A lot of observers compare Unilever’s huge portfolio of foods, which is much larger than home and personal care, but the reverse in India, and then they see the aggressive foray by ITC into foods — I am sure you must have heard this odious comparison before. But when is the big bang in foods going to come for HUL?
I am glad you asked that question otherwise I wouldn’t have been able to give you my spiel (laughs heartily). Foods will be a big opportunity; it’s a matter of time. The foods market is very large — € 200 billion, packaged foods is € 10 billion or even less. That this market will convert is given but certain conditions have to be met — part of it sociological conditions such as demographic changes, dual-income families, pressure on time and so on. But part of it has to do with the changing trade structure also.
Modern retail is more conducive to selling packaged foods and therefore it suggests that as modern retail grows, packaged foods will become large — but they are tough markets to build. You have to cater to local palates and there is the big barrier of people saying they can do it themselves. So there are a whole lot of things that have to come together before foods can succeed. But it has happened everywhere so it will happen here. The opportunities involved are many. We want to make sure that when this game is getting played out — it won’t be played out in the next year or two — and if I were to use a chess analogy, I would say we want to make sure that we have all our pieces rightly positioned before the end game. It’s not about making a move today which is opportunistic for short-term gains but about making sure we make the right strategic moves so that our brands are well positioned to win. We will be disciplined in the manner that we enter and develop the category.
We have a strong portfolio in foods. We are determined to build a large Knorr brand in savouries. We started with soups, got into Chinese meal makers, and we will build it systematically into bigger platforms. We have got Kissan, which is the market leader in its category, and we will leverage it fully. We are experimenting with Amaze. We have market leadership in tea and coffee and have strong brands like Brooke Bond, Lipton and Bru. While we have a big play here, we will be disciplined about the spaces we enter.
We will not get into spaces where Unilever does not have the technology or understanding to win long-term. Building competitive and profitable businesses is the key to a sustainable play. We have been here for 75 years and we want to be here for the next 75 years and more. For that we have to do it right. Lastly, we will enter categories which are consistent with our corporate purpose and vitality mission, which requires us to address foods in a responsible manner.
What about Modern Foods, won’t that too be a key plank for your foods business, besides Knorr and Annapurna?
Yes, it would be. I think a fair scorecard would be that we have turned around the business through systematic efforts over the several years since we acquired it. We have some ideas on what we could do to drive growth faster, but I can’t comment on that. It took us a little longer than we imagined, at the time of acquisition, to get it to a state where it is ready for growth. When a business is bleeding you have to stop the haemorrhage before you earn the right to start investing in growth.
The early part of this decade, 2002-04, HUL, went through some trying times, you lost market share, profits dipped.…
(Laughs) Yes, our performance in that period was short of our extremely strong track record over many years.
So, today is it a case of the Empire striking back, given your strong showing? You’ve gained share against competition, beaten back the challenge posed by regional brands?
(Laughs again) I wouldn’t say that, but it’s interesting that you raised this question. But let me tell you a little bit about that period. I have lived through that and I must admit the early part of that I was quite nonplussed. It was an attack on different fronts.
Slowing demand, strong regional brands, the aggression from P&G …?
No, that wasn’t really it. The crux of the issue was we were experiencing something that no one in the company had gone through. There was a generation of managers who had seen success for 15 years … from 1987, when I joined the company, I hadn’t seen a year as we had in 2002. And we had seen only growth and taken it for granted. How can a country which had low penetration and consumption get to a situation where markets don’t grow? It took us a long time to understand what went wrong. And there were three-four factors all coming together which led to that. The first one: India had opened up and there were a lot more choices, whether it was mobile telephony or cars. The second one was that it was a period of low interest rates which meant that EMIs were affordable. EMIs are associated with high value purchases. But now even a phone instrument could be bought on an EMI. So, capital expenditure became revenue expenditure. Now, imagine a large number of people in a low interest scenario suddenly flooded with offers. It’s like a kid in a toy shop and his mother tells him that we can afford all this because of EMIs! This is an analogy in a larger sense.
So, interest and share of wallet of FMCGs came down because of all this. You combine this with another set of factors, two years, mainly 2000-01 and 2002-03, agricultural production declined by 7 per cent and 17 per cent respectively. Seventy per cent of your consumers live out there, so if food grain production declined it had a significant impact on FMCG sales. And, the last factor was the fact that commodity prices were low, so the normal inflation that you have and a bit of growth that you get through pricing increases were also not coming through.
And, if you ever needed another reason to add to all this; the world had opened up to the fact that if you didn’t have a position in India and China you were not ready for the future. So many companies made big investments in India and we were competing with them. Then one of our competitors dropped prices, requiring us to drop prices further — it was a peculiar set of circumstances with a whole lot of factors coming into play simultaneously for it to lead to a three-year period when growth in FMCG categories slowed down sharply.
So, what were your learnings?
A lot! We are making sure that we build capabilities for the future and gear up for eventualities. Can it happen again in the future? The only thing I have learnt is that anyone saying that it can never happen is walking on thin ice! Although very unlikely, it is possible if all the factors I mentioned came together again.
Coming back to your competition and your brands, have you gained whatever share you lost vis-À-vis competition and the regional brands?
Take the case of the biggest battle we had (with P&G) … in 2004, in laundry. Our priority was to retain our franchise in the short-term and grow the market in the long-term. We took a call in dropping and matching prices and investing in quality. Our profits were significantly impacted. It was the wisest decision we took. The markets, though, punished us and our share price dropped to about Rs 104. But we were clear that we were not managing by quarters. We did the right thing and invested, and grew.
