HUL’s Digital Sales Take A Leap Amid Channel Conflicts
The share of digital channel continues to grow for Hindustan Unilever Ltd. even as India’s largest consumer goods maker and its peers face a pushback from the backbone of the nation’s retail supply chain.
The maker of Lifebuoy soaps and Dove shampoos generated more than 15% of its demand digitally in the quarter ended September, according to its investor presentation. That compares with 10% in the June quarter.
A five-percentage-point increase in a quarter is a significant shift for a company with annual sales of Rs 45,000 crore.
But it’s been in the works for half a decade.
HUL launched its ‘Reimagining HUL’ digital transformation programme nearly five years ago. Besides building an agile supply chain, it was aimed at creating new channels to reach the consumer. Through e-commerce platforms, online business-to-business bulk suppliers and by also selling directly to customers. That paid off when the pandemic struck, accelerating India’s digital shift.
“HUL is clearly a front-runner in this as they had started a lot of work on their apps for kiranas (mom-and-pop stores) and the end consumers pre-Covid,” said Rajat Wahi, consumer business expert and partner at Deloitte Touche Tohmatsu India LLP. “They have further leveraged digital platforms to enable ordering, shipments, promotions and marketing directly, while continuing to support their distributors.”
Still, channel conflicts are emerging.
Distributors, who dominate India's retail supply chain with 85% share, are already pushing back against consumer goods makers selling to online business-to-business platforms such as Udaan. HUL's own partnership with JioMart, billionaire Mukesh Ambani’s marriage of online and offline retail by co-opting neighbourhood stores, is also facing flak.
The “unethical and predatory” practice of new-age e-commerce platforms to establish monopoly destroys an age-old retail network, the All India Consumer Products Distributors Federation said in its letter to companies.
HUL declined to comment on BloombergQuint’s specific queries on rising share of digital channel revenue.
Sanjiv Mehta, chairman and managing director at the maker of Surf Excel, however, said in a post-earnings call that the company is only “making the chain much smoother".
To strike a balance between the channels, HUL has been launching more packs and sachets across the general trade—or a network of small retailers fed by distributors—to make products more accessible. For modern trade or hypermarkets and supermarkets, the company is bringing large packs and multi and is expanding its portfolio sold through e-commerce, he said.
Yet, general trade will remain the dominant trade channel, driven by rural areas as distributors evolve with the help of technology, according to a recent Deloitte report. But it’s expected to lose market share as new distribution models gain.
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The business-to-business Shikhar app serves retailers at the click of a button, according to HUL.
“This app is a real game changer for us,” Mehta said. “If we were to spin it off as a separate entity, it would become a unicorn overnight.”
The app is available in more than 6.5 lakh stores with its adoption only rising in urban and semi-urban areas but going down in rural areas. However, it isn’t introduced as a substitute to other channels but as a “complementary system”, Mehta said.
Using the app, retailers can choose what they need from a wide catalogue of products across HUL brands and then place their orders directly to the company. They can also see the different offers and schemes that the company is offering. The demand is then fulfilled through distributors.
HUL pitches the app to retailers as "a customised solution for each store not based on what they sell but what they should sell".
Instead of keeping 20 pieces of three sizes, they may be able to keep 20 pieces of three variants or maybe seven or eight variants, Mehta said.
"With more frequent fill-up, they (the retailers) would be able to operate with much smaller inventory,” he said. “On the other hand, with higher assortment, the throughput would go up."
This will reduce the inventory refill time from three or four days after placing the order to the very next day, pushing more variants on the shelf space, he said.
The app, however, does not merely streamline inventory.
Typically, a retailer borrows either from non-banks or from the market at a much higher rate. The app offers a credit facility. "We have tied up with SBI (State Bank of India), which allows us to give them credit at a rate much lower than the market,” Mehta said. “With this, we are bringing in more efficiency into the system, which will make a difference to our growth.”
HUL has a dedicated direct-to-consumer platform for four of its premium beauty brands: Lakme, Simple, Love Beauty and Planet, and Dermalogica.
"The D2C platform of Lakme gets more than two million visitors per month and, together with the e-commerce, it contributes to more than 30% of the brand turnover," Mehta said.
The consumer goods company's multi-brand platform UShop continues to gain more traction, especially from first-time shoppers since it went live in Mumbai and Delhi earlier this year. The web store sells 24 out of its 50-plus household brands including Vim, Ponds, Horlicks, Kissan and Lifebuoy. It also helps HUL get key customer insights.
Selling directly to consumers, however, is fraught with challenges for consumer goods makers.
“E-commerce margins are slim, and shipping and warehousing costs are higher due to last mile delivery and a high rate of product returns,” said the Deloitte report. Increased cost of advertising along with the high cost of last-mile deliveries as a percentage of bill value makes the proposition of the D2C channel less lucrative for fast-moving consumer goods companies, it said.
But HUL is scaling up UShop by adding more cities.
The Covid-19 pandemic prompted Indians to buy more online. HUL thinks the habit will stick even after the pandemic as consumers get used to convenience. The company plans to tap 50 million digital-native new consumers.
The e-commerce channel contributes 5-6% to sales and the profitability is higher than modern trade (supermarkets and hypermarkets), said the HUL chief. For instance, the company has seen its purifiers register a double-digit growth led by an uptick in e-commerce penetration during the pandemic.
In another initiative, the company has tied up with Swiggy, Zomato and Dunzo to provide home delivery of ice cream.
“It is doing extremely well,” said the HUL’s management.
Premium Digital Play
HUL is betting on premiumisation of digital channels to drive growth as its high-margin discretionary brands begin to see a turnaround.
Premium brands performed exceptionally as mobility returned in July-September, Mehta said. The company has also set up an incubator to boost innovation. "This, we call the Premium Beauty Unit, within the HUL ecosystem," said Mehta. It launched sulfate-free hair care range with onion and apple cider vinegar under its Love Beauty and Planet brand and Simple-branded booster serums.
It’s not just about launching a new product but also doing so in minimal time. And the company is building a team to achieve that.
“For the premium beauty unit, we have brought talent from outside who are digitally-savvy. We have also pulled in people from within who are very entrepreneurial and even our remuneration system for them… their incentive is very different,” he said.
Premiumisation trend was visible in the second quarter.
The beauty and personal care segment saw a growth of 10.3%, driven by recovery in discretionary categories like skin care and colour cosmetics.
Premium brand Surf Excel grew at a faster pace.
The discretionary category, constituting 12% of the product portfolio, grew 31% year-on-year and is closer to pre-2019 sales.
In September 2020, the discretionary product mix stood at 63% of the pre-pandemic month of September 2019, HUL said. A year later in 2020, it's at 103%.
"It has definitely picked up and is a very attractive category for us,” said Mehta. This improvement, he said, is serving as a tailwind, partly alleviating the input cost pressures.