A keen market analyst was watching Hindustan Lever Ltd. (HLL) Chairman, Vindi Banga and his finance chief explaining the company’s FY 2003 results on CNBC. The interview took place during trading hours on February 17; and even as the Chairman spoke, he watched the price decline from Rs 198 to Rs 191.35. When the scrip closed at 192.80, the analyst said, “This company is in big trouble”.
Signs of that trouble have been evident in the sluggish topline growth ever since 1998.The company struggled ceaselessly to squeeze input costs and successfully increased profits, but its reluctance to sacrifice high product margins clearly affected its ability to expand the market. Even when newer players began to eat into the market, the multinational (MNC) was happy to focus on the premium end of business.
A few months ago, HLL and its MNC rival Proctor and Gamble (P&G) slashed the price of its detergent sachets, in order to boost volume growth. On a comparison by weight, the sachets were priced lower than larger packages. But instead of boosting volumes, it only began to hurt margins; the market had signalled that MNCs would have to sacrifice profits to grow the market.
Last week, P&G decided to take the war directly into the HLL camp. In line with its worldwide strategy (decided in December 2003) of pushing market share over margins, it slashed the price of its premium detergent brands.A startled HLL was forced to follow suit by hacking the price of Surf Excel overnight.
While P&G India chopped the price of Ariel and Tide, HLL has matched it by cutting the price on its premium detergent, Surf Excel, from Rs 130 a kg to Rs 99. The mid-priced Surf Blue has seen its price drop from Rs 85 a kilo to Rs 60, but it remains higher than P&G’s Tide, which is sold at Rs 46. Just a year ago, prices were 50 to 80 per cent higher.
In effect, P&G had declared war and the market leader, plagued by sluggish growth, had no choice but to respond. In other words, the market leader has forfeited the advantage of dictating marketing strategy and is forced to follow the pace set by its competitors.
For the moment however, investors have reacted negatively to both warring MNCs and caused their stock prices to tumble. HLL’s share price has dropped below Rs 160, while P&G has fallen to Rs 400 on March 5). The HLL scrip has been in a downward spiral since January this year, having shed over 25 per cent value from its January 1, closing of Rs 212.6 and P&G has also kept pace by falling continuously from the level of Rs 474.9 on January 1.
But HLL probably has a lot more to lose if lower product prices don’t give a turbo-boost to sales. After all, HLL’s market share in the Rs 4000 crore detergent business is 40 per cent while P&G is a mere five per cent. Also, the detergent business contributes a hefty 20 to HLL’s total turnover and lower product margins will severely affect its bottomline (the soap and detergents division had a fat margin of 30 per cent on PBIT in 2003). In fact, soaps, detergents and personal care products account for 89 per cent of HLL’s PBIT (profit before interest and tax).
Investors clearly don’t expect HLL’s price cuts to lead to exponential volume growth; not do they expect that consumers who buy mid-priced products like Nirma (which has a 34 per cent market share in the non-premium segment), Key and Ghadi will upgrade to Surf Excel. That is surprising, because year after year, analysts have argued that the biggest impediment to topline growth in the soap, detergent and personal care businesses has been high prices.
What does the new trend in the detergent war mean for India’s most respected company? Effectively, it means that the company may find it difficult to protect its high margins in other product categories as well. In fact, HLL’s soaps and shampoos are also very expensive and facing tough competition from equally good and lower priced domestic products and those imported from countries such as Indonesia, Thailand, Australia and China even after duty and freight.
Also, many users suspect that in its effort to cut input costs and protect margins, the quality of its products have suffered; but this is a charge that the company denies. HLL has also tried to keep brand excitement alive by frequently chopping and changing its product portfolio. Several old brands have been dropped and the more successful ones are being constantly reinvented and relaunched; but with the limited impact of protecting their market share and not growing it. It has also tried to lure consumers with freebies and ‘extras’ – in fact, anything to avoid an outright price cut.
HLL’s five year effort to find emerging consumer goods categories (Project Millennium of 1999) and its forays into confectionery and ayurvedic healthcare products have yet to yield significant results. The food business also remains a damper on profitability and efforts such as direct marketing (Aviance), aggressive exports, marketing of packaged water and plans to launch Laundromats or expand the Lakme beauty salons have either been shelved or have stagnated. The foods business, which was supposed to equal its personal care business continues to remain stubbornly sluggish.
HLL’s future now depends on the seriousness of its rural marketing programmes and its ability to control its hefty wage bill and high overheads, especially when faced with the lower cost operations of its increasing competitors. It is only then that its lower product prices would give it a serious chance of capturing larger chunks of the rural market. So far, HLL has announced several plans with catchy labels such as Project Bharat, Project Shakti and Operation Streamline.
While the first was a rural sampling programme, the second aimed at increasing rural reach through sub-stockists in 50,000 villages (covering 250 million consumers). The ground is now laid for Project Shakti, which at lower unit prices could increase market penetration. But HLL, which was the first to embark on ferocious growth by taking advantage of India’s liberalised economy, probably has to reinvent itself for operating in a new wholly new market paradigm.