A Study on Distribution Strategies of

Hindustan Unilever Limited

By

Rajnikant Gharat

1 Introduction Hindustan Unilever Limited‐Hindustan Unilever Limited (lsquoHULrsquo) formerly Hindustan Lever Limited (it was renamed in late June 2007 as HUL) is Indias largest Fast Moving Consumer Goods company touching the lives of two out of three Indians with over 20 distinct categories in Home amp Personal Care Products and Foods amp Beverages These products endow the company with a scale of combined volumes of about 4 million tonnes and sales of nearly Rs 13718 crores

HUL is also one of the countrys largest exporters it has been recognised as a Golden Super Star Trading House by the Government of India

The mission that inspires HULs over 15000 employees including over 1300 managers is to add vitality to life HUL meets every day needs for nutrition hygiene and personal care with brands that help people feel good look good and get more out of life It is a mission HUL shares with its parent company Unilever which holds 5210 of the equity The rest of the shareholding is distributed among 360675 individual shareholders and financial institutions

HULs brands like Lifebuoy Lux Surf Excel Rin Wheel Fair amp Lovely Ponds Sunsilk Clinic‐ Pepsodent Close up Lakme Brooke Bond Kissan Knorr Annapurna Kwality Walls ndash are household‐ ‐ names across the country and span many categories soaps detergents personal products tea‐ coffee branded staples ice cream and culinary products These products are manufactured over 40 factories across India The operations involve over 2000 suppliers and associates HULs distribution network comprises about 4000 redistribution stockists covering 63 million retail outlets reaching the entire urban population and about 250 million rural consumers

We have analyzed the distribution network of HUL from the following aspects

1 Evolution of HULrsquos distribution network

2 Transportation amp Logistics

3 Channel Design

4 Initiatives taken for channel member management

5 Field force management

6 Analytical Framework

7 Financial Analysis

2 Distribution Network of HUL 21 Evolution over Time The HULrsquos distribution network has evolved with time The first phase of the HUL distribution network had wholesalers placing bulk orders directly with the company Large retailers also placed direct orders which comprised almost 30 per cent of the total orders collected The company salesman grouped all these orders and placed an indent with the Head Office Goods were sent to these markets with the company salesman as the consignee The salesman then collected and distributed the products to the respective wholesalers against cash payment and the money was remitted to the company The focus of the second phase which spanned the decades of the 40s was to provide desired products and quality service to the companys customers In order to achieve this one wholesaler in each market was appointed as a Registered Wholesaler a stock point for the companys products in that market The company salesman still covered the market canvassing for orders from the rest of the trade He then distributed stocks from the Registered Wholesaler through distribution units maintained by the company The Registered Wholesaler system therefore increased the distribution reach of the company to a larger number of customers The highlight of the third phase was the concept of Redistribution Stockist (RS) who replaced the RWs The RS was required to provide the distribution units to the company salesman The second characteristic of this period was the establishment of the Company Depots system This system helped in transshipment bulk breaking and as a stockpoint to minimise stock outs at the RS level In‐ the recent past a significant change has been the replacement of the Company Depot by a system of third party Carrying and Forwarding Agents (CampFAs) The CampFAs act as buffer stock points to ensure‐ that stock outs did not take place The CampFA system has also resulted in cost savings in terms of‐ direct transportation and reduced time lag in delivery The most important benefit has been improved customer service to the RS The role performed by the Redistribution Stockists includes Financing stocks providing warehousing facilities providing manpower providing service to retailers implementing promotional activities extending indirect coverage reporting sales and stock data demand simulation and screening for transit damages

22 Detail Overview

The distribution network of HUL is one of the key strengths that help it to supply most products to almost any place in the country from Srinagar to Kanyakumari This includes maintaining favorable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things Each business of HUL portfolio has customized the network to meet its objectives The most obvious function of providing the logistics support is to get the companyrsquos product to the end customer

DISTRIBUTION SYSTEM OF HUL

HULs products are distributed through a network of 4000 redistribution stockists covering 63 million retail outlets reaching the entire urban population and about 250 million rural consumers There are 35 CampFAs in the country who feed these redistribution stockists regularly The general trade comprises grocery stores chemists wholesale kiosks and general stores Hindustan Unilever provides tailor made services to each of its channel partners It has developed customer management and supply chain capabilities for partnering emerging self service stores and‐ supermarkets Around 2000 suppliers and associates serve HULrsquos 40 manufacturing plants which are decentralized across 2 million square miles of territory

(Fig 1 ndash Schematic of HULrsquos Distribution Network) Distribution at the Villages The company has brought all markets with populations of below 50000 under one rural sales organisationThe team comprises an exclusive sales force and exclusive redistribution stockistsThe team focuses on building superior availability of products In rural India the network directly covers about 50000 villages reaching 250 million consumers through 6000 sub stockists ‐

(Fig 2 ndash Rural Distribution Model of HUL) HUL approached the rural market with two criteria the accessibility and viability To service this‐ segment HUL appointed a Redistribution stockist who was responsible for all outlets and all business within his particular town In the 25 of the accessible markets with low business potential HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets This sub stockist distributes the companys products to outlets in‐ adjacent smaller villages using transportation suitable to interconnecting roads like cycles scooters or the age old bullock cart Thus Hindustan Unilever is trying to circumvent the barrier of motorable‐ roads The company simultaneously uses the wholesale channel suitably incentivising them to distribute company products The most common form of trading remains the grassroots buy and‐ ‐sell mode This enables HUL to influence the retailers stocks and quantities sold through credit extension and trade discounts HUL launched this Indirect Coverage (IDC) in 1960sUnder the Indirect 7

Coverage (IDC) method company vans were replaced by vans belonging to Redistribution Stockists which serviced a select group of neighbouring markets

Distribution at the Urban centres

Distribution of goods from the manufacturing site to C amp F agents take place through either the trucks or rail roads depending on the time factor for delivery and cost of transportation Generally the manufacturing site is located such that it covers a bigger geographical segment of India From the C amp F agents the goods are transported to RSrsquos by means of trucks and the products finally make the lsquolast milersquo based on the local popular and cheap mode of transport

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers Started in the late 2000 Project Shakti had enabled Hindustan Lever to access 80000 of Indias 638000 villages HULs partnership with Self Help Groups(SHGs) of rural women is becoming an extended arm of the companys operation in rural hinterlands Project Shakti has already been extended to about 12 states Andhra Pradesh Karnataka Gujarat Madhya Pradesh Tamil Nadu Chattisgarh Uttar‐ Pradesh Orissa Punjab Rajasthan Maharashtra and West Bengal The respective state governments and several NGOs are actively involved in the initiative The SHGs have chosen to partner with HUL as a business venture armed with training from HUL and support from government agencies concerned and NGOs Armed with micro credit women from SHGs become‐ direct to home distributors in rural markets ‐ ‐

The model consists of groups of (15 20) villagers below the poverty line (Rs750 per month) taking‐ micro credit from banks and using that to buy our products which they will then directly sell to‐ consumers In general a member from a SHG selected as a Shakti entrepreneur commonly referred as Shakti Amma receives stocks from the HUL rural distributor After being trained by the company the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village Each Shakti entrepreneur usually service 6 10 villages in the population strata of 1000 2000 The‐ ‐ Shakti entrepreneurs are given HUL products on a `cash and carry basis

The following two diagrams show the Project Shakti model as initiated by HUL 8

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

1 Introduction Hindustan Unilever Limited‐Hindustan Unilever Limited (lsquoHULrsquo) formerly Hindustan Lever Limited (it was renamed in late June 2007 as HUL) is Indias largest Fast Moving Consumer Goods company touching the lives of two out of three Indians with over 20 distinct categories in Home amp Personal Care Products and Foods amp Beverages These products endow the company with a scale of combined volumes of about 4 million tonnes and sales of nearly Rs 13718 crores

HUL is also one of the countrys largest exporters it has been recognised as a Golden Super Star Trading House by the Government of India

