Hindustan Unilever sinks further on poor growth, high ad spends

HUL’s sales growth has again not kept pace with inflation, net profit is down despite an advertising blitzkrieg of 71% in the December quarter

The third-quarter results of Hindustan Unilever Ltd (HUL) shows that the company continues to be a rudderless boat. It has sunk further into a quagmire of low growth and high advertising expenditure. HUL, of course, sees things differently. The company which has some of the best-known consumer brands (Lux, Liril, Dove, Pepsodent etc.), claims to have reported “strong growth”. Strong growth in this case meant 5% rise in sales during the third quarter (Q3) of FY10 over Q3FY09.

HUL has also stated that its volume growth has “accelerated” by 5% in the December quarter. Compared with the scorching growth every single consumer products company is recording, HUL’s idea of strong growth and accelerating volume growth is strange. If 5% growth rate is strong in a market like India, what will you call the 16% sales growth reported by Godrej Consumer Products Ltd during the same period? Godrej has a much smaller portfolio of products but these are obviously marketed in a much smarter way compared to HUL, which at one time was looked upon with awe by marketing professionals. Indeed, sales of the core of HUL’s product range—soaps and detergents—actually shrank by 2.4% quarter-on-quarter.

HUL also claims that increased cost savings and buying efficiencies improved gross margins. This looks like a dubious claim. In Q3FY09, sales were Rs4,307 crore and operating profit was Rs723 crore, a gross margin of 16.8%. In Q3FY10, operating profit barely inched up to Rs742 crore on sales of Rs4,504 crore. This yields a margin of 16.5%. Operating margin fell; it did not rise, as HUL claims. 

HUL’s December quarter looks pretty pathetic by itself, belying the optimism and cheer of its press release. Set against the galloping advertising expenditure, it should look worrying for shareholders. During the third quarter, HUL, a 52%-owned subsidiary of Anglo-Dutch giant Unilever, spent Rs632.88 crore on advertising and promotions, a 71% jump over the same quarter last year. During Q3FY09, the company spent Rs371.02 crore on the same. Since this ad spend did not lead to higher sales, it means either this huge spending was a drain or HUL’s sales would simply slump if they were not propped up by advertising and promotions.

The key problem with HUL that remains unaddressed for almost decades now is that it has no pricing power, very little competitive edge and its marketing has become totally ineffective. The December quarter results reinforce this view.
 

  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    amol

    1 decade ago

    Compay is spending on the advertising but it is good but the medium of advertising are really expensive rather puting the add on the television company should give the advertisement in dailly news papers so that the cost will be low .HUL is facing the problem of sales decrease though some time it show that sales is superior but actually its not something like that. Rural marketing is a very good by HUL but it need to research on pricing strategy of the rural market and the urban market if HUL really want to grow in the rural market then it must have to think about the pricing strategy otherwise it will lose the customers. HUL is well know brand in India so company should put the much more attention on marketing and research of product. company must pay the attention on the marketing research of the products through the brand wise.

    M.R.Borkar

    1 decade ago

    If yr example is taken further, the market has valued it correctly, the % rise in the price of both shares over a 3 year period will reveal what is happening. More over some of the ads are of very poor quality n taste. I am writing to them. I am holding shares for the last 20yrs. and the co is sliding down.




















    Vinay Lele

    1 decade ago

    These kind of results are with the support of tax incentives with HUL's Factories spread over HP,Uttaranchal ,Silvassa , Daman which are giving them excise / I.T.benefit. The Company needs to think what would happen once these benefits are over !!

    Navin

    1 decade ago

    Well, its quite complex. The Company claims that 5% growth is "strong", and it spends 71% more on advertising to deliver that strong growth. Its time for heads to roll at HUL. The company probably pays its employees very well, and hence they continue sticking around as "best talent" in the country. With their IIM tags and the close networking which these institutions have, they continue increasing their headcount at higher and higher cost. I think this company at the moment is not being run for shareholders.

    Anil Agashe

    1 decade ago

    I have always thought that for HUL cut in advertising would mean better profits. I do not know why they spend so much to advertise brands which are supposed to be market leaders,especially when they show no growth in volumes.

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    28 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 4 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)