A Study on Distribution Management of Hindustan Unilever Limited

Submitted To Prof. S Govindrajan By PRADEEP NARAIN g08075 SANJEEV KUMAR JHA SATADRU BAGCHI SOUMITRA DHALI TARUN KUMAR SAHA 2 Content g08086 g08088 g08090 g08095

Page 1. Introduction Hindustan Unilever Limited 3 2. Distribution Network of HUL 2.1. Evolution over Time 4

2.2. Detail Overview 5 3. Channel Design 12 4. Initiatives taken to Improve the Distribution Network 14 5. Field Force Management 16 6. Analytical Framework 18 7. Financial Analysis 26 8. References 33 3

1. Introduction Hindustan Unilever Limited Hindustan Unilever Limited (HUL), formerly Hindustan Lever Limited (it was renamed in late June 2007 as HUL), is India s largest Fast Moving Consumer Goods company, touching th e lives of two out of three Indians with over 20 distinct categories in Home & P ersonal Care Products and Foods & Beverages. These products endow the company wi th a scale of combined volumes of about 4 million tonnes and sales of nearly Rs. 13718 crores. HUL is also one of the country s largest exporters; it has been recognised as a Golden Super Star Trading House by the Government of India. The mission that inspires HUL s over 15,000 employees, including over 1,300 mana gers, is to "add vitality to life." HUL meets everyday needs for nutrition, hygi ene, 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 52.10% of the equity. The rest of the shareholding is distributed a mong 360,675 individual shareholders and financial institutions. HUL s brands like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pon d s, Sunsilk, Clinic, Pepsodent, Closeup, Lakme, Brooke Bond, Kissan, KnorrAnnapur na, Kwality Wall s are household names across the country and span many categori es 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 2,000 suppliers and associates. HUL s distri

bution network comprises about 4,000 redistribution stockists, covering 6.3 mill ion retail outlets reaching the entire urban population, and about 250 million r ural consumers. We have analyzed the distribution network of HUL from the following aspects: 1. 2. 3. 4. 5. 6. 7. 4 Evolution of HULs distribution network Transportation & Logistics Channel Design Initiatives taken for channel member management. Field force management Analytical Framework Financial Analysis

2. Distribution Network of HUL 2.1. Evolution over Time The HULs distribution network has evolved with time. The first phase of the HUL d istribution network had wholesalers placing bulk orders directly with the compan y. Large retailers also placed direct orders, which comprised almost 30 per cent of the total orders collected. The company salesman grouped all these orders an d 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 distribut ed the products to the respective wholesalers, against cash payment, and the mon ey was remitted to the company. The focus of the second phase, which spanned the decades of the 40s, was to prov ide desired products and quality service to the company s customers. In order to achieve this, one wholesaler in each market was appointed as a "Registered Whol esaler," a stock point for the company s products in that market. The company sa lesman still covered the market, canvassing for orders from the rest of the trad e. He then distributed stocks from the Registered Wholesaler through distributio n 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" (R S) who replaced the RWs. The RS was required to provide the distribution units t o the company salesman. The second characteristic of this period was the establi shment of the "Company Depots" system. This system helped in transshipment, bulk breaking, and as a stockpoint to minimise stockouts at the RS level. In the rece nt past, a significant change has been the replacement of the Company Depot by a system of third party Carrying and Forwarding Agents (C&FAs). The C&FAs act as buffer stockpoints to ensure that stockouts did not take place. The C&FA system ha s also resulted in cost savings in terms of direct transportation and reduced time lag in delivery. The most important benefit has been improved cus tomer service to the RS.

The role performed by the Redistribution Stockists includes: Fin ancing stocks, providing warehousing facilities, providing manpower, providing service to retailers, implementing promotional activities, ext ending indirect coverage, reporting sales and stock data, demand simulation and screening for transit damages. 5 2.2. Detail Overview The distribution network of HUL is one of the key strengths that help it to supp ly most products to almost any place in the country from Srinagar to Kanyakumari . This includes, maintaining favorable trade relations, providing innovative inc entives 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 companys product to the end customer. Distribution System of HUL HUL s products, are distributed through a network of 4,000 redistribution stocki sts, covering 6.3 million retail outlets reaching the entire urban population, a nd about 250 million rural consumers. There are 35 C&FAs in the country who feed these redistribution stockists regularly. The general trade comprises grocery s tores, chemists, wholesale, kiosks and general stores. Hindustan Unilever provid es tailor made services to each of its channel partners. It has deve loped customer management and supply chain capabilities for partnering emerging selfservice stores and supermarkets. Around 2,000 suppliers and associates serve HULs 40 manufacturing plants which are decentralized across 2 million square mil es of territory. 6 (Fig. 1 Schematic of HULs Distribution Network) Distribution at the Villages: The company has brought all markets with populations of below 50,000 under one r ural sales organisation.The team comprises an exclusive sales force and exclusiv e redistribution stockists.The team focuses on building superior availability of products. In rural India, the network directly covers about 50,000 villages, reaching 250 million consumers, through 6000 substockists.

