Monday, March 4, 2024

HUL signals first steps to regain market share from small players

Hindustan Unilever (HUL), the largest fast-moving consumer goods (FMCG) manufacturer in the country, has recently revised its distributor margins. The company has shifted from a fixed margin model of 3.9%-3.3% to an increased variable margin in the 1-1.3% range across various distributor categories. This shift is an attempt to stimulate volumes and reduce distribution costs. Will the distributors agree to work with this?

HUL recently acknowledged a decline in its value market share particularly in the mass-end of its portfolio which includes categories like detergents and tea, losing ground to smaller competitors. “We have seen the resurgence of small and regional players in select categories and price points, many of whom had vacated the market during the peak of inflation. This has continued into the September quarter from the June quarter,” HUL’s CEO & MD Rohit Jawa said following the company’s second-quarter earnings.

According to a recent Redseer survey, a significant portion of consumers are open to purchasing unbranded products, provided they meet the criteria of quality and perceived value.

The trend among mass consumers is shifting towards utilizing e-commerce platforms for a wide range of shopping categories, including FMCG. The attractive pricing and product variety offered by direct-to-consumer (D2C) brands might impart valuable marketing insights for FMCG brands.

Moreover, as a Nielsen report also said, prominent FMCG companies are experiencing a decline in pricing growth. This shift is ascribed to adjustments in trade pipelines and the integration of product price reductions by companies, now becoming evident in pushing for retail sales.

Analysts anticipate gradual improvement in volume growth. On the gross margins front, there has been a noticeable sequential recovery for most FMCG firms, attributed to the stability of key raw material prices, including crude, packaging, and palm. 

Further recovery is expected in the upcoming quarters as raw material prices continue to stabilize. However, the rise of local and regional competitors poses a new challenge. Ebitda margins have exhibited a measured recovery, influenced by increased advertising expenditures aimed at enhancing market presence. Consequently, larger players, including HUL, are poised to encounter a more subdued pace of volume growth.

While HUL’s stock price has remained unchanged for over two years, its counterparts have demonstrated more favorable performance. Despite sustained indications of rural recovery, inflation alleviation, and enhanced gross margins, the FMCG sector experienced growth in 2023. The Nifty FMCG index surpassed the benchmark, registering a 25% increase compared to the 18% rise in Nifty.

What elements are absent from HUL’s growth trajectory? Will the management overhaul fortify its position against local and regional competitors? Can the revised distribution margin structure enhance distributor engagement and drive increased sales? 

Sustaining market relevance amid local competition remains a pivotal question. Currently, it appears that HUL has belatedly realized this, despite enduring two years of lackluster stock performance and market acknowledgment. A broader product lineup may be imperative to capture consumer attention, boost volume sales, and counteract pricing pressures.

The introduction of fresh product lines is essential for attaining elevated margins, a prospect potentially offered by their focus on beauty and well-being. This underscores the significance of the recent management changes. HUL recently unveiled plans for the transformation of its beauty and personal care division into distinct beauty and well-being (B&W) and personal care businesses, aiming to enhance business focus. Additionally, the company has augmented its workforce with top talent dedicated to advancing its digital agenda, reinforcing HUL’s commitment to becoming more future-ready.

However, HUL must contend with narrower profit margins when competing with local brands in the mass product segment. It is imperative for the company to establish brand attractiveness, enticing distributors to drive volume growth. Introducing new product lines is crucial, to avoid cannibalizing existing brands. Until these steps are taken, achieving higher stock valuations in the market may not materialise.

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