Unilever in India: Business and Growth – Material for study and discussion

Unilever was the world's largest Fast Moving Consumer Goods (FMCG) company with a worldwide revenue of
$55 billion in 2005. It's Indian subsidiary, the Hindustan Unilever Limited (HUL) was the country's largest
FMCG company with combined volumes of about 4 million tonnes and revenues near about $2.43 billion .
HUL's major brands included Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Sunsilk, Clinic,
Pepsodent, Close-up, Lakme, Brooke Bond, Kissan, Knorr-Annapurna, Kwality Wall's etc. These were
manufactured over 40 factories across the country .

In 1931, Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company . Thereafter
the Lever Brothers India Limited and United Traders Limited were established in 1933 and 1935 respectively. In
November 1956, these three companies merged and form HUL. Unilever's share in HUL was 51.55% in 2005
and the remaining of the shareholding was distributed among about 380,000 individual shareholders and
financial institutions. A foray of acquisitions followed thereafter . In 1984, the Brooke Bond joined the Unilever
fold. Lipton was acquired in 1972 and Ponds in 1986 . HUL was following a growth strategy of diversification
always in line with Indian opinions and aspirations.

The economic and political development in the 1990s had marked an inflexion in HUL's and the Group's growth
curve. Economic liberalization permitted the company to explore every single product and opportunity segment,
without any constraints on production capacity. On the other hand, deregulation allowed alliances, mergers and
acquisitions. In 1993, HUL merged with the Tata Oil Mills Company (TOMCO) 1993. In 1995, HUL formed a
50:50 joint venture with another Tata company, Lakme Limited .

The company had also made a string of mergers, acquisitions and alliances in the Foods and Beverages sector.
Some of these were the acquisition of Kothari General Foods (1992), Kissan (1993), Dollops Icecream business
from Cadbury India (1993), Modern Foods (2002), Cooked Shrimp and Pasteurised Crabmeat business of the
Amalgam Group of Companies (2003).

With 12.2% of the world population residing in the villages of India, the country's rural FMCG market had a
huge potential. The Indian FMCG sector was the fourth largest sector in the economy with a market size of
$13.1 billion. The sector was expected to grow by over 60% by 2010. In 2005-2006 the urban India accounted
for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India
accounted for more than 40% consumption in major FMCG categories such as personal care, fabric care, and
hot beverages. The Bid FMCG companies such as HLL, Nirma and ITC joined the foray to tap the huge
potential.

In the 1990s, a local Indian firm, Nirma Ltd. started providing detergents to the rural poor at the lowest cost.
The company had created a business system with a new product formulation, low-cost manufacturing, wide
distribution channel, special packaging and value pricing. After a decade, Nirma became one of the largest
branded detergent makers with a 38% market share and 121% return on its capital employed .

In 2002, ITC set up a network of internet-based kiosks, e-choupals, to help the farmers in their procurement
process. The initiative began with the soya growers in Madhya Pradesh and then expanded to cotton, tobacco,
shrimp etc. Starting with six e-choupals in June 2000, ITC's Internet-based, rural initiative had linked 6,000
Indian villages with around 1,200 e-choupals by 2002. The setting up of each e-choupal entails an investment of
Rs 1-3 lakh .The objectives behind e-choupals was to allow single place procurement and purchase point,
allowing farmers to sell their products directly to ITC on the basis of updated current prices prevailing in the
market. This eliminated middlemen and thus helped ITC to cut its costs.

In 2007, around 34% of the FMCG products sales came from rural areas . The number of households that used
FMCG products in rural India had grown from 13.6 crore in 2004 to 14.3 crore in 2007. This growth was
achieved on an average 1.8% year-on-year growth in the number of households, which use at least one FMCG
product. However, the growth in penetration level for the entire FMCG products was not same. According to
one study by a market research firm IMRB, the monthly consumption of detergents and toilet soaps remained
largely stagnant with a 92% penetration, but that of liquid shampoos grew from 68% in 2004 to 83% in 2007.
These figures revealed a shift towards higher-value products among the rural market, from toothpowder to
toothpaste or from unbranded to branded products. According to the senior project director of IMRB
International, Manoj K Menon, "One of the most significant changes, includes growing preference towards
branded products. For example, in the food and beverages segment, penetration of branded atta has gone up
year-on-year by 8 per cent and branded salt by 3 per cent. The penetration of unbranded atta has decreased by 1
per cent and salt by 3 per cent."

The HLL Marketing Effort: Transition to Rural Market

HUL's competitive advantage generated from three sources. First its strong well established brands, second, its
local manufacturing capacity and supply chain and third its vast sales and distribution system. It was soon felt
that HUL's sales and distribution system which had protected it from competitors would be soon replicated by
its rivals and to maintain its edge, the company had to increase its reach beyond the urban markets. So far the
operations of HUL included more than 2,000 suppliers and associates. The distribution network, consisted of
4,000 stockists, covering 6.3 million retail outlets reaching the entire urban population, and about 250 million
rural consumers.