(Fig. 2 Rural Distribution Model of HUL) HUL approached the rural market with two criteria the accessibility and viabilit y. To service this segment, HUL appointed a Redistribution stockist who wa s 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 substockist distributes the co mpany s products to outlets in adjacent smaller villages using transportation su itable to interconnecting roads, like cycles, scooters or the ageold bullock cart . Thus, Hindustan Unilever is trying to circumvent the barrier of motorable road s. The company simultaneously uses the wholesale channel, suitably incentivis ing them to distribute company products. The most common form of trading remain s the grassroots buyandsell mode. This enables HUL to influence the retailers stoc ks and quantities sold through credit extension and trade discounts. HUL lau nched this Indirect Coverage (IDC) in 1960s.Under the Indirect 7 Coverage (IDC) method, company vans were replaced by vans belonging to Redistrib ution Stockists, which serviced a select group of neighbouring markets. Distribution at the Urban centres: Distribution of goods from the manufacturing site to C & F agents take place thr ough either the trucks or rail roads depending on the time factor for delivery a nd cost of transportation. Generally the manufacturing site is located such that it covers a bigger geographical segment of India. From the C & F agents, the go ods are transported to RSs by means of trucks and the products finally make the la st mile 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. Starte d in the late 2000, Project Shakti ,000 villages .HUL s becoming an extended t Shakti has already had enabled Hindustan Lever to access 80,000 of India s 638 partnership with Self Help Groups(SHGs) of rural women, is arm of the company s operation in rural hinterlands. Projec been extended to about 12 states Andhra Pradesh, Karnataka,

Gujarat, Madhya Pradesh, Tamil Nadu, Chattisgarh, Uttar Pradesh, Orissa, Pu njab, Rajasthan, Maharashtra and West Bengal. The respective sta te governments and several NGOs are actively involved in the initiative. The SHG s have chosen to partner with HUL as a business venture, armed with tra ining from HUL and support from government agencies concerned and NGOs. Arm ed with microcredit, women from SHGs become directtohome distributors in rural mark ets. The model consists of groups of (1520) villagers below the poverty line (Rs.750 p er month) taking microcredit from banks, and using that to buy our products, whic h they will then directly sell to consumers. In general, a member from a SHG sel ected as a Shakti entrepreneur, commonly referred as Shakti Amma receives stoc ks from the HUL rural distributor. After being trained by the company, the Shakt i entrepreneur then sells those goods directly to consumers and retailers in the village. Each Shakti entrepreneur usually service 610 villages in the population strata of 1,0002,000. 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 pote ntial HUL initiated a Streamline initiative in 1997. Project Streamline is an innovative and effective distribution network for rural areas that focuses on ex tending distribution to villages with less than 2000 people with the help of r ural substockists/Star Sellers who are based in these very villages. As a result, the distribution network directly covers as of now about 40 per cen t of the rural population. Under Project Streamline, the goods are distributed from C & F Agents to Rural D istributors (RD), who has 1520 rural substockists attached to him. Each of these s ubstockists / star sellers is located in a rural market. The substockists then per form the role of driving distribution in neighboring villages using unconventi onal means of transport such as tractor and bullock carts. Project Str eamline being a cross functional initiative, the Star Seller sells everything fr om detergents to personal products. Higher quality servicing, in terms of frequency, credit and fullline 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 company s arm in the Direct Selling channel, one of the fastest growin g in India today. It already has about several lakh consultants all independent entrepreneurs, trained and guided by HLN s expert managers. HLN has already spre ad to over 1500 towns and cities, covering 80% of the urban population, backed b y 42 offices and 240 service centres across the country. It presents a range of customised offerings in Home & 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 pools 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 (MDJIT). Certain C &FAs 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 p acks required for the set of markets which the MD and JITs service in a given ar ea are sent to the mother depot by all manufacturing units. The JITs draw their requirements from the MD on a weekly or biweekly 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 2,000 suppliers, 8 0 factories and 7,000 stockists. This sophisticated network with its voice and d ata communication facilities has linked more than 200 locations all over the cou ntry, including the head office, branch offices, factories, depots and the key r edistribution stockists. They have also combined backend processes into a common Shared Service infrastructure, which supports the units across the countr y. All these initiatives together have 10

