12950828 distribution management of hindustan unilever ltd

7/31/2019 12950828 Distribution Management of Hindustan Unilever Ltd

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A St udy on D ist r i bu t i on

Managem en t o f

H indu st an Un i l eve r Lim i t ed

Submitted To

Prof.S Govindrajan

By

PRADEEP NARAIN g08075

SANJEEV KUMAR JHA g08086

SATADRU BAGCHI g08088

SOUMITRA DHALI g08090

TARUN KUMAR SAHA g08095


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2

Content

Page

1.Introduction

Hindustan

Unilever

Limited

3

2. DistributionNetworkofHUL2.1.EvolutionoverTime 42.2.DetailOverview 5

3. ChannelDesign 124. InitiativestakentoImprovetheDistributionNetwork 145. FieldForceManagement 166. AnalyticalFramework 187. FinancialAnalysis 268. References 33


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3

1. Introductionr Hindustan Unilever Limited

HindustanUnilever

Limited

(HUL),

formerly

Hindustan

Lever

Limited

(it

was

renamed

in

late

June

2007asHUL),isIndia'slargestFastMovingConsumerGoodscompany,touchingthelivesoftwoout

of three Indianswithover20distinct categories inHome&PersonalCareProductsand Foods&

Beverages.Theseproductsendowthecompanywithascaleofcombinedvolumesofabout4million

tonnesandsalesofnearlyRs.13718crores.

HUL isalsooneof thecountry's largestexporters; ithasbeen recognisedasaGoldenSuperStar

TradingHousebytheGovernmentofIndia.

Themissionthat inspiresHUL'sover15,000employees, includingover1,300managers, isto"add

vitalitytolife."HULmeetseverydayneedsfornutrition,hygiene,andpersonalcarewithbrandsthat

helppeoplefeelgood,lookgoodandgetmoreoutoflife.ItisamissionHULshareswithitsparent

company,Unilever,whichholds52.10%of theequity.The restof the shareholding isdistributed

among360,675individualshareholdersandfinancialinstitutions.

HUL's brands like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Sunsilk, Clinic,

Pepsodent,Closeup,Lakme,BrookeBond,Kissan,KnorrAnnapurna,KwalityWall'sarehousehold

namesacross the countryand spanmany categories soaps,detergents,personalproducts, tea,

coffee,brandedstaples,icecreamandculinaryproducts.Theseproductsaremanufacturedover40

factoriesacrossIndia.Theoperationsinvolveover2,000suppliersandassociates.HUL'sdistribution

networkcomprisesabout4,000redistributionstockists,covering6.3millionretailoutletsreaching

theentireurbanpopulation,andabout250millionruralconsumers.

WehaveanalyzedthedistributionnetworkofHULfromthefollowingaspects:

1. EvolutionofHULsdistributionnetwork2. Transportation&Logistics3. ChannelDesign4. Initiativestakenforchannelmembermanagement.5. Fieldforcemanagement6. AnalyticalFramework7. FinancialAnalysis


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2. Distribution Network of HUL

2.1. Evolution over Time

TheHULsdistributionnetworkhasevolvedwithtime.ThefirstphaseoftheHULdistribution

networkhad

wholesalers

placing

bulk

orders

directly

with

the

company.

Large

retailers

also

placed

directorders,whichcomprisedalmost30percentofthetotalorderscollected.Thecompany

salesmangroupedalltheseordersandplacedanindentwiththeHeadOffice.Goodsweresentto

thesemarkets,withthecompanysalesmanastheconsignee.Thesalesmanthencollectedand

distributedtheproductstotherespectivewholesalers,againstcashpayment,andthemoneywas

remittedtothecompany.

The focus of the second phase,which spanned the decades of the 40s,was to provide desired

productsandqualityservicetothecompany'scustomers.Inordertoachievethis,onewholesalerin

eachmarketwasappointedasa"RegisteredWholesaler,"astockpointforthecompany'sproducts

inthatmarket.Thecompanysalesmanstillcoveredthemarket,canvassingforordersfromtherest

ofthetrade.HethendistributedstocksfromtheRegisteredWholesalerthroughdistributionunits

maintained by the company. The Registered Wholesaler system, therefore, increased the

distributionreachofthecompanytoalargernumberofcustomers.

Thehighlightofthethirdphasewastheconceptof"RedistributionStockist"(RS)whoreplacedthe

RWs.TheRSwas requiredtoprovidethedistributionunitstothecompanysalesman.Thesecond

characteristicof thisperiodwas theestablishmentof the"CompanyDepots" system.This system

helpedintransshipment,bulkbreaking,andasastockpointtominimisestockoutsattheRSlevel.In

therecentpast,asignificantchangehasbeenthereplacementoftheCompanyDepotbyasystemof

thirdpartyCarryingandForwardingAgents(C&FAs).TheC&FAsactasbufferstockpointstoensure

that stockoutsdidnot takeplace.TheC&FA systemhasalso resulted in cost savings in termsof

directtransportation

and

reduced

time

lag

in

delivery.

The

most

important

benefit

has

been

improvedcustomerservicetotheRS.

The role performed by the Redistribution Stockists includes: Financing stocks, providing

warehousing facilities, providing manpower, providing service to retailers, implementing

promotional activities, extending indirect coverage, reporting sales and stock data, demand

simulationandscreeningfortransitdamages.


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2.2. Detail Overview

ThedistributionnetworkofHUL isoneofthekeystrengthsthathelpittosupplymostproductsto

almostanyplaceinthecountryfromSrinagartoKanyakumari.Thisincludes,maintainingfavorable

trade relations, providing innovative incentives to retailers and organizing demand generation

activitiesamongahostofotherthings.EachbusinessofHULportfoliohascustomizedthenetwork

tomeet itsobjectives.Themostobvious functionofproviding the logistics support is to get the

companysproducttotheendcustomer.

Distribution System of HUL

HUL's products, are distributed through a network of 4,000 redistribution stockists, covering 6.3

millionretailoutletsreachingtheentireurbanpopulation,andabout250millionruralconsumers.

Thereare35C&FAs in the countrywho feed these redistribution stockists regularly.The general

tradecomprisesgrocerystores,chemists,wholesale,kiosksandgeneralstores.HindustanUnilever

provides tailor made services to each of its channel partners. It has developed customer

management and supply chain capabilities for partnering emerging selfservice stores and

supermarkets.Around2,000suppliersandassociatesserveHULs40manufacturingplantswhichare

decentralizedacross2millionsquaremilesofterritory.


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(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 rural sales

organisation.Theteamcomprisesanexclusivesalesforceandexclusiveredistributionstockists.The

teamfocuses

on

building

superior

availability

of

products.

In

rural

India,

the

network

directly

covers

about50,000villages,reaching250millionconsumers,through6000substockists.

