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A new, improved HLL?

Nandini Lakshman | April 17, 2004

For nearly a decade, Anglo-Dutch foods and toiletries major Hindustan Lever was one of the brightest stars on parent Unilever's radar screen. So gung ho was the London-headquartered Unilever that it often announced that the Indian model would be replicated in some other parts of the world.

So far so good. So what does Thursday's announcement of a major restructuring at HLL, both in terms of businesses and personnel signify? Why has HLL been forced to forsake its unique model, of varying profit centres, to be more in sync with the parent? "Earlier, it was all about strategy, now it is structure," says a business consultant.

Unilever had always iterated that its two main businesses were foods and home & personal care, each accounting for half its turnover.

In India, however, HPC, which includes soaps and detergents, continues to wash around three quarters of its topline and almost 85 per cent of its profits. What's more, foods has been a niggling issue with HLL for some time now.

HLL's earlier structure had 12 directors (including executive directors) heading different businesses who reported to chairman M S Banga. Now, with soaps and detergents integrated into HPC, HLL has been split along two businesses -- HPC and foods -- each under a new managing director.

Arun Adhikari, executive director of personal care, has been re-designated managing director of the integrated HPC business. S Ravindranath, executive director, beverages, will oversee the integrated foods buffet, which includes ice cream, processed foods and confectionery. And with effect from July 1, Banga will be non-executive chairman of HLL but elevated as Business Group President of Unilever's HPC business in Asia.

Reporting to him will be the four-member management committee comprising vice chairman M K Sharma, finance director D Sundaram and the HPC and foods heads. The rest of the directors will all report to Sharma.

There are many who believe that HLL has come a full circle with this restructuring. In the mid-nineties, the company had two managing directors -- Keki Dadiseth for the HPC business and R Gopalakrishnan for foods -- both reporting to then chairman Sushim Datta. But HLL managers say it is unfair to compare.

"At that time, Brooke Bond and HLL were two separate companies with two heads. Now it is a merged entity," says a senior HLL manager.

The new structure is what Unilever has been following in most of the global economies. Even neighbouring Pakistan, where Unilever has placed its first-ever woman chairman, has a similar set-up.

In India, propping up growth through mergers and acquisitions over the last decade, the Rs 10,000 crore (Rs 100 billion) HLL had become a case study for many of Unilever's less-successful outposts in south-east Asia and Latin America. Whether it was product development or its marketing strategies or its array of profit centres, HLL was always considered worthy of emulation.

On the home front, it had become a favourite poaching ground for almost all the multinationals that set foot in India after economic reform. And yes, it is fair to say it taught the country marketing.

With such a legacy, Unilever had let India operate as one of the exceptions. Until now. "In Unilever's internal hierarchy, India seems to have lost out. It is no longer a shining star," says a management consultant.

Talks of the latest changes were floating around for over six months. And the triggers for the latest salvo are many, claim industry sources. Says a competitor, "The Indian model would have continued to survive if the overall performance had been buoyant."

HLL's decade-old track record displays the problems. Since 1993, sales surged five-fold to Rs 10,142 crore (Rs 101.42 billion) in 1999. But in the last four years, it had stagnated to close calendar 2003 at Rs 10,138 crore (Rs 101.38 billion).

To start with, HLL had seen many of its main product lines -- soaps, detergents and personal care -- stagnate. Plus competition at both the lower and top end of HLL's product categories has been taking a toll on its results.

For instance, It continues to have a trying time with foods. Take the Rs 2,000-crore (Rs 20 billion) ice cream market where the organised sector accounts for only 20 per cent.

Two years ago, both Amul and HLL's Kwality Walls's were running almost neck-to-neck. But with Amul's low-priced offerings licking HLL's shares, the multinational decided to abandon the mass market to chase the premium business, concentrating on just seven major cities.

Today, Amul is the market leader with a 27 per cent share followed by Kwality-Wall's at 8 per cent.

There are problems in the beverages and "atta" (wheat flour) businesses too. Stiff competition from both loose and packaged tea players including a rejuvenated Tata Tea continues to keep HLL's beverage business weak, long after Brooke and Lipton were merged.

From 109,000 tonnes in 2001, HLL brewed only 80,674 tonnes of packet tea, with market share dipping from 34.6 per cent two years ago to 33 per cent.

Only last month, Banga had said, "Of course, business is tough but we are using our scale to give us competitive leverage." Actually, the scale was giving HLL better margins, rather than growth. Operating margins were up from 13.35 per cent in 1993 to 24 per cent last year.

Indeed, in many ways, this has become HLL's weakness. The general perception is that HLL's value engineering over the years has taken a toll on product quality. But with consumers downtrading to good-quality value-for-money products, HLL spruced up on quality. But the impact was marginal: sales barely increased.

But a fresh round of price cuts in some of its key categories -- detergents, oral care and hair care -- in the last couple of months will only put more pressure on its bottomline, say analysts. All this comes at a time when Unilever's global arch rival Procter & Gamble has woken from its decade-long slumber in India.

When the company's results were announced in February, Banga said, "The previous couple of years, we were focused on increasing our growth margins and rationalising our brand portfolio. Now that we have the portfolio we want, we are totally focused on growth."

Unfortunately for Banga, HLL's stagnation began just when he took over four years ago. An additional problem is the lack of a clear successor.

Company managers hint that Unilever had identified many of its Indian managers littered across the globe. And while some fell short of the requisite skills, others declined to head this once growth engine.

"HLL has so many dynamic managers, that it is tough to anoint successors. But now the company has cut off significant flab and concentrated power in the hands of a few," says a management consultant.

For instance, for foods, apart from Ravindranath, there was Jeetu Mehta heading ice creams, and G Kapur, the head of the acquired Modern Foods, all of whom reported to Banga. With Mehta retiring, Kapur will soon embark on an overseas assignment.

The new structure is expected to impact HLL's rural distribution channels and big retail outlets. Last year, HLL devised a "diamond" model for sales and distribution.

So unlike earlier, where four or five people made sales calls to a channel, each representing a category, now there is only one sales representative for foods.

All these moves could have far reaching consequences for HLL's business. Already, its share price rose from Rs 150.65 on Thursday to close at Rs 152 on Friday, though that is still lower than its February 17 price of Rs 192.80.

But there are many challenges, warn some. "Let's not forget that HLL is a strong profit-and-loss driven company. Now the pressure is more on foods as it has been a non-performer. All this while, it could have cross-subsidised its businesses. Now, it is going to be difficult to hedge its risks," says a long time HLL watcher.

Again, there are many who feel that consolidation could impact response time adversely. But they all agree on one point is that the restructuring could well help put the country's largest consumer non-durables player back on track.

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Sub: A new improved HLL?

Neck-to- neck is a wrong expression. It should be neck-and -neck

Posted by Kallianpur Girish


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