enhanced operational efficiencies, improved the service to the customers and hav e brought us closer to the marketplace. RS Net Initiative: The RS Net initiative, launched in 2001, aims at connecting Redistribution Stock ists (RSs) through an internet based system. It now covers stockists of the Home & Personal Care business and Foods & Beverages in close to 1200 towns and citie s. Together they account for about 80% of the company s turnover. RS Net is one of the largest B2B ecommerce initiatives ever undertaken in India. It provides linkages with the RSs own transaction systems, enables monitoring of stocks and secondary sales and optimises RSs orders and inventories on a daily b asis through online interaction on orders, despatches, information sharing and m onitoring. The ITpowered system has been implemented to supply stocks to redi stribution stockists on a continuous replenishment basis. Today, the sales sy stem gets to know every day what HUL stockists have sold to almost a million out lets across the country. Information on secondary sales is now available on RS N et every day. RS Net is part of Project Leap. Project Leap begins with the supplier runs throu gh the factories and depots and reaches up to the RSs. This ensures HULs growth b y ensuring that the right product is available at the right place in the right q uantities and at the right time in the most costeffective manner. Leap also ai ms at reducing inventories and improving efficiencies right through the extended supply chain. RS Net has come as a force multiplier for HUL Way, the company s actionplan to no t 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 Reple nishment 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 al so enabled RSs to provide improved service to retail outlets. Simultaneously, HU L is servicing the rural market, key urban outlets, and the modern trade as a si ngle concern. Adexa iCollaboration suite In 2000, HUL identified improved supply chain management as a critical bu siness priority and launched a comprehensive initiative, Project Leap, tasked with increasing supplier/distributor responsiveness, reducing inventory buffers , and optimizing planning and scheduling. HUL chose the Adexa iCollaboration sui te for facilitating centralized monitoring of the SCM, live customer /supplier c ollaboration, and integrating demand and distribution planning with production s cheduling. 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 inventor y 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 HULs Turnover Compared with Competitors, 2006)

(Fig. 4 HULs Market Leadership across various FMCG Categories) 12

3. Channel Design Hindustan Lever Limited (HUL) has two types of channel selling i. ii. Regular (traditional) retail channel, Direct Selling Channel in the name of Hindustan Lever Network (HLN).

HUL has a well entrenched high distribution model which comprises of C&FAs, Redi stribution Stockists, wholesalers and retailers (as shown earlier). Hindustan Un ilever s distribution network is recognized as one of its key strengths. Its foc uses on Product availability, Brand communication, and higher levels of brand ex perience. HULs Sales Breakup through different channels: Sales Break-up Through Different Channels

7% 33%

60%

Modern Retail

Channel Structure (Special Focus is on Jamshedpur) Typically, the goods produced in each of the HUL s 40 factories are sent to a de pot with the help of a carrying and forwarding agent (C&FA). The company has its depot in every state of the country. The C&FA is a third party and gets servici ng 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 C&FA and sells them t o retail outlets. In Jharkhand the C&FA is in Ranchi and Jamshedpur is serviced by 3 Redistribution Stockists at Sakchi (M/s Om Prakash Agarwal), Bistupur and P arsudih. The HUL management realized certain problems with the existing sales model. Firs t, the model was not viable for small towns with small population and small busi ness. HUL found it expensive to appoint one stockist exclusively for each town. Secondly, the retail revolution in the country has changed the pattern the custo mers shop. Large retail self service shops are becoming commonplace. 13

Urban General Trade

Rural Areas

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 o f 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 pro fitcenter 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 g oing to be reduced to only one with effect from next month of this year. Sales Margin: 4.76% which includes cash discount, unloading expenses from depot, distribution expenses to retailers, incentive schemes & other incidental expense s. Modes of transport used: Rickshaw, tempo. Incentive schemes: Before 2000 holiday packages and tours but after 2000 no n onmonetary incentive for RS. Software systems and Information System: UNIFY 8.3 (Developed by IBM & 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. Areas of Operations: Marked for each of the RS. Selling Operations: RSs sells the goods to o Wholesaler (gets 1.5 % max. discount from RS) o Retailers (gets 1.0% max. discount from RS)

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

Retailers: Total retailer base in Jamshedpur: Approximately 1070. Sales Margin: Depends on the product o Soap, detergents o Cosmetics o Food items 14 Incentive schemes: Company programs (Scheme Discounts + Cash Discounts) TPR schemes based on Sales (1 % to 4 %) 8% on MRP 10% on MRP 8% on MRP

Vijeta scheme is not for retailers.

Field Sales Force: To meet the everchanging needs of the consumer, HUL has set up a distribution net work that ensures availability of all their products, in all outlets, at all times. This includes, maintaining favourable trade relations, providin g innovative incentives to retailers and organizing demand generation activities among a host of other things. The important activities that HUL field sales force does and (ii) reporting on a daily basis. Account information ps given by HUL. During our research and informal survey e, we came to know that for the last two years, training ll to the sales force. are (i) target chasing is maintained on palmto of HUL field sales forc is not being given at a