(Fig. 2 Rural Distribution Model of HUL)

HULapproached the ruralmarketwith twocriteria theaccessibilityandviability.To service this

segment, HUL appointed a Redistribution stockist who was responsible for all outlets and all

businesswithinhisparticulartown.Inthe25%oftheaccessiblemarketswithlowbusinesspotential,

HUL

assigned

a

sub

stockist

who

was

responsible

to

access

all

the

villages

at

least

once

in

a

fortnight

andsendstockstothosemarkets. Thissubstockistdistributesthecompany'sproductstooutletsin

adjacentsmallervillagesusingtransportationsuitabletointerconnectingroads,likecycles,scooters

ortheageoldbullockcart.Thus,HindustanUnileveristryingtocircumventthebarrierofmotorable

roads. The company simultaneously uses the wholesale channel, suitably incentivising them to

distributecompanyproducts.Themostcommonformoftradingremainsthegrassrootsbuyandsell

mode.ThisenablesHULtoinfluencetheretailersstocksandquantitiessoldthroughcreditextension

and trade discounts. HUL launched this Indirect Coverage (IDC) in 1960s.Under the Indirect


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Coverage(IDC)method,companyvanswerereplacedbyvansbelongingtoRedistributionStockists,

whichservicedaselectgroupofneighbouringmarkets.

Distribution at the Urban centres:

Distributionof goods from themanufacturing site toC& Fagents takeplace througheither the

trucksorrailroadsdependingonthetimefactorfordeliveryandcostoftransportation.Generally

themanufacturingsite is locatedsuchthat itcoversabiggergeographicalsegmentof India.From

theC&Fagents,thegoodsaretransportedtoRSsbymeansoftrucksandtheproductsfinallymake

thelastmilebasedonthelocalpopularandcheapmodeoftransport.

New distribution channels

Project Shakti

Thismodel creates a symbiotic partnership betweenHUL and its consumers. Started in the late

2000,ProjectShaktihadenabledHindustanLevertoaccess80,000ofIndia's638,000villages.HUL's

partnership with Self Help Groups(SHGs) of rural women, is becoming an extended arm of the

company's operation in rural hinterlands. Project Shakti has already been extended to about 12

states Andhra Pradesh, Karnataka, Gujarat, Madhya Pradesh, Tamil Nadu, Chattisgarh, Uttar

Pradesh, Orissa, Punjab, Rajasthan, Maharashtra and West Bengal. The respective state

governments and severalNGOs are actively involved in the initiative. The SHGs have chosen to

partner with HUL as a business venture, armed with training from HUL and support from

governmentagencies concernedandNGOs.Armedwithmicrocredit,women fromSHGsbecome

directtohomedistributorsinruralmarkets.

Themodelconsistsofgroupsof(1520)villagersbelowthepoverty line(Rs.750permonth)taking

microcredit frombanks,andusing that tobuyourproducts,which theywill thendirectly sell to

consumers.Ingeneral,amemberfromaSHGselectedasaShaktientrepreneur,commonlyreferred

as'ShaktiAmma'receivesstocksfromtheHULruraldistributor.Afterbeingtrainedbythecompany,

the Shakti entrepreneur then sells those goodsdirectly to consumersand retailers in the village.

EachShaktientrepreneurusuallyservice610villages in thepopulationstrataof1,0002,000.The

ShaktientrepreneursaregivenHULproductsona`cashandcarrybasis.'

ThefollowingtwodiagramsshowtheProjectShaktimodelasinitiatedbyHUL.


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Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a

Streamline initiative in1997.ProjectStreamline isan innovativeandeffectivedistributionnetwork

forruralareasthatfocusesonextendingdistributiontovillageswithlessthan2000peoplewiththe

help of rural substockists/Star Sellers who are based in these very villages. As a result, the

distributionnetworkdirectlycoversasofnowabout40percentoftheruralpopulation.

UnderProjectStreamline, thegoodsaredistributed fromC&FAgents toRuralDistributors (RD),

whohas1520ruralsubstockistsattachedtohim.Eachofthesesubstockists/starsellersislocated

in a ruralmarket. The substockists then perform the role of driving distribution in neighboring

villages using unconventional means of transport such as tractor and bullock carts. Project

Streamline being a cross functional initiative, the Star Seller sells everything from detergents to

personalproducts.

Higherqualityservicing, intermsof frequency,creditand fulllineavailability, istobeprovidedto

ruraltradeaspartofthenewdistributionstrategy.

Thediagram

in

the

next

page

shows

the

model

of

Project

Streamline.


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Hindustan Lever Network (HLN)

It is thecompany'sarm in theDirectSellingchannel,oneof the fastestgrowing in India today. It

alreadyhas

about

several

lakh

consultants

all

independent

entrepreneurs,

trained

and

guided

by

HLN'sexpertmanagers.HLNhasalreadyspreadtoover1500townsandcities,covering80%ofthe

urbanpopulation,backedby42officesand240 service centresacross the country. Itpresents a

rangeofcustomisedofferingsinHome&PersonalCareandFoods.

TheNewCompensationplan forHLNpartnersprovidesnew excitingwaysofearning substantial

income in addition to offering rewards like revenue sharing through the innovative concept of

pools

Mother Depot and Just in Time System

Inordertorationalisethelogisticsandplanningtask,aninnovativestephasbeentheformationof

theMotherDepotandJustinTimeSystem(MDJIT).CertainC&FAswereselectedacrossthecountry

to actasmotherdepots. Eachof themhas aminimumnumberof JITdepots attached for stock

requirements.AllbrandsandpacksrequiredforthesetofmarketswhichtheMDandJITsservicein

a given area are sent to the mother depot by all manufacturing units. The JITs draw their

requirementsfromtheMDonaweeklyorbiweeklybasis.

Leveraging Information technology

HULcustomersareservicedoncontinuousreplenishment.ThisispossiblebecauseofITconnectivity

across theextended supply chainof about2,000 suppliers,80 factories and 7,000 stockists.This

sophisticatednetworkwith its voice anddata communication facilitieshas linkedmore than 200

locationsalloverthecountry,includingtheheadoffice,branchoffices,factories,depotsandthekey

redistributionstockists.TheyhavealsocombinedbackendprocessesintoacommonSharedService

infrastructure,which

supports

the

units

across

the

country.

All

these

initiatives

together

have


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enhanced operational efficiencies, improved the service to the customers and have brought us

closertothemarketplace.

RS Net Initiative:

TheRSNetinitiative,launchedin2001,aimsatconnectingRedistributionStockists(RSs)throughan

internetbasedsystem. ItnowcoversstockistsoftheHome&PersonalCarebusinessandFoods&

Beveragesincloseto1200townsandcities.Togethertheyaccountforabout80%ofthecompany'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

secondarysalesandoptimisesRSsordersandinventoriesonadailybasisthroughonlineinteraction

on orders, despatches, information sharing and monitoring. The ITpowered system has been

implementedto

supply

stocks

to

redistribution

stockists

on

acontinuous

replenishment

basis.