The mission that inspires HULs over 15000 employees including over 1300 managers is to add vitality to life HUL meets every day needs for nutrition hygiene and personal care with brands that help people feel good look good and get more out of life It is a mission HUL shares with its parent company Unilever which holds 5210 of the equity The rest of the shareholding is distributed among 360675 individual shareholders and financial institutions

HULs brands like Lifebuoy Lux Surf Excel Rin Wheel Fair amp Lovely Ponds Sunsilk Clinic‐ Pepsodent Close up Lakme Brooke Bond Kissan Knorr Annapurna Kwality Walls ndash are household‐ ‐ names across the country and span many categories soaps detergents personal products tea‐ coffee branded staples ice cream and culinary products These products are manufactured over 40 factories across India The operations involve over 2000 suppliers and associates HULs distribution network comprises about 4000 redistribution stockists covering 63 million retail outlets reaching the entire urban population and about 250 million rural consumers

We have analyzed the distribution network of HUL from the following aspects

1 Evolution of HULrsquos distribution network

2 Transportation amp Logistics

3 Channel Design

4 Initiatives taken for channel member management

5 Field force management

6 Analytical Framework

7 Financial Analysis

2 Distribution Network of HUL 21 Evolution over Time The HULrsquos distribution network has evolved with time The first phase of the HUL distribution network had wholesalers placing bulk orders directly with the company Large retailers also placed direct orders which comprised almost 30 per cent of the total orders collected The company salesman grouped all these orders and placed an indent with the Head Office Goods were sent to these markets with the company salesman as the consignee The salesman then collected and distributed the products to the respective wholesalers against cash payment and the money was remitted to the company The focus of the second phase which spanned the decades of the 40s was to provide desired products and quality service to the companys customers In order to achieve this one wholesaler in each market was appointed as a Registered Wholesaler a stock point for the companys products in that market The company salesman still covered the market canvassing for orders from the rest of the trade He then distributed stocks from the Registered Wholesaler through distribution units maintained by the company The Registered Wholesaler system therefore increased the distribution reach of the company to a larger number of customers The highlight of the third phase was the concept of Redistribution Stockist (RS) who replaced the RWs The RS was required to provide the distribution units to the company salesman The second characteristic of this period was the establishment of the Company Depots system This system helped in transshipment bulk breaking and as a stockpoint to minimise stock outs at the RS level In‐ the recent past a significant change has been the replacement of the Company Depot by a system of third party Carrying and Forwarding Agents (CampFAs) The CampFAs act as buffer stock points to ensure‐ that stock outs did not take place The CampFA system has also resulted in cost savings in terms of‐ direct transportation and reduced time lag in delivery The most important benefit has been improved customer service to the RS The role performed by the Redistribution Stockists includes Financing stocks providing warehousing facilities providing manpower providing service to retailers implementing promotional activities extending indirect coverage reporting sales and stock data demand simulation and screening for transit damages

22 Detail Overview

The distribution network of HUL is one of the key strengths that help it to supply most products to almost any place in the country from Srinagar to Kanyakumari This includes maintaining favorable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things Each business of HUL portfolio has customized the network to meet its objectives The most obvious function of providing the logistics support is to get the companyrsquos product to the end customer

DISTRIBUTION SYSTEM OF HUL

HULs products are distributed through a network of 4000 redistribution stockists covering 63 million retail outlets reaching the entire urban population and about 250 million rural consumers There are 35 CampFAs in the country who feed these redistribution stockists regularly The general trade comprises grocery stores chemists wholesale kiosks and general stores Hindustan Unilever provides tailor made services to each of its channel partners It has developed customer management and supply chain capabilities for partnering emerging self service stores and‐ supermarkets Around 2000 suppliers and associates serve HULrsquos 40 manufacturing plants which are decentralized across 2 million square miles of territory

(Fig 1 ndash Schematic of HULrsquos Distribution Network) Distribution at the Villages The company has brought all markets with populations of below 50000 under one rural sales organisationThe team comprises an exclusive sales force and exclusive redistribution stockistsThe team focuses on building superior availability of products In rural India the network directly covers about 50000 villages reaching 250 million consumers through 6000 sub stockists ‐

(Fig 2 ndash Rural Distribution Model of HUL) HUL approached the rural market with two criteria the accessibility and viability To service this‐ segment HUL appointed a Redistribution stockist who was responsible for all outlets and all business within his particular town In the 25 of the accessible markets with low business potential HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets This sub stockist distributes the companys products to outlets in‐ adjacent smaller villages using transportation suitable to interconnecting roads like cycles scooters or the age old bullock cart Thus Hindustan Unilever is trying to circumvent the barrier of motorable‐ roads The company simultaneously uses the wholesale channel suitably incentivising them to distribute company products The most common form of trading remains the grassroots buy and‐ ‐sell mode This enables HUL to influence the retailers stocks and quantities sold through credit extension and trade discounts HUL launched this Indirect Coverage (IDC) in 1960sUnder the Indirect 7

Coverage (IDC) method company vans were replaced by vans belonging to Redistribution Stockists which serviced a select group of neighbouring markets

Distribution at the Urban centres

Distribution of goods from the manufacturing site to C amp F agents take place through either the trucks or rail roads depending on the time factor for delivery and cost of transportation Generally the manufacturing site is located such that it covers a bigger geographical segment of India From the C amp F agents the goods are transported to RSrsquos by means of trucks and the products finally make the lsquolast milersquo based on the local popular and cheap mode of transport

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers Started in the late 2000 Project Shakti had enabled Hindustan Lever to access 80000 of Indias 638000 villages HULs partnership with Self Help Groups(SHGs) of rural women is becoming an extended arm of the companys operation in rural hinterlands Project Shakti has already been extended to about 12 states Andhra Pradesh Karnataka Gujarat Madhya Pradesh Tamil Nadu Chattisgarh Uttar‐ Pradesh Orissa Punjab Rajasthan Maharashtra and West Bengal The respective state governments and several NGOs are actively involved in the initiative The SHGs have chosen to partner with HUL as a business venture armed with training from HUL and support from government agencies concerned and NGOs Armed with micro credit women from SHGs become‐ direct to home distributors in rural markets ‐ ‐

The model consists of groups of (15 20) villagers below the poverty line (Rs750 per month) taking‐ micro credit from banks and using that to buy our products which they will then directly sell to‐ consumers In general a member from a SHG selected as a Shakti entrepreneur commonly referred as Shakti Amma receives stocks from the HUL rural distributor After being trained by the company the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village Each Shakti entrepreneur usually service 6 10 villages in the population strata of 1000 2000 The‐ ‐ Shakti entrepreneurs are given HUL products on a `cash and carry basis

The following two diagrams show the Project Shakti model as initiated by HUL 8

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

2 Distribution Network of HUL 21 Evolution over Time The HULrsquos distribution network has evolved with time The first phase of the HUL distribution network had wholesalers placing bulk orders directly with the company Large retailers also placed direct orders which comprised almost 30 per cent of the total orders collected The company salesman grouped all these orders and placed an indent with the Head Office Goods were sent to these markets with the company salesman as the consignee The salesman then collected and distributed the products to the respective wholesalers against cash payment and the money was remitted to the company The focus of the second phase which spanned the decades of the 40s was to provide desired products and quality service to the companys customers In order to achieve this one wholesaler in each market was appointed as a Registered Wholesaler a stock point for the companys products in that market The company salesman still covered the market canvassing for orders from the rest of the trade He then distributed stocks from the Registered Wholesaler through distribution units maintained by the company The Registered Wholesaler system therefore increased the distribution reach of the company to a larger number of customers The highlight of the third phase was the concept of Redistribution Stockist (RS) who replaced the RWs The RS was required to provide the distribution units to the company salesman The second characteristic of this period was the establishment of the Company Depots system This system helped in transshipment bulk breaking and as a stockpoint to minimise stock outs at the RS level In‐ the recent past a significant change has been the replacement of the Company Depot by a system of third party Carrying and Forwarding Agents (CampFAs) The CampFAs act as buffer stock points to ensure‐ that stock outs did not take place The CampFA system has also resulted in cost savings in terms of‐ direct transportation and reduced time lag in delivery The most important benefit has been improved customer service to the RS The role performed by the Redistribution Stockists includes Financing stocks providing warehousing facilities providing manpower providing service to retailers implementing promotional activities extending indirect coverage reporting sales and stock data demand simulation and screening for transit damages