HUL has limited the network channel selling to categories of Home & Personal Car e (HPC) and Food products with exclusive brands for this channel. That is, these particular brands (products) are all exclusive to HLN, specifically developed f or the Direct Selling channel, and not available in the retail channel. The gen eral trade comprises grocery stores, chemists, wholesaler, kiosks and gene ral stores. Hindustan Unilever services each with a tailormade mix of services. 4. Initiatives taken to Improve the Distribution Network HUL has taken the following initiatives to improve its distribution network: Setting up of a fullscale sales organisation comprising key account management and activation to impact, fully engage and service modern retailers as they emerge. Servicing Channel partners and customers with continuous daily replenishment. Leveraging scale and building expertise to service Modern Trade and Rural Mar kets. Delayering of sales force to improve response times and service levels. Revamping of its sales organisation in the rural markets to fully meet the em erging needs and increased purchasing power of the rural population. HULs distrib ution network in rural India already directly covers about 50,000 villages, reac hing about 250 million consumers through about 6,000 sub stockists. 15 Implementation of supply chain system that connects stockists across the coun try, and also includes a backend system connecting suppliers, all company sites a nd stretching right up to stockists. IT tools have been deployed for connectivit y across the extended supply chains. Backend processes have been combined into a common Shared Service infrastructure. Launching of Project Shakti through which the company is able to extend its o perations in villages. HUL has also included several NGOs and state governments as the initia tive helps rural women to improve their financial position. Launching of HUL Network to leverage the channel of direct selling by present ing customised offerings in 11 home and personal care and food categories. Started in 2003, it already has a base of 300,000 consultants across the country.

Starting 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. Finding out Innovative ways to reach out to its consumers, particularly in ru ral areas by leveraging nonconventional media like wall paintings, cinema vans, weekly markets (haats), fairs and festivals. Initiating 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 ret ail in the face increasing inroads made by large, modern retailing chains like Sp encers, Reliance Fresh etc (where HUL is squeezed harder for discounts), HUL star ted restructuring some of the selected SVSs into the form of selfservice retail s hops a la modern retails. This is to protect & maintain the competitive advantag e that HUL has over its biggest competitors in the other markets (e.g., P&G), wi th its very deep distribution reach through traditional retail. Launching the Unicare scheme with upmarket pharmacies and retailers to sale i ts premium brands. Undertaking several initiatives for traditional channels in order to improve its capabilities at the frontend by developing skills for stockists sales force. Under Project Dronacharya , the FMCG major continuously imparted training to o ver 10,000 stockist salesmen. Launching of several promotional schemes for existing wholesalers and distrib utors. For instance, it has started the Vijeta Rishta Jeet Ka scheme last year to provide a p latform for the wholesaler and HUL to grow the business by earning points and re deeming them. 16 5. Field Force Management The working cycle of a typical HUL field force member is from 21st of every mont h 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 per formance relative to other. To start with the field force member is given a particular area and his responsi bility is to cater to all the retailers in that area. While deciding the area fo r each member of the field force, the company makes sure that the operating area of each field member doesn t overlap with his other colleagues. There are vario us methods used by the company to incentivize the field force Monetary and Non M onetary. In HUL, the field force is evaluated using QOC (Quality of Contribution). It con sists of 4 components 1. Secondary Sale (Max points = 2.5) 2. Eco (Max points = 0.5)

3. Focus (Max points = 0.5) 4. FCS (Max Points = 0.5)

SECONDARY

ECO QOC FOCUS

FCS 17 Secondary Sale et in terms of ext month). If 95% target he ore as well as Based on the operating area, each member is given a specific targ value (e.g., Rs. 15 lacs) for the operating month (21st 20th of n he achieves 100% of the target he gets 2.5 points, if he achieves gets 1.5 points. These points are used to add to the total QOC sc linked to monetary incentive.

ECO / Width pack Target This is used for the penetration/reach of certain produc ts in the existing market. The following is a typical ECO target assigned to a f ield force agent: Lux International 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 t o the retailers. The concerned agent receives this target around 25th of each mo nth and has to complete this target within the 5th day of next month. Upon compl etion he gets additional 0.5 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 This is mainly used to increase the sales volume of ce rtain products. A typical Focus target is given below: Lux International Rs 20,640 / @ Rs 6/ per unit Life Buoy Rs 70,220 / @ Rs 10/ per unit Wheel Rs 99

,000 / @ Rs 10/ per unit Breeze Soap Rs 27,000 / @ Rs 10 / per u nit This target needs to be achieved within 20th of next month. Upon achieving the target the field person is awarded 0.5 points which is then added to his overall QOC score.