Today, the sales systemgets toknoweverydaywhatHUL stockistshave sold toalmostamillion

outletsacrossthecountry.InformationonsecondarysalesisnowavailableonRSNeteveryday.

RSNet ispartofProjectLeap.ProjectLeapbeginswiththesupplierrunsthroughthefactoriesand

depotsandreachesuptotheRSs.ThisensuresHULsgrowthbyensuringthattherightproduct is

availableat the rightplace in the rightquantitiesandat the right time in themostcosteffective

manner. Leap also aims at reducing inventories and improving efficiencies right through the

extendedsupplychain.

RSNethascomeasaforcemultiplierforHULWay,thecompany'sactionplantonotonlymaximise

thenumberofoutlets reachedbutalso toachieve leadership ineveryoutlet.RSNethasenabled

stockists toplaceordersonaContinuousReplenishmentSystem.This in turnhasunshackled the

fieldforcetosolelyfocusonsecondarysalesfromthestockiststoretailersandmarketactivation.It

hasalsoenabledRSstoprovide improvedservicetoretailoutlets.Simultaneously,HUL isservicing

theruralmarket,keyurbanoutlets,andthemoderntradeasasingleconcern.

Adexa iCollaboration suite

In 2000, HUL identified improved supply chain management as a critical business priority and

launched a comprehensive initiative, Project Leap, tasked with increasing supplier/distributor

responsiveness,reducing inventorybuffers,andoptimizingplanningandscheduling.HULchosethe

AdexaiCollaborationsuiteforfacilitatingcentralizedmonitoringoftheSCM,livecustomer/supplier

collaboration,and integratingdemandanddistributionplanningwithproduction scheduling.With

theaggregated

view

of

data

provided

by

the

iCollaboration

suite,

HUL

was

able

to

combine

sales

and


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distributioneffortsonthediverseproductlines,whichresultedinsignificantsavingsonthecostside

for inventoriesanddistribution.HULupdates inventorypositions, shipmentsandcustomerorders

onadailybasiswiththesesoftwarepackagesandcangetapulseonthemarketrealtime.

(Fig.

3

HULs

Turnover

Compared

with

Competitors,

2006)

(Fig.4

HULs

Market

Leadership

across

various

FMCG

Categories)


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3. Channel Design

HindustanLeverLimited(HUL)hastwotypesofchannelselling

i. Regular(traditional)retailchannel,ii.

Direct

Selling

Channel

in

the

name

of

Hindustan

Lever

Network

(HLN).

HUL has a well entrenched high distribution model which comprises of C&FAs, Redistribution

Stockists,wholesalersandretailers(asshownearlier).HindustanUnilever'sdistributionnetwork is

recognizedasoneofitskeystrengths.ItsfocusesonProductavailability,Brandcommunication,and

higherlevelsofbrandexperience.

HULs Sales Breakrup through different channels:

Sales Break-up Through Different Channels

7%

60%

33%

Modern Retail Urban General Trade Rural Areas

Channel Structure (Special Focus is on Jamshedpur)

Typically,thegoodsproducedineachoftheHUL's40factoriesaresenttoadepotwiththehelpofa

carryingandforwardingagent(C&FA).Thecompanyhasitsdepotineverystateofthecountry.The

C&FAis

athird

party

and

gets

servicing

fee

for

stock

and

delivery

of

the

products.

In

each

town,

thereisatleastaredistributionstockist(RS)whotakesthegoodsfromtheC&FAandsellsthemto

retailoutlets. In Jharkhand theC&FA is inRanchiand Jamshedpur is servicedby3Redistribution

StockistsatSakchi(M/sOmPrakashAgarwal),BistupurandParsudih.

TheHULmanagementrealizedcertainproblemswiththeexistingsalesmodel.First,themodelwas

not viable for small townswith small population and small business.HUL found it expensive to

appointone stockistexclusively foreach town. Secondly, the retail revolution in the countryhas

changedthepatternthecustomersshop.Largeretailselfserviceshopsarebecomingcommonplace.


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In response of these problems, HUL redesigned its sales and distribution channel and the new

systemisknownas'diamond model'inthecompany.Atthetopendofthediamond,therearethe

selfserviceretailstoreswhichconstitute10%ofthetotalFMCGmarket.Themiddle,fatterpartof

thediamondrepresentstheprofitcenterbasedsalesteam.Inthebottomofthepyramidistherural

marketing and distribution which accounts for 20% of the business. As a result of the new

distributionplanthecompanyhasplannedtoreducethenumberofRSinsmalltowns.

RedistributionStockists:

TotalnumberofRSinJamshedpur=3(atSakchi,Bistupur,Parsudih). Thisisgoingtobereducedto

onlyonewitheffectfromnextmonthofthisyear.

Sales Margin: 4.76% which includes cash discount, unloading expenses from depot,distribution

expenses

to

retailers,

incentive

schemes

&

other

incidental

expenses.

Modesoftransportused:Rickshaw,tempo. Incentiveschemes:Before2000holidaypackagesandtoursbutafter2000nononmonetary

incentiveforRS.

Software systems and Information System: UNIFY 8.3 (Developed by IBM & CMC). Thissoftwareneedstobesynchronizeddailyandthesystemupdatesanyinformation/incentive

schemes/salesfiguresetctoandfromthecommonsharedplatform.

Areas

of

Operations:

Marked

for

each

of

the

RS.

SellingOperations:RSssellsthegoodsto o Wholesaler(gets 1.5%max.discountfromRS)o Retailers(gets 1.0%max.discountfromRS)

Wholesaler:

GetscashdiscountsandotherschemespromotedbyHUL(getspointsunderVijetaScheme).

Retailers:

TotalretailerbaseinJamshedpur: Approximately1070. SalesMargin:Dependsontheproduct

o Soap,detergents 8%onMRPo Cosmetics 10%onMRPo Fooditems 8%onMRP


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Incentive schemes:

Companyprograms(SchemeDiscounts+CashDiscounts)

TPRschemesbasedonSales(1%to4%)

Vijetaschemeisnotforretailers.

Field Sales Force:

Tomeet the everchanging needs of the consumer, HUL has set up a distribution network that

ensures availability of all their products, in all outlets, at all times. This includes, maintaining

favourable trade relations, providing innovative incentives to retailers and organizing demand

generationactivitiesamongahostofotherthings.

Theimportant

activities

that

HUL

field

sales

force

does

are

(i)

target

chasing

and

(ii)

reporting

on

a

dailybasis.Account information ismaintainedonpalmtopsgivenbyHUL.Duringourresearchand

informalsurveyofHULfieldsalesforce,wecametoknowthatforthelasttwoyears,trainingisnot

beinggivenatalltothesalesforce.