It was a wise decision to have acted swiftly even at the risk of profit erosion because in the end as long as we hold on to our consumer franchise, sensible and economic profits will return and we will be better placed to benefit from it. We were absolutely sure we didn’t want to cede ground at that stage.
For many of our other categories our relative shares continue to be strong. There are always pluses and minuses, but on the whole we are directionally ahead of the market. I don’t say well ahead, but directionally. There have been a couple of categories where we have lost share and some where we have gained. It’s a mixed bag. But on an aggregate we are in the right direction.
So, the challenge of smaller regional brands and your MNC competitors have been met in some sense?
That challenge will always remain. In India we have a peculiar situation where all MNCs will compete with you as well as strong local regional competitors. So we just make sure that when we have an ambition to straddle the pyramid and that we have to do different things at different ends and compete effectively.
So, when you compete at the premium end of the market with your launches you will continue to focus at the bottom of the market with your brands?
Absolutely, if we want to earn the love and respect of India we cannot ignore the bottom of the pyramid where most of the Indians are. Equally, we cannot ignore the increasing number of affluent Indians. That is the future and there’s a big opportunity there and we must have a portfolio which addresses them and their needs and aspirations.
Specifically in the skincare market where you have a lot of brands, which will be your main driver?
We will have a portfolio of brands. In Ponds, we have an anti-ageing and anti-wrinkle range. Then there’s Fair & Lovely which is in the centre to lower centre of this market. Then there is Lakme — all core face care brands. We have hand and body care brands like Vaseline which play a strong role in that space. Dove in the area of face and skin care is largely present in modern trade. It started off with skin cleansing and has successfully extended its franchise now into hair. It has the capacity to start moving as a brand into other personal care categories like hand and body care.
Coming back to foods will there be a large contribution from this category, given the fact that you are present right now only in niches such as soups and sauces?
That the contribution of foods will grow goes without saying. What time period, I don’t know. We have a road map with milestones that we want to achieve. A stage will come when it will take off. But we must have patience and faith in doing the right things. But having faith does not mean being obstinate and refusing to see the clear writing on the wall. We may change a few things but that does not detract us from the larger strategic direction and belief that foods will become large.
Modern trade you say will contribute 25 per cent of your sales in a few years — is that forcing a change within the company?
The answer is it does force change. Because the capabilities required to service modern trade are different from general trade. And we have done a whole lot of things differently. Many years ago we realised this would happen and we started sending our people abroad to learn those skills – some went to Unilever and some even went to Wal-Mart and Tesco to work with them and get first-hand experience. We brought in expatriates from Unilever — that’s where Unileverage comes in — who have done this for the last 20 years, to set up systems rather than reinvent the wheel. The third thing we did was to have partnered with Smollan. It has got great expertise in point of sale execution in modern trade and the technology used to deal with this. This required us to make fairly significant changes internally to make sure we build the skills required to deal with modern trade, to have as leading a position with modern trade as we have with general trade and doing it ahead of time.
Many of these benefits we are seeing are because of the actions we took when we went through a tough time a few years ago. The need to invest in the future originated at that time when it would have been easy to set it aside but we decided that there were some strategic calls to make — people have to go out and learn skills. We are reaping the benefits now. That’s the internal change.
But we also see a great opportunity in modern trade. Of course, terms of trade will be higher than general trade to some extent but there are benefits to be had. We have the number one and two brands in most categories. So, modern trade needs us as much as we need them. We, therefore, need to forge partnerships.
Private labels of retailers can also be a threat?
Private labels may come in but may not have an impact on us like they have had in the West. The reason is: what do private labels offer? Value for money. In India the regional and local players are already offering discounted products. These players, however, will find it difficult to do business with modern trade. They don’t have the systems, the IT which they need to deal with modern trade, which wants automated systems in place. They don’t want to negotiate with 50 different companies or across different stores. They need connectivity, logistic support. The small and local players will find that difficult. So, the proportion of local brands in modern trade comes down and that actually benefits organised players like us. Some of that space will be occupied by private labels so ultimately you will be no worse off. In the end we have to remember that partnerships and collaboration is the name of the game, this is not an adversarial relationship.
Many Unilever managers with 15-20 years of experience have moved on from Levers and other organisations have benefited. What are you doing to actually leverage their expertise for Levers?
Firstly, we are proud of our alumni. That doesn’t take away from the proposition which we have for our people. The fact that our attrition is within control, within levels that we want it to be, says that we have a strong proposition. If we had zero attrition, I would be a worried man! Because it means you haven’t added any value to your people to make them attractive to other companies!
The fact that others find your guys attractive within reason is a good thing. I would also be worried if there is no churn because you need new thoughts and new ideas. Some attrition is good, only excessive attrition is bad. Equally, the quality of attrition is important. Whom are you losing? And, while we may have lost some of our high fliers we have regained many as well.
The person who is doing the job I was doing till April, Gopal Vittal, left us and was chief marketing officer for Airtel. He chose to come back and is now on the Management Committee. He was a regretted loss and we wanted him back. There are two others. Sudhanshu Vats, who heads our laundry business, left us and felt a need to come back and Sidharth Singh, who heads our processed foods business, moved to Pepsi and Nokia and came back to us. All of them saw the intrinsic strength and culture of this company and chose to come back. We are pleased that our people are doing well outside which tells us we are doing something right here and those who come back are richer for the experience.
6 months ago