Typically, the goods produced in each of the HUL's 40 factories were sent to a depot with the help of a carrying
and forwarding agent (CFA). The company had its depot in every state of the country. The CFA was a third
party and got servicing fee for stock and delivery of the products. In each town, there was a redistribution
stockist (RS) who took the goods from the CFA and sell them to retail outlets. By the late 1990s, 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 changed the pattern the customers shop. Large retail
self service shops were established. In the response of these problems, HUL redesigned its sales and distribution
channel and the new system was known as 'diamond model' in the company. At the top end of the diamond,
there were the self service retail stores which constituted 10% of the total FMCG market. The middle, fatter part
of the diamond represented the profit-center based sales team. In the bottom of the pyramid was the rural
marketing and distribution which accounted for 20% of the business.

Almost three-fourth of the total 1.2 billion Indian population resided in the rural areas and majority of them had
a very low per capita income (around 44% of that of urban India) . Urban market had reached the saturation
point, thus changing focus on rural India. In comparison to just 5,161 towns in India there are 6,38,365 villages
in India [Exhibit I]. Moreover, more than 70% of India's population lived in villages and made a big market for
the FMCG industry because of increasing disposal incomes and awareness level.

Exhibit I
Distribution of Villages in India

Source: Kash Rangan, Sehgal Dalip et. Al., "Global Poverty: Business Approaches and Solutions",
http://www.hbs.edu/socialenterprise/pdf/3-Rangan&Rajan-Presentation.pdf

When HLL shifted to the rural India, it faced many problems. In contrast with a low per capita income
comparative to the urban citizens, there were some areas with enough money but their awareness level and
consumerism was very low. Secondly, rural FMCG demand was depended upon agricultural situation which
was again depended upon monsoon. Transportation was also a major hindrance. Many of the rural areas were
not connected by rail transport. The Kacha roads were unserviceable during the monsoon and interior villages
get isolated. Besides transportation, there was a problem of distribution and communication facilities such as
telephone, fax and internet. Moreover, the lives in rural areas were still governed by ethnicity and traditions and
people did not simply get used to new practices. For example, even rich and educated class of farmers does not
wear jeans or branded shoes. The buying decisions in villages were slow and delayed. They wanted to give a
trial and buy only after being satisfied. And, finally the poor illiterate villagers viewed experience more
important than formal education and they valued sales people who could provide practical solutions to their
problems.

HLL approached the rural market with two criteria - the accessibility and viability [Exhibit II]. Around 40% of
the accessible rural market had high business potential. To service this segment, HLL appointed a common
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, HLL assigned a retail stockist who was responsible to access all
the villages at least once in a fortnight and send stocks to those markets. This enables HLL to influence the
retailers stocks and quantities sold through credit extension and trade discounts. HLL launched this Indirect
coverage (IDC) in 1960s.

To cater the needs of the inaccessible market with high business potential HLL initiated a Streamline initiative
in 1997. HLL appointed rural distributors and Star Sellers. The star seller purchased goods from rural
distributors and distributed them to retailers in small villages using the local mean of transport. In this way
around 35% of the inaccessible rural market came under the control of HLL. But a still untapped market - the
inaccessible but low business potential market was left outside. The size of this untapped market was estimated
to be around 500,000 villages with a population over 500 million . At this stage, Project Shakti was conceived.

Exhibit II
HLL's Approach to Rural Market

Low Business Potential High Business Potential

Accessible Markets Indirect Coverage (25%) Direct Coverage (40%)
Inaccessible Markets Space for Shakti Streamline (35%)
Source: V. Kasturi Rangan Rohithari Rajan, "Unilever in India: Hindustan Lever's Project Shakti--Marketing
FMCG to the Rural", http://www.caseplace.org/d.asp?d=244 - 27k

Project Shakti

HLL soon realized that although it was enjoying a greater penetration in the rural market when compared with
its competitor such as Nirma and ITC, its direct reach was restricted to only 16% . The FMCG giant was
desperate to increase this share. HUL saw its dream fulfillment in the vast Indian rural market. The company
was already engaged in rural development with the launch of the Integrated Rural Development Programme in
1976 in the Etah district of Uttar Pradesh. This program was in tandem with HUL's dairy operations and covered
500 villages in Etah. Subsequently, the company introduced similar programs in adjacent villages. These
activities mainly aimed at training farmers, animal husbandry, generating alternative income, health & hygiene
and infrastructure development. The main issue in rural development was to create income-generating prospects
for the poor villagers. Such initiatives, linked with the company's core business, became successful and
sustainable and proved to be mutually beneficial to both the company ant its rural customers. However, much
remained to be done. Project Shakti was conceived.

