Thursday, March 18, 2010

Unilever in crisis mode ?

Hindustan Unilever (HUL) is strategically important to Unilever as repeatedly claimed by the latter. The number of households as customer base is perhaps the largest for HUL among all Unilever companies. Unilever admittedly learns a lot from the experience of HUL. HUL (HLL before it was rechristened) has produced many stalwarts (called Listers inhouse) who were subsequently promoted and repositioned globally by Unilever. HUL markets a bouquet of products which are household names in India. HUL has also been a coveted employer for a long time. Many executives trained and sharpened in HUL are now ably managing other companies.

All does not seem to be well with HUL of late. Unilever is rumoured to have cracked its whip and advised HUL to show better results, both topline and bottomline. The renowned marketing expertise of HUL has been steadily losing its sheen in this century. Has the company lost its way ? In early noughties, HLL started focusing its attention on "power brands" with a view to bolster its profitability. Instead of boosting profits, the strategy resulted in diminished sales and profits. This double whammy forced the company to dwell on opportunities from bottom of the pyramid for some time. When this changed marketing strategy failed to improve its fortunes, the company started re-emphasising its high-margin products. This to-and-fro marketing mess-up brought disrepute to the company and stakeholders began to view it as a company in terminal decline.

When a firm is seen to be in decline, exits from top management lend further credence to negative public opinion. D,Sundaram, Vice-Chairman of the company quit a few months back. He was the CFO of the company for a pretty long time and the public used to associate him with the financial well-being of HUL. His departure from the company when he was only 54 years of age fuelled suspicion that HUL was perhaps a sinking ship.

Even before this news was fully digested by the market, out comes the information that M S Banga who was earlier Chairman of HLL and presently in executive Board of Unilever has decided to call it a day in Unilever and to reinvent himself in some other (and perhaps better) environment. He is aged 55. Is there something behind the formal mutual encomiums exchanged between Unilever and Banga when the surprising announcement was made ?

When in a crisis, it is not unusual for persons and companies to go berserk. Is this what happened when HUL released an advertisement recently disparaging Tide natural ( detergent made by P&G) by name ? Is it desperation masquerading as a competitive ad ?

Corporate distress is often foreshadowed by a dent in the share price. HUL, ITC and P&G Hygiene are viewed as peers in the stock market . HUL was quoting at a premium of Rs.40 over ITC for a long time. It has now started suffering a discount by the same amount. HUL's Price to Earnings Ratio was traditionally more than ITC's because of the latter's predominant exposure to tobacco. At present, PE Ratios of HUL, ITC and P&G are 24.4, 25.8 and 29.7 (based on closing prices on 18th March) respectively.

Will HUL regain its pristine lustre as a sought-after employer, a marketer of "quality products" and a darling of the stock market ? Or will it cease to be a gem in Unilever group, denting the group's fortunes in the process ?

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