took charge of Hindustan Unilever (HUL) a decade ago. Since then the FMCG major has grown nearly five times, but with competition getting fierce amid unprecedented levels of inflation and a slowdown in consumer demand, it faces fresh challenges. The Chairman and MD, however, is confident about the future. In an interview with Business Today’s Arnab Dutta, Mehta says HUL is being re-imagined and this would keep it future-ready. Edited excerpts:
Q: High inflation has been a major concern and has led to repeated price hikes. Amid faltering demand, what is the outlook for the next two-three quarters?
A: From the macroeconomic point of view, there are two other factors at play. One is private consumption or expenditure is still lower than the pre-pandemic levels. The second... is private capital expenditure. Private capex kicks in when you have your capacity utilised by over 75 per cent on an average. We are pleased that the government is not reducing the Budget deficit and is willing to continue with capital expenditure until private capex starts in a big way. The massive capital expenditure allocation by the government for the year should reflect in improving consumption.
There is a stress on demand and it is more acute in rural areas. We are witnessing that through off-take trends for small packs—priced between `1 and `10. This clearly indicates the stress, which worsened due to inflation, especially for households whose budgets are limited. Disruptions in the supply chain have a role in the ongoing inflation. I am hoping that in the second half of 2022, we shall start seeing some tapering off [of] prices and then gradually inflation coming down.
Q: The government’s capex for FY23 is significantly higher. But such measures usually take time to change the downward trend in private consumption…..
A: We did highlight this during our representations with the government secretaries and the good bit is that the government is very cognisant that if the need arises, they would be agile with spending. I hope that the Omicron variant is the beginning of an end [to the Covid-19 pandemic]. However, in case more variants arrive, I think the government is very clear that it would not hesitate to spend... That gives me comfort. If the government is open to spending more and meanwhile private capex kicks in, then we will witness demand coming back.
Q: What would be the impact on margins?
A: This stress will remain for a few quarters. This is cyclical. During these times, our focus is on two areas: gaining market share so that we do not lose the consumer franchise; and, second, we keep the business model intact. We have a very healthy Ebitda margin at 25 per cent. Thus, as long as I can keep that within the band and our market share intact, I’d be ready to play even harder when commodity prices cool off. From that perspective, I am confident that we’d be able to navigate this crisis.
Q: Since you took charge in 2013, there have been significant changes in the dynamics of the FMCG market in India. While HUL is still the largest player, companies like ITC, Adani Wilmar and Tata Consumer have expanded aggressively in segments like personal and home care and branded commodities. How does HUL plan to hold on to its position?
A: In the past 10 years we have grown at about 9 per cent CAGR, despite the rural slowdown, demonetisation, implementation of GST and the Covid-19 pandemic... Our operating margin improved by about 800 basis points. That is why, since I came in, HUL’s market cap has grown from about $16 billion to $70 billion. It has been a quantum shift. There are two key parameters to judge it. Today, our market share is one of the strongest we have enjoyed in many years. And second, the increase in turnover [we] managed in the last 10 years is greater than the total turnover of any other FMCG company in the country.
India is such an attractive consumer market that new players will come in. I believe, competitors are good for the consumers and they are good for a company like HUL too—because they bring the best out of us. If we did not have good competition, we would have become complacent. Competitors keep us on our toes.
Q: How will HUL survive the onslaught, given that competitors are getting more aggressive?
A: The per capita consumption of FMCG products in India is about 40 tonnes, which is half of the average for Asia, one-third of China’s and in comparison to the Philippines it, is one-fourth. Therefore, the headroom to grow in this market continues to be massive. However, apart from the potential of the India market, what keeps me optimistic about a brighter future for HUL are three key factors. First is our portfolio. We have done a lot of work to make our portfolio future-ready by expanding into newer categories, segments and adjacencies and investing significantly in growing the pie through market development. The second factor is talent. We are still the employer of choice in this country... when we go to the IIMs, we recruit the best possible talent. Then we have the most rigorous programmes to sharpen them. We get the best and we make them better. That is the reason why we still maintain the tag of being ‘the CEO factory’. Third is our capability. We have invested significant amounts of money and talent in re-imagining HUL. Our vision is very clear: we want to be the most intelligent consumer goods enterprise. We started re-imagining HUL six years back. We are working across the value chain, by further digitising it, bringing in robots, by implementing AI tools. The HUL of tomorrow is going to be significantly different from the HUL of the past.