22 Detail Overview

The distribution network of HUL is one of the key strengths that help it to supply most products to almost any place in the country from Srinagar to Kanyakumari This includes maintaining favorable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things Each business of HUL portfolio has customized the network to meet its objectives The most obvious function of providing the logistics support is to get the companyrsquos product to the end customer

DISTRIBUTION SYSTEM OF HUL

HULs products are distributed through a network of 4000 redistribution stockists covering 63 million retail outlets reaching the entire urban population and about 250 million rural consumers There are 35 CampFAs in the country who feed these redistribution stockists regularly The general trade comprises grocery stores chemists wholesale kiosks and general stores Hindustan Unilever provides tailor made services to each of its channel partners It has developed customer management and supply chain capabilities for partnering emerging self service stores and‐ supermarkets Around 2000 suppliers and associates serve HULrsquos 40 manufacturing plants which are decentralized across 2 million square miles of territory

(Fig 1 ndash Schematic of HULrsquos Distribution Network) Distribution at the Villages The company has brought all markets with populations of below 50000 under one rural sales organisationThe team comprises an exclusive sales force and exclusive redistribution stockistsThe team focuses on building superior availability of products In rural India the network directly covers about 50000 villages reaching 250 million consumers through 6000 sub stockists ‐

(Fig 2 ndash Rural Distribution Model of HUL) HUL approached the rural market with two criteria the accessibility and viability To service this‐ segment HUL appointed a Redistribution stockist who was responsible for all outlets and all business within his particular town In the 25 of the accessible markets with low business potential HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets This sub stockist distributes the companys products to outlets in‐ adjacent smaller villages using transportation suitable to interconnecting roads like cycles scooters or the age old bullock cart Thus Hindustan Unilever is trying to circumvent the barrier of motorable‐ roads The company simultaneously uses the wholesale channel suitably incentivising them to distribute company products The most common form of trading remains the grassroots buy and‐ ‐sell mode This enables HUL to influence the retailers stocks and quantities sold through credit extension and trade discounts HUL launched this Indirect Coverage (IDC) in 1960sUnder the Indirect 7

Coverage (IDC) method company vans were replaced by vans belonging to Redistribution Stockists which serviced a select group of neighbouring markets

Distribution at the Urban centres

Distribution of goods from the manufacturing site to C amp F agents take place through either the trucks or rail roads depending on the time factor for delivery and cost of transportation Generally the manufacturing site is located such that it covers a bigger geographical segment of India From the C amp F agents the goods are transported to RSrsquos by means of trucks and the products finally make the lsquolast milersquo based on the local popular and cheap mode of transport

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers Started in the late 2000 Project Shakti had enabled Hindustan Lever to access 80000 of Indias 638000 villages HULs partnership with Self Help Groups(SHGs) of rural women is becoming an extended arm of the companys operation in rural hinterlands Project Shakti has already been extended to about 12 states Andhra Pradesh Karnataka Gujarat Madhya Pradesh Tamil Nadu Chattisgarh Uttar‐ Pradesh Orissa Punjab Rajasthan Maharashtra and West Bengal The respective state governments and several NGOs are actively involved in the initiative The SHGs have chosen to partner with HUL as a business venture armed with training from HUL and support from government agencies concerned and NGOs Armed with micro credit women from SHGs become‐ direct to home distributors in rural markets ‐ ‐

The model consists of groups of (15 20) villagers below the poverty line (Rs750 per month) taking‐ micro credit from banks and using that to buy our products which they will then directly sell to‐ consumers In general a member from a SHG selected as a Shakti entrepreneur commonly referred as Shakti Amma receives stocks from the HUL rural distributor After being trained by the company the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village Each Shakti entrepreneur usually service 6 10 villages in the population strata of 1000 2000 The‐ ‐ Shakti entrepreneurs are given HUL products on a `cash and carry basis

The following two diagrams show the Project Shakti model as initiated by HUL 8

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

22 Detail Overview

The distribution network of HUL is one of the key strengths that help it to supply most products to almost any place in the country from Srinagar to Kanyakumari This includes maintaining favorable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things Each business of HUL portfolio has customized the network to meet its objectives The most obvious function of providing the logistics support is to get the companyrsquos product to the end customer

DISTRIBUTION SYSTEM OF HUL

HULs products are distributed through a network of 4000 redistribution stockists covering 63 million retail outlets reaching the entire urban population and about 250 million rural consumers There are 35 CampFAs in the country who feed these redistribution stockists regularly The general trade comprises grocery stores chemists wholesale kiosks and general stores Hindustan Unilever provides tailor made services to each of its channel partners It has developed customer management and supply chain capabilities for partnering emerging self service stores and‐ supermarkets Around 2000 suppliers and associates serve HULrsquos 40 manufacturing plants which are decentralized across 2 million square miles of territory

(Fig 1 ndash Schematic of HULrsquos Distribution Network) Distribution at the Villages The company has brought all markets with populations of below 50000 under one rural sales organisationThe team comprises an exclusive sales force and exclusive redistribution stockistsThe team focuses on building superior availability of products In rural India the network directly covers about 50000 villages reaching 250 million consumers through 6000 sub stockists ‐

(Fig 2 ndash Rural Distribution Model of HUL) HUL approached the rural market with two criteria the accessibility and viability To service this‐ segment HUL appointed a Redistribution stockist who was responsible for all outlets and all business within his particular town In the 25 of the accessible markets with low business potential HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets This sub stockist distributes the companys products to outlets in‐ adjacent smaller villages using transportation suitable to interconnecting roads like cycles scooters or the age old bullock cart Thus Hindustan Unilever is trying to circumvent the barrier of motorable‐ roads The company simultaneously uses the wholesale channel suitably incentivising them to distribute company products The most common form of trading remains the grassroots buy and‐ ‐sell mode This enables HUL to influence the retailers stocks and quantities sold through credit extension and trade discounts HUL launched this Indirect Coverage (IDC) in 1960sUnder the Indirect 7

Coverage (IDC) method company vans were replaced by vans belonging to Redistribution Stockists which serviced a select group of neighbouring markets

Distribution at the Urban centres

Distribution of goods from the manufacturing site to C amp F agents take place through either the trucks or rail roads depending on the time factor for delivery and cost of transportation Generally the manufacturing site is located such that it covers a bigger geographical segment of India From the C amp F agents the goods are transported to RSrsquos by means of trucks and the products finally make the lsquolast milersquo based on the local popular and cheap mode of transport

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers Started in the late 2000 Project Shakti had enabled Hindustan Lever to access 80000 of Indias 638000 villages HULs partnership with Self Help Groups(SHGs) of rural women is becoming an extended arm of the companys operation in rural hinterlands Project Shakti has already been extended to about 12 states Andhra Pradesh Karnataka Gujarat Madhya Pradesh Tamil Nadu Chattisgarh Uttar‐ Pradesh Orissa Punjab Rajasthan Maharashtra and West Bengal The respective state governments and several NGOs are actively involved in the initiative The SHGs have chosen to partner with HUL as a business venture armed with training from HUL and support from government agencies concerned and NGOs Armed with micro credit women from SHGs become‐ direct to home distributors in rural markets ‐ ‐

The model consists of groups of (15 20) villagers below the poverty line (Rs750 per month) taking‐ micro credit from banks and using that to buy our products which they will then directly sell to‐ consumers In general a member from a SHG selected as a Shakti entrepreneur commonly referred as Shakti Amma receives stocks from the HUL rural distributor After being trained by the company the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village Each Shakti entrepreneur usually service 6 10 villages in the population strata of 1000 2000 The‐ ‐ Shakti entrepreneurs are given HUL products on a `cash and carry basis