HULhaslimitedthenetworkchannelsellingtocategoriesofHome&PersonalCare(HPC)andFood

productswithexclusivebrands for thischannel.That is, theseparticularbrands (products)areall

exclusive

to

HLN,

specifically

developed

for

the

Direct

Selling

channel,

and

not

available

in

the

retail

channel. The general trade comprises grocery stores, chemists, wholesaler, kiosks and general

stores.HindustanUnileverserviceseachwithatailormademixofservices.

4. Initiatives taken to Improve the Distribution Network

HULhastakenthefollowinginitiativestoimproveitsdistributionnetwork:

Setting up of a fullscale sales organisation comprising key account management andactivationtoimpact,fullyengageandservicemodernretailersastheyemerge.

ServicingChannelpartnersandcustomerswithcontinuousdailyreplenishment. LeveragingscaleandbuildingexpertisetoserviceModernTradeandRuralMarkets. Delayeringofsalesforcetoimproveresponsetimesandservicelevels. Revampingof itssalesorganisation inthe ruralmarketsto fullymeet theemergingneeds

andincreasedpurchasingpoweroftheruralpopulation.HULsdistributionnetworkinrural

Indiaalreadydirectly coversabout50,000villages, reachingabout250million consumers

throughabout6,000substockists.


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Implementationofsupplychainsystemthatconnectsstockistsacrossthecountry,andalsoincludesabackendsystemconnectingsuppliers,allcompanysitesandstretchingrightupto

stockists. IT toolshavebeendeployed forconnectivityacross theextended supplychains.

BackendprocesseshavebeencombinedintoacommonSharedServiceinfrastructure.

LaunchingofProjectShaktithroughwhichthecompany isabletoextend itsoperations invillages.HULhasalso includedseveralNGOsandstategovernmentsas the initiativehelps

ruralwomentoimprovetheirfinancialposition.

LaunchingofHULNetworktoleveragethechannelofdirectsellingbypresentingcustomisedofferingsin11homeandpersonalcareandfoodcategories.Startedin2003,italreadyhasa

baseof300,000consultantsacrossthecountry.

StartingoffranchisedLakmeBeautySalonsandAyushTherapycentrestoofferstandardisedservices,

in

line

with

the

strategy

to

leverage

the

equity

of

its

brands

through

relevant

services.

Finding out Innovativeways to reach out to its consumers, particularly in rural areas byleveragingnonconventionalmedialikewallpaintings,cinemavans,weeklymarkets(haats),

fairsandfestivals.

InitiatingtheconceptofSuperValueStores(SVS)inurbanareastopartnertraditionalstoresto provide a range of services ranging frommanaging their inventory to setting up POS

(point

of

sale)

banners.

In

addition

to

this,

to

boost

up

traditional

retail

in

the

face

increasing

inroadsmadeby large,modern retailing chains like Spencers,RelianceFreshetc (where

HULissqueezedharderfordiscounts),HULstartedrestructuringsomeoftheselectedSVSs

intotheformofselfserviceretailshopsalamodernretails.Thisistoprotect&maintainthe

competitiveadvantagethatHULhasoveritsbiggestcompetitorsintheothermarkets(e.g.,

P&G),withitsverydeepdistributionreachthroughtraditionalretail.

LaunchingtheUnicareschemewithupmarketpharmaciesandretailerstosale itspremiumbrands.

Undertakingseveralinitiativesfortraditionalchannelsinordertoimproveitscapabilitiesatthefrontendbydevelopingskillsforstockists'salesforce.Under'ProjectDronacharya',the

FMCGmajorcontinuouslyimpartedtrainingtoover10,000stockistsalesmen.

Launching of several promotional schemes for existingwholesalers and distributors. Forinstance,ithasstartedtheVijeta RishtaJeetKaschemelastyeartoprovideaplatformfor

thewholesalerandHULtogrowthebusinessbyearningpointsandredeemingthem.


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5. Field Force Management

TheworkingcycleofatypicalHULfieldforcememberisfrom21stofeverymonthtothe20thofthe

nextmonth.Duringthisperiodheisgivenvarioustargetsthathelpstoachievecompanyobjectives

and

gives

him

a

chance

to

prove

his

performance

relative

to

other.

Tostartwiththefieldforcememberisgivenaparticularareaandhisresponsibilityistocatertoall

theretailersinthatarea.Whiledecidingtheareaforeachmemberofthefieldforce,thecompany

makessurethattheoperatingareaofeachfieldmemberdoesn'toverlapwithhisothercolleagues.

Therearevariousmethodsusedbythecompanyto incentivizethefieldforce MonetaryandNon

Monetary.

InHUL,thefieldforceisevaluatedusingQOC(QualityofContribution).Itconsistsof4components

1.SecondarySale(Maxpoints=2.5)

2.Eco(Maxpoints=0.5)

3.Focus(Maxpoints=0.5)

4.FCS(MaxPoints=0.5)

ECO

SECONDARY

FCS

FOCUS

QOC


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SecondarySale Basedon theoperatingarea,eachmember isgivenaspecific target in termsof

value(e.g.,Rs.15 lacs)fortheoperatingmonth(21st20

thofnextmonth).Ifheachieves100%of

thetargethegets2.5points,ifheachieves95%targethegets1.5points.Thesepointsareusedto

addtothetotalQOCscoreaswellaslinkedtomonetaryincentive.

ECO/WidthpackTargetThisisusedforthepenetration/reachofcertainproductsintheexisting

market.ThefollowingisatypicalECOtargetassignedtoafieldforceagent:

LuxInternational 105outletsx1SKU

PearsSoap 135outletsx1SKU

Rin 104outletsx1SKU

BreezeSoap 100outletsx1SKU

Theoutletsmentionedarewithintheoperatingareaofthepersonand1SKU=Rs.27/.Basedon

thistheFieldpersoncalculatesnumberofpacksheshouldselltotheretailers.Theconcernedagent

receivesthistargetaround25th

ofeachmonthandhastocompletethistargetwithinthe5th

dayof

nextmonth.Upon completion he gets additional 0.5 points added to hisQOC score alongwith

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

certain

products.

A

typicalFocustargetisgivenbelow:

LuxInternational Rs20,640/@Rs6/ perunit

LifeBuoy Rs70,220/@Rs10/ perunit

Wheel Rs99,000/@Rs10/ perunit

BreezeSoap Rs27,000/@Rs10/ perunit

This targetneeds to be achievedwithin 20th

of nextmonth.Upon achieving the target the field

personis

awarded

0.5

points

which

is

then

added

to

his

overall

QOC

score.

FieldCapabilityScore(FCS) Inthiscomponent,thefieldforcepersonsarerequiredtoensurethat

the scheduledvisit/outletbilling is such thatat least15 itemsaredemandedperorder. If this is

achieved the retailergetsadiscountof1%on thebilledamountandon theotherhand the field

persongetsanadditional scoreof0.5which isadded tohisQOC score.Each scheduledvisitper

outlet isoneperweek. Forexample if thereare100outletswithin theoperatingareaofa field

personthenthenumberofvisitperweekis100andtotalnumberofvisitpermonth=100x4=400.


