Moneycontrol Pro Panorama | Winds of change are blowing at Unilever 

What Unilever does invariably has some effect on HUL, the prize jewel in its pack.

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Hindustan Unilever’s parent company Unilever Plc has a new chief executive Hein Schumacher, who recently took over. He had promised investors after the June quarter results, that he will unveil his plans for the company after the next quarter’s results. That update is now available. What Unilever does invariably has some effect on HUL, the prize jewel in its pack. HUL and what HUL does invariably also affect how the FMCG industry evolves, too. Big change is afoot, if you take his strategy plan at face value.

A clarification is in order that HUL has an independent board and management, that takes decisions pertinent to the local company. However, there is a certain harmony in their strategic direction that has been discernible. For instance, when Unilever had announced an official operating profit margin target of 20 percent, HUL’s margins rose subsequently and would have supported the parent’s goal. But HUL does not announce any margin targets and neither does it set any revenue guidance and so on.

Now, the thing about a new hand at the helm is that you get to see statements such as ‘I'm not happy with our overall competitiveness’. And investors welcome it as this is what they are looking for, change and for the better and preferably one that delivers quick results. But you don’t just say that and leave the troops demoralised, so Schumacher also said he has conviction, “that there is potential to be realized and value to be unlocked”. So, that really is the journey he will set out upon.

What does he not like? Volume growth has lagged, competitiveness is underperforming, gross margin has declined and EPS growth stagnant. Now, these don’t all necessarily apply to HUL, but investors will recognise some of these trends becoming visible of late. Schumacher wants Unilever’s performance to match the top three in its peer group.

Where does he see scope for improvements? Unilever has “outstanding science and technology capabilities”, but these are spread thinly. He would like them to be focussed more on big multi-category platforms. Unilever has many brands and a global reach but not enough prioritising on the biggest brands and big opportunities.

So, what’s lined up? One objective is to attain faster growth. Initially, Unilever will focus on 30 power brands, a strategy familiar to long-term observers of HUL. Pick the largest and most promising brands and put the whole weight of innovation and marketing behind them. The tail will get attention too, but disproportionate attention and investments go to the power brands. The idea is to introduce more innovations in these brands and then move consumers up the premium ladder. Innovation will be put behind new benefits and formats, rather than relaunches. Science and technology keeps popping up repeatedly and it appears Unilever will see a lot more innovation within its existing brands and that should be visible in India, too.

More advertising and promotions will happen and this is actually already visible in HUL’s performance, but the power brands will get a lion’s share of it. No major acquisitions will happen, but some pruning could happen.

The second shift is on more productivity and simplicity. It will seek to build back gross margins. This is already happening in India to a large extent. While falling prices and mix have helped, the new focus will be on cost-cutting. On sustainability, a more nuanced approach is going to be taken, probably to address investor criticism that excessive focus on ‘purpose’ is affecting business goals.

These are broadly the changes that Unilever expects to start making, but there is considerable scepticism among the analysts attending the call, on whether these measures will amount to anything substantial, as Unilever has done similar restructuring announcements in the past, too. The ball is in Schumacher’s court to show why this time is different and this boils down to execution of these plans.

What does all this mean for HUL’s investors should become clearer in the next few quarters and possibly years, too. Many of these changes will be global in nature, even if the focus will be on the developed markets where growth has been underwhelming for a long time now. But, as has been seen in the past, HUL’s size means that if Unilever is seeking higher growth and higher gross margins, then it can be counted upon to become a significant contributor to the same.

The good news then is that higher growth, higher gross margins and cost-cutting will always be welcomed by investors. But some of the other strategies, such as a focus on power brands may bring some chaos in the near term, as the company de-focuses on smaller products or variants. Selling off of smaller brands could also disrupt growth. And, lastly, Horlicks found mention as an acquisition that has not delivered and that it will be made to work. What shape that takes will also be of considerable interest to HUL shareholders as this is a large business.

Unilever’s and in turn HUL’s actions will also see rivals making changes to their own strategies. A more aggressive Unilever will call for a response from them, too. These changes are what investors should be keeping a watch over to see how it can affect HUL and possibly other FMCG stocks.

One last thing:  We have started a new series today for Pro subscribers. MC Pro Inside Edge peeps into the inner goings-on of Dalal Street, bringing you a ringside view of what stocks veteran bulls are eyeing, what the bears are ganging up against, secret deals and more. Do read and we hope you enjoy it.

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Ravi AnanthanarayananMoneycontrol Pro