The following two diagrams show the Project Shakti model as initiated by HUL 8

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

(Fig 1 ndash Schematic of HULrsquos Distribution Network) Distribution at the Villages The company has brought all markets with populations of below 50000 under one rural sales organisationThe team comprises an exclusive sales force and exclusive redistribution stockistsThe team focuses on building superior availability of products In rural India the network directly covers about 50000 villages reaching 250 million consumers through 6000 sub stockists ‐

(Fig 2 ndash Rural Distribution Model of HUL) HUL approached the rural market with two criteria the accessibility and viability To service this‐ segment HUL appointed a Redistribution stockist who was responsible for all outlets and all business within his particular town In the 25 of the accessible markets with low business potential HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets This sub stockist distributes the companys products to outlets in‐ adjacent smaller villages using transportation suitable to interconnecting roads like cycles scooters or the age old bullock cart Thus Hindustan Unilever is trying to circumvent the barrier of motorable‐ roads The company simultaneously uses the wholesale channel suitably incentivising them to distribute company products The most common form of trading remains the grassroots buy and‐ ‐sell mode This enables HUL to influence the retailers stocks and quantities sold through credit extension and trade discounts HUL launched this Indirect Coverage (IDC) in 1960sUnder the Indirect 7

Coverage (IDC) method company vans were replaced by vans belonging to Redistribution Stockists which serviced a select group of neighbouring markets

Distribution at the Urban centres

Distribution of goods from the manufacturing site to C amp F agents take place through either the trucks or rail roads depending on the time factor for delivery and cost of transportation Generally the manufacturing site is located such that it covers a bigger geographical segment of India From the C amp F agents the goods are transported to RSrsquos by means of trucks and the products finally make the lsquolast milersquo based on the local popular and cheap mode of transport

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers Started in the late 2000 Project Shakti had enabled Hindustan Lever to access 80000 of Indias 638000 villages HULs partnership with Self Help Groups(SHGs) of rural women is becoming an extended arm of the companys operation in rural hinterlands Project Shakti has already been extended to about 12 states Andhra Pradesh Karnataka Gujarat Madhya Pradesh Tamil Nadu Chattisgarh Uttar‐ Pradesh Orissa Punjab Rajasthan Maharashtra and West Bengal The respective state governments and several NGOs are actively involved in the initiative The SHGs have chosen to partner with HUL as a business venture armed with training from HUL and support from government agencies concerned and NGOs Armed with micro credit women from SHGs become‐ direct to home distributors in rural markets ‐ ‐

The model consists of groups of (15 20) villagers below the poverty line (Rs750 per month) taking‐ micro credit from banks and using that to buy our products which they will then directly sell to‐ consumers In general a member from a SHG selected as a Shakti entrepreneur commonly referred as Shakti Amma receives stocks from the HUL rural distributor After being trained by the company the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village Each Shakti entrepreneur usually service 6 10 villages in the population strata of 1000 2000 The‐ ‐ Shakti entrepreneurs are given HUL products on a `cash and carry basis

The following two diagrams show the Project Shakti model as initiated by HUL 8

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

Coverage (IDC) method company vans were replaced by vans belonging to Redistribution Stockists which serviced a select group of neighbouring markets

Distribution at the Urban centres

Distribution of goods from the manufacturing site to C amp F agents take place through either the trucks or rail roads depending on the time factor for delivery and cost of transportation Generally the manufacturing site is located such that it covers a bigger geographical segment of India From the C amp F agents the goods are transported to RSrsquos by means of trucks and the products finally make the lsquolast milersquo based on the local popular and cheap mode of transport

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers Started in the late 2000 Project Shakti had enabled Hindustan Lever to access 80000 of Indias 638000 villages HULs partnership with Self Help Groups(SHGs) of rural women is becoming an extended arm of the companys operation in rural hinterlands Project Shakti has already been extended to about 12 states Andhra Pradesh Karnataka Gujarat Madhya Pradesh Tamil Nadu Chattisgarh Uttar‐ Pradesh Orissa Punjab Rajasthan Maharashtra and West Bengal The respective state governments and several NGOs are actively involved in the initiative The SHGs have chosen to partner with HUL as a business venture armed with training from HUL and support from government agencies concerned and NGOs Armed with micro credit women from SHGs become‐ direct to home distributors in rural markets ‐ ‐

The model consists of groups of (15 20) villagers below the poverty line (Rs750 per month) taking‐ micro credit from banks and using that to buy our products which they will then directly sell to‐ consumers In general a member from a SHG selected as a Shakti entrepreneur commonly referred as Shakti Amma receives stocks from the HUL rural distributor After being trained by the company the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village Each Shakti entrepreneur usually service 6 10 villages in the population strata of 1000 2000 The‐ ‐ Shakti entrepreneurs are given HUL products on a `cash and carry basis

The following two diagrams show the Project Shakti model as initiated by HUL 8

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamline initiative in 1997 Project Streamline is an innovative and effective distribution network for rural areas that focuses on extending distribution to villages with less than 2000 people with the help of rural sub stockists‐ Star Sellers who are based in these very villages As a result the distribution network directly covers as of now about 40 per cent of the rural population

Under Project Streamline the goods are distributed from C amp F Agents to Rural Distributors (RD) who has 15 20 rural sub stockists attached to him Each of these sub stockists star sellers is‐ ‐ ‐ located in a rural market The sub stockists then perform the role of driving distribution in‐ neighboring villages using unconventional means of transport such as tractor and bullock carts Project Streamline being a cross functional initiative the Star Seller sells everything from detergents to personal products

Higher quality servicing in terms of frequency credit and full line availability is to be provided to‐ rural trade as part of the new distribution strategy

The diagram in the next page shows the model of Project Streamline 9

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

Hindustan Lever Network (HLN)

It is the companys arm in the Direct Selling channel one of the fastest growing in India today It already has about several lakh consultants all independent entrepreneurs trained and guided by‐ HLNs expert managers HLN has already spread to over 1500 towns and cities covering 80 of the urban population backed by 42 offices and 240 service centres across the country It presents a range of customised offerings in Home amp Personal Care and Foods

The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of ldquopoolsrdquo Mother Depot and Just in Time System

In order to rationalise the logistics and planning task an innovative step has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country‐ to act as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis ‐

Leveraging Information technology

HUL customers are serviced on continuous replenishment This is possible because of IT connectivity across the extended supply chain of about 2000 suppliers 80 factories and 7000 stockists This sophisticated network with its voice and data communication facilities has linked more than 200 locations all over the country including the head office branch offices factories depots and the key redistribution stockists They have also combined backend processes into a common Shared Service infrastructure which supports the units across the country All these initiatives together have 10

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

enhanced operational efficiencies improved the service to the customers and have brought us closer to the marketplace

RS Net Initiative

The RS Net initiative launched in 2001 aims at connecting Redistribution Stockists (RSs) through an internet based system It now covers stockists of the Home amp Personal Care business and Foods amp Beverages in close to 1200 towns and cities Together they account for about 80 of the companys turnover RS Net is one of the largest B2B e commerce initiatives ever undertaken in India It‐ provides linkages with the RSsrsquo own transaction systems enables monitoring of stocks and secondary sales and optimises RSrsquos orders and inventories on a daily basis through online interaction on orders despatches information sharing and monitoring The IT powered system has been‐ implemented to supply stocks to redistribution stockists on a continuous replenishment basis Today the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country Information on secondary sales is now available on RS Net every day

RS Net is part of Project Leap Project Leap begins with the supplier runs through the factories and depots and reaches up to the RSs This ensures HULrsquos growth by ensuring that the right product is available at the right place in the right quantities and at the right time in the most cost effective‐ manner Leap also aims at reducing inventories and improving efficiencies right through the extended supply chain

RS Net has come as a force multiplier for HUL Way the companys action plan to not only maximise‐ the number of outlets reached but also to achieve leadership in every outlet RS Net has enabled stockists to place orders on a Continuous Replenishment System This in turn has unshackled the field force to solely focus on secondary sales from the stockists to retailers and market activation It has also enabled RSs to provide improved service to retail outlets Simultaneously HUL is servicing the rural market key urban outlets and the modern trade as a single concern