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Thesalesperson isrequiredtoachieve90%successratetoget0.5pointsforhisQOCscoreandat

least65%forasatisfactoryperformance.

Non Monetary Methods

TheotherpurposeoftheQOCscoresistohighlighttheperformanceofthefieldpersonamonghis

peers.Basedon theQOCvariousawardsaredistributed to the fieldpersonsat theendofevery

month. These awards are also known as MOC Star awards.MOC stands forMonthly operating

Cycle.

IfQOCscore>4.5Thepersoniseligiblefor7staraward IfQOCscore>4 Thepersoniseligiblefor5staraward IfQOCscore>3.5Thepersoniseligiblefor3staraward

Inthe

event

of

exceptional

performance,

management

representatives

from

the

regional

office

cometothezonalofficetodistributetheawards.Thephotographoftheawardwinnersisdisplayed

intheofficeasasourceofinspirationforothersalesperson.

Target Setting Mechanism and monitoring

Theregionalofficemonitorstheperformanceofvariouszones.Athoroughanalysis isdoneatthe

end of eachmonth and based on that theweak products are identified or those forwhich the

demand

has

weakened.

This

is

the

basis

of

setting

ECO

and

FOCUS

targets

for

the

field

persons.

Each

fieldpersonisgivenapalmtopwhereinhecanfeedtheentriesonthespotwherethetransactionis

done.Thissolvesbasicallythetwopurposes

a)Thefieldpersonisfreedfromthetedioustaskofmaintainingcumbersomerecordsandcanthen

concentrateonthejob(thusITisreplacingsomeofthefieldforceorotherchannelmembers),

b)Thesolditemisimmediatelyupdatedinthecompanyinformationsystem.

6. Analytical Framework

WetriedtoanalyzeHULsdistributionnetworkinthelightof20mostsignificantvariablesthataffect

thedistributionpartofchannelmanagement foranyorganization in thebusinessofmarketing&

sellingofgoods.Thevariables,theirexplanationsandtheirimpactontheHULsdistributionnetwork

aregivenbelow

1. NumberofConsumersIn retailbusinessdominatedby traditional stores likeKiranaStoresetc (Indian retailbusiness

falls

in

this

category),

higher

the

no.

of

consumers,

higher

will

be

the

no.

of

channel

intermediaries.Theimplicationofthisisthattherewillbemany layersinthechannelinsucha


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19

situationandmanagingsuchacomplexdistributionnetworkbykeepingtabsoneveryplayerwill

beahuge task.Moreover,Transport&Logistics (T&L)supportprovidedby theorganization

needstobewellorganized.

Implicationfor

HUL

HULskeystrengthliesinmanagingitsdistributionnetworkinIndia.HULisIndiaslargestFMCG

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,

coveringabout6.3million retailoutlets reaching theentireurbanpopulation,andabout250

million ruralconsumers in India. Itssaid thatHUL isable to touch the livesofabout2outof

every 3 Indian 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

in

the

long

run).

Foracomparison,P&G,worlds largestFMCGmajor,doesnotfind itsname inthe listoftop5

FMCGmajorsinIndiaasitsstrengthliesinmanagingmodernretail(biggestexample,WalMart),

butnottraditionalretail.

2. GeographicDispersionofConsumersAgain,thisiscloselyrelatedwiththepreviousvariable,moresoinalarge,geographicallydiverse

country like in India.With the increase in thisdispersion level,more intermediariesandmore

layersare

required

in

the

distribution

network

so

as

to

effectively

reach

the

length

&

breadth

of

the country. Obviously the T&L management for such an organization would be critical to

accomplishthis.

ImplicationforHUL

Foracountryasgeographicallydiverseas India,panIndianpresence&market leadershipcan

only be possiblewhen products reach even the remotest parts of the country. HUL is very

successfulin

achieving

and

maintaining

this

reach

due

to

its

distribution

network.

3. FrequencyofPurchaseIf the frequency of purchase is high, then transport intensity in the last mile (i.e., from

distributortoretailers)increasesmanifold.ForFMCGproducts,asathumbrulewecantakethat

themeantimebetweentwopurchasesis~90days.Withtheintroductionofsmallerformfactor

packagingforFMCGgoods(Re.1/ shampoosachetsbeingaverygoodexample),thetransport

intensityincreasedfurther.


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20

ImplicationforHUL

HULhasabout4000 redistribution stockists,who supply toapprox.6.3millionoutletsacross

India.Sincemanufacturingisdoneat40plantsaroundthecountry,rationalizingthelogisticsand

planningis

ahuge

task.

An

innovative

step

in

that

regard

has

been

the

formation

of

the

Mother

DepotandJustinTimeSystem(MDJIT).CertainC&FAswereselectedacrossthecountrytoact

as mother depots. Each of them has a minimum number of JIT depots attached for stock

requirements. All brands and packs required for the set ofmarketswhich theMD and JITs

service inagivenareaaresenttothemotherdepotbyallmanufacturingunits.TheJITsdraw

theirrequirementsfromtheMDonaweeklyorbiweeklybasisandsupplytostockists inthat

area,who,inturn,supplytoretailers.

4. TendencytoPostponePurchaseIfthetendencytopostponepurchaseislesser,thentheproductwillbeeasiertodistribute.For

example,products/serviceslikeFireExtinguishers,LifeInsuranceetc.aresuchthatthoughthese

are needed, the overall tendency for the consumers is to postpone the purchases these

products/services can be termed as necessary evil. For this kind of products, regular

reinforcementinthemindsofconsumersbecomesnecessary,salesfieldforcebecomescritical

anduseofexpertfieldforceiscommonplace.

Implicationfor

HUL

Since FMCG products are used regularly and these products are not necessary evils,

distributionnetworkofHULdoesnotrequireanyexpertfieldforcetosellitsproducts.Onlythe

recent diversification ofHUL into HomeWater Purification business (Pure It brand) needs

dedicatedfieldsalesforce.

5. LevelofFamiliarity/Knowledge(ofconsumer)abouttheProductIf

the

level

of

familiarity

of

consumer

with

the

product

is

higher,

lower

will

be

the

importance

of

fieldsalesforceandhigherwillbetheimportanceofchannel.

ImplicationforHUL

SinceFMCGgoodsareverymuchfamiliartoconsumers,channelanditsdifferentmembersare

very much important to HUL and field sales forces function is mostly limited to channel

managementandensuringavailabilityofproducts.


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21

6. DegreeofBrandLoyaltyIf the consumers aremore brand loyal, then less pushwill be required from the channel

memberstoselltheproductsastherewillbesufficientpullordemandfromtheconsumers.

Thisimpliesthatforproductswith loyalcustomerbase,effortsfromthechannelmemberscan

bemuchlesserforfinalofftaketohappenwhichinturnleadstolessermarginstothechannel

members for thoseproducts.For fastermovingproducts (mostlydue tobrandpull), retailers

maynotbeaversetoslightlylessermarginsasrotationoftheproductsishighandthushis/her

ROIisprotected.

