Despite the present challenges brought on by inflationary cost rises, Hindustan Unilever Limited (HUL) has emphasised that its beverage-based nutrition or health food drinks (HFD) portfolio would continue to be a primary area of emphasis for the firm.
HUL has announced a 16% overall rise year-over-year to INR149bn (US$1.8bn) and a 12% growth in profits to INR25.1bn (US$303.3mn) in its Q3 FY2033 financial results (for the quarter ended December 31 2022).
The firm’s executives stressed at the HUL Earnings Call earlier this year that the effects of inflationary pressures are still noticeable, despite some of them having subsided, but that HUL is retaining a constructive view based on recent recoveries.
According to Sanjiv Mehta, CEO and MD of HUL, “this year, the FMCG industry witnessed unprecedented inflation across a wide basket of commodities, driven by supply side issues. However, recently, we have noticed a softening in a few key commodities, such as palm oil, for which inflation has decreased by about 30% compared to the same quarter in 2021.
Because of this, we think that both the consumer price inflation and year-over-year inflation are steadily declining from their recent peaks. However, when seen through a two-year perspective, commodities continue to trade above long-term norms; for example, crude oil, food ingredients, and other commodities continue to experience near to 100% inflation compared to the same quarter of 2020. However, assuming commodities continue where they are, we expect the inflationary pressure to progressively lessen, which bodes good for the sector. This has been further exacerbated by currency, where the US dollar has risen by almost 10% versus the Indian rupee this year”.
Mehta noted that the effects on several food and beverage categories, such as the company’s much-lauded Health Food Drinks (HFD) or beverage-based nutrition segment, which predominantly consists of the Horlicks and Boost brands, cannot be dismissed despite this upbeat outlook. The results [in terms of business growth] for the HFD business would have been comparable to how we expanded the Detergent and Home Care businesses in prior years by this point.
“I don’t think we will need to wait nearly so long to see benefits for HFD; it should be much quicker. It took around five to six years to see effects in the laundry business. A lot of price hikes, like those for barley by 120% and skimmed milk powder by 50% over the previous two years, had a huge influence on [this whole industry], else we would have accomplished this much sooner.
“Consequently, we’ll start seeing a lot bigger rise in HFD come in much early if commodities prices are positively influenced by, say, a particular stimulus to lower these prices.” Ritesh Tiwari, the CFO of HUL, emphasised that the cause of this is consumer conversion, which ultimately boils down to price.
In terms of market share, he explained, “now the conversion is happening, and this happens when we raise the penetration, where we bring more people into the fold.” However, middle-class customers who are utilising larger pack sizes tend to cut back on their consumption in order to manage their budgets, which has an impact on consumption. “As it subsides, this will return [and we seek to] generate enhanced consumer relevance for the category — there’s the Plus range that delivers higher order advantages and science-based benefits, and Horlicks with its various price points and pack sizes marketed to and explored by various customers.”
Continuing Unilever cooperation
Although HUL is regarded as the Indian division of Netherlands-based Unilever, their collaboration is based on a central service and royalty agreement that HUL recently extended for an additional five years.
According to Mehta, “HUL’s previous trademark and technology licence and central service agreement with Unilever was signed in January 2013 for a period of 10 years, and it granted us [the key rights to] use Unilever-owned brands, access Unilever’s technical know-how, R&D and innovation capabilities, as well as leverage Unilever’s expertise and services across various functions.”
“The HUL board has approved the new agreement effective February 1 2023 for a tenure of five years,” the statement reads. “This new arrangement envisages a staggered increase of 80bps over a period of three years from 2.65% to 3.45% of turnover [but is] a necessary investment that positions HUL well t…” The contract expired on January 31 2023, and Unilever requested a review with India being one of its top three priority markets. Concerns about the reduced contract term and higher royalties going to Unilever were also addressed by Mehta, who emphasised that they were critical steps in this time period to maximise flexibility and innovation capabilities.
“It’s excellent corporate governance in these times to lock in the contract for five years,” he added. “The globe is highly unpredictable and we are living in circumstances that are really different.”
The agreement has been extended for another five years so that we can revisit the terms as circumstances change. “The royalty has a few subcomponents to it – a royalty for trademark for using Unilever brands, for the technology we are getting from Unilever, and then a large component for central services from digital marketing to other capabilities and technology [so that these ben] improved accordingly.