Hindustan Unilever’s chief executive officer and managing director Sanjiv Mehta has not seen an inflationary situation like this in the 30 years he has spent at the company. He expects the times to be tough in the near future but is also confident that India remains a great market for FMCG companies and they are ready to meet these turbulent times. He talks about how HUL will navigate these turbulent waters, including on the latest threat from Indonesia’s decision to ban palm oil exports.
In an interaction with Moneycontrol, Mehta refutes their being interested in acquiring MDH. He also makes it clear that in foods, they are not interested in commodity plays and are looking for opportunities where they can use technology and value-add to build great brands. Inflation is leading to weak demand conditions but the company is winning market share across channels, categories and both urban and rural markets. Horlicks' uptake is weaker than expected because of market conditions but they have a gameplan to get it back on track. He also opens up about what the restructuring at Unilever means for HUL. Finally, you can read his outlook for the sector, the company and why he thinks HUL has never been as strong as it is today and that the best is yet to come.
Please note the text has been edited for brevity and clarity.
The past few years have been a challenge for any CEO, what with COVID, supply chain disruptions, slowing demand growth, and now a war in Ukraine that has sent inflation through the roof. What are some of your important learnings? And what would you do differently if you could go back in time?
I've been a student all my life. There are several learnings. Most industries drive for efficiency and productivity improvement. But, one thing which has come in very clear, loud and clear, during the pandemic is the need for resilience. And resilience does imply that you will have spare capacity. Otherwise, you won't have inbuilt resilience. But the critical bit is to understand where in your value chain you will drive for efficiency, and where you will create resilience. So, that's the first learning.
The second important one is adaptability. The US Army used to talk about the world being VUCA -- volatile, uncertain, complex and ambiguous. That hasn't gone away. An American futurist rightly talks about the world being BANI -- brittle, anxious, non-linear and incomprehensible. If you put the VUCA and the BANI together, these are the choppy waters we’ve been navigating in the last few years. What’s critical is how adaptable we are. When growing up, we would make a strategic plan, which would run its course for three years. Now, when you make a strategic plan, it may become irrelevant after three months. What’s important for an organisation is agility -- the speed with which you’re able to adapt.
The third learning has been on information. If you wait for precise information to come in, you will be too late. And you have to put together disparate information and make sense of it. I call it sense making. And this is a skill, which comes from experience, knowledge and to some extent intuition. And what data and analytics do is help you tremendously in this quest for sense making.
The fourth learning that has come in and which is something which we’ve been telling all our colleagues is, whenever we used to talk about leadership, we used to talk about a person very good in say, strategy, a person who is a great orator, articulates very well, a person who is very good in execution. But we never talked about compassion. I think one thing, which has again come home to roost (is) how important compassion is for leaders, compassion for your neighbours, compassion for your people, and compassion for the community in which you live. And these are some of the things which have become absolutely loud and clear. And these were not so pronounced before the crisis that we've seen in the last few years.
And, what would you have done differently?
In January 2020, when COVID came into China, we set up a crisis team. And the brief was that we were importing chemicals from China and if their chemicals supply gets disrupted, how will we mitigate the risk. But we never thought that COVID would come into our country. Otherwise, I would have got a three-month head start. When we do our risk assessment exercises, it’s not that the pandemic hasn’t appeared in it. It has, and even zoonotic diseases have appeared. But we never thought that it will really play out.
For instance, all of us are conscious that if you're not able to control global warming, many parts of the world will go under water. But is any one of us making mitigating actions? The answer is no. But a few years down the road if we are not able to control rising temperatures, then we will have to have plans, keeping in perspective things which are distant in the future, but happening at a much greater speed. So, it is not going to be placid waters anymore.
And we have seen it over the years, right? The Gulf War, I was running North Africa then, and the Middle East where we had the Arab Spring. Then we had financial crisis and COVID. In India, we also had demonetisation. Yeah, there will be a slowdown of the economy and there will be a pick-up, and you have to be very agile, very focused, very adaptable, build in resilience in your value chain, and lead with compassion.
