Feb 2004: HLL slashes prices of one of its power brands, namely Surf.
Clearly there is serious backtracking that has happened at HLL. But, even more seriously, while most would believe the price cuts will automatically lead to volumes going up for the brand, investment advisors like India Infoline.com still recommend a sell on HLL (March 2004). (India Infoline interestingly recommended a buy on HLL in January 2001 when the power brands strategy was discussed by Mr Banga). I havent seen financial services company, SS Kantilal Ishwarlal Securities (SSKI) latest FMCG sector report,but the one dated January 2004 calls HLL an underperformer.
The fact is that while prices on a key power brand of Hindustan Lever have been cut (Surf stain champion earlier cost Rs 89 per kg and now Surf Excel Blue costs Rs 67 per kg effectively), making it 25 per cent cheaper, investment an-lysts are wary. Therefore, it seems very clear that the complete story is yet to unfold, since the impact of the price cuts may not be as straightforward as it seems. Traditional theory says that demand goes up as prices come down, but in this case, demand going up depends on various factors.
While the information in it is somewhat dated, the NCAER India Market Demo-graphics Report 2002, outlines some potential problem areas. It shows that for the period 1995-96 to 1998-99, 49 per cent of the increase in market size for washing powders was due to an increase in income levels (80 per cent of the increase in income levels happened in the urban markets, where, as income went up people migrated from washing cakes to washing powders). Only 21 per cent was due to increased consumption (that is, existing users consuming more kilograms per month).
Presumably, a price decrease or an increase in income should both lead to an increase in consumption per household. To that extent, Levers strategy, though dictated to it by Procter & Gambles price cuts, appears a sensible one. But the break-up shows that consumption per household actually declined in the urban markets during this period, despite the increase in income levels.
Another table also shows that penetration levels for washing powder are already very high in urban markets (80-85 per cent in 1998-99). Making it very clear that volume increases due to price cuts can only come from increasing both consumption and penetration levels primarily in rural markets.
This in turn makes it necessary to have a good rural distribution network. One hasnt seen detailed analysis of the gap between opportunity and fulfilment in the rural sector for FMCG products besides the normal data that says 70 per cent of Indias population resides there and that is the opportunity.
Hindustan Lever of course appears to be focussed on this need, since it has already been working on building this distribution network through Project Shakti, which started off as a project empowering women through self-help groups which helped increase awareness of HLLs products in some villages of Andhra Pradesh. The company is now substituting traditional stockists with these women as door-to-door selling agents to reach all of rural India.
How important it is to ramp up the marketing network is of course best shown from an example in an unrelated industry. According to consulting firm Skochs Browser Report released last month, thanks to the excise duty-induced price cuts, demand for PCs is slated to grow by 52 per cent this year. However, according to Skoch, none of the existing players in the organised sector have ramped up their sales forces and marketing network to the desired levels.
In which case, according to the same report additional market is likely to get captured by the unorganised sector.
So while price rationalisation has been forced upon the FMCG players, whether due to market imperatives or competitor imperatives, the paradigm should now shift to the twin imperatives of distribution and last mile connectivity in the rural markets.
Namita Jain is a retail consultant. She can be contacted at email@example.com