Adexa iCollaboration suite

In 2000 HUL identified improved supply chain management as a critical business priority and launched a comprehensive initiative ldquoProject Leaprdquo tasked with increasing supplierdistributor responsiveness reducing inventory buffers and optimizing planning and scheduling HUL chose the Adexa iCollaboration suite for facilitating centralized monitoring of the SCM live customer supplier collaboration and integrating demand and distribution planning with production scheduling With the aggregated view of data provided by the iCollaboration suite HUL was able to combine sales and 11

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

distribution efforts on the diverse product lines which resulted in significant savings on the cost side for inventories and distribution HUL updates inventory positions shipments and customer orders on a daily basis with these software packages and can get a pulse on the market real time

(Fig 3 ndash HULrsquos Turnover Compared with Competitors 2006) (Fig 4 ndash HULrsquos Market Leadership across various FMCG Categories) 12

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

3 Channel Design Hindustan Lever Limited (HUL) has two types of channel selling ‐

i Regular (traditional) retail channel ii Direct Selling Channel in the name of Hindustan Lever Network (HLN)

HUL has a well entrenched high distribution model which comprises of CampFAs Redistribution Stockists wholesalers and retailers (as shown earlier) Hindustan Unilevers distribution network is recognized as one of its key strengths Its focuses on Product availability Brand communication and higher levels of brand experience HULrsquos Sales Break up through different channels ‐Sales Break-up Through Different Channels76033Modern RetailUrban General TradeRural Areas Channel Structure (Special Focus is on Jamshedpur) Typically the goods produced in each of the HULs 40 factories are sent to a depot with the help of a carrying and forwarding agent (CampFA) The company has its depot in every state of the country The CampFA is a third party and gets servicing fee for stock and delivery of the products In each town there is at least a redistribution stockist (RS) who takes the goods from the CampFA and sells them to retail outlets In Jharkhand the CampFA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (Ms Om Prakash Agarwal) Bistupur and Parsudih The HUL management realized certain problems with the existing sales model First the model was not viable for small towns with small population and small business HUL found it expensive to appoint one stockist exclusively for each town Secondly the retail revolution in the country has changed the pattern the customers shop Large retail self service shops are becoming commonplace 13

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

In response of these problems HUL redesigned its sales and distribution channel and the new system is known as diamond model in the company At the top end of the diamond there are the self service retail stores which constitute 10 of the total FMCG market The middle fatter part of the diamond represents the profit center based sales team In the bottom of the pyramid is the rural‐ marketing and distribution which accounts for 20 of the business As a result of the new distribution plan the company has planned to reduce the number of RS in small towns Redistribution Stockists Total number of RS in Jamshedpur = 3 (at Sakchi Bistupur Parsudih) This is going to be reduced to only one with effect from next month of this year

10487071048707Sales Margin 476 which includes cash discount unloading expenses from depot distribution expenses to retailers incentive schemes amp other incidental expenses

10487071048707Modes of transport used Rickshaw tempo 10487071048707Incentive schemes Before 2000 holiday packages and tours but after 2000 no non monetary‐

incentive for RS 10487071048707Software systems and Information System UNIFY 83 (Developed by IBM amp CMC) This

software needs to be synchronized daily and the system updates any information incentive schemes sales figures etc to and from the common shared platform

10487071048707Areas of Operations Marked for each of the RS 10487071048707Selling Operations RSs sells the goods to ‐

o Wholesaler (gets 15 max discount from RS) o Retailers (gets 10 max discount from RS)

Wholesaler Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme) Retailers

10487071048707Total retailer base in Jamshedpur Approximately 1070 10487071048707Sales Margin Depends on the product

o Soap detergents 8 on MRP ‐o Cosmetics 10 on MRP ‐o Food items 8 on MRP ‐

14

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

Incentive schemes Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 to 4 ) Vijeta scheme is not for retailers Field Sales Force To meet the ever changing needs of the consumer HUL has set up a distribution network that‐ ensures availability of all their products in all outlets at all times This includes maintaining favourable trade relations providing innovative incentives to retailers and organizing demand generation activities among a host of other things The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a daily basis Account information is maintained on palmtops given by HUL During our research and informal survey of HUL field sales force we came to know that for the last two years training is not being given at all to the sales force HUL has limited the network channel selling to categories of Home amp Personal Care (HPC) and Food products with exclusive brands for this channel That is these particular brands (products) are all exclusive to HLN specifically developed for the Direct Selling channel and not available in the retail channel The general trade comprises grocery stores chemists wholesaler kiosks and general stores Hindustan Unilever services each with a tailor made mix of services ‐

4 Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network

10487071048707Setting up of a full scale sales organisation comprising key account management and‐ activation to impact fully engage and service modern retailers as they emerge

10487071048707Servicing Channel partners and customers with continuous daily replenishment 10487071048707Leveraging scale and building expertise to service Modern Trade and Rural Markets 10487071048707Delayering of sales force to improve response times and service levels 10487071048707Revamping of its sales organisation in the rural markets to fully meet the emerging needs and

increased purchasing power of the rural population HULrsquos distribution network in rural India already directly covers about 50000 villages reaching about 250 million consumers through about 6000 sub stockists

15

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

10487071048707Implementation of supply chain system that connects stockists across the country and also includes a back end system connecting suppliers all company sites and stretching right up to‐ stockists IT tools have been deployed for connectivity across the extended supply chains Backend processes have been combined into a common Shared Service infrastructure

10487071048707Launching of Project Shakti through which the company is able to extend its operations in villages HUL has also included several NGOs and state governments as the initiative helps rural women to improve their financial position

10487071048707Launching of HUL Network to leverage the channel of direct selling by presenting customised offerings in 11 home and personal care and food categories Started in 2003 it already has a base of 300000 consultants across the country

10487071048707Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised services in line with the strategy to leverage the equity of its brands through relevant services

10487071048707Finding out Innovative ways to reach out to its consumers particularly in rural areas by leveraging non conventional media like wall paintings cinema vans weekly markets (haats)‐ fairs and festivals

10487071048707Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores to provide a range of services ranging from managing their inventory to setting up POS (point of sale) banners In addition to this to boost up traditional retail in the face increasing in roads made by large modern retailing chains like Spencerrsquos Reliance Fresh etc (where‐ HUL is squeezed harder for discounts) HUL started restructuring some of the selected SVSs into the form of self service retail shops a la modern retails This is to protect amp maintain the‐ competitive advantage that HUL has over its biggest competitors in the other markets (eg PampG) with its very deep distribution reach through traditional retail

10487071048707Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium brands

10487071048707Undertaking several initiatives for traditional channels in order to improve its capabilities at the front end by developing skills for stockists sales force Under Project Dronacharya the‐ FMCG major continuously imparted training to over 10000 stockist salesmen

10487071048707Launching of several promotional schemes for existing wholesalers and distributors For instance it has started the lsquoVijeta Rishta Jeet Karsquo scheme last year to provide a platform for‐ the wholesaler and HUL to grow the business by earning points and redeeming them

16

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

5 Field Force Management The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the next month During this period he is given various targets that helps to achieve company objectives and gives him a chance to prove his performance relative to other

To start with the field force member is given a particular area and his responsibility is to cater to all the retailers in that area While deciding the area for each member of the field force the company makes sure that the operating area of each field member doesnt overlap with his other colleagues There are various methods used by the company to incentivize the field force Monetary and Non‐ Monetary

In HUL the field force is evaluated using QOC (Quality of Contribution) It consists of 4 components ‐

1 Secondary Sale (Max points = 25)

2 Eco (Max points = 05)

3 Focus (Max points = 05)

4 FCS (Max Points = 05)

QOC

FCS

ECO

SECONDARY

FOCUS17

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

Secondary Sale Based on the operating area each member is given a specific target in terms of‐

value (eg Rs 15 lacs) for the operating month (21st ndash 20th of next month) If he achieves 100 of the target he gets 25 points if he achieves 95 target he gets 15 points These points are used to add to the total QOC score as well as linked to monetary incentive

