‘We are looking to widen the gap with competitors'

What has helped the Rs 19,700-crore Hindustan Unilever beat much small rivals in delivering growth despite the challenges of inflation? Mr R. Sridhar , the company's Chief Financial Officer, talks of a slew of new initiatives — innovative launches, weekly tracking of input prices, nuanced pricing decisions and a tripling of rural reach — that set a hard act for competitors to follow.

Excerpts from the interview:

Delivering high growth has always been a challenge for Hindustan Unilever, given its size. But you have managed strong volume-driven growth in recent quarters. What are the category innovations that have driven this?

We have managed double-digit volume growth for five consecutive quarters. That has never happened in our recorded history! There are many factors driving this. There is the consumer insight programme, which we have been trying to build on. We have used this to accelerate the pace of innovation across categories.

One category where we have really accelerated the pace of innovations would be skin care. There, we have really leveraged our brand portfolio and made sure that we are present in every benefit segment that the consumer is looking for — whether it is facial cleansing, premium skin lightening or premium moisturising. The other segment where we have innovated is in packaged foods and ice-cream.

From end-2009, we have been focussing on improving our execution capabilities. That involves using hard metrics to measure how well we are servicing our customers; how quickly we fill the pipeline, and so on.

Yes, we are market leaders, but competition is catching up. So how do we widen the gap with them on every aspect of business? Distribution is a key aspect.

Raw material prices are far more volatile than they were a few years ago. How is HUL coping with this?

What adds to the complexity is that general inflation too is very high. One of the key questions from 2009 was — how do we manage volatility better? The learning was that we should be far more dynamic.

This meant stepping up the frequency with which we review key drivers of performance. If you take palm oil or crude oil, for instance, the frequency with which we review the cost, the (forward) covers, competitor action and pricing, is now weekly.

A couple of years ago, it was once a month. We have a practice of taking forward covers for our inputs. We alter this dynamically based on the outlook for commodity prices.

What underpins our pricing decisions is the need to remain competitive at all times and offer value to the consumer. If we face challenges of input cost inflation, we first look at what we can do within our costs — our procurement and supply-chain to offset this. However, high inflation cannot be managed by cost effectiveness alone.

So, one thing that helps us is that we have brands straddling many price points, and catering to consumers from different economic segments. We, therefore, have more flexibility to make adjustments in price.

FMCG makers have resorted to grammage reductions in some categories. Does that not affect value to the consumer?

At one level, most consumers today recognise that there is enormous inflation in India. Then the question is, for different kinds of brands and price points, what is the most sensible way to manage inflation.

In some brands and pack sizes, it is straight price increase. In others, it may be a grammage adjustment because the price point is important to the consumer. He or she comes to the market looking to spend only Rs 10 on a soap cake. The way we deliver value is by making sure that the effective price increase we have taken in these categories is much lesser than the actual impact of the cost inflation. That is very true of soaps and detergents. We also have the means to measure the price elasticity for every one of our brands.

Over the past five years or so, competitive actions have really battered margins in detergents. What is the probability that this can happen to other categories as well?

The probability of such a situation can never be zero. However, in detergents, two things have happened. One is cost inflation particularly in crude oil, which feeds into LAB and packaging etc. Two, competitive intensity has gone up enormously.

The second fact doesn't surprise me. If we think India is an attractive market, with 100-crore plus people, everyone will think it is an attractive market. Our position is very clear.

We will defend our competitive position very resolutely. Protecting the consumer franchise is in a FMCG business a key driver of long-term value creation.

Can this happen in other segments? It can, but just contrast this with personal care.

If somebody is buying a skin cream, she is not buying it only for the price. She is looking for a benefit like say, marks removal. The brand has to deliver and delivering that benefit requires technology.

If a competitor comes in at a 20 per cent discount, if the product doesn't deliver, the consumer will try it once but will not return. That is why you have to make a distinction between products such as detergents and the ones like personal care. What you put on your skin, what you consume, there the consumer is very particular about delivery.

We hear a lot about premiumisation; consumers upgrading to more expensive products. What trends are aiding this?

There are many indications of the shift happening in India. A report by NCAER had mapped out how the mix of Indian households have changed between 2003 and 2013.

This showed the country moving from a pyramid-shaped demographic structure to a diamond-shaped one. The top income earning households were projected to expand from 3 million to 11-12 million by 2012. The middle too was set to become bigger. That suggests an increase in affluence.

Alongside, you are seeing an increase in rural affluence driven by minimum support prices going up, spending on NREGA and similar factors. That is driving an upgrade in the rural quality of living.

Five years ago, we had no sales of Dove in rural markets, but today we have sales happening there. With the advent of mass media, aspirations have become more homogenous between rural and urban India. However, means and capabilities are still not homogenous. As the means start to become better, people will upgrade.

Do you see food inflation forcing consumers to cut back on expenditure and impacting the rural growth story?

Inflation is a concern. Consumers are constantly re-appraising if they are getting the right value. What you eat or apply on yourself, you are being much more discerning. That is what has made Dove, our premium offering, also our fastest growing brand. Of course, part of this is about making sure that the brand is available.

We have done an enormous lot to increase our direct coverage. We have tripled our rural direct coverage and significantly increased our urban direct coverage. We are now covering 1.5 million outlets directly, compared to 800,000-900,000 in end-2009.

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