India is not a zero-sum game. If some company is making an additional say `300 crore, that does not mean it is going to cost HUL `300 crore. This year, we are adding `5,000 crore to our top line. These together make me confident that HUL has an amazing future ahead.
Q: What do you envisage as the HUL of tomorrow?
A: The business of FMCG is undergoing a major transformation. Earlier, we used to procure raw materials, produce goods at scale to keep the costs down, reach as many outlets as possible and create market pull through promotions. That is how the FMCG system used to work. Now we are in the process of being an intelligent enterprise, creating ecosystems involving consumers and operations where data and technology take centre stage. Today, our Shikhar app that we benchmark has over 700,000 customers (retail partners). So even when a sales representative does not visit stores, retailers can place orders any time they choose... Our tie-up with State Bank of India ensures that retailers get paperless credit from the lender, using the app.
There was a time, when we used to do a huge amount of consumer research (physically) to gauge what the consumer needs, following which our R&D teams would create prototypes, then we [would] test them out and do commercial runs, etc. Today, at our innovation hub, most of the work we do is simulations. From designing to testing and dry runs—everything is simulated. During the lockdowns we had engaged with consumers to get a sense of their changing behaviour, provided the info to [our] innovation funnel and have come up with products based [on] their needs. So the entire process of getting a sense of the consumer’s mind, changing behaviour and emerging demands to placing the products on the shelf—we are creating a very intelligent ecosystem. This also helps decision-making. Be it our pricing strategy across SKUs [stock-keeping units], whether to invest in channel distribution or promotion and in which media, [all this is] based on machine learning.
Q: Now, one of the hottest FMCG segments is branded kitchen commodities, where HUL does not have much influence. Why is it so?
A: We would not like to play everywhere. We prefer business segments where we can create more value for our customers and for ourselves. We would like to play in value-added products rather than in commodities. Yes, our commodities business is very small but that’s not an area of focus for us. I would rather spend my resources in improving our nutrition portfolio—on the different product ranges in the segment, analysing and solving problems of nutritional needs and vitamin deficiency—than trying to sell packaged commodities.
Q: Does HUL want to ramp up its game with the Horlicks brand?
A: There are categories we play in, like detergents or oral care, [which] are universally penetrated. But in a category like health food drinks, which is represented by Horlicks, the penetration level is only 25 per cent. We have got massive room to increase penetration of these products; and sustainably grow those at a very high rate for the years to come.
Q: What are the value-added segments you are focussing on?
A: In highly penetrated categories like basic home care and hygiene, the game is all about upgrading the consumer. In categories like dish-wash bars and liquids or surface cleaners, massive opportunities lie ahead. In beauty, which is a very big segment, we are by far the largest player and our nearest competitor is probably a fifth of us. Be it skin or hair care, all these are massive business opportunities, where we dominate. In refreshments—tea and coffee for us—converting consumers from unbranded to branded and higher value products will drive growth. Apart from health food drinks, we are focussing on packaged foods through brands like Kissan, Hellmann’s and have launched several products in the ready-to-eat segment. That is where, I believe, we can move further up the value chain.
Q: HUL is a major revenue contributor for parent Unilever. What are the expectations and pressure you face?
A: We are part of one of the fastest growing major economies, where we are the largest FMCG player. Therefore, the expectations are always very high. HUL is very unique in that sense. We are a provider of talent to the global unit and we have a large market cap. For Unilever, we are the largest company in volume terms and the second largest in value terms. I will not be surprised if in a few years we become the largest in terms of value for the global entity. So, we are the crown jewel of Unilever. While we are a major provider for them, we take a lot—in terms of R&D, global brands and technology—from them.
In the past 10 years, we have managed to live up to those high expectations. With size, with stature come responsibilities. I think, we have always ensured that we don’t let Unilever down.
Q: Are you interested in taking advantage of the government’s PLI scheme that calls for creating global food processing giants out of India?
A: Yes, we are. The PLI scheme is a very good initiative because it helps you to compete on the most critical dimension—that is cost—by mitigating it through scale. We have already applied under the scheme and we are on to it. I hope that the government extents the PLI scheme into health food drinks.
Following a restructuring, Mehta will be CEO & MD, HUL, from March 31.
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