Could you sketch out the demand situation in urban and rural areas? And what’s your outlook, say, for the next six to 12 months?
If we take a step back, pre-COVID, we’d seen the rural slowdown happening. And then COVID happened. Rural proved to be much more resilient for various reasons. Amongst them, I would say is, first, the spread of COVID in the first wave was more concentrated in urban areas as opposed to rural areas. The second was government interventions: the direct transfer of money, free food grains, increase in the outlay of MGNREGA, all helped the cause. These were absolutely the right things to do because you expect every government to look after its people, particularly those who are not so well off. So, rural proved to be very resilient. Urban markets took a lot of battering, because stores were closed, economic activities came to a halt, modern trade came to a halt. So, we saw rural was growing at a much faster pace. Then from last year onwards, as economic activity started picking up, the modern trade stores came back, urban activity started, urban growth going back, and rural against a high base started to cut down.And so, it has been coming down and this got exacerbated with inflation coming in. I've been now working for Unilever for nearly 30 years and I have not seen this kind of inflation. There used to be a period when crude oil price went up. In the first decade of the millennium, there was a time when it went up to $135-$140 a barrel before the financial crisis. But we've not seen a period where crude oil-based derivatives, palm oil and everything else linked to it, go up like this. In a country like India, where we may be a $3-trillion economy, but the per capita income is $2,000 on an average and there’s a large section of population who still have very little income in their hands, this kind of inflation proves to be a real hardship. And when prices go up, people who have more money, they go for more value packs, such as large packs, but people who have less money, they titrate volumes or go for low unit price packs. And when prices go up, people do not have unlimited money. And prices are going up for nearly everything, not just packaged goods. Edible oils are going up, food grains are going up. So, the outlay comes down, then they veer towards more essential products and then they titrate the volume. Whatever they can get within that pool of money is what they're going to buy and volumes take a knock when you have this kind of price increase.
Are people falling off the consumption bandwagon?
Penetration is not going down. It is not that people have stopped using detergent powders or stopped using personal wash products. Some discretionary items do get impacted. But we must also remember that discretionary items are used by people who have higher disposable income. Discretionary items got impacted more by COVID lockdowns or the threat of COVID or work from home. I anticipate a few more quarters where (discretionary) volumes will be under stress.
Do you think the Indonesia palm oil export ban is going to worsen the situation? And which categories will be most impacted?
Indonesia consumes about 30 percent of the palm oil on a normative basis of what they produce. And this is a big export item for Indonesia. I can understand them putting in controls to control the price for the 30 percent which is consumed domestically. I don't see it as a long-term issue. The palm oil that we use, the fractionation units, they have not been put under ban. At this moment in time, I don't see it as a major issue. Leave aside the price (increase), but from an availability perspective, I don't think this would be an issue for us.
Prices have gone up. But what happens is that if prices remain high for a longer period, then people look at alternatives.
A slowing market also means a tapering of valuations in general. Do M&A opportunities look more attractive? There was talk about spices. Has HUL had a rethink on being present in food staples?
The news about MDH (about HUL being interested in acquiring the spice-maker) was wrong. But if the question is about, are we looking at inorganic growth, then yes. In the last few years, we acquired Indulekha, which has proved to be an extremely wonderful acquisition. Then we went in for Adityaa Milk, which was focusing on the south of India, which was basically strengthening out footprint in ice creams in the south of India. Then we acquired GSK, which was the mother of all acquisitions. And then, we acquired VWash, a fabulous intimate hygiene brand and is doing extremely well. So, we've had a good series of acquisitions.Are we on the drawing board, looking at acquisitions? Yes, we always do that. For us, organic growth is very important. But we also look at inorganic opportunities. But when we look at inorganic opportunities, we look at the strategic fit. We look at the evolution of the brand, where it is in the S-curve. We also look at what would be a fair valuation. And then of course, an acquisition happens when a seller is also willing to sell, right? So, we keep looking. But just because there is a fashion to acquire brands, we don’t join that race. We have firepower -- we are a zero debt company. And the way we did the GSK deal was fabulous. We used higher price earnings (PE) ratio and we used the share swap structure to acquire this fabulous brand. Today, our market cap is over Rs 5 lakh crore. So yes, the firepower is there.
