HUL loses ground

Market dynamics can change rapidly in the fast-moving consumer goods (FMCG) business. In early 2008, consumer non-durable companies were grappling with a sharp increase in raw material prices like oil and packaging material. Modern retailers were tightening their product portfolios and downsizing existing inventory—some even closed shop, squeezing sales volumes of FMCG companies.

Towards the end of 2008, raw material and packaging material prices started sliding as oil prices dipped. Consumer non-durable companies soon passed the benefits on to consumers by paring product prices. Now, overall volume sales growth has perked up to around 30 per cent in March 2009 as compared to a sluggish 20 per cent last year. FMCG’s roller-coaster ride seems to have come to an end.

Such a rapid cycle made it tougher for FMCG behemoth Hindustan Unilever Limited (HUL) to navigate the market conditions. HUL volumes dipped 4 per cent in the quarter ended March 2008-09. Says Harish Manwani, Non-Executive Chairman, HUL: “We have never seen a situation where price inflation and deflation happened so rapidly. As our marketing pipeline is huge, the impact of changing prices may differ from those companies that operate only at one end of the market.” However, lower raw material costs helped boost margins by two percentage points.

HUL is losing some ground to small and mid-sized companies and lost market share in March 2009 in some key product categories. For instance, in soaps, market share in value is down to 47.5 per cent in March 2009 from 53.4 per cent in the same period last year, according to data from AC Nielsen. In shampoos, HUL’s market share dipped to 45.9 per cent from 47.3 per cent. In toothpaste and detergents, too, HUL has slipped. In tea, however, HUL managed to buck the trend and increased its share from 22.6 per cent to 23 per cent. Price hikes and the downstocking in big retail had an impact on HUL’s sales. HUL has corrected its product pricing now and is working to regain market share in the coming months. Says Manwani: “There has been pressure at the bottom-end of the market. We changed the prices in the March quarter, a lot of which has not reached our consumers yet.”

On the other hand, small players are pushing sales aggressively. Many absorbed the higher-input costs, taking margin hits and made gains in their market shares. For instance, Godrej Consumer’s market share, in value terms, in soaps, increased from 9.2 per cent in March 2008 to 10 per cent. Others, like Marico, chose not to hike prices aggressively and the strategy seems to have paid off. Says Saugata Gupta, CEO, consumer products, Marico: “We had higher costs, but we believed in retaining consumers. So we didn’t pass on the entire cost.”

Urban markets proved tougher to negotiate for consumer companies. A sharp decline in sales and a lower stocking of goods at modern retailers hurt volume growth. With almost 9 per cent of its revenue derived from big retail, HUL took a significant volume hit. A three-day downstocking in a quarter can have a 3-4 per cent impact on HUL’s volumes. Besides, consumers are also changing their buying patterns—a fallout of the economic downturn. High-value FMCG brands that are heavily dependent on big retailers for sale, are seeing a slump in volumes at the top-end of the market.

This is, in part, due to a dip in impulse buying, which translates into lower-volume growth for companies. At the bottom-end of the category, consumers are buying on a needbased basis rather than making bulk purchases. Says Gupta: “In the impulse category, there could be potential for lower consumption. Consumers don’t tend to migrate to high-value brands in a recession.”

The rural market, though, is expanding. For many companies, particularly the smaller ones, the rural market is still unexplored and as they spread in India’s interiors their volumes tend to get a significant boost. Says R.K. Sinha, Chief Operating Officer, Godrej Consumer Products: “Rural market is a faster-growing segment and is still under-penetrated. We are still not available in many rural areas as developing distribution takes time.” With consumer-spending power on the upswing in the rural areas, this is a good time for mid-sized companies to gun for growth. Says Sunil Duggal, CEO, Dabur: “Our overall strategy this year is to focus on the rural market, and with the government’s rural push, we see good potential.” FMCG giant HUL already has a fairly sizeable presence in the rural market.

Profits of mid-sized companies grew at a faster clip than big competitors due to their rural focus. Their volume growth has been robust in 2008-09. Overall, Dabur recorded volumes in excess of 10 per cent for its hair oil and oral-care segments and nearly 15 per cent for its foods business. Marico clocked a 20 per cent volume growth in consumer products while Godrej Consumer’s soaps business grew 20 per cent.

Still, the business environment remains challenging for FMCG companies as the economy is not out of the woods. Says Gupta: “It’s a difficult market, so we are looking at retaining volume growth this year.”

Companies are devising ways of retaining their existing consumers by fine-tuning their pricing and packaging of their products. One key strategy has been to introduce sachets with the right pricing in rural markets. For instance, the Rs 10 strategic price point has found favour with the pricesensitive rural consumers. Says Duggal: “There are critical price points in the rural market that are very important.”

Meanwhile, cost control is again the buzzword in FMCG circles. And, the priority is managing marketing networks. As consumers taste changes rapidly, companies with larger distribution get hit harder. They have a disadvantage in the short-term as they have to unwind stock positions.

HUL has been working on reducing its execution cycles so as to better respond to marketing changes. It’s streamlining its distributor network—sticking to a fewer big distributors—and through the use of technology, seeks to reduce inventory levels. As a result, it will lead to quicker response to fickle consumers. Says Manwani: “We are absolutely sure how to manage shorter execution cycles.” Mid-sized companies, with smaller distribution networks, respond quickly to changes in the market, which gives a fillip to business volumes.

HUL now is gearing up to take on competition with new price points and a streamlined distribution. Says Manwani: “For us, it’s business as usual on growth and business unusual on costs.” But, for the moment, it’s advantage small companies.