The Hindu Business Line : Seeking to Unileverage

It’s a Friday evening of the Diwali week and the business district in the Churchgate area of Mumbai is winding down. It’s been pretty much a holiday most of the week. However, inside consumer goods major Hindustan Unilever’s (HUL) headquarters, with its open office spaces brightly swathed in the colours of its many brands, for Nitin Paranjpe, HUL’s 45-year-old CEO and Managing Director, it’s just another busy day at the office. Gung-ho after the company’s strong showing in its third quarter results, Paranjpe, part of him thinking of his son’s progress in a squash tournament in Chennai, spoke to Brand Line on a wide variety of issues offering insights and analysis into some of the decisions that the company made. He laughs easily, heartiest when you comment that he is perhaps the youngest person to head the FMCG behemoth. “I’ve been told that but am asking my people to check if that’s correct!” is what he says, guffawing. Paranjpe joined HUL in 1987, the only company he’s worked for. Excerpts from the interview:

As the head of the largest consumer goods company in India, what would you say is the macro outlook on consumer spending? The slowdown is impacting the durables industry in some way; do you see it impacting the FMCG industry as well?

All I can say is we have seen no evidence of reduced consumer spending. In fact, if you were to take published numbers from A.C. Nielsen, in quarter three markets have grown in all the categories we operate in at a faster rate than they grew in the second or the first quarter. That’s quite reassuring for us. In categories such as laundry and personal wash, the bulk of the growth is coming from price, with no volume growth. In the rest of the categories, such as personal care and beverages, we are seeing a good balance between price and volumes.

The second thing we are seeing is a balanced growth between the urban and rural markets. After a very long time both markets are growing at the same pace — across geographies — urban is growing while rural too is growing at a similar same pace.

At what rate of growth are they?

The markets, at the end of June, were growing at about 15 per cent, and a bit faster in the quarter ended in September. Both urban and rural markets are growing at the same pace, give or take one percentage point. That’s unusual but very reassuring. While it’s fair to say that volume growth has come down in some categories, consumer spending has not come down. In fact, consumer spending has gone up by 15 per cent in the categories we operate in.

You said it’s unusual, both rural and urban growth at the same pace. Why?

Normally one would have expected growth rates to come down in inflationary times. There are a few reasons why we feel growth has held out thus far, but what happens in the future as a result of the events of the past few weeks is anybody’s guess so I don’t want to venture into that space. Why has rural growth been strong? First and foremost is that a lot of money is being spent in rural India through government employment generation schemes and the loan waiver has changed sentiment substantially.

We have been blessed with good monsoons and good agricultural production and that’s helped. With technology, price discovery has been much better, there’s greater transparency in prices, as the result of which the farmer has benefited. Then, there has been food inflation. It negatively impacts the urban consumer but benefits the farmers because their realisation increases in inflationary times, especially as their input costs continue to be subsidised to a large extent. While input is subsidised, prices are rising, so money in hand has actually gone up. The landless labourer who works in rural India is paid wages in the form of grain so inflation does not impact him as much. If you combine all of this you find that the rural economy has actually been pretty good.

The affluent urbanite’s demand is inelastic for the goods and services that we offer. So, that demand continues.

The real pressure is on the lower middle class urban consumer who feels the pinch of rising prices, inflation, higher demands on their disposable income, interest rates going up, EMIs — this is the segment we have to watch out for.

Almost 70 per cent of India is in rural, where 50 per cent of consumption is, and that’s protected. The upper end of consumers, who may constitute the top 5-8 per cent of the population, may account for 15-20 per cent of consumption. So you are really talking in terms of 25-30 per cent of the consumption where some squeeze may happen.

That’s still a large consuming class, isn’t it?

Yes, but there is another factor which exists today which is often not recognised and that factor has largely to do with how the country’s structure is changing. If you take a 10-year horizon, 2003 to 2013, and we are at the halfway mark, we believe in this period the affluent Indian households will quadruple from 3 million to 12 million. These households could be spending € 10,000 per annum, almost Rs 6 lakhs. Eleven million households is just under 50 million consumers, almost the size of Britain, with almost equal spending power in these categories. The middle class is likely to treble in this period.