Have you changed your view on presence in food staples?
See, staples for us, we had a rice brand, Indus Valley, which we've sold off. We have Annapurna (wheat flour) in certain pockets. But that's not a big thrust area for us. For us, it is more about creating a brand where there is more technology involved, more value-add involved. We would not like to be in the commodity space, we would like to be more where we can create a great brand.
And if you look at our foods’ portfolio today, we have a fabulous business in tea where we are the volume and value market leaders. We took back leadership a couple of years back and we have kept strengthening it. Coffee is a good player for us. Kissan is a wonderful brand where we were in jams and ketchup, but now we have gone in for peanut butter. We have extended our spreads into mayonnaise, Hellmann's mayonnaise has been launched, Knorr we have soups. We have launched cubes in certain parts. And then we are a big player in HFD (health food drinks).
What about D2C (direct to consumer) brands? Several companies have come up in this area in beauty and personal care as well as health and nutrition segments. Are we going to see any acquisitions here?
E-commerce is bound to play an increasing role in the FMCG space, COVID or no COVID, because of their sheer assortment and convenience. For us, that's a big thrust area. And we have been investing in e-commerce capabilities much ahead of the curve. Today, because of our thrust on technology, we are proud that 20 percent of our demand capture is done digitally. As far as e-commerce is concerned, whether pure-play, omni-channel, or through our own sites, we are in every segment. In Lakme, for instance, it has the largest followers on Instagram of any beauty brand. And 30 percent of our sales are coming from e-commerce today, including from our own site. For us, that will remain and we have also carved out a separate premium business unit with the entire focus on digital first brands. Simple, Love Beauty & Planet, Dove Baby are brands focused on e-commerce through the premium business unit.
How are they doing?
They are doing reasonably well. We are very satisfied with the entire game that we are playing on e-commerce and our thrust will continue. When it comes to acquisitions, I'll come back to the same thing that it has to be a strategic fit, we will see where it is on the stage of evolution and it has to be at a price that makes sense to us.
What is your assessment of competitive intensity in the FMCG market in the past two years? Has it stepped up, has it stepped down? And you know, you have companies such as ITC and Patanjali with aggressive growth plans.
Competition is good for consumers. No question about that. In our country, the per capita consumption of FMCG is just about $45. If you look at a country like Indonesia, it is 2X of India, China is 3X of India, Philippines is 4X of India. So, when it comes to the runway to grow, there’s a massive opportunity. The second point is that this is not a zero sum game. We have not reached a level of saturation, that if someone else grows, it will be necessarily at my cost. So, you keep growing, because the market has so much more to it. The third important bit is that a good competitor brings out the best in Hindustan Unilever. It keeps us on our toes. It allows us to do the best that is required for our consumers and for our business. If you look at our track record, in the last nine years, we have doubled our business, we have tripled our profits and we have quadrupled our market cap. When we say we have doubled our business, we have added Rs 25,000 crore to it, more than the total turnover of any of our competitors. We have our feet on the ground, we are not complacent and we respect all our competitors.
Does the unorganised segment pose a threat since consumers are downgrading?
Our portfolios straddle the price benefit pyramid. If you look at hair care, we have Clinic Plus shampoo where the largest selling SKU is at one rupee. A great brand, consumers love it and has great brand salience. Can you get anything really good at less than one rupee? No. But if you want to go up (the value chain), we have a mass beauty brand Sunsilk, if you want a salon kind of hair care at home, you have TRESemmé, if you want a brand for hair repair it's Dove. And if you want a premium natural brand, there is Indulekha. We straddle the price benefit pyramid. Even if there is downgrading, we have brands to cater to that.