Following the pioneering work carried out by Grameen Bank of Bangladesh , Self Help Groups (SHGs) of rural
women were formed by several institutions, NGOs and government bodies in villages across India. This group
of usually 15 members contributed a small amount of money to a common pool and then offered a micro-credit
to a member of the group to invest in a commonly approved economic activity. Partnering with these SHGs,
HLL started its Project Shakti in Nalgonda district of Andhra Pradesh in 50 villages in the year 2000. The social
side of the Project Shakti was that it was aimed to create income-generating capabilities for underprivileged
rural women, by providing a sustainable micro enterprise opportunity, and to improve rural living standards
through health and hygiene awareness. Most SHG women viewed Project Shakti as a powerful business
proposition and are keen participants in it. There after it was extended in other states with the total strength of
over 40,000 Shakti Entrepreneurs.

HLL offered a wide range of products to the SHGs, which were relevant to rural customers. HUL invested
significantly in resources who work with the women on the field and provide them with on-the-job training and
support. HUL provided the necessary training to these groups on the basics of enterprise management, which the
women need to manage their enterprises. For the SHG women, this translated into a much-needed, sustainable
income contributing towards better living and prosperity. Armed with micro-credit, women from SHGs become
direct-to-home distributors in rural markets [Exhibit III].

Exhibit III
Structure of HLL's Market Reach in India

Source: Kash Rangan, Sehgal Dalip et. Al., "Global Poverty: Business Approaches and Solutions",
http://www.hbs.edu/socialenterprise/pdf/3-Rangan&Rajan-Presentation.pdf

Shakti: How it works

In general, a member from a SHG was selected as a Shakti entrepreneur, commonly referred as 'Shakti Amma'
received stocks from the HLL rural distributor. After trained by the company, the Shakti entrepreneur then sold
those goods directly to consumers and retailers in the village. Each Shakti entrepreneur usually serviced 6-10
villages in the population strata of 1,000-2,000 people with 4-5 major brands of HLL - Lifebuoy, Wheel,
Pepsodent, Annapurna salt and Clinic Plus. Apart from these, other brands included Lux, Ponds, Nihar and 3
Roses tea. The Shakti entrepreneurs were given HLL products on a `cash and carry basis.' However, the local
self-help groups or banks provided them micro credit wherever required. According to Dalip Sehgal, Executive
Director, New Ventures & Marketing Services, HLL Project Shakti was adding up to 15% of HLL sales in rural
Andhra Pradesh. He further asserted that given the largeness of the country and backwardness of its women,
Project Shakti-like endeavor would place everybody in a win-win situation.

I-Shakti: Crossing the Border

Encouraged by the goodwill and success of Project Shakti, in August 2003, HLL launched an Internet-based
rural information service, called I-Shakti, in Andhra Pradesh, in association with the Andhra Pradesh
Government's Rajiv Internet Village Programme. I-Shakti was an IT-based rural information service to provide
vital information to the rural people in fields like agriculture, education, vocational training, health, hygiene and
the like [Exhibit IV]. The objective behind the i-Shakti model was to give need based demand driven
information and services in the villages.
The i-Shakti kiosk was operated by the Shakti Entrepreneur. This was expected to strengthen their relationship
with their customers. HUL expected that this would improve the productivity of the rural community and unlock
economic and social progress.

Exhibit IV
A snapshot of the 'i-Shakti' website

Source: "HUL Shakti-Changing lives in rural India.", http://www.hllshakti.com/sbcms/temp1.asp?

pid=46802256 - 41k

I-Shakti was based on an interactive discussion technology developed & patented by the Unilever Corporate
Research Team, U.K. The system enabled an in-depth understanding of each user needs and thereby improved
the quality of services offered to them. The APonline , had tied up with i-Shakti to launch various services.
Moreover, through i-shakti, the ICICI Bank and HUL jointly provided various financial products and services
such as life and general insurance, investment products (Equity, Mutual Funds, Bonds), ICICI Bank Pure Gold
(gold coins), Personal Credit, Rural Savings Accounts and Remittances to the rural customer.

Redefinition Rural Distribution: Changing Lives

Having successful in Nalgonda, in 2003 HLL planned to broaden Shakti to a 100 districts in Madhya Pradesh,
Gujarat and UP. There were other plans such as to allow other companies (except HLL's competitors) such as
Nippo, TVS Motor for mopeds, insurance companies for LIC policies to get onto the Shakti network to sell their
stocks. Sehgal was looking proud when he announced, "We wanted to first stabilise the project before we can
look at other companies. It requires somebody with scale and size to build a platform and then invite other
companies onto this platform." He further emphasized that Shakti was creating a win-win partnership between
HLL and its consumers.