ECO Width pack Target ndash This is used for the penetrationreach of certain products in the existing market The following is a typical ECO target assigned to a field force agent Lux International ndash 105 outlets x 1 SKU Pears Soap 135 outlets x 1 SKU ‐Rin 104 outlets x 1SKU ‐Breeze Soap 100 outlets x 1 SKU ‐The outlets mentioned are within the operating area of the person and 1 SKU = Rs 27 Based on‐ this the Field person calculates number of packs he should sell to the retailers The concerned agent

receives this target around 25th of each month and has to complete this target within the 5th day of next month Upon completion he gets additional 05 points added to his QOC score along with

monetary incentive associated with it However if this is not met within 5th he looses the opportunity Focus Depth Pack target ndash This is mainly used to increase the sales volume of certain products A typical lsquoFocusrsquo target is given below Lux International ndash Rs 20640 Rs 6 per unit ‐ ‐Life Buoy Rs 70220 Rs 10 per unit ‐ ‐ ‐Wheel Rs 99000 Rs 10 per unit ‐ ‐ ‐Breeze Soap Rs 27000 Rs 10 per unit ‐ ‐ ‐

This target needs to be achieved within 20th of next month Upon achieving the target the field person is awarded 05 points which is then added to his overall QOC score Field Capability Score (FCS) ‐ In this component the field force persons are required to ensure that the scheduled visitoutlet billing is such that at least 15 items are demanded per order If this is achieved the retailer gets a discount of 1 on the billed amount and on the other hand the field person gets an additional score of 05 which is added to his QOC score Each scheduled visit per outlet is one per week For example if there are 100 outlets within the operating area of a field person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400 18

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

The sales person is required to achieve 90 success rate to get 05 points for his QOC score and at least 65 for a satisfactory performance Non Monetary Methods The other purpose of the QOC scores is to highlight the performance of the field person among his peers Based on the QOC various awards are distributed to the field persons at the end of every month These awards are also known as lsquoMOC Starrsquo awards MOC stands for Monthly operating Cycle

10487071048707If QOC score gt 45 ndash The person is eligible for 7 star award 10487071048707If QOC score gt 4 ndash The person is eligible for 5 star award 10487071048707If QOC score gt 35 ndash The person is eligible for 3 star award

In the event of exceptional performance management representatives from the regional office come to the zonal office to distribute the awards The photograph of the award winners is displayed in the office as a source of inspiration for other sales person Target Setting Mechanism and monitoring The regional office monitors the performance of various zones A thorough analysis is done at the end of each month and based on that the weak products are identified or those for which the demand has weakened This is the basis of setting ECO and FOCUS targets for the field persons Each field person is given a palmtop wherein he can feed the entries on the spot where the transaction is done This solves basically the two purposes ‐a) The field person is freed from the tedious task of maintaining cumbersome records and can then concentrate on the job (thus IT is replacing some of the field force or other channel members) b) The sold item is immediately updated in the company information system 6 Analytical Framework We tried to analyze HULrsquos distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organization in the business of marketing amp selling of goods The variables their explanations and their impact on the HULrsquos distribution network are given below ndash

1 Number of Consumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category) higher the no of consumers higher will be the no of channel intermediaries The implication of this is that there will be many layers in the channel in such a

19

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

situation and managing such a complex distribution network by keeping tabs on every player will be a huge task Moreover Transport amp Logistics (ldquoTampLrdquo) support provided by the organization needs to be well organized

Implication for HUL

HULrsquos key strength lies in managing its distribution network in India HUL is Indiarsquos largest FMCG company with unmatched distribution network which is built over a century focusing on traditional retail HULs distribution network comprises about 4000 redistribution stockists covering about 63 million retail outlets reaching the entire urban population and about 250 million rural consumers in India Itrsquos said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers This achievement is due to the sheer strength of its distribution network (products should be good as always otherwise they will find no buyers in the long run) For a comparison PampG worldrsquos largest FMCG major does not find its name in the list of top 5 FMCG majors in India as its strength lies in managing modern retail (biggest example Wal Mart)‐ but not traditional retail

2 Geographic Dispersion of Consumers Again this is closely related with the previous variable more so in a large geographically diverse country like in India With the increase in this dispersion level more intermediaries and more layers are required in the distribution network so as to effectively reach the length amp breadth of the country Obviously the TampL management for such an organization would be critical to accomplish this

Implication for HUL

For a country as geographically diverse as India pan Indian presence amp market leadership can‐ only be possible when products reach even the remotest parts of the country HUL is very successful in achieving and maintaining this reach due to its distribution network

3 Frequency of Purchase If the frequency of purchase is high then transport intensity in ldquothe last milerdquo (ie from distributor to retailers) increases manifold For FMCG products as a thumb rule we can take that the mean time between two purchases is ~ 90 days With the introduction of smaller form factor packaging for FMCG goods (Re1 shampoo sachets being a very good example) the transport‐ intensity increased further

20

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

Implication for HUL

HUL has about 4000 redistribution stockists who supply to approx 63 million outlets across India Since manufacturing is done at 40 plants around the country rationalizing the logistics and planning is a huge task An innovative step in that regard has been the formation of the Mother Depot and Just in Time System (MD JIT) Certain CampFAs were selected across the country to act‐ as mother depots Each of them has a minimum number of JIT depots attached for stock requirements All brands and packs required for the set of markets which the MD and JITs service in a given area are sent to the mother depot by all manufacturing units The JITs draw their requirements from the MD on a weekly or bi weekly basis and supply to stockists in that‐ area who in turn supply to retailers

4 Tendency to Postpone Purchase If the tendency to postpone purchase is lesser then the product will be easier to distribute For example productsservices like Fire Extinguishers Life Insurance etc are such that though these are needed the overall tendency for the consumers is to postpone the purchases ndash these productsservices can be termed as ldquonecessary evilrdquo For this kind of products regular reinforcement in the minds of consumers becomes necessary sales field force becomes critical and use of ldquoexpertrdquo field force is commonplace

Implication for HUL

Since FMCG products are used regularly and these products are not ldquonecessary evilsrdquo distribution network of HUL does not require any expert field force to sell its products Only the recent diversification of HUL into Home Water Purification business (ldquoPure Itrdquo brand) needs dedicated field sales force

5 Level of FamiliarityKnowledge (of consumer) about the Product If the level of familiarity of consumer with the product is higher lower will be the importance of field sales force and higher will be the importance of channel

Implication for HUL

Since FMCG goods are very much familiar to consumers channel and its different members are very much important to HUL and field sales forcersquos function is mostly limited to channel management and ensuring availability of products

21

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

6 Degree of Brand Loyalty If the consumers are more brand loyal then less ldquopushrdquo will be required from the channel members to sell the products as there will be sufficient ldquopullrdquo or demand from the consumers This implies that for products with loyal customer base efforts from the channel members can be much lesser for final off take to happen which in turn leads to lesser margins to the channel‐ members for those products For faster moving products (mostly due to brand pull) retailers may not be averse to slightly lesser margins as rotation of the products is high and thus hisher ROI is protected

Retailerrsquos ROI = InvestmentRotationinMtimesarg

For a FMCG player with a non established brand margins to channel members and point of sale‐ (POS) advertising are both important

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps Detergents Personal Care products etc with strong brands with continuous ldquopullrdquo HUL has less to worry about margins to channel members or POS advertising But this situation can change considerably in the face of rise of a significant competitor having almost the same reach as HUL has (eg ITC as itrsquos eating into HULrsquos market share continuously since it entered FMCG segment)

7 Purchased on Impulse The impulse purchase products like chocolates toffees colas ice creams etc follow Sayrsquos Law which states that ldquoSupply Creates Demandrdquo implying availability of these products are the most critical aspect for these to be sold and consumed This stresses on the fact that TampL for these products becomes very important

Implication for HUL

HUL has only one product in this impulse purchase category Kwality Walls (ice cream) HUL is‐ 2 after Amul in this FMCG segment To increase this brandrsquos sale amp market share availability visibility and consumer mind share has to be increased and improved as well

8 Level of Involvement (LOI) Level of involvement (ie time amp effort spent by the consumer) generally depends on the product cost If LOI is higher lower is the importance of availability and more critical is the

22

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

supply of information as consumer decision process depends more on elaborate information search