Not only that, take laundry, for instance. The biggest selling brand in laundry is Surf Excel. It's also one of our largest brands with sales of more than Rs 5,000 crore, and also a premium brand. But we have made it accessible. You can get Surf Excel for Rs 10 (sachet pack). Our market share gains have been the highest in a year, say compared to a decade or more than a decade ago.When times are tough, people can’t afford to waste money. And when they can’t afford to waste money, they go after trusted large brands, provided they are accessible. So, brands like Lifebuoy, brands like Lux, brands like Clinic Plus, brands like Wheel, brands like Taaza. These are the brands which are trusted by millions, and they’re able to compete at those price points.
It’s interesting that you’re talking about accessibility, because you’ve also mentioned about a plan to introduce bridge packs. How does that fit in?
There'll be some consumers for whom one rupee would be very important. There’ll be some consumers who would say, I want more value and two rupees is still affordable for me from an outlay perspective, and they would be very happy to migrate. When the commodity costs increase then in large packs you can take a price increase. For a Rs 100 bottle, you can go to Rs 105. But if you're a one-rupee pack, going to two rupees means doubling, which may not be sensible. Then you look at reducing the volume a bit. But if you reduce the volume beyond a point, then it will not give you the kind of cleaning that the consumers are looking for. Therefore, you can’t reduce quantity below a certain point. The question is, if the commodity price still keeps going up, how do you ensure that you’re able to protect the business model of that SKU while ensuring a value to the consumer, and that’s where a bridge pack comes in.
Could you tell a little more about your plans for bridge packs; is it going to be across categories?
We are still working it out. Price is not the only dimension consumers look at. What they look at is price value and many times, like I said at the beginning of the conversation, that many consumers are veering towards large packs. They’re going towards the large packs, because they get higher value for it. And if consumers find that between one rupee and two rupees, they get a better value for two rupees, they will migrate towards it. But there would be still consumers who would say, I’d rather stick to one rupee. So be it.
The plan for bridge packs is in the drawing stages, we are working it out, and you will see it happening.
Will the categories most impacted by inflation see a roll out of bridge packs?
The two categories most impacted are skin cleansing -- toilet soaps, because of palm oil, laundry powders, because of crude-based derivatives. These have been most impacted so far. But increasingly, what we’re seeing is the impact coming in other categories, hair, because of SLES, which is again a palm-based derivative. Then packaging material cost is going up because most of them are polymer-based. Prices are going up. And they're going to go up till we reach a point where the commodity prices start going down.
And I believe one of the trigger could be the settling of the Ukrainian crisis. If you look at the genesis, first it was supply chain disruptions because workers were not there during the harvesting season (due to COVID-related lockdowns). So, supply came down prices went up. Shipping lines got choked and the supply chain movement got curtailed. These cost increases were mainly driven by supply chain constraints, and not as much as by demand. It's still a question of whether it is structural or supply chain-driven inflation. Of course, what happens when things start going up and when geopolitics gets involved, then speculation also comes in, in anticipation that there would be constraints, prices are driven up further. So, you need a trigger for commodity prices to start softening. In current times, a geopolitical settlement between Ukraine and Russia could lead to softening of prices.
In the March quarter, what level of price increases were taken? And in the current quarter, what kind of price increases could be expected?
We took about a 10 percent price increase (in the March quarter).
There are two imperatives for us. One is the consumer franchise, where we want to strengthen. The second is we want to protect the business. You would have seen over the last many quarters, margins have remained within a certain range. Our first point of call is looking at all lines of P&L and asking ourselves how do we optimise, taking away all costs, which are in any way discretionary, we do that. Then we drive efficiency and productivity much harder. Over the last few years, we have been delivering savings of between 6 to 9 percent of turnover. So, it’s a very aggressive savings agenda.
But there are some things which we don't touch. One is product superiority -- it gives us a huge edge. And we must also remember that why consumers trust big brands is because of product superiority and brand salience. Coming to brand salience, I’ve always maintained that we will keep spending money at a rate where our share voice is higher than our share of market, because we want our brand salience to be there. Rest of the things, we will optimise. And after that, the last port of call is how do we take price increases? And again, we look at it from an affordability perspective, to an extent where consumers can afford more we take more, but what is very important is the price value. And in price value, one of the factors, which is very important is relative pricing. We don't want to be out of whack when it comes to relative price. It’s difficult to predict what would be the precise quantum of price increases, but the way we see it is commodity costs keep going up, so there will be more price actions. Margins will be under pressure in the short term. But then, we'll get it back.
