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HLL: Searching for a new route

Nandini Lakshman

It was a seminar in which management guru Jack Trout learnt a thing or two. In March, Trout faced about 45 top- and middle-level managers of the Rs 10,000 crore (Rs 100 billion) Hindustan Lever, the country's most high-profile foods and toiletries conglomerate. On the agenda was Trout's favourite subject: do brand extensions work or not?

Trout, who along with erstwhile partner Al Ries, made positioning part of adspeak, has always been dead against brand extensions. But at this seminar he was pitted against HLL Chairman M S Banga.

In the ensuing debate, Banga presented case studies where brand extensions had worked. At the end of the session, Trout is believed to have backed down. "Well, brand extensions do work at times," he admitted, according to one participant.

Unfortunately, Banga is not having such an easy time convincing the market that HLL is on the right track. Profits have been battered and Banga is trying hard to resuscitate HLL's portfolio.

Also, he is putting new initiatives, like a herbal foray, mineral water and outsourcing, in place to drive future growth. He's winning a few battles but it is tough going in most categories.

Over the last six months, the HLL stock has been hammered down 17 per cent and it underperformed the BSE Sensex by 10 per cent.

What's more, net sales for the first half of this year have dipped 9 per cent to Rs 5,052.23 crore (Rs 50.522 billion). But the big silver lining is that net profit before exceptional items rose by 13.65 per cent to Rs 754.29 crore (Rs 7.542 billion).

"We feel we are exactly on track in terms of delivery, strategy and growth," Banga told analysts last week.

In fact, the June quarter has seen a slight recovery with a domestic sales growth of 1.7 per cent from the 5.3 per cent drop in the previous quarter.

What's more, there's a 20 per cent growth in operating profits. Clawing back are the home and personal care power brands that grew 5.1 per cent. Profitability in foods is also up.

But that doesn't mean that HLL is back on the fast-track to growth. Even in home and personal care products (everything from shampoos to toothpastes) it hasn't been able to boost its market share in terms of value and has lost about Rs 5 crore (Rs 50 million) on the Aviance cosmetics business. Also, it has had a tough time in fields like ice creams.

That isn't all. The market conditions have now changed permanently and HLL will have to adjust to that. HLL is getting pummelled by international competition at one end and low-cost players at the other. So, the big question is: can HLL continue to grow in a shrinking market?

Says D Sundaram, finance director at HLL: "We can absolutely sustain our growth. We do not agree that the market is shrinking and we believe that it will change at some time."

The market is not enthused by the bravado. "They are not saying it, but it is apparent that HLL is moving out of the mass market to concentrate at the top end. How else can they improve profitability," says an analyst tracking the FMCG sector.

But a move upmarket is a tricky business. It has worked in ice creams which has been turned around. In the June quarter, the ice cream business made a Rs 4.94 crore (Rs 49.4 million) pre-tax profit compared to a Rs 2.91 crore (Rs 29.1 million) loss last quarter.

That came even though the turnover in ice creams is down from Rs 60.94 crore (Rs 609.4 million) to Rs 44.69 crore (Rs 446.9 million). This was because HLL's new ice cream strategy has been to concentrate on the premium market focusing on just seven main national markets.

This has seen its ice cream business melt from 43 per cent market share six months ago to 34 per cent.

In comparison, Gujarat Co-operative Milk Marketing Federation's Amul and Mother Dairy have together scooped up a 38 per cent share, up from 35 per cent earlier.

In other areas, however, the attempt to hike margins didn't work. In the Rs 2,500 crore (Rs 25 billion) hair care market, HLL hiked the prices of two of its key brands last year - Sunsilk and Clinic Plus.

In sachets, which wash off 80 per cent of shampoo sales, south-based Chik shampoo sachets retailed at 50 paise and Re 1. HLL raised prices from Rs 2 to Rs. 2.50.

The result? Chik jumped from a 16 per cent volume market share to 20 per cent. Meanwhile, HLL was down from 64 per cent to 60 per cent.

Banga claims that with competition not following, they had to reduce prices. A chastened HLL has now introduced 50 paise sachets of Sunsilk, Clinic and Lux shampoos. The trade claims that this move has pushed up offtake. "Even the 50 paise sachet is an innovation for us," says Dalip Sehgal, executive director, new ventures & marketing services.