There were about 4.36 lakh women SHGs in AP with almost 58.29 lakh poor women. AP alone had about half
of the SHGs of the country. By 2005 the SHGs had mobolised Rs 1500 crore had mobilised as corpus. The rural
women organised themselves into `thrift and credit' groups with a saving of Re.1 a day which created a fund of
more than Rs 800 crore. While the savings was there among the SHGs, there was no channel of investment.
HLL tapped this huge overlooked network to launch Project Shakti. HLL has able to provide a window of
prospect to invest and earn.

The impact of HLL was not all of a sudden. HLL witnessed 15% incremental sales from the villages of AP,
which accounted 50% of the total sales of HLL products in AP. Market analysts were perceiving a huge
potential in the rural foray of HLL. Nikhil Vora, Sr. Vice President of research group ASK Raymond James
believed that if there was one company that could take on the onus of developing the rural markets, it was HLL.
He further continued, "HLL contributes 20 per cent of the total FMCG business in the country. So, clearly, the
onus is on HLL to grow the market. Returns may not happen in the next five years, but a lot of consumer
understanding and insights comes from an exercise like Project Shakti, which in turn can lead to product
innovation."

HLL acknowledged that for Project Shakti to be successful for the company's rural penetration, dealers and
communicators must be well trained. It was unclear how dealers would perform in an expanded infrastructure.
Although HLL's rural initiatives incurred huge costs to the company, it was expected that with the monsoon
revival and greater rural incomes could decline the payback period for projects like Shakti. Moreover, the
decreasing brand loyalty among urban consumers rural market had become an imperative. According to the
Concurs K.N. Siva Subramanian, Sr. Vice President, Franklin Templeton India Ltd, "The (HLL) management
had recognized the impending saturation of the urban markets some time back and launched aggressive plans to
capture the rural markets. However, a slowdown in the agricultural sector resulted in rural incomes remaining
flat and affecting sales. We believe that by targeting lower price points and further expanding the distribution
network, companies can tap the potential of rural markets. Initiatives like Project Shakti will help them in
establishing and consolidating their base in rural markets."

HLL would have to determine whether Project Shakti could be repeatable in other countries. The Indian family
structure and village interaction provide a unique diffusion mechanism that is an effective vehicle for Shakti.
Whether this model could be successfully implemented in other countries must be further explored. Moreover, it
need to find out whether the Project Shakti or e-choupal like initiatives could be increased. There was no doubt
that the regional brands, or even larger FMCG companies, did not have the kind of distribution reach that HLL
had established and in the long run, that could prove a winner for HLL.

Some quotes:

"Our partnership with HUL offers the rural entrepreneur a profitable business model while operating i-Shakti
kiosks. Also, low cost delivery and customized products will result in higher benefit through enhanced
economic gains for the rural consumers." ~ Mr. Nachiket More, Executive Director, Wholesale Banking Group
ICICI

"There's incredible potential in rural markets. That's where the growth will come from." ~ Sharat Dhall,
Hindustan Lever's director of new ventures and marketing services

Sankaramma, the leader of the local Kanaka Durga self-help Group (SHG) belongs to K. Thimmapuram
village's Muddaner Mandal in the Kadapa district of Andhra Pradesh. The village has 350 households with a
total population of 1200. Sankaramma's 5 hectares of agricultural land was not sufficient for six member family
due to severe drought in the region. She started a business in April 2003 with the Hindustan Unilever Ltd. By
2005, she had a regular monthly turnover of Rs.10,000 per month. Initially she sold door to door, but thereafter
the customers started visiting her home for products. She sees Project Shakti as a mean for the bright futures of
her children. Project Shakti also enabled her to provide mid-day meals at the primary school in her village.
Today, Sankaramma has become a key development figure in her village.

Usha Sarvatai, a mother of 2, traveled 32 km everyday to work. Her husband's income was not sufficient for the
two children and their old parents. But the long distance and the odd timings of the job forced Usha to quit the
job. Then she got a call from the Government dept. to attend a meeting, convened by Project Shakti. Usha
became a Shakti Amma and started a new venture. In a short span the good relationships she developed with the
villagers helped her do good business. She says, "I am happy fulfilling my family's requirements and people
give me a lot of respect today." And she is now very eager to grow her business in the years to come.

The list does not end here. Hindustan Lever Ltd, a subsidiary of Unilever is counting on thousands of women
like Sankaramma and Usha Sarvatai to sell its products to the rural consumers it couldn't reach before. By 2005,
around 13,000 poor women were selling the company's products in 50,000 villages in India's 12 states and
contributed for 15% of the company's rural sales in those states . The women typically earned between $16 and
$22 per month , often doubling their household income which was used to educate their children. Overall,
around 30% of Hindustan Lever's revenue came from the rural markets in India