A few discretionary and beauty and personal care portfolios did not fare well in the quarter. How do you see demand panning out in these categories?First is, they didn't fare well from a relative growth perspective. But in beauty, personal care, foods and refreshments, we gained market shares. And the story on market shares is we are winning in urban, we are winning in rural. We are winning in GT (general trade), we are winning in MT (modern trade). We are winning in large packs, we are winning in small packs, we are winning in premium segment, and we are winning in mid-tier and in economy. Our gaining of market share has been across the portfolio spectrum. When it comes to discretionary categories, we must remember that in the first two months of the year, we were hit by Omicron. Discretionary gets impacted when people don't step out of their homes. When you don't step out, you don't use that same quantum of make-up for instance, or you don't use the same kind of skincare products. So, they do get impacted. And we have seen that March was better than the first two months of the last quarter. So, I would hope as the country keeps opening up and the next variant doesn’t come in, hopefully, discretionary should bounce back.
On performance in fabric wash and how growth was good despite price hikes…
Fabric wash has been on a rhythm for many years. We have completely changed the profitability of the division. It used to be a bleeder from our perspective, now it has very healthy margins. We have great brands, superior products, and we have been outpacing the market for many years.
If we take, say the last two, three years, there was a period when the tea business was growing at 20-25 percent. There was a period when skin cleansing was growing at 20 percent. There was a period when hair care was growing majestically. We have the benefit of a portfolio. One strategy which comes in very handy is winning in many Indias. We don't have a pan-India strategy. We craft strategy for the 15 clusters that we have. And each cluster has its own nuance. The competitive context is different. Brands are at a different stage of evolution; per capita consumption is different. And whenever we hunt for an opportunity based on our winning strategy, we press hard on the pedal.
What's the strategy behind tapering advertising and promotions spend? Do you see this change in the coming quarters?
There can't be a one-to-one correspondence between commodity price increases and your selling price. Everyone tries to optimise their spending and their entire industry spending comes down. We keep a hawk’s eye focus on ensuring that our share of voice is greater than the share of market. And the two things we look at are, the share of voice should be greater than the share of market, and the other is that there should be a certain minimum reach. And if the entire (spending) table goes down, then yes, the advertising spend goes down, but not on a competitive basis.
Does it mean that the market does not have that strength to give returns commensurate with what you are spending?
Because you're not able to pass on (price hikes) your gross margin takes a massive hit. How do you optimize, because a 3-4 percent inflation is something which the industry can very easily build into their plans and absorb. But when, just to give you an idea, (you) compare the July quarter of 2020 with the March quarter of 2022, then the net material inflation went up in rupee terms by 4.5 times. So, this is not something which is normal. It's very high inflation. So, the entire industry optimises.
On Unilever's restructuring, what will be the impact on the Indian unit in terms of layoffs?
First, let me give you a perspective of why Unilever has gone about doing it. Organisation structures are meant to evolve. They're like a living organism. So, you have to keep evolving and taking cognisance that we need to be much faster and agile, we need to be more focused, and we need to have a greater end-to-end accountability. Unilever has gone about creating what we call the compass organisation, where there are going to be five business groups. And in most parts of the world, Unilever will be aligned in that fashion.
Now, India is a bit different. We are a large company. We are one of the fastest growing companies and we are a listed company. Here, the executive leadership of the business will remain with me. And we will align to the five business groups. But unlike in most parts of the world, we will have three leaders like today leading the business. So, beauty and wellbeing and personal care, which is part of our beauty and personal care will be led by Madhusudhan Rao now. Homecare will remain homecare and will be led by Deepak Subramanian, and foods and refreshment, Unilever has broken up into nutrition and ice cream. In our case, both of these will be led together as foods and refreshment by Srinandan Sundaram. So for us, that doesn't change at all. But where the benefit to us will come in is we believe this new structure will allow Unilever for speed of decision making. Second is, we should be getting better innovations. So, all this will augur good for a business like India, and I lead South Asia as well. So, I'm very bullish about the new Unilever structure, it would be right for Unilever. And it would be good for HUL.