Field Capability Score (FCS) In this component, the field force persons are requ ired to ensure that the scheduled visit/outlet billing is such that at least 15 items are demanded per order. If this is achieved the retailer gets a discount o f 1% on the billed amount and on the other hand the field person gets an additio nal score of 0.5 which is added to his QOC score. Each scheduled visit per outle t is one per week. For example if there are 100 outlets within the operating are a 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 0.5 points for h is 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 MOC Star a wards. MOC stands for Monthly operating Cycle. If QOC score > 4.5 The person is eligible for 7 star award If QOC score > 4 The person is eligible for 5 star award If QOC score > 3.5 The person is eligible for 3 star award In the event of exceptional performance, management representatives from the reg ional office come to the zonal office to distribute the awards. The photograph o f the award winners is displayed in the office as a source of inspiration for ot her sales person. Target Setting Mechanism and monitoring The regional office monitors the performance of various zones. A thorough analys is is done at the end of each month and based on that the weak products are iden tified 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 palmto p wherein he can feed the entries on the spot where the transaction is done. Thi s solves basically the two purposes a) The field person is freed from the tedious task of maintaining cumbersome rec ords 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 HULs distribution network in the light of 20 most significant variables that affect the distribution part of channel management for any organ ization in the business of marketing & selling of goods. The variables, their ex

planations and their impact on the HULs distribution network are given below 1. Number of Consumers

In retail business dominated by traditional stores like Kirana Stores etc (India n retail business falls in this category), higher the no. of consumers, higher w ill 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 ev ery player will be a huge task. Moreover, Transport & Logistics (T&L) support prov ided by the organization needs to be well organized. Implication for HUL HULs key strength lies in managing its distribution network in India. HUL is Indi as largest FMCG company with unmatched distribution network, which is built over a century focusing on traditional retail. HUL s distribution network comprises about 4,000 redistribution stockists, covering about 6.3 million retail outlets reaching the entire urban population, and about 250 million rural consumers in I ndia. Its said that HUL is able to touch the lives of about 2 out of every 3 Indi an 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 i n the long run). For a comparison, P&G, worlds 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 exa mple, WalMart), but not traditional retail. 2. Geographic Dispersion of Consumers

Again, this is closely related with the previous variable, more so in a large, g eographically diverse country like in India. With the increase in this dispersio n level, more intermediaries and more layers are required in the distribution ne twork so as to effectively reach the length & breadth of the country. Obviousl y the T&L management for such an organization would be critical to accompl ish this. Implication for HUL For a country as geographically diverse as India, panIndian presence & market lea dership 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 i ts distribution network. 3. Frequency of Purchase

If the frequency of purchase is high, then transport intensity in the last mile (i.e., from distributor to retailers) increases manifold. For FMCG produ cts, as a thumb rule we can take that the mean time between two purchases is ~ 9 0 days. With the introduction of smaller form factor packaging for FMCG goods (R e.1 / shampoo sachets being a very good example), the transport intensity increas ed further. 20 Implication for HUL

HUL has about 4000 redistribution stockists, who supply to approx. 6.3 million o utlets 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 (MDJIT). Certain C&FAs were selected across the country to act as mother depots. Each of them has a minimum number of JIT depots attached for stock require ments. All brands and packs required for the set of markets which the MD and JIT s service in a given area are sent to the mother depot by all manufacturing unit s. The JITs draw their requirements from the MD on a weekly or biweekly 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, products/services like Fire Extinguishers, Life Insu rance etc. are such that though these are needed, the overall tendency for the c onsumers is to postpone the purchases these products/services can be termed as ne cessary evil. For this kind of products, regular reinforcement in the minds of co nsumers becomes necessary, sales field force becomes critical and use of expert fi eld force is commonplace. Implication for HUL Since FMCG products are used regularly and these products are not nece ssary evils, distribution network of HUL does not require any expert field force to sell its products. Only the recent diversification of HUL into Home Water Pu rification business (Pure It brand) needs dedicated field sales force. 5. Level of Familiarity/Knowledge (of consumer) about the Product

If the level of familiarity of consumer with the product is higher, lower will b e the importance of field sales force and higher will be the importance of chann el. 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 forces 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 push will be required from the ch annel members to sell the products as there will be sufficient pull 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 offtake to happen which in turn leads to lesser margins to the channel members for those products. For fas ter moving products (mostly due to brand pull), retailers may not be averse to s lightly lesser margins as rotation of the products is high and thus his/her ROI is protected.

Retailers ROI =

M arg in Rotation Investment For a FMCG player with a nonestablished brand, margins to channel members and poi nt 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 pull, HUL has less t o 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 a lmost the same reach as HUL has (e.g., ITC as its eating into HULs market share co ntinuously since it entered FMCG segment). 7. Purchased on Impulse

The impulse purchase products like chocolates, toffees, colas, ice creams etc. f ollow Says Law which states that Supply Creates Demand, implying availability of th ese products are the most critical aspect for these to be sold and consumed. Thi s stresses on the fact that T&L for these products becomes very important. Implication for HUL HUL has only one product in this impulse purchase category Kwality Walls (ice cr eam). HUL is #2 after Amul in this FMCG segment. To increase this brands sale & market share, availability, visibility and consumer mind share has to be increased and improve d as well. 8. Level of Involvement (LOI)

Level of involvement (i.e., time & effort spent by the consumer) generally depen ds on the product cost. If LOI is higher, lower is the importance of availabilit y and more critical is the 22 supply of information as consumer decision process depends more on elaborate inf ormation 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 goo ds (e.g., Rice, Flour powder, Cooking oil etc at the beginning of the month) are to be made available together for final offtake.

