New Page 2In order to avoid duplication between the Directors’ Report and ManagementDiscussion and Analysis, we present below a composite summary of performance of thevarious businesses and functions of the Company.
4.1 Economy and Markets
World economy was severely impacted by the US financial crisis, with its contagioneffect across countries. Global trade was affected with reduced exports from Developing& Emerging (D & E) countries like India and China.
India was one of the few large economies that registered a robust growth in GDP at 7%for 2008-09. Country benefited from a near normal monsoon, reflecting in agriculturegrowing by 2.6%. Rural economy was also buoyed by Government spendings, employment schemesand higher food prices. While services sector continued to grow at a healthy rate,industrial production registered significant slow down, impacted by the global recession.Country’s GDP growth for the second half of 2008-09 was lower compared to the firsthalf.
Slow down was witnessed in capital goods, consumer durables, automotives, aviation andthe like, although FMCG markets somewhat held their value growth levels. There waspressure on volumes in categories like Soaps and Detergents, with signs of downtradingacross segments. Government including Reserve Bank of India, launched fiscal and monetarymeasures to boost credit, investment and consumption. FMCG sector benefited fromsignificant reduction in excise duty rates on finished goods.
The year 2008 also witnessed high levels of volatility in commodity prices, essentiallyled by petroleum crude. Vegetable fats, chemicals and packaging materials also reflectedthis price volatility, causing stress in business planning processes. Wholesale priceinflation touched high levels during the year, before decelerating sharply towards thelater part of the year under review. Your Company’s good performance for the period2008-09 has to be seen in the context of above economic background.
PERFORMANCE OF DIVISIONS/ CATEGORIES
Some highlights are given below in respect of each of the business categories of theCompany.
Increase / growth percentages refer to a period of 15 months over the base of 12months.
4.2 Home & Personal Care business (HPC)
The business comprises Personal Wash, Fabric Wash, Household Care and Personal Carecategories. The business recorded a growth of 51%. This was broad based and acrosscategories and was achieved in the face of two major challenges;
• Competition continued to be intense, both from existing and new players. YourCompany responded through increased brand investments, value enhancing innovations andpowerful market activation.
• Volatile commodity markets with petroleum crude prices at c.$ 90 per barrel atthe beginning of 2008 peaking to $ 147 per barrel before dropping to levels of c.$ 50. Thesevere impact of cost inflation was felt in inputs like vegetable oils, laundry chemicals,packaging and freight. Robust planning systems and strong dynamic performance managementprocesses helped the business manage this volatility. Judicious and sensible priceincreases, together with continued aggressive cost savings programme enabledcompetitiveness of Company’s brands in the market place. Benefit due to reduction inexcise duty rates from 14% to 8% in two phases (in December 2008 and February 2009) waspooled and passed on to consumers through price reduction in select packs.
Potential for growth in all categories of Home and Personal Care is high, given thecurrent low levels of per capita consumption. Directors believe that sustained investmentsbehind brands by way of technology, innovations and consumer communication will benefitthe business in creating value.
4.2.1 Soaps & Detergents
Soaps and Detergents category recorded a robust sales growth of 54% with a slight dropin annual segmental margin by 20 bps. This needs to be seen in the backdrop of high andvolatile input costs and competitive pressures. With the softening of crude oil prices andthe consequent easing of input material costs, product prices have been recalibrated toenhance market competitiveness and grow volumes.
Fabric Wash continued its growth momentum despite experiencing severe cost pressures.All brands across price segments, Surf, Rin, Sunlight and Wheel delivered strong value andvolume growth. Wheel became the largest detergent brand of India with annual turnoverexceeding Rs. 2000 crores. Wheel Gold was successfully launched, providing better washperformance at affordable prices to drive upgradation of consumers. Surf franchisecontinued to do well with both, bar and powder, reporting growth. Rin Powder wasre-launched during the year with superior formulation and proposition, and was extended towashing machine segment with the launch of Rin Matic. Sunlight grew well in its strongholdmarkets.
Cost pressure in the category was managed through judicious price increases on premiumproducts, but price point affordability was retained in mass segment for the low incomeconsumers by appropriately adjusting fill levels.