RetailersROI=Investment

RotationinM arg

ForaFMCG

player

with

anon

established

brand,

margins

to

channel

members

and

point

of

sale

(POS)advertisingarebothimportant.

ImplicationforHUL

AsHULenjoysleadershippositioninmanyFMCGsegmentslikeSoaps,Detergents,PersonalCare

productsetcwithstrongbrandswithcontinuouspull,HULhaslesstoworryaboutmarginsto

channelmembersorPOSadvertising.Butthissituationcanchangeconsiderably inthefaceof

riseofasignificantcompetitorhavingalmostthesamereachasHULhas(e.g.,ITCasitseating

intoHULsmarketsharecontinuouslysinceitenteredFMCGsegment).

7. PurchasedonImpulseThe impulsepurchaseproducts likechocolates,toffees,colas, icecreamsetc. followSaysLaw

whichstatesthatSupplyCreatesDemand,implyingavailabilityoftheseproductsarethemost

criticalaspect forthesetobesoldandconsumed.Thisstressesonthe fact thatT&L forthese

productsbecomesveryimportant.

Implicationfor

HUL

HULhasonlyoneproduct inthis impulsepurchasecategory KwalityWalls(icecream).HUL is

#2afterAmul inthisFMCGsegment.To increasethisbrandssale&marketshare,availability,

visibilityandconsumermindsharehastobeincreasedandimprovedaswell.

8. LevelofInvolvement(LOI)Level of involvement (i.e., time & effort spent by the consumer) generally depends on the

productcost.

If

LOI

is

higher,

lower

is

the

importance

of

availability

and

more

critical

is

the


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22

supplyof information as consumerdecisionprocess dependsmore on elaborate information

search.

ImplicationforHUL

AsFMCGproductsaregenerallyLowInvolvementProducts,HULhastobothermoreonensuring

availabilityoftheproducts,ratherthansupplyofinformation.

9. PurchasedasaBasketofGoodsTheproductswhicharegenerallyboughttogetherbyconsumersasabasketofgoods(e.g.,Rice,

Flourpowder,Cookingoiletcatthebeginningofthemonth)aretobemadeavailabletogether

forfinalofftake.

Implicationfor

HUL

ThisaspectpartlyappliestoHULsproductsassomeproductslikeshampoos,soaps,detergents

mayfallinabasket.EfficientdistributionnetworkofHULensuresavailabilityofallsuchproducts

ateachsellingpoint(individualretailer).

10.Speed&ComplexityofDecisionMakingProcessIfthespeed is low,thenthecomplexityofthedecisionmakingprocessishigherandgreater is

the

importance

of

field

sales

force

and

the

salespersons

skill,

knowledge

and

quality.

ImplicationforHUL

ForFMCGproducts,complexityofdecisionmakingprocessisnotthereandso,speedofdecision

makingishigh.ThismeansthatforHUL,fieldsalesforceisoflimitedfunctionalusage.

11.PresentofExpertInfluencerintheDecisionMakingProcessRoles of sales field force vary depending upon whether expert influencer (e.g., doctors) is

presentin

the

process

or

not.

If

present,

then

consumer

buying

behavior

may

become

subcontractedandtheexpertinfluencerbecomesanothercustomerofthenetwork,apartfrom

the enduser. In that situation two groups of sales force are needed to cater to both the

segments.

ImplicationforHUL

ForFMCGgoods,roleofexpertinfluencerislimited.Butcompaniestrytoassociatebrandswith

regulatory bodies/authorities and show advertising with experts commenting upon superior

virtues of a product in an attempt tomake the buying behaviour shift frompicking/variety


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23

seekingtosubcontractedandmakeconsumersmoreloyaltothebrand.ThesearetrueforHUL

also(e.g.,PondsIntitute).

12.ElementofCrisisPurchaseExistsIf

element

of

crisis

purchase

exists

in

the

buying

decision

of

aproduct

(for

example,

bulbs

&

tubes),thenitsavailabilitybecomescritical.

ImplicationforHUL

Noneof theproductsofHUL fallunder thiscategory.Nevertheless,availabilityofproductsof

HULisnecessaryforotherreasons.

13.ElementofRiskAversionExistsIf

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,channelmemberscanunsellabrandbygivingexplicitor implicitsuggestions.This

implies that insuchacase,sellingdependsonmanycaseshowthecompany istakingcareof

channelmembers(keepingthemhappy)suchthattheyarenotluredbyothercompetitorsor

directedbygrievancessoastounsellthebrand.ThissituationisprevalentmostlyinConsumer

Durables(likeTV,Refrigeratorsetc.).InFMCGgoods,thesituationdoesnotexistperse.

Implicationfor

HUL

HUL isnotaffectedfor itsFMCGproductsbythisvariable.ForwaterpurifierPureIt,thiscan

haveconsiderable impact if itssalestartstohappenthroughchannelmembersratherthanby

fieldsalesforceasishappeningnow.

14.PerishabilityoftheProductIftheproductisperishable(havingsmallshelflife;examplesnewspaper,milk,fruitsetc),then

thedimension

of

speed

in

reaching

the

end

consumers

becomes

critical

&

T&L

assumes

great

significanceforthecompany.

ImplicationforHUL

TheFMCGproducts thatHUL sellsarenotperishablebynature,buthave limited life.So this

aspectisnotcriticalforHUL.

15. TimeBandAssociatedwiththePurchaseoftheProductIf

there

is

seasonality/cyclicity

for

the

demand

or

purchase

of

the

product

(examples

newspaper,milk aremostondemand in the 1st threehoursof theday; cookingoil, rice etc


24/32

24

grocery items are most on demand in the 1st week of the month), then high T&L and

infrastructuralrequirementsareneededforthelastmileforthetimebandwhendemand is

maximum. It ispossible tohave idle capacity in theareasmentionedaboveoutside thepeak

requiredtimeband.

ImplicationforHUL

ForsomeoftheproductsofHUL,theabovestatedvariable issignificant.Forexample, inFood

segment,BrandedAttaAnnapurna;insegmentslikeLaundryDetergents,Shampoo&HairOil

etc. this element of demand time band exist to a certain extent. This underscores the

importance of T&L for HUL as the transport intensity between distributors and retailers

increases inthe1st&4

thweekofamonthfortheproductsmentionedabove.This isoverand

abovethe

regular

replenishment

of

stocks

at

retailers

done

by

distributors.

Festivals

like

Holi

etc.

may also increase the demand for personal care items like soaps, shampoos etc for a short

periodanddistributionnetworkshouldbegearedupnottomissanysuchopportunity.

16.FungibilityFungibility is the property of a good or a commoditywhose individual units are capable of

mutualsubstitution.Examplesofhighlyfungiblecommoditiesarecrudeoil,wheat,orangejuice,

preciousmetals,andcurrencies.Fungibilityhasnothingtodowiththeabilitytoexchangeone

commodityfor

another

different

commodity.