Implication for HUL This aspect partly applies to HULs 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 & Complexity of Decision Making Process If the speed is low, then the complexity of the decision making process is highe r and greater is the importance of field sales force and the salespersons skill, knowledge and quality. Implication for HUL For FMCG products, complexity of decision making process is not there and so, sp eed 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 (e. g., doctors) is present in the process or not. If present, then consumer buying behavior may become subcontracted and the expert influencer becomes another cus tomer of the network, apart from the enduser. 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 assoc iate brands with regulatory bodies/authorities and show advertising with experts commenting upon superior virtues of a product in an attempt to make the buying behaviour shift from picking/variety 23 seeking to subcontracted and make consumers more loyal to the brand. These are t rue for HUL also (e.g., Ponds Intitute). 12. Element of Crisis Purchase Exists If element of crisis purchase exists in the buying decision of a product (for ex ample, bulbs & 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 unsell a brand by giving explicit or implicit suggestions. This implies that in such a case, selli ng depends on many cases how the company is taking care of channel members (keepi ng them happy) such that they are not lured by other competitors or directed by g rievances so as to unsell the brand. This situation is prevalent mostly in Consu mer Durables (like TV, Refrigerators etc.). In FMCG goods, the situation does no t exist per se. Implication for HUL HUL is not affected for its FMCG products by this variable. For water purifier Pu re It, this can have considerable impact if its sale starts to happen through cha nnel 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 newspaper, milk, fruits etc), then the dimension of speed in reaching the end consumers becomes cr itical & T&L 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 seasonality/cyclicity for the demand or purchase of the p roduct (examples newspaper, milk are most on demand in the 1st three hours of the day; cooking o il, rice etc 24 grocery items are most on demand in the 1st week of the month), then high T&L an d infrastructural requirements are needed for the last mile 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 e xample, in Food segment, Branded Atta Annapurna; in segments like Laundry Detergen ts, Shampoo & Hair Oil etc. this element of demand time band exist to a certain extent. This underscores the importance of T&L for HUL as th e transport intensity between distributors and retailers increases in the 1st & 4th week of a month for the products mentioned above. This is over and a bove the regular replenishment of stocks at retailers done by distributors. Fest ivals like Holi etc. may also increase the demand for personal care items like s oaps, 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 crud e oil, wheat, orange juice, precious metals, and currencies. Fungibility has not hing to do with the ability to exchange one commodity for another different comm odity. It refers only to the ease of substitution of one unit of a commodity wit h 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 sai d that commodities are fungible, goods tangible, services intangible, experience s memorable & transformations are effectual1. As an example, one Rs. 100/ bank note is interchangeable with another. Cash is fu ngible. A barrel of West Texas Intermediate crude oil is fungible (direct exchan ge) with another barrel of the same crude oil. Oil (of the same type) is fungibl e. Fungibility does not imply liquidity, and liquidity does not imply fungibility. Jewels can be readily bought and sold (the trade is liquid), but individual diam onds, being unique, are not interchangeable (diamonds are not fungible). Indian rupee bank notes are interchangeable in London (they are fungible there), but th ey are not easily traded there (they are not liquid in London). In contrast to d iamonds, gold coins are fungible. They are also liquid, especially under a 25 gold standard. The combination of fungibility and liquidity is one of the reason s why gold has successfully served as money for thousands of years. Further, a fungible thing can become nonfungible under some circumstances. For ex ample, an old coin or a currency note may assume a value which is way above its f ace value due to historical reasons or due to some defects in it which makes it u nique from others from a viewpoint which sees it differently than its intended p urpose. 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 b y IT. A good example of this is dematerialization (Demat) route for share tradin g 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 decommodi tize & 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 customiz ation, lesser the economies of scale. Also, criticality of sales field force inc reases with customization levels of the offering.

Implication for HUL For FMCG products of HUL, which are mass produced, such customizations are not p ossible and thus with higher economies of scale, lower criticality of field forc es 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 avoid/reduce the pro blem (ex. insurance, washing machine, car battery etc). Positive reinforcing pro ducts are those which gratify the senses (ex. Perfumes, Chocolates, Vacation etc ). Shopping experience becomes a critical aspect for positive reinforcing produc ts to reaffirm the positive feelings. Implication for HUL Axe & Rexona deodorants are distinctly positive reinforcing products from HUL, inclu ding others like Lux, Lakme etc. So these are seen in most shopping malls etc. w ith high visibility displays to reaffirm the feelings. Consumers are willing to pay higher for these brands. 26 19. Value/Volume Ratio (Value Density) of the Product This ratio is very important for both the company and the retailer for its two c ritical aspects T&L cost and retailer ROI/sq. 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 T&L cost per unit volume tran sported 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 in creases the packaging density (increased packaging density increase cost to some extent, but favours mechanized handling greatly, reducing handling costs). Sinc e value density is less, transportation costs will be higher and thus it is of e conomic sense to have manufacturing plants located closure to major markets. Thi s is the reason HUL has various manufacturing plants (40 in totality) located ac ross India. This is a pointer to the fact most of the major FMCG players (includ ing 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 marketi ng & sales (including distribution) functions of HUL and comparable companies. B y comparable, we mean those companies whose main economic activity, as defined in the CMIE database, is the same as HULs. For example, main economic activity of HU L as defined in that database is Cosmetics, toilet preparations, soap & washing p rep. Obviously, one major FMCG company in India, ITC, does not come under this pu