Could you give us an update on the Horlicks business, it seems to be growing at a slower than anticipated.
That's right. Horlicks, we acquired when we were in the pandemic situation (the formal completion of the acquisition). In fact, the integration took place virtually. And, the Horlicks story, the growth premise was based on penetration of HFDs is still in the mid-twenties, whereas we know how to grow laundry business where the penetration in universal. The second is that we will be able to ramp up distribution. And the third is our prowess of market development. We know how to grow a category. Many categories in the country were created after HUL brought them in. So, those were the fundamentals. And the fourth one was that we will be able to get synergy from cost saving. First, because of the pandemic, it took us longer to do the distribution integration. The second is market development, which is based on experiential marketing, which is based on house-to-house sampling and education -- that did not take off at the same speed, as we would have normally done. And the third is that some of the variables in the market got changed with schools remaining closed. The children were at home, the mothers had many more alternatives than when the kids are going to school, when you would give them a glass of Horlicks. Some of the dynamics very clearly changed. But I am as bullish about Horlicks as about when we acquired the business.
What can we expect to see in the next one or two years?It will gradually get back to the growth that we were looking at. I’m very confident about that. You know, we’ve launched the Mothers Plus, Diabetes Plus, and they're doing extremely well. We've started putting activities back on market development. The distribution integration is done. Our cost savings is running ahead of plan. And we are putting big money behind it. We're relooking at the whole communication. And I'm very bullish, we'll get back.
There was friction between traditional distributors and online B2B apps. Has that been resolved?
Between us and our distributors, there was no friction. We have a great relationship with our distributors. We have 3,500 distributors. And we are committed to them. A large part of our business is through the distributors. And with distributors, we have a great relationship, many of them multi-generational distributors. They're not the first generation distributors. And our endeavour has to be very clearly we bring in better technology to them. We bring in better practices to them. And we allow them to grow the business. If you look at the Shikhar app, it allows our distributors to bring in the benefit of technology because all those outlets which are today adopted by Shikhar or who adopt Chicago, they are serviced by the distributors. So, I didn't see any issues with our distributors. Our distributors have a great relationship. And even now I see no issues at all with our distributors.
Finally, how do you expect the FMCG industry, and more importantly HUL, to perform in the next one or two years? Which are the categories of growth, some new products or new categories that HUL could enter?
First let me tell you, none of the segments in which we operate are anywhere close to maturity. So, there is headroom to grow everything. Yeah. And the growth could come through penetration, the growth could come through upgradation or growth could come by increasing consumption. There is headroom to grow everywhere. That's point number one. Second is, we have market leadership in over 80 percent of our turnover. The third important bit is that we have absolutely great brands. We have brands which are big, which are trusted, which we keep renovating and innovating to make them contemporary. The fourth is we are building massive capability under a reimagined HUL agenda, where we want to be the most intelligent consumer goods enterprise. And last but not the least are our people. We are the employer of choice in the country, we are able to recruit the best possible talent. And our people are behind all those initiatives. So, I'm very confident, that it will be tough, it is going to be very challenging, but we will navigate these times and we will have to adjust our sales (to the new reality). But we'll come out winners. I believe that HUL has never been as strong as it is today.So there will be turbulence. There will be choppy waters. But this is a great market for FMCG. And as I said, it is not a zero sum game. We have over nearly 95 percent of the households using one or more of our brands, where we have great market leadership, great capabilities, where we have deep roots, where we align ourselves to the national agenda, and we have great talent. So, I'm very confident about HUL's future. While we may be a Rs 50,000-crore company, let me say very confidently, that our best is yet to come.