Implication for HUL

As FMCG products are generally Low Involvement Products HUL has to bother more on ensuring availability of the products rather than supply of information

9 Purchased as a Basket of Goods The products which are generally bought together by consumers as a basket of goods (eg Rice Flour powder Cooking oil etc at the beginning of the month) are to be made available together for final off take ‐

Implication for HUL

This aspect partly applies to HULrsquos products as some products like shampoos soaps detergents may fall in a basket Efficient distribution network of HUL ensures availability of all such products at each selling point (individual retailer)

10 Speed amp Complexity of Decision Making Process If the speed is low then the complexity of the decision making process is higher and greater is the importance of field sales force and the salespersonsrsquo skill knowledge and quality

Implication for HUL

For FMCG products complexity of decision making process is not there and so speed of decision making is high This means that for HUL field sales force is of limited functional usage

11 Present of Expert Influencer in the Decision Making Process Roles of sales field force vary depending upon whether expert influencer (eg doctors) is present in the process or not If present then consumer buying behavior may become subcontracted and the expert influencer becomes another customer of the network apart from the end user In that situation two groups of sales force are needed to cater to both the‐ segments

Implication for HUL

For FMCG goods role of expert influencer is limited But companies try to associate brands with regulatory bodiesauthorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from pickingvariety‐

23

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

seeking to subcontracted and make consumers more loyal to the brand These are true for HUL also (eg Pondrsquos Intitute)

12 Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for example bulbs amp tubes) then its availability becomes critical

Implication for HUL

None of the products of HUL fall under this category Nevertheless availability of products of HUL is necessary for other reasons

13 Element of Risk Aversion Exists If the level of involvement of the consumer in buying decision process is higher risk taking tendency of the consumer will be lower or consumer will be more risk averse In such a situation channel members can ldquounsellrdquo a brand by giving explicit or implicit suggestions This implies that in such a case selling depends on many cases how the company is taking care of channel members (ldquokeeping them happyrdquo) such that they are not lured by other competitors or directed by grievances so as to unsell the brand This situation is prevalent mostly in Consumer Durables (like TV Refrigerators etc) In FMCG goods the situation does not exist per se

Implication for HUL

HUL is not affected for its FMCG products by this variable For water purifier ldquoPure Itrdquo this can have considerable impact if its sale starts to happen through channel members rather than by field sales force as is happening now

14 Perishability of the Product If the product is perishable (having small shelf life examples ndash newspaper milk fruits etc) then the dimension of ldquospeedrdquo in reaching the end consumers becomes critical amp TampL assumes great significance for the company

Implication for HUL

The FMCG products that HUL sells are not perishable by nature but have limited life So this aspect is not critical for HUL

15 Time Band Associated with the Purchase of the Product If there is seasonalitycyclicity for the demand or purchase of the product (examples ndash

newspaper milk are most on demand in the 1st three hours of the day cooking oil rice etc

24

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

grocery items are most on demand in the 1st week of the month) then high TampL and infrastructural requirements are needed for the ldquolast milerdquo for the time band when demand is maximum It is possible to have idle capacity in the areas mentioned above outside the peak required time band

Implication for HUL

For some of the products of HUL the above stated variable is significant For example in Food segment Branded Atta ndash lsquoAnnapurnarsquo in segments like Laundry Detergents Shampoo amp Hair Oil etc this element of demand time band exist to a certain extent This underscores the importance of TampL for HUL as the transport intensity between distributors and retailers

increases in the 1st amp 4th week of a month for the products mentioned above This is over and above the regular replenishment of stocks at retailers done by distributors Festivals like Holi etc may also increase the demand for personal care items like soaps shampoos etc for a short period and distribution network should be geared up not to miss any such opportunity

16 Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution Examples of highly fungible commodities are crude oil wheat orange juice precious metals and currencies Fungibility has nothing to do with the ability to exchange one commodity for another different commodity It refers only to the ease of substitution of one unit of a commodity with another unit of the same commodity for all intents and purposes

Fungibility is different from liquidity A good is liquid and tradable if it can be easily exchanged for money or for another different good A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place It is said that commodities are fungible goods tangible services intangible

experiences memorable amp transformations are effectual1

As an example one Rs 100 bank note is interchangeable with another Cash is fungible A‐ barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil Oil (of the same type) is fungible

Fungibility does not imply liquidity and liquidity does not imply fungibility Jewels can be readily bought and sold (the trade is liquid) but individual diamonds being unique are not interchangeable (diamonds are not fungible) Indian rupee bank notes are interchangeable in London (they are fungible there) but they are not easily traded there (they are not liquid in London) In contrast to diamonds gold coins are fungible They are also liquid especially under a

25

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

gold standard The combination of fungibility and liquidity is one of the reasons why gold has successfully served as money for thousands of years

Further a fungible thing can become non fungible under some circumstances For example an‐ old coin or a currency note may assume a value which is way above its lsquoface valuersquo due to historical reasons or due to some defects in it which makes it unique from others from a viewpoint which sees it differently than its intended purpose

The outcome of product fungibility is that the more fungible a product becomes higher is the chance that parts of the distribution channel it can be replaced by IT A good example of this is dematerialization (Demat) route for share trading now where there is no physical existence of shares

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to ldquodecommoditizerdquo amp differentiate the product) the importance of channel members will continue

17 Degree of Customization Possible Degree of customization directly affects economies of scale higher the customization lesser the economies of scale Also criticality of sales field force increases with customization levels of the offering

Implication for HUL

For FMCG products of HUL which are mass produced such customizations are not possible and thus with higher economies of scale lower criticality of field forces from the standpoint of customization of product offerings costs are lower in these respects with HUL

18 Negative or Positive Reinforcing Product Negative reinforcing products are those which are bought to avoidreduce the problem (ex ndash insurance washing machine car battery etc) Positive reinforcing products are those which gratify the senses (ex ndash Perfumes Chocolates Vacation etc) Shopping experience becomes a critical aspect for positive reinforcing products to reaffirm the positive feelings

Implication for HUL

ldquoAxerdquo amp ldquoRexonardquo deodorants are distinctly positive reinforcing products from HUL including others like Lux Lakme etc So these are seen in most shopping malls etc with high visibility displays to reaffirm the feelings Consumers are willing to pay higher for these brands

26

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

19 ValueVolume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two critical aspects ndash TampL cost and retailer ROIsq cm (retailers are actually in real estate business in true sense) Higher the ratio better it is for both company and the retailer as higher ratio signifies lesser TampL cost per unit volume transported for the company and greater ROI per unit of shelf space for the retailer

Implication for HUL

In general for FMCG goods and for HUL as well value density is relatively lower In addition to this fact increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent but favours mechanized handling greatly reducing handling costs) Since value density is less transportation costs will be higher and thus it is of economic sense to have manufacturing plants located closure to major markets This is the reason HUL has various manufacturing plants (40 in totality) located across India This is a pointer to the fact most of the major FMCG players (including HUL) use contracted manufacturing dispersed across the geographic spread so as to lower transportation cost component

7 Financial Analysis We have taken data from CMIE database while analyzing the performance of marketing amp sales (including distribution) functions of HUL and comparable companies By lsquocomparablelsquo we mean those companies whose main economic activity as defined in the CMIE database is the same as HULrsquos For example main economic activity of HUL as defined in that database is ldquoCosmetics toilet‐ preparations soap amp washing preprdquo Obviously one major FMCG company in India ITC does not come under this purview as its major economic activity is Tobacco business which is nearly 85 of its total revenue But for the sake of comparison we have included ITC also as its non tobacco FMCG‐ business revenue in FY lsquo08 was Rs 2511 Cr nearly as high as Nirma the second largest player after HUL in HULrsquos chosen category But the figures for advertising marketing amp distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as product categories are different and the impact of above mentioned variables on these two companyrsquos sales amp distribution function is dissimilar Other major FMCG players not included in the analysis are Nestle Amul Britannia amp Tata Tea which are mostly into the Food amp Beverages 27