In Household Care, Vim liquid, a convenient premium dish wash product was re-launchedin a highly efficient gel formulation; it is receiving good consumer response. In surfacecleaning, Domex continued to grow and doubled sales. Strong marketing activitiesestablished Domex as a powerful proposition for floor and toilet cleaning.
Personal Wash category faced a steep rise in vegetable/palm oil prices during thecourse of the year. Competition from existing and new players has been intense.
The category was managed through multi-pack offerings, consumer promotions and moderateprice increase in low unit price packs. Lifebuoy grew on the back of small and multipacks. Re-launch of Lux in variants like Strawberry and Peach supported by a new thematiccommunication enabled the brand to grow well. Dove and Pears grew ahead of the market inthe premium category. We will leverage all our brands in this category to drive growth.
4.2.2 Personal Products
Personal Products include categories like hair care, skin care, toothpaste and brush,deodorants and colour cosmetics.
In Hair Care, HUL maintained the leadership position in Shampoo with its powerful brandportfolio, addressing consumer needs across the income pyramid. Price points werecarefully maintained in the context of inflationary pressures. The premium Dove shampooand conditioners range launched during 2007, reported very good growth through acombination of high quality advertising and actions in the market place. Clinic Pluscontinued to grow and strengthened its position as the single largest shampoo brand.Sunsilk range was re-launched with further improvements to product quality and packaging.Clinic All Clear is being re-launched to regain its earlier position. Rapid progress isbeing achieved in driving the emerging and high potential hair conditioner segment.
Skin Care category continued to witness intense activities in the market across incomesegments. Share of high value premium products is also increasing; this has excellentpotential for HUL through Pond’s top end products. In mass skin lightening category,Fair & Lovely delivered strong growth. A consumer friendly pack format at affordableprice was introduced; this will help to upgrade sachet users to tube format. In premiumcategory, Pond’s increased its consumer base with good offerings in anti-ageing andskin lightening segments. Modern Trade and specialist distribution channels helped inupgrading consumers to premium products.
Lakm Skin Care range performed well. Vaseline launched newer formulations in bodylotions offering relevant consumer benefits like moisturisation. Talcum powders continuedto do well.
In Oral category, Close-up performed very well, led by the re-launch in September 2008,recording growth ahead of the market for the third year in a row. Pepsodent underperformedand appropriate actions are being taken to drive the performance of the brand in 2009.
The Lakm range of Colour Cosmetics grew well. New innovations like aqua shine lipcolour, summer and winter collections were well received by the consumers. Lakm FashionWeek continues to be a signature campaign for the brand.
In countries like India, Deodorants business has excellent potential for growth giventhe low user base currently. Investment behind Axe Deodorant was significantly enhanced.Special edition packs and memorable media campaigns support the brand. The category,however, continues to suffer from duplicates and illegal imports. We are addressing thisissue holistically through consumer information and working with industry bodies foreffective enforcement of laws by agencies concerned. Going forward, we will deploy thetotality of the portfolio to sustain growth of this key category.
Kimberly Clark Lever Pvt Ltd (KCLL)
KCLL is a Joint Venture between HUL (50% equity) and Kimberly Clarke Corp., USA (50%equity) and is engaged in infant care and feminine care products under brands like Huggiesand Kotex. These products are sold through HUL distribution system and delivered a goodunderlying volume growth. New products were introduced at different price points forfurther developing the market. The Joint Venture is profitable and has been payingdividends for the past few years.
4.3 Foods
HUL’s Foods portfolio comprises Beverages (Tea and Coffee), Processed Foods(Kissan, Knorr and Annapurna range of products), Ice Cream and Bakery products (ModernFoods).
The business sustained its growth momentum of the last three years. The growth has beenbroad based, competitive and profitable. Delivering product freshness continued to receiveutmost priority and several actions have been taken to further reinforce the work alreadydone.
Beverages like Tea and Coffee are well entrenched habits among Indian consumers withfurther potential for higher per capita consumption. However, processed foods is a smallfraction of the large foods market and hence offers huge potential for companies like HUL.The processed foods opportunity is at an inflexion point in India. With a formidable arrayof brands (across hot and cold formats, in-house and out-of-home segments), strongresearch, development and technology support from Unilever and your Company’sintimate understanding of Indian consumers, we are well positioned to benefit from thethrust on Foods categories.
