Latha Venkatraman

A sudden announcement has brought a dramatic change to the management structure of Hindustan Lever, with M. S. Banga, the feisty chairman of the FMCG giant, moving on to a new position. Catalyst takes stock of the Banga years at the h elm.

M. S. Banga, who has been appointed Business Group President of Unilever's home and personal care business in Asia.

M. K. Sharma

Arun Adhikari

S. Ravindranath

D. Sundaram

THERE'S never a dull moment at Hindustan Lever Ltd (HLL), the country's largest consumer goods company. And anything that HLL does it does in enough measure to merit ample attention. Rightly so, as HLL is head and shoulders above its competitors in the fast moving consumer goods (FMCG) segment. Yet, the last three years have possibly been the most challenging period when growth came to a near halt. Slowdown in the Indian FMCG market, stringent competition and absence of a clear growth engine were gnawing at the company's stranglehold in most of the categories it was present. Surely, HLL's image had undergone a major change in the last three years.

It could have been an uncanny coincidence that when the Manvinder Singh Banga took over as Chairman — then the youngest ever at 45 — in May 2000, any further progress was seen to be becoming increasingly difficult. The company's large size may have prompted the then chairman, K. B. Dadiseth, to review the growth target of doubling its turnover in four years and profits in three years. "We are aiming to grow as fast as we can. But doubling turnover in four years will not be sustainable. Therefore, we will review this next year," Dadiseth had told HLL shareholders in May 1999.

In the '90s, HLL had grown by leaps and bounds, acquiring a range of companies en route to emerging as the leading consumer goods maker with savvy marketing strategies and a distribution network that criss-crossed the length and breadth of the country. Surely, HLL was a model for those grappling with logistics and distribution. More importantly, it built aspirations for hundreds of management graduates coming out of B-Schools. Clearly, Dadiseth knew the story. "The better we harness the potential of the people, the faster HLL will grow. Equally, the faster HLL grows, the more opportunities we can create to excite and retain our talent," he had said.

A story on HLL's blistering pace of growth prompted a journalist to turn out a headline that went like this: `HLL swallows competition to become a giant.' Having assumed such a size, HLL looked to growth engines to move forward. But conventional businesses started to slow down. In fact, by the end of the third quarter of 2000, the company started to show distinct signs of slowing down. Its new businesses did not yet have the wherewithal to pull the humungous company forward. It had brands in excess of 100 across various product categories. But not all were pulling their weight, negating the profit-making ability of select brands. The earlier strategy of making up for slow growth with price increases would no longer work as the agriculture slowdown eroded purchasing power in rural areas. This affected HLL, the bulk of whose sales come from rural markets.

HLL resorted to productivity improvements and savings in its supply chain system. Centralised material and media buying, a change in HLL's system of outsourcing from third-party suppliers and a complete integration of the supply chain were the cost reduction measures put in place by HLL, under the stewardship of Banga.

He believed that limits to creativity and imagination were the only restricting factors for putting in place continuous cost reduction measures.

Cost reduction across the supply chain did help the organisation, but only to the extent of propping up profits margins. But equity analysts tracking this sector did not buy into the cost theory of HLL. A company as huge as HLL cannot move into the next league merely on cost initiatives, was their refrain. Even as HLL was strengthening its power brand strategy, focusing on 30 national brands, regional players were beating the market leader. You had a Gold Winner, Anchor White, Fairever, Mother Dairy Ice cream and scores of other brands which neatly ensconced themselves in little regional niches with a price strategy that worked. "For a company which had a huge share in the market, there will be a time when driving this share up will become difficult," said a long-term investor of the company. Growth in the earlier years was abnormal and this cannot be sustained, he pointed out.

Earlier, the company had been setting up plants in backward areas to gain tax benefits and shifting operations from older well-established plants to these units. This did help the company sustain its high return on net worth, now at 50-53 per cent. Much of the focus has been on margin growth. "But there is a limit to how much and how fast you increase your return on net worth,'' says this investor. There was criticism that far too many brands were dragging down the profitability of the few. Therefore, not only a greater focus on its 30 power brands became essential but also the need to phase out a number of brands was imperative. A company, which had grown primarily through acquiring brands and businesses, was now on the reverse track. It kept chopping away at its non-core businesses and phasing out brands that affected the profitability of the category.

In fact, Banga's term saw a huge chunk of divestment for HLL. The slowdown in the FMCG sector brought on by the vagaries of the monsoon season did provide an entry for small and regional players and thereby put a hold on the pricing power of the leading players. HLL began to rely on its inherent abilities in marketing, technology and supply-chain efficiency. By the end of 2003, the power brand strategy was coming to fruition, but rising input cost was a new spectre that reared its head.

On input cost rise, Banga's contention was that HLL's pricing strategy is not wholly driven by commodity price trends. HLL and other leading players were also resorting to consumer offers. This was evident in the fact that HLL's share of advertising spend kept dipping while promotional spend rose. The much awaited lag effect of good monsoon during 2003 failed to show up. Again Banga maintained that the first flush of rural income went to repay high-cost debt, demand thus manifesting with a lag. Having built up a massive distribution network over the years, growth in this area had also reached a peak. At this juncture there was no growth engine that could budge HLL out of its stagnation. The foray into bottled water, talked about for at least a couple of year, too did not materialise. "It is time HLL went in for an acquisition - either an existing water brand or a leading biscuit brand. Unless one or the other happens, the fundamentals of the company will remain unchanged," said an analyst after the changes in the management and operational structure.

Last week's announcements revamping the management structure and bringing all the FMCG businesses within two divisions — Home and Personal Care (HPC) and Foods — could result in clearer focus to its two leading businesses, analysts said. But the capital market is not particularly enthused with the change. "I don 't think these changes would alter the outlook on HLL on the stock market,'' said an analyst at a domestic broking firm. At best, Banga's shift to head Unilever's $6-billion HPC business in Asia is seen as a possible integration of Unilever's business category-wise. "If indeed Unilever is focusing on the HPC business in Asia, HLL will be a major beneficiary," said another analyst.

Asia, HLL officials confirm, is one of the fastest growing markets within the Unilever universe. "HLL is trying. You cannot fault the company for absence of growth. Now the external environment has to improve," the analyst said. Growth will return. Already there are signs of an improvement in the FMCG market and news that the monsoon season of 2004 will be normal can only make things better for this giant, which ended the year 2003 with sales of Rs 10,138 crore and net profits of Rs 1,771.79 crore.

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