So what has happened is that the bottom of the pyramid has shrunk a bit and with that people who weren’t even consumers of our products have started becoming consumers. The affluent who are likely to quadruple is leading to increasing ‘premiumisation’ of portfolios and categories.

We have this interesting dynamic – there are some people who feel the squeeze and downtrade; equally there are some who have now more money and unlike in the past today they are comfortable spending it and affordable indulgence is no longer frowned upon. So both uptrading and some downtrading co-exist. As a secular trend, if you were to see longer term we will see premiumisation.

So, is this why Levers has consciously come out with an array of premium products in various categories?

Our strategy has always been to straddle the pyramid. A company of our size, scale and ambition cannot but have a proposition for every Indian. If our vision is to earn the love and respect of the people of India through our brands which make them look good, feel good and get more out of life, we have to cater to them, which means we need offerings everywhere.

In the past the proportion of affluent Indians was very few and also spending habits were very different. With changing media, changing generations, people’s attitudes towards consumption and consumerism has changed and knowledge and awareness has gone up. People today have the money and are often demanding products and services of a quality which are no inferior to any elsewhere in the world. As these numbers started growing we needed to augment our portfolio to cater to this segment.

There is no taking away our focus from the bottom of the pyramid. This segment will remain a large part of India in the foreseeable future. But we need to widen our portfolio with new benefits, variants and formats catering to the affluent Indian who has the propensity to spend.

This sociological trend which you talk about also coincided with your growth over the past few years?

This started a few years earlier and I call this the generation which has come up post 1980, which is entering working life now. That decade coincided with two developments: mass media really took off, especially in the ’90s, and it was a huge influence on people.

Habits were changing, a large number of consumers saw the same ads, so aspirations became homogenous even though means were heterogeneous.

So, whether you were rich or poor you were exposed to the same things. It also coincided with India liberalising. Not only did attitudes change, this generation also hasn’t seen rationing or a controlled era, their spending habits are very different than the earlier one which lived in Gandhian austerity.

In the ’90s a lot of companies which came and set up shop did so on the basis of the number of middle-class households. Many of them burnt their fingers because the money may have been there but the propensity to spend was not there. Now you have both the money and desire to spend so you are likely to see growth.

Going by that analysis, what will be the categories that will drive Lever’s growth?

We believe the largest growth will come from existing categories, not new. There are tremendous opportunities for growth in the FMCG segment in India in terms of penetration, consumption and upgrade. The consumption levels are very low even compared to a market like China. For example, in shampoos it is 30 per cent and in skin care it is 10 per cent. The economic and social indicators in China are about 10-12 years ahead of India, so if you were to take China in the mid- ’90s and India today, we would see similar per capita incomes. So, it’s a possibility in the next 10-12 years the Indian market could grow close to what the Chinese markets are today.

That means some categories could grow many times over. That is the exciting opportunity we have.

The second belief is that some categories that are small and nascent could grow disproportionately. A case in point is premium face care – the anti-ageing market did not exist few years ago. Deodorants, premium face care, packaged foods, water, will be the sort of categories that will see disproportionate growth though from a small base.

You stress on the quality of execution rather than strategy?

Yes, indeed. I don’t want to belittle strategy. It is very important. But I have come to the conclusion that most organisations have enough people who come up with reasonably good strategies. Most companies have more or less the same emphasis and use the same language — satisfied customers, low costs, and so on. What makes the difference then is how you execute it.

For example, everyone knew Dell’s supply chain strategy. However, no one else could replicate it.

That’s because execution is not just knowledge about strategy but it is also about culture, processes, behaviour in the organisation, capabilities, about rewards and recognition you put in place and other such building blocks.

I am of the view that everything else can come to nought if you execute poorly. So we will do what it takes to glamorise execution and not make it seem as some dirty task that people think ought to be done. Driving accountability and a performance culture is a necessary requirement.

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