It

refers

only

to

the

ease

of

substitution

of

one

unit

ofacommoditywithanotherunitofthesamecommodityforallintentsandpurposes.

Fungibility isdifferentfrom liquidity.Agood is liquidandtradable if itcanbeeasilyexchanged

for money or for another different good. A good is fungible if one unit of the good is

substantiallyequivalenttoanotherunitofthesamegoodofthesamequalityatthesametime

and place. It is said that commodities are fungible, goods tangible, services intangible,

experiencesmemorable&transformationsareeffectual1.

As an example,oneRs. 100/ banknote is interchangeablewith another.Cash is fungible.A

barrelofWestTexasIntermediatecrudeoilisfungible(directexchange)withanotherbarrelof

thesamecrudeoil.Oil(ofthesametype)isfungible.

Fungibilitydoesnotimplyliquidity,andliquiditydoesnotimplyfungibility.Jewelscanbereadily

bought and sold (the trade is liquid), but individual diamonds, being unique, are not

interchangeable (diamondsarenot fungible). Indian rupeebanknotesare interchangeable in

London(they

are

fungible

there),

but

they

are

not

easily

traded

there

(they

are

not

liquid

in

London).Incontrasttodiamonds,goldcoinsarefungible.Theyarealsoliquid,especiallyundera


25/32

25

gold standard.Thecombinationof fungibilityand liquidity isoneof the reasonswhygoldhas

successfullyservedasmoneyforthousandsofyears.

Further,afungiblethingcanbecomenonfungibleundersomecircumstances.Forexample,an

oldcoin

or

acurrency

note

may

assume

avalue

which

is

way

above

its

face

value

due

to

historical reasons or due to some defects in it which makes it unique from others from a

viewpointwhichseesitdifferentlythanitsintendedpurpose.

Theoutcomeofproduct fungibility isthatthemore fungibleaproductbecomes,higher isthe

chancethatpartsofthedistributionchannelitcanbereplacedbyIT.Agoodexampleofthisis

dematerialization (Demat)route forsharetradingnowwherethere isnophysicalexistenceof

shares.

ImplicationforHUL

As branded FMCG goods are not fungible per se (branding is done to decommoditize &

differentiatetheproduct),theimportanceofchannelmemberswillcontinue.

17.DegreeofCustomizationPossibleDegreeofcustomizationdirectlyaffectseconomiesofscale;higherthecustomization,lesserthe

economiesofscale.Also,criticalityofsalesfieldforceincreaseswithcustomizationlevelsofthe

offering.

ImplicationforHUL

ForFMCGproductsofHUL,whicharemassproduced,suchcustomizationsarenotpossibleand

thuswith higher economies of scale, lower criticality of field forces from the standpoint of

customizationofproductofferings,costsarelowerintheserespectswithHUL.

18.NegativeorPositiveReinforcingProductNegative reinforcingproductsare thosewhicharebought toavoid/reduce theproblem (ex.

insurance, washing machine, car battery etc). Positive reinforcing products are those which

gratify the senses (ex.Perfumes,Chocolates,Vacationetc).Shoppingexperiencebecomesa

criticalaspectforpositivereinforcingproductstoreaffirmthepositivefeelings.

ImplicationforHUL

Axe& Rexonadeodorantsaredistinctlypositive reinforcingproducts fromHUL, including

otherslike

Lux,

Lakme

etc.

So

these

are

seen

in

most

shopping

malls

etc.

with

high

visibility

displaystoreaffirmthefeelings.Consumersarewillingtopayhigherforthesebrands.


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26

19.Value/VolumeRatio(ValueDensity)oftheProductThisratio isvery important forboththecompanyandtheretailerfor itstwocriticalaspects

T&L costand retailerROI/sq. cm (retailersareactually in realestatebusiness in true sense).

Highertheratio,betteritisforbothcompanyandtheretailerashigherratiosignifieslesserT&L

costperunitvolumetransportedforthecompanyandgreaterROIperunitofshelfspaceforthe

retailer.

ImplicationforHUL

IngeneralforFMCGgoodsandforHULaswell,valuedensity isrelatively lower.Inadditionto

this fact, increasing trend towards using smaller pack sizes increases the packaging density

(increased packaging density increase cost to some extent, but favoursmechanized handling

greatly,reducing

handling

costs).

Since

value

density

is

less,

transportation

costs

will

be

higher

andthusitisofeconomicsensetohavemanufacturingplantslocatedclosuretomajormarkets.

ThisisthereasonHULhasvariousmanufacturingplants(40intotality)locatedacrossIndia.This

is a pointer to the fact most of the major FMCG players (including HUL) use contracted

manufacturing dispersed across the geographic spread so as to lower transportation cost

component.

7. Financial Analysis

Wehave takendata from CMIE databasewhile analyzing the performance ofmarketing& sales

(including distribution) functions of HUL and comparable companies. By comparable,wemean

those companieswhosemaineconomicactivity,asdefined in theCMIEdatabase, is the sameas

HULs.Forexample,maineconomicactivityofHULasdefinedinthatdatabaseis Cosmetics,toilet

preparations,soap&washingprep.Obviously,onemajorFMCGcompany in India, ITC,doesnot

comeunderthispurviewasitsmajoreconomicactivityisTobaccobusinesswhichisnearly85%ofits

totalrevenue.Butforthesakeofcomparison,wehaveincludedITCalsoas itsnon tobaccoFMCG

businessrevenueinFY08wasRs.2511Cr.,nearlyashighasNirma,thesecondlargestplayerafter

HULinHULschosencategory.Butthefiguresforadvertising,marketing&distributionexpensesof

ITC as percentages to its total salesmay not be directly comparable to those figures ofHUL as

product categories are different and the impact of above mentioned variables on these two

companyssales&distributionfunctionisdissimilar.OthermajorFMCGplayersnotincludedinthe

analysis are Nestle, Amul, Britannia & Tata Tea, which are mostly into the Food & Beverages


27/32

27

segmentwhereHULhasrelativelylesserpresence(ProcessedFoods&Icecreamsegmentstogether

constituteonlyapproximately5%ofHULstotalsales).InTea,HULispresentsignificantly,though.

Inthefollowingpagesadvertising,marketing&distributionexpensesofmajorFMCGgoods(inHULs

categorymostly)

are

being

shown.

It

is

to

be

understood

here

that

marketing expenses

here

include

commissions, rebates, discounts, sales promotional, expenses on direct selling agents &

entertainmentexpenseswhereasdistribution expensesincludeoutwardfreight.