4.3.1 Processed Foods
Kissan is one of the most trusted Foods brands among Indian consumers. The growth inKissan portfolio, supported by successful innovations, was good. Jam squeeze launched inSeptember quarter was attractive to children. New packaging formats in Ketchup such asvalue packs and kids friendly upside down squeezable pack were received very well. Kissancontinued to maintain its leadership position in Jams and achieved strong shares inKetchup segment.
The Knorr proposition was extended through Indian range of soups and ready to cookrecipes. These have been well received in the market.
The staples business (Annapurna salt and flour) was impacted in the first half of 2008on account of supply issues. These have since been addressed, helping the business achievegood growth. There has been a significant improvement in the profitability of the businesson the back of supply chain savings and improved product mix. ‘Amaze’ brain foodis in test market phase in three Southern states.
4.3.2 Beverages
Consumers of Tea continued to upgrade from loose tea to branded packet tea, which nowaccounts for some 40% of total domestic tea consumption. Packet Tea market remainsextremely competitive. The tea business delivered well with good volume gains and furtherstrengthened its value leadership position. The market shares increased across brands.Focussed marketing initiatives undertaken in key geographies have delivered good results.Tea prices continued to rule high necessitating selective price increases across packs andbrands. Margins were managed through a combination of pricing and supply chain costsavings.
3 Roses Mindsharp was launched to offer the consumer the goodness of ayurvedicingredients like brahmi and badam which help to achieve relaxed yet alert state of mind.Taj tea bags were relaunched in Ginger, Cardamom and Lemon flavours. The business iscurrently test marketing a new product under the brand ‘Brooke Bond Sehatmand’,offering nutritional benefits like vitamins to tea consumers. Lipton has been relaunchedand continues to grow strongly in the out of home segment through acquisition of newaccounts and expansion of vending machines, gaining a wider national footprint.
Coffee business led by Bru Instant Coffee registered a good growth in 2008. Bru wasre-launched in the second half of 2008 focussing on aroma delivery (through aroma lock)and improved sensorials, backed by strong media campaigns and trade activations program.Cappuccino business continued to add new consumers in non-south geographies both in hotand ice cool variants. We will continue to focus on building growth in Instant Coffee,consolidate our position in ‘roast and ground’ segment and drive premiumisationof the portfolio.
Out-of-home consumption is one of the key value drivers for the business, by providingconsumers with a refreshing experience of branded beverages while they are out of home– at work or wait or play. We will continue to drive aggressive growth in thischannel through required investments.
4.3.3 Ice Creams
Ice Cream business sustained its growth momentum and delivered strongly; both impulseand take home segments delivered well. Underlying profitability continued to improve withincreasing scale and better operational efficiencies. The business fully uses itsunlimited access to Unilever’s portfolio of brands and innovations to offer excitingproducts, suitable to Indian consumers.
Gelato, a premium take home product was introduced with two variants – Tiramisuand Nochiola and has shown encouraging results. Further, a range of innovations inCornetto such as ‘Almond Praline’ and ‘Choco Brownie’ has beenintroduced in the impulse segment; Cornetto cone variants called ‘Black Forest’and ‘Strawberry Tease Cake’ were launched successfully. Attention to expansionof cabinets infrastructure for increasing availability, improved customer service andstrong brand communication have ensured that the business continues to perform well.
4.3.4 Bakery (Modern Foods)
Bakery (bread and cakes) grew strongly through a combination of higher volumes, betterproduct mix and judicious pricing. Profitability has also improved over the years. Mergersynergies are being realised through centralised buying for key materials and adoption ofgood manufacturing practices.
4.4 Exports Business
Continuing portfolio of Exports comprising FMCG and Specialty Exports grew strongly.Margins improved reflecting the benefits of a rationalised product portfolio andappropriate restructuring. All categories recorded good value growth leveraging on thehigh commodity prices. Your Company also earned the reputation for delivering excellentlevels of customer service.