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

segment where HUL has relatively lesser presence (Processed Foods amp Ice cream segments together‐ constitute only approximately 5 of HULrsquos total sales) In Tea HUL is present significantly though

In the following pages advertising marketing amp distribution expenses of major FMCG goods (in HULrsquos category mostly) are being shown It is to be understood here that marketing expenses here include commissions rebates discounts sales promotional expenses on direct selling agents amp entertainment expenses whereas distribution expenses include outward freight

Exhibit 1 Annual Spend in Advertising Marketing amp Distribution functions in FY lsquo08 AnnualAnnualAnnualAnnualRs CroreRs CroreRs CroreRs CroreMar-08Mar-08Mar-08Mar-08Sl NoCompany NameSalesAdvertising expensesAdvert Exp As of SalesMarketing expensesMarketing Exp As of SalesDistribution expensesDist Exp As of Sales1HUL149378814229953607004731414902Nirma26511540961547187271136915163Dabur2128172481116621410166843144olgate-Palmolive15973256511606000035362215Reckitt Benckiser13347620785155793407055884196PampG Home107957119451106443141070546537Godrej92278614665423745932273508Emami58642102921755274646814862539PampG Hygiene amp Health55602579510424085735372467010Henkel430330000409495116438111Henkel Marketing41779000065641571176342212ITC21467384278319968170325484255

Exhibit 2 Advertising Expenses as percentage of Sales

Advertising Expenses as of Sales953154116616061557110666517551042000000199000200400600800100012001400160018002000HULNirmaDaburColgae-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCAdvertising Exp as to Sales 28

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

We can see here that Nirma Godrej amp Henkel (ITC also) have less advertising expenses (as to sales) than HUL Importantly Henkel has zero advertising expenses in 2008 which may explain the fact that awareness level in consumers for Henkel brands is low HUL advertising is done mainly in case of soaps (for example ndash ldquoDoverdquo done mainly to reaffirm that itrsquos not a soap) shampoos deodorants (ldquoAxerdquo) laundry detergents (ldquoSurf Excelrdquo ldquoRinrdquo) etc With the introduction of home water purifier (ldquoPure Itrdquo) considerable advertising amp promotional expenses have gone into it

Of late we see very little of Nirma advertisements This is apparent from its advertising expense as to sales which is very low (only 154) ITC is altogether a different story Cigarettes amp other tobacco related products which constitute approx 85 of its sales all relate to ldquointoxicationrdquo or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising (surrogate advertising is done) is needed either to reaffirm the brands or introduce new consumers to the brands (there is regulatory angle as well) Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course they do it voluntarily and without knowing what theyrsquore doing But while moving faster into non tobacco FMCG business riding high on its‐ strength of distribution network matching or surpassing in some cases that of HUL ITC has started aggressive advertising campaigns (ldquoFiama Di Willsrdquo shampoo ldquoVivelrdquo soap ldquoSunfeastrdquo biscuits ldquoBingordquo snacks etc) directly focusing on marquee brands of HUL like ldquoSunsilkrdquo amp ldquoLuxrdquo increasing the heat on Britannia for biscuits and taking on ldquoKurkurerdquo amp other snacks and chips from Pepsi Coke and others

Advertising expenses as percentage to sales is highest for Emami which owns brands such as Navratna hair oil amp talc Boroplus cream amp talc Himani Fast Relief Fair amp Handsome Sona Chandi Chawanprash Menthoplus etc each of which is advertised heavily in the mass media (eg TV) with famous amp expensive celebrity endorsers like Amitabh Bachchan Kareena Kapoor Govinda etc On the other hand we see regular advertising streams for Colgate toothpastes and other oral care products in which category Colgate Palmolive is the market leader Reckitt Benckiser advertises‐ ‐ considerably for its brands like Herpic Mortein Vanish Clearasil Dettol Strepsils etc which is the reason for its high advertising cost as percentage of sales

Marketing Expenses

As stated earlier also marketing expenses here include the following ndash

10487071048707commissions 10487071048707rebates

29

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

10487071048707discounts 10487071048707sales promotional 10487071048707expenses on direct selling agents 10487071048707entertainment expenses etc

Exhibit 3 Marketing Expenses as percentage of Sales

Marketing Expenses as to Sales004271101000070410459468735951157103200020040060080010001200140016001800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCMarketing Exp as to Sales

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate ndash Palmolive which has very good brand pull for its ldquoColgaterdquo toothpastes) This proves that HUL is able to maintain considerable brand pull through advertising ITC again comes among the lowest its tobacco products require very little lsquopushrsquo and have very high rotations Also ITC mostly deals with small retailers and distributors (lsquopaan cigarette shops ownersrsquo)‐ who have marginal bargaining power

Another revelation is that Henkel which has zero advertising expenditure has the highest marketing expenses among all others But this strategy to lsquopushrsquo the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo Fa Neem toothpaste etc are losing out in the market Further it is also a pointer to the fact that Henkelrsquos largest business share is in industrial 30

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

chemicals (adhesives sealants ndash eg popular brand ldquoLoctiterdquo this segment constitute ~44 of worldwide sales of Henkel) and for B2B advertising per se is not that much important For B2B important is direct selling approach which generally requires negotiations volume discounts etc‐ which are reflected in highest marketing expenses (as percentage to sales) compared to others

PampG is in between the extremes and with considerable advertising expenses also it is unable to create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are also relatively higher) or itrsquos getting stuck for the lack of sufficient distribution muscle a la HUL in traditional retail in India and suffers from lack of reach and availability at the end consumer level

As mentioned earlier both Colgate Palmolive and Reckitt Benckiser both enjoys very good brand‐ ‐ loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (1 in antiseptics) Herpic Mortein etc This is corroborated by the fact that these companies have some of the lowest marketing expenses (as percentage to sales) in the group as shown in the chart

Distribution Expenses

Distribution expenses include the outward freight cost to the company

Exhibit 4 Distribution Expenses as percentage of Sales

Distribution Expenses as to Sales490516314221419653350253670381422255000100200300400500600700800HULNirmaDaburColgate-PalmoliveReckittBenckiserPampGHomeGodrejEmamiPampGHygiene ampHealthHenkelHenkelMarketingITCDistribution Exp as to Sales 31

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

We have seen that TampL plays a very important role for HUL amp others who have pan Indian presence‐ in FMCG business Colgate Palmolive Emami amp ITC has some of the lowest distribution expenses (as‐ to sales figures) amp PampG has the highest HUL is lower in this respect than Nirma amp PampG but higher than Henkel This can be explained somewhat from the impact of the variable Time Band of purchase on the increased transport intensity for HUL in the last mile for some of the products like household personal care laundry detergent branded atta etc in the first amp last week of the moth ITC (tobacco) Henkel (largely B2B) are mostly protected from this implication of the variable

Another important thing to remember that value density of FMCG goods is relatively lower causing share of transportation costs in the overall cost structure to be relatively higher This implies dispersed manufacturing locating manufacturing plants nearer to major markets So one location manufacturing to get higher economies of scale and on the other hand trying to serve geographically diverse markets may not be economically attractive for FMCG sector Compared to

HULrsquos 40 manufacturing plants across India Nirma the 2nd largest FMCG major in soaps and detergents category has 6 manufacturing plants all located in and around Gujarat So transportation cost of Nirma if it tries to cater to pan Indian market will be higher This is supported‐ by the fact that Nirmarsquos higher distribution cost percentage than HUL For PampG the same reasons significantly affect its distribution cost which is highest for the group analyzed 32

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia

8 References

1 B Joseph Pine James H Gilmore (1999) The Experience Economy Work is Theatre amp Every Business a Stage Published by Harvard Business Press 254 pages

2 HUL Website (httpwwwhulcoin)

3 HUL CLSA Conference Investor Presentation (24th Sept 2008)

4 Reckitt ndash Benckiser Website (httpwwwreckittbenckisercomsiteRKBRTemplatesHomeaspxpageid=1)

5 Colgate ndash Palmolive Website (httpwwwcolgatecoinappColgateINHomePagecvsp)

6 Emami Group Website (httpwwwemamigroupcomBrands)

7 CMIE

8 Wikipedia