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

Sales1 H U L 1 4 9 3 7 . 8 8 1 4 2 2 . 9 9 . 5 3 6 .0 7 0 .0 4 7 3 1 .4 1 4 . 9 0

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 6.65 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

Adver t is ing Expenses as % of Sales

9.53

1.54

11.66

16.0615.57

11.06

6.65

17.55

10.42

0.00 0.00

1.99

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

HUL Nirma Dabur Colgate-

Palmolive

Reckitt

Benckiser

P&G

Home

Godrej Emami P&G

Hygiene &

Health

Henkel Henkel

Marketing

ITC

AdvertisingExp.as%toSales


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28

We can seehere thatNirma,Godrej&Henkel (ITCalso)have lessadvertisingexpenses (as% to

sales)thanHUL.Importantly,Henkelhaszeroadvertisingexpenses in2008,whichmayexplainthe

factthatawareness level inconsumersforHenkelbrands is low.HULadvertising isdonemainly in

case of soaps (for example Dove; donemainly to reaffirm that its not a soap!), shampoos,

deodorants (Axe), laundry detergents (Surf Excel, Rin) etc.With the introduction of home

waterpurifier(PureIt),considerableadvertising&promotionalexpenseshavegoneintoit.

Oflate,weseeverylittleofNirmaadvertisements.Thisisapparentfromitsadvertisingexpenseas

% to sales,which is very low (only1.54%). ITC is altogetheradifferent story.Cigarettes&other

tobacco relatedproductswhich constituteapprox. 85%of its sales,all relate to intoxicationor

habitual consumption patterns having intensely brand loyal consumers and thus almost no

advertising(surrogateadvertisingisdone)isneededeithertoreaffirmthebrandsorintroducenew

consumers to thebrands (there is regulatoryangleaswell).Current consumersof these tobacco

productsare thebiggestadvertisingagents that ITChasandof course, theydo itvoluntarilyand

without knowingwhat theyre doing. Butwhile moving faster into nontobacco FMCG business

ridinghighonitsstrengthofdistributionnetworkmatchingorsurpassinginsomecasesthatofHUL,

ITC has started aggressive advertising campaigns (Fiama Di Wills shampoo, Vivel soap,

Sunfeastbiscuits,Bingosnacksetc),directlyfocusingonmarqueebrandsofHULlikeSunsilk&

Lux,increasingtheheatonBritanniaforbiscuitsandtakingonKurkure&othersnacksandchips

fromPepsi,

Coke

and

others.

Advertising expenses as percentage to sales is highest for Emami, which owns brands such as

Navratnahairoil&talc,Boropluscream&talc,HimaniFastRelief,Fair&Handsome,SonaChandi

Chawanprash,Menthoplusetc,eachofwhichisadvertisedheavilyinthemassmedia(e.g.,TV)with

famous&expensivecelebrityendorsers likeAmitabhBachchan,KareenaKapoor,Govindaetc.On

the other hand,we see regular advertising streams for Colgate toothpastes and other oral care

products, inwhich category ColgatePalmolive is themarket leader. ReckittBenckiser advertises

considerablyfor itsbrands likeHerpic,Mortein,Vanish,Clearasil,Dettol,Strepsilsetc,which isthe

reasonforitshighadvertisingcostaspercentageofsales.

MarketingExpenses

Asstatedearlieralso,marketingexpenseshereincludethefollowing

commissions rebates


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29

discounts salespromotional expensesondirectsellingagents entertainmentexpensesetc.

Exhibit 3: Marketing Expenses as percentage of Sales

Market in g Expenses as % to Sales

0.04

2.71

1.01

0.00

0.70

4.104.59 4.68

7.35

9.51

15.71

0.32

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00


Palmolive

Reckitt

Benckiser

P&G

Home

Godrej Emami P&G

Hygiene &

Health

Henkel Henkel

Marketing

ITC

MarketingExp.as%toSales

Herewe see that themarketing expensesofHULareamong the lowest in themarket (only the

second lowest after Colgate Palmolive which has very good brand pull for its Colgate

toothpastes).ThisprovesthatHUL isabletomaintainconsiderablebrandpullthroughadvertising.

ITCagaincomesamongthelowestitstobaccoproductsrequireverylittlepushandhaveveryhigh

rotations.Also,ITCmostlydealswithsmallretailersanddistributors(paancigaretteshopsowners)

whohavemarginalbargainingpower.

AnotherrevelationisthatHenkel,whichhaszeroadvertisingexpenditure,hasthehighestmarketing

expensesamongallothers.But this strategy to push theproducts through the channelpartners

may not be a good one for Henkel as itmight be losing out for the lack of visibility and thus

consumermind share andbrands such asMargo, Fa,Neem toothpasteetc are losingout in the

market.Further, it isalsoapointer to the fact thatHenkels largestbusiness share is in industrial


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30

chemicals (adhesives, sealants e.g., popular brand Loctite; this segment constitute ~44% of

worldwide salesofHenkel)and forB2B,advertisingper se isnot thatmuch important.ForB2B ,

important isdirectsellingapproach,which generally requiresnegotiations, volumediscountsetc,

whicharereflectedinhighestmarketingexpenses(aspercentagetosales)comparedtoothers.

P&G is inbetween theextremesandwith considerableadvertisingexpensesalso, it isunable to

createsufficientpullforitsproductsinIndia(asevidencedbythefactthatmarketingexpensesare

also relativelyhigher)or itsgetting stuck for the lackofsufficientdistributionmusclea laHUL in

traditionalretailinIndiaandsuffersfromlackofreachandavailabilityattheendconsumerlevel.

Asmentioned earlier,bothColgatePalmolive andReckittBenckiserbothenjoys very goodbrand

loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (#1 in

antiseptics),Herpic,

Mortein

etc.

This

is

corroborated

by

the

fact

that

these

companies

have

some

of

thelowestmarketingexpenses(aspercentagetosales)inthegroup,asshowninthechart.

DistributionExpenses

Distributionexpensesincludetheoutwardfreightcosttothecompany.

Exhibit 4: Distribution Expenses as percentage of Sales

Dis t r ibut ion Expenses as % to Sales

4.905.16

3.14

2.21

4.19

6.53

3.50

2.53

6.70

3.81

4.22

2.55

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00


Palmolive

Reckitt

Benckiser

P&G

Home

Godrej Emami P&G

Hygiene &

Health

Henkel Henkel

Marketing

ITC

DistributionE

xp.as%toSales


31/32

31

WehaveseenthatT&LplaysaveryimportantroleforHUL&otherswhohavepanIndianpresence

inFMCGbusiness.ColgatePalmolive,Emami&ITChassomeofthelowestdistributionexpenses(as

%tosalesfigures)&P&Ghasthehighest.HULislowerinthisrespectthanNirma&P&G,buthigher

than Henkel. This can be explained somewhat from the impact of the variable, Time Band of

purchase,ontheincreasedtransportintensityforHULinthelastmileforsomeoftheproductslike

householdpersonalcare, laundrydetergent,brandedattaetc inthefirst& lastweekofthemoth.

ITC(tobacco),Henkel(largelyB2B)aremostlyprotectedfromthisimplicationofthevariable