HPC Exports reported handsome growth driven by Skin and Hair categories. Investments inKandla unit helped to develop the site into a world class competitive sourcing locationfor HPC products, particularly high range Skin Care products. Kandla unit securedinternational certification from US FDA and the Canadian Ministry of Health. Skin careexports to Arabia, Malaysia and Sri Lanka performed very well, thanks to good demand. Oralturnover growth was flat as toothpaste sourcing for Europe dried up following their moveof on- shore production. Pears franchise continued its good performance across manycountries.
Foods and Beverages exports improved its profitability with parts of portfoliorationalised, mainly by way of stoppage of Bulk tea and raw coffee bean exports. Thecontinuing businesses performed well; value added tea bags segment grew strongly. Effortsto increase the coverage of Instant Tea exports to Europe were successful. Export of 3 in1 tea premix to Arabia has also been received well. Culinary products like soups and jamsshow promise with turnover doubling, albeit on a small base.
In Specialty Exports, Marine business reported profits, benefiting from very favourablemarket conditions for Surimi. Crabstick business continued steady growth and profitabilitywith a widened customer base. Rice business reported good growth of turnover and profitsdriven by strong brand positions in Indus Valley and Rozana especially in the Gulfmarkets.
Your Company will continue to focus on value added FMCG exports and drive internationalcompetitiveness to deliver growth.
Leather (Pond’s Exports Limited)
Leather Exports had a difficult year due to forex volatility and recessionaryconditions in Europe. India’s competitive advantages of good quality leather and theability to service small orders were neutralised by China’s significant costadvantages and a well developed market for components. The shoe-upper business continuedto deliver profits. In the shoes segment, major markets in the European Union were pricesensitive, with some key customers switching to low cost locations. In order to achievecost competitiveness and remain viable, the Company has taken steps to restructure thehigh cost manufacturing facility at Puducherry. Collaboration with a Design Centre inChina to provide a stream of new designs and cost effective components has been helpful.
HUL shareholders have already approved the divestment of this business, but we are yetto find a suitable buyer. In the meantime, steps are being taken continuously to improvethe performance and profitability of the business.
4.5 Water
Pureit is a unique in-home drinking water purification system, offering water ‘assafe as boiled’, thereby protecting children and families from waterborne diseases.It is the only purifier in the world that provides this level of safety without dependingon cooking gas, electricity and pressurised tap water, and is affordably priced.
Following awards for Pureit during the year reflect the high public recognition for thesame:
• Golden Peacock product innovation award,
• Innovation award in India from the United Kingdom Trade and Investmentorganisation, and
• Water Digest award supported by UNESCO for the best domestic non-electric waterpurifier.
Pureit has been nationally extended with its footprint in 28 states. The business hasdeveloped a unique customer acquisition system and strong capabilities in supply chain andcustomer service. More than one million units of Pureit were sold during the period ofApril 2008 to March 2009; sales turnover of the business was Rs. 190 crores for thisperiod. The business is in an investment phase, we continue to commit resources in thisbusiness, mainly to fund brand development and sales infrastructure. The potential for thebusiness is high given the critical need for clean water at low cost.
4.6 Hindustan unilever network
The strategy of the network is redefined in line with its vision of empowering modernIndian woman by serving her with superior beauty and healthcare products throughcustomised and professional services.
Accordingly the network channel has been repositioned, to offer premium products in thetwo growing categories of Beauty Solutions and Health & Wellness, under two corebrands viz. Aviance and Ayush respectively. This is an important channel and the keychallenge to drive the business to scale through outstanding execution remains.
4.7 Beauty & Wellness Division
Growing disposable income and changing lifestyles in urban India have led to greaterawareness about personal grooming, health and wellness. The emerging trends augur well,for Beauty and Wellness services sector, presenting a large and exciting opportunity. Wecurrently operate in this segment through a largely franchised network of Lakm BeautySalons and Ayush Therapy Centers.
We have licensed ‘Lakm’ and ‘Lever Ayush’ brands to, ‘LakmeLever Private Limited’, a subsidiary Company. This creates the necessary focus forthe services business and nurtures a dedicated customer service mindset. Lakme LeverPrivate Limited will evaluate options towards developing a uniquely different, newbusiness model for this opportunity, with singularity of purpose and dedicated focus. Inthe meanwhile the existing network of franchisees would continue to grow in the segment.