On 11th Feb 2005, FMCG major Hindustan Level Ltd, reported its fourth quarter and full year profits. The net profit for the fourth quarter fell to Rs 333.67 crore (Rs 3.33 billion) from Rs 494.72 crore (Rs 4.94 billion) last year.
The net profit for the full year fell to Rs 1,197.36 crore (Rs 11.97 billion) from Rs1771.79 (Rs 17.71 billion) last year.
The management has attributed the fall in profit to initiatives taken by the company to counter competitive moves in laundry and hair care segments, supply chain restructuring in the foods division and increased advertising and promotional spend.
This the management felt drove down profitability. In this article I will try and look at the reasons for the drop in the financial performance of HLL in the last few years.
The Price Game
Sometime in the middle of March last year, Procter and Gamble decided to abandon its premium positioning strategy through which it extracted a price premium for what it thought was a superior product.
P&G decided to cut prices of Ariel and Tide, its detergent brands.Within two days, HLL followed suit and cut prices for Surf Excel. This sudden cut in prices shocked the industry.
P&G's decision to cut prices and HLL's decision to follow it, hit HLL's profit margins.
HLL's strategy over the years has constantly been to jack up margins. The management graduates who run the company probably forgot a basic lesson in economics.
When a company makes 'abnormal profits', new competitors enter the arena and drive away margins. Over the last few years, sales of HLL have stagnated and the company has been maintaining its margins through cost cuts.
Cost cuts can be taken only till a certain level, beyond, which the quality of the product starts to suffer. HLL may already have reached that level.
Several lower priced brands have started attacking HLL on the price front. The first among them was of course Nirma.
Kanpur Trading Corporation's Ghadi detergent is the biggest brand in UP and adjoining markets. Ghadi is one of the fastest growing brands in the detergent sector.
Cavin Care in south India is also giving HLL a run for its money. AMUL has forced HLL to limit its presence to the bigger cities in the ice cream market. (Amul ice cream on the other hand is sold in more than 1000 towns and cities across India).
A big reason for the success of these brands has been their ability to build their presence through the regional television channels in a cost effective way. A decade and a half back these brands could not think of advertising on television.
Counterfeiting
Another major problem facing FMCG companies in India is counterfeiting. Counterfeiting of branded goods is nothing new to India, (Lifebuoy has more than hundred fakes in the market) but in the recent years it has achieved huge proportions.
An AC Nielsen study a few years back put losses to the FMCG industry because of counterfeiting at Rs.1700 crore, per annum. Over the last few years this figure would have definitely gone up.
Other than pulling down the profits of the FMCG companies, a counterfeit product of lesser quality gives a "bad name" to the brand.
But the question to be asked here is, " How can a counterfeit product reach kirana stores until someone has managed to infiltrate the distribution chain itself ". And that's precisely how it works.
The wholesalers are the people who manufacture the counterfeits and sell it to the retailers. For retailers it's the higher margin on the counterfeit that does the trick.
The company is to be blamed to a certain extent if somebody has been able to infiltrate its distribution channel. The Federation of Indian Chambers of Commerce and Industry has set up the Brand Protection Committee a few years back to tackle this problem.
Power Brands
In mid-2000 after M.S. Banga took over the reins at HLL, the company decided that it would focus on 30 odd 'Power Brands' and carefully plan its entry into new businesses.
Intuitively this made sense, instead of spreading your resources all over the place concentrate on a few brands.
But what it meant was that power brands had to grow at higher rates to compensate for the loss of sales from other brands.
Unfortunately, the other brands have shrunk faster vis-à-vis the rate at which the power brands have grown. This has hit the top line of the company. The company's Vanasapti brand, Dalda, is a case in point.
HLL felt that the brand had no potential in a scenario where consumers were getting "health conscious". The company that bought it, the $22 billion, US based, Bunge Ltd, obviously saw some potential in it.
The 'power brand' strategy prompted HLL to withdraw from a large number of small markets. This has given an opportunity to many small players in the market. Once these new companies establish themselves in these smaller markets, using this as a base, they may want to move into the big league.
Innovation is the key
If stock markets are a barometer for the future of a company, HLL is definitely in a spot. The stock price of the company has fallen from Rs 250 in May 2000 (when Banga took over as the chairman of the company) to Rs 155.45 on 11th February 2005, the day the fourth quarter and annual results were announced.
So what is the way out? Most of the products manufactured by FMCG companies do not have high usage as compared to international standards.
So the focus should be on increasing the usage of FMCG products. The reasons for this less usage, as per management guru, C.K.Prahlad are, "People at times do not know the importance of using a product more frequently, at times they do not have the requisite infrastructure for usage like availability of water and at times its just sheer cost. So a combination of education, access and affordability should be used for increasing usage".
Another profit opportunity identified by HLL is outsourcing. On 20th June 2002, at the Annual General Meeting of its shareholders, Banga said, " HLL's vision is to build a billion dollar outsourcing business out of India".
This can prove to be a stable earnings opportunity with extremely low marketing and inventory costs. HLL for sometime now has not launched any successful new product. A country like India presents it with huge opportunities.
As Prahlad points out, " Everybody in the FMCG business has to deal with the availability of water. It is also a tremendously scarce commodity. What if I create a soap or detergent which will need only one fifth of water used of the water that is currently required."
With overcapacity being the bane of most industries today, its customers who are scarce and most of the goods and services cannot be differentiated.
HLL needs to innovate to tackle these problems and create profit opportunities for itself.
The author is Research Scholar, ICFAI University.
Design: Rahil Shaikh
Photo: Rob Elliott/AFP/Getty Images
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