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Hindustan Lever Takes A Bath


A decade ago, Vinayak Chatterjee kept nearly a dozen products from Hindustan Lever Ltd. (HLL) stashed in his cabinets -- everything from Signal toothpaste and Sunsilk shampoo to Surf detergent and Liril soap. Today there's just one: Close-Up toothpaste. Why? The Delhi resident says the wares of Hindustan Lever (HLL) -- a publicly traded company 52% owned by Anglo-Dutch giant Unilever -- have become ``fuddy-duddy.''

That's a big problem for the $2.2 billion consumer products giant. In the 1980s and 1990s it dominated the Indian market with its soaps, shampoos, toothpastes, creams, and beverages. Up-to-date technology, bright packaging, and savvy marketing of tiny sachets of soap that sold for as little as 2 cents allowed Lever to dominate the market. And investors, sensing the company's deep understanding of the Indian consumer psyche, saw its shares as a proxy for India.

These days, Hindustan Lever could use some scrubbing up. Its market share in many product categories is dipping as new competitors offer rock-bottom prices. That has driven revenues down and hurt its stock price. The benchmark Sensitive Index is up 18.5% in the past year, while Hindustan Lever has fallen by 23%, though it has recovered somewhat this autumn along with the broader market. ``The tough times are still not over,'' predicts Harrish Zaveri, an analyst at Bombay investment bank Edelweiss Capital.

Blame Lever's decline on a mixture of management hubris and a rapidly changing Indian market. After two decades of dominance, Lever's managers lost touch with consumers. Parent Unilever wanted to focus on boosting profit margins, which meant cutting smaller brands and merging popular regional offerings into nationally marketed ones. Since 2001, Lever has shrunk from 110 brands to just 35. Sales fell from $2.33 billion in 2001 to $2.11 billion in 2002, and J.P. Morgan Chase & Co. (JPM) expects them to reach just $2.16 billion this year. Lever did achieve its profit goals: Even as sales slid, margins last year hit 19.9%, up from 15.6% in 2001. ``We've been very careful to benefit shareholders,'' says Chairman M.S. ``Vindi'' Banga.

SAVVY COMPETITION

But while management focused on earnings, India changed. Consumers wanted more choice, and an army of small, regional players with strong local knowledge emerged to give it to them. Madras-based CavinKare, for instance, challenged Lever's Sunsilk and Clinic with Chik, a highly perfumed and protein-rich shampoo tailored to the tastes of women from the south. Anchor, a Bombay producer of household electrical switches, used its distribution network to launch Anchor Toothpaste, which it markets as ``vegetarian.'' The company quickly grew from its base in western India and seized 4% of the national market by offering a free toothbrush -- roughly a 33 cents value -- with every 55 cents tube.

In theory, say analysts, Lever's strategy was smart: Get rid of underperforming products and cut the fat. But the timing was wrong. In 2001, India was hit by a three-year drought that ravaged the incomes of Lever's largely rural consumers, forcing them to buy cheaper products. That benefited the likes of CavinKare, which offered sachets of Chik for about 1 cents, half Lever's price. From 58.8% of India's shampoo market in 2001, Lever has dropped to 50.3%, according to ACNielsen ORG-MARG figures provided by Lever. The company's share of the toothpaste market, meanwhile, has fallen to 28.2%, from 33.1% three years ago. Then in February, 2004, Procter & Gamble Co. (PG) cut the price of its Ariel and Tide detergents by more than 40%, doubling its share of the the detergent market to 3.5%.

Lever finally got the message. A week later, the company dropped the price of its Surf Excel detergent by 35%, and shortly thereafter cut prices for its shampoos by 20%. Now Lever is trying to raise its profile by increasing its advertising budget by more than 25% and introducing a half-dozen new creams, soaps, and detergents. Those moves have helped stop market share losses, but have hit earnings. In the quarter ended in September, Lever's profits fell by 31%, to $70.5 million, compared with the same period in 2003, and for the year the company is likely to see profits decline 20%, according to J.P. Morgan (JPM). Chairman M.S. ``Vindi'' Banga, meanwhile, maintains that the strategy of consolidating brands and then later cutting prices to respond to competition were both right decisions. ``The environment in India changed dramatically,'' he says. ``The market has become more pernicious, but we have to keep our share.''

The environment is changing again -- and in a direction that will surely help Lever. The Indian economy is slated to grow at 6.5% this year, and as incomes increase, Indians will buy more personal-care products. But some still warn that Lever must keep cutting prices if it wants to stay on top. ``In order to maintain market share, the company will have to be willing to sacrifice its margins,'' J.P. Morgan analyst Vijay Chugh wrote in a recent report. Only when consumers like Chatterjee start refilling their cabinets with Lever products will investors really start stocking up on Lever shares again. By Manjeet Kripalani in Bombay


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