But the quick back-and-forth movement on sachets did reveal one thing. HLL has speeded up its reaction time in recent times. Says one executive: "Our market response and speed is much better today because there is a category focus."

Take the case of two of its power brands - Lux and Lifebuoy - which account for around 30 per cent of sales. Company managers say that Lux has edged out Lifebuoy as the largest brand in the HLL stable.

The company was quick to launch the Rs 5 Lux to stem the runaway success of Nirma's Nima bath soap. This has seen Lux increase its volume market share from 12 per cent to 14 per cent in the last six months.

Competitors claim that even HLL's advertising in recent times is far more effective. Take the education-based campaign for the new Lifebuoy which talks of the cleanliness aspect.

"If our work is perceived to be better today, it is because there is more brand focus today. People are focusing on one brand instead of 30 different things earlier," says Sehgal.

This is an outcome of HLL's switch from a functional to a category structure 18 months ago. Every category head now has a set of activation and innovation teams.

The innovation manager is responsible for product development and brand planning, while the activation managers implement the marketing plan besides maintaining consumer connectivity.

But while the category structure has made the organisation more nimble footed, it has brought along its own set of problems.

"With more accountability for the brand now, at times we do take short-term measures to move it forward - like brand extensions," says a brand manager. Take the case of Fair & Lovely. In its quest for growth, the brand is today a winter cream, an under eye cream and even a soap. Has it worked?

Not really. The F&L soap has a mere 0.5 per cent volume share compared to Godrej Consumer Products' Fair Glow at 1 per cent. Or consider the Rs 700 crore (Rs 7 billion) talc market, which has seen a 4 per cent de-growth. HLL has three talcs - Denim (shaving cream, soap and talc), Pond's and Axe.

Managers say that in the talc pipeline, there's a Lux talc, Lifebuoy talc and a Fair & Lovely talc.

Says Sehgal: "Just because the market isn't growing, it doesn't mean that you can't innovate. At the end of the day, the deodorant usage is only 5 per cent compared to more than 60 per cent for talcs. So we are not looking at it as a talc or deo category but as a smell good category."

Or look at hair colour. With its shampoo market shrinking, HLL tried to jump on the hair colour wagon in July 2001. Coinciding with the Lakme India Fashion Week, its range of Sunsilk hair colour was aimed at the young, fashion conscious user. In comparison, the hair colour market has traditionally been for grey hair coverage.

Being a late entrant, the youth positioning was supposed to be a distinguishing factor. Despite spending around Rs 6-8 crore (Rs 60-80 million) on advertising, the Sunsilk brand failed to deliver on its promise.

Dealers say that except for the black, none of the colours covered grey and the product bombed. Sehgal says that HLL is reworking its product and expanding its franchise before relaunching it.

So is HLL going overboard on the brand extensions? "We are an evolving organisation. We will continue to experiment and in that respect learn from our mistakes," says Sundaram.

But in the quest for growth, for perhaps the first time, aspersions are being cast on the capability of the HLL manager's role as a team player. "For a brand to grow, it all depends on the quality and commitment of the category head," says a manager.

Again, with most category heads having a marketing background, and now with innovation and activation managers also pitching in, it is a case of too many cooks spoiling the broth.

Sundaram and Sehgal are not convinced. "I don't think that's right. It's like saying that India will win in cricket consistently but India does not have a team. Axiomatically, a successful organisation like ours has to rely on powerful teams," says Sundaram.

Adds Sehgal: "Our success is largely because we have individuals who are very bright and who work very well in a team."

At the moment, for HLL, many of its initiatives are hanging fire. Last year, its e-tailing venture had launched a replenishment system, targeting shoppers for home delivery.

Sundaram says that while most of the stockists are online, the back end has to be in place. "We are getting there," he adds.

Another venture is its iced tea ambitions. Pitched against soft drinks, the iced tea distribution is a different ballgame altogether.

In test market stage for the past two years, Sundaram says that it is still at the pilot stage. These definitely are long-term plans. For now, at least, HLL has more pressing things on its agenda. Banga has an even tougher task on hand.

As an analyst says: "The next few quarters are going to be even more critical. It will show if the changes have had any long-term effect." Until that happens, sharekhan.com has relegated its HLL stock to the 'forgive and forget' cadre.

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