rview 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 08 was Rs. 2511 Cr., nearly as high as Nirma, the second largest player after HUL in HULs chosen category. But the figu res for advertising, marketing & distribution expenses of ITC as percentages to its total sales may not be directly comparable to those figures of HUL as produc t categories are different and the impact of above mentioned variables on these two companys sales & distribution function is dissimilar. Other major FMCG player s not included in the analysis are Nestle, Amul, Britannia & Tata Tea, which are mostly into the Food & Beverages 27 segment where HUL has relatively lesser presence (Processed Foods & Icecream segm ents together constitute only approximately 5% of HULs total sales). In Tea, HUL is present significantly, though. In the following pages advertising, marketing & distribution expenses of major F MCG goods (in HULs category mostly) are being shown. It is to be understood here that marketing expenses here include commissions, rebates, discounts, sales prom otional, expenses on direct selling agents & entertainment expenses whereas dist ribution expenses include outward freight. Exhibit 1: Annual Spend in Advertising, Marketing & Distribution functions in FY 08 Annual Annual Annual Annual Rs. Crore Rs. Crore Rs. Crore Rs. Crore Mar-08 Mar-08 Mar -08 Mar-08 Sl. No. Company Name Sales Advertising expenses Advert. Exp. As % of Sales Marketing expenses Marketing Exp. As % of Sales Distribution expenses Dist. Exp. As % of Sales 1 HUL 14937.88 1422.9 9 .53 6.07 0.04 731.41 4.90 2 Nirma 2651.15 40.96 1.54 71.87 2.71 136.91 5.16 3 Dabur 2128.17 248.1 11.66 21.4 1.01 66.84 3.14 4 Colgate-Palmolive 1597.3 256.51 16.06 0 0.00 35.36 2.21 5 Reckitt Benckiser 1334.76 207.85 15.57 9.34 0.70 55.88 4.19 6 P&G Home 1079.57 119.45 11.06 44.31 4.10 70.54 6.53 7 Godrej 922.78 61.4 6.6 5 42.37 4.59 32.27 3.50 8 Emami 586.42 102.92 17.55 27.46 4.68 14.86 2.53

9 P&G Hygiene & Health 556.02 57.95 10.42 40 .85 7.35 37.24 6.70 10 Henkel 430.33 0 0. 00 40.94 9.51 16.4 3.81 11 Henkel Marketing 417.79 0 0.00 65.64 15.71 17.63 4.22 12 ITC 21467.38 427.83 1.99 68.17 0.32 548.4 2.55 Exhibit 2: Advertising Expenses as percentage of Sales

Advertising Expenses as % of Sales 20.00 18.00 17.55 16.00 16.06 15.57 14.00 12.00 10.00

9.53 11.66 11.06 10.42 8.00 6.65 6.00 4.00 2.00 1.54 1.99

0.00

HUL

Nirma

Dabur

Colgate-

Reckitt

P&G

Godrej 0.00 Henkel

Emami 0.00 Henkel

P&G

ITC Palmolive Benckiser Home Hygiene & Health Marketing 28 We can see here that Nirma, Godrej & Henkel (ITC also) have less advertising exp enses (as % to sales) than HUL. Importantly, Henkel has zero advertising expense s in 2008, which may explain the fact that awareness level in consumers for Henk el brands is low. HUL advertising is done mainly in case of soaps (for example Do ve; done mainly to reaffirm that its not a soap!), shampoos, deodorants (Axe), laund ry detergents (Surf Excel, Rin) etc. With the introduction of home water purifier (Pu re It), considerable advertising & promotional expenses have gone into it. Of late, we see very little of Nirma advertisements. This is apparent from its a dvertising expense as % to sales, which is very low (only 1.54%). ITC is altogether a different story. Cigarettes & other tobacco related products which constitute approx. 85% of its sales, all relate to intoxication or habitual consumption patterns having intense ly brand loyal consumers and thus almost no advertising (surrogate advertising i s done) is needed either to reaffirm the brands or introduce new consumers to th e 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 theyre doing. But while moving faster in to nontobacco FMCG business riding high on its strength of distribution network m atching or surpassing in some cases that of HUL, ITC has started aggressive advertising campaigns (Fiama Di Wills shampoo, Vivel soap, Sunfeast biscuits, ngo snacks etc), directly focusing on marquee brands of HUL like Sunsilk & Lux, incre asing the heat on Britannia for biscuits and taking on Kurkure & 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 & talc, Boroplus cream & talc, Himani Fast Reli ef, Fair & Handsome, Sona Chandi Chawanprash, Menthoplus etc, each of which is a dvertised heavily in the mass media (e.g., TV) with famous & 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 ColgatePalmolive is the market leader. ReckittBenckis er advertises considerably for its brands like Herpic, Mortein, Vanish, Clearasi l, Dettol, Strepsils etc, which is the reason for its high advertising cost as p ercentage of sales.

