Moneycontrol Pro Panorama | Adverse times may see FMCG companies focus on core strengths

Shareholders in FMCG companies should keep a close watch for how some of the commodity-facing businesses are performing and if they are eroding value. (Representative image)

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 
Hindustan Unilever’s shares did not skip a beat after its decision to sell its wheat flour brand Annapurna and salt brand Captain Cook. No surprises there. Shareholders of a newer vintage may have never even heard of these names before. If their presence was a negligible one, at 0.25 percent of FY22 sales, their sale too earned a mere Rs 60 crore, a sign these brands are not in good health. HUL’s market capitalisation is 11 times its FY22 sales.  

But their sale is a significant event, nevertheless. It marks HUL’s complete exit from two staples, in which two leading competitors—ITC and the Tata group—are active. But these brands had ceased to be a focus a long time ago. Salt was anyway a low-margin product and remains so. Atta too was a difficult market, but HUL had big plans, probably to counter ITC’s growing national spread with its Aashirwad atta. 

While margins were low in both, they also required considerable and sustained investments in marketing. This meant using cash flows from other businesses to incubate the brands for at least a decade. ITC’s tobacco business gave it a cash hosepipe that it has used to nurture several brands. Tata Chemicals had its soda ash business that yielded salt as a byproduct. 

Ordinary table salt was probably too difficult a market to crack, which is why even ITC did not touch it. ITC had an edge in atta since it traded in agricultural commodities and understood how the agricultural sector worked. Although HUL did not have any skills in this market, its foray into atta could have been attributable to the potential — India’s wheat belt is a huge market — and also to counter the rising graph of ITC.  

But it was a difficult market, starting from low margins. There were other difficulties, too. The price of wheat fluctuated frequently, as did the supply. Even when contracted, if the spot price was higher, there could be supply problems. And, HUL’s management was not keen on varying the product price in tune with market fluctuations. That’s common in packaged edible oils, for example. Apart from ITC, it also had to compete with a bunch of strong regional and local brands, and then the loose flour market.  

HUL made all efforts to make it a viable product. It even made a ready-to-eat chapati product to move up the value chain and be freed of commodity pricing, but that did not take off. Eventually, it exited the national market for wheat and continued selling in some select southern markets. That’s like selling vada pav in all markets except Maharashtra. 

Why sell now is a question. HUL says it’s in line with its stated intention of exiting non-core businesses. But that was the case even in 2018 when it decided to sell its Modern Foods bakery business. Could this be a one-off exercise or could this be part of a bigger restructuring piece? We had written in 2022 about how an impending organisational restructuring could bring about changes for HUL, too.  

But HUL may not be the only company focusing on the core. Deciding what is non-core is the management’s prerogative. Consumer companies, globally, are finding the going tough because of higher inflation hurting sales growth. Exiting less profitable brands will support profitability and allow companies to focus on fewer and more profitable brands. Nestle SA too had talked about focusing on fewer brands and this may be a theme that could play out in the FMCG sector. There was a time some decades ago when the ‘power brand strategy’ had become fashionable in India. If inflation and slowing demand continue, it may return. 

Last, it would appear that if atta and salt are kicked out of HUL’s shelf, then kitchen spices may not find a place there either. After companies such as ITC and Dabur have acquired masala companies, there was speculation HUL may do so, too. That seems unlikely now. It’s likely to focus on the value-added categories, with value-addition not meaning pounding and packaging of commodities as seen in atta and spices. But then some may say mayonnaise is just milk or eggs whipped with oil and spices. And, HUL does sell Hellmann’s mayonnaise in India. But that argument, on what is the line that separates a commodity from a FMCG product, is for another day. 

For now, shareholders in FMCG companies should keep a close watch for how some of the commodity-facing businesses are performing and if they are eroding value. And, if companies talk more about focusing on the core or on improving profitability of brands, then expect a minor storm in the making. Focusing on the core means hacking away at the tail and that takes time to play out, as the supply chain has to be flushed of these brands and then consumers have to be moved on to the core brands (or be resigned to their moving to rival brands). Sales growth declines meanwhile, before finally beginning to move upwards, while profitability looks healthier. 

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Technical Picks: Persistent Systems, USD-INR, ICICI Bank, Anant Raj, SRF and Lead (These are published every trading day before markets open and can be read on the app).Ravi Ananthanarayanan
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