Marketing Expenses As stated earlier also, marketing expenses here include the following commissions rebates 29 discounts sales promotional expenses on direct selling agents entertainment expenses etc.

Exhibit 3: Marketing Expenses as percentage of Sales

Marketing Expenses as % to Sales 18.00 16.00 15.71 14.00 12.00 10.00 9.51 8.00 7.35 6.00

4.00

2.71 4.10 4.59 2.00 0.00 4.68

0.04 1.01

0.00 0.70 0.32 HUL Nirma Reckitt P&G Godrej Emami Henkel Henkel ITC Palmolive Benckiser Home Hygiene & Health Marketing

Dabur P&G

Colgate-

Here we see that the marketing expenses of HUL are among the lowest in the marke t (only the second lowest after Colgate Palmolive which has very good brand pull for its Colgate toothpastes). This proves that HUL is able to maint ain considerable brand pull through advertising. ITC again comes among the lowes t its tobacco products require very little push and have very high rotations. Also , ITC mostly deals with small retailers and distributors (paancigarette shops owne rs) who have marginal bargaining power. Another revelation is that Henkel, which has zero advertising expenditure, has t he highest marketing expenses among all others. But this strategy to push the prod ucts through the channel partners may not be a good one for Henkel as it might b e 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 Henkels largest business share is in industri

al 30 chemicals (adhesives, sealants e.g., popular brand Loctite; this segment constitut e ~44% of worldwide sales of Henkel) and for B2B, advertising per se is not that much important. For B2B , important is directselling approach, which generally r equires negotiations, volume discounts etc, which are reflected in highest marke ting expenses (as percentage to sales) compared to others. P&G 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 b y the fact that marketing expenses are also relatively higher) or its getting stu ck 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 le vel. As mentioned earlier, both ColgatePalmolive and ReckittBenckiser both enjoys very good brand loyalties and market leadership for their key brands like Colgate too thpastes and Dettol (#1 in antiseptics), Herpic, Mortein etc. This is corroborat ed 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 Sales 8.00 7.00 6.53 6.70 6.00 5.00 4.90 5.16 4.00 3.00 2.00

3.14

2.21 4.19

3.50

2.53 3.81 4.22

2.55 1.00 0.00 HUL Reckitt P&G Godrej Henkel Emami Henkel P&G Nirma Dabur Colgate-

ITC Palmolive Benckiser Home Hygiene & Health Marketing 31

We have seen that T&L plays a very important role for HUL & others who have panIn dian presence in FMCG business. ColgatePalmolive, Emami & ITC has some of the low est distribution expenses (as % to sales figures) & P&G has the highest. HUL is lower in this respect than Nir ma & P&G, but higher than Henkel. This can be explained somewhat from the impact of the variabl e, Time Band of purchase, on the increased transport intensity for HUL in the la st mile for some of the products like household personal care, laundry detergent , branded atta etc in the first & 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 relative ly lower, causing share of transportation costs in the overall cost struct ure to be relatively higher. This implies dispersed manufacturing, locating m anufacturing 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 sect or. Compared to HULs 40 manufacturing plants across India, Nirma, the 2nd largest FMCG major in soaps and detergents category, has 6 manufact uring plants, all located in and around Gujarat. So, transportatio n cost of Nirma, if it tries to cater to panIndian market will be higher. This is supported by the fact that Nirmas higher distribution cost percentage than HUL. For P&G, the same reasons significantly affect its distribution cost which is hi ghest for the group analyzed. 32

8. References 1. B. Joseph Pine, James H. Gilmore (1999), The Experience Economy: Work is Th eatre & Every Business a Stage, Published by Harvard Business Press, 254 pages. 2. 3. 4. HUL Website (http://www.hul.co.in/) HUL CLSA Conference, Investor Presentation (24th Sept., 2008). Reckitt Benckiser Website

(http://www.reckittbenckiser.com/site/RKBR/Templates/Home.aspx?pageid=1) 5. Colgate Palmolive Website

(http://www.colgate.co.in/app/Colgate/IN/HomePage.cvsp) 6. 7. Emami Group Website (http://www.emamigroup.com/Brands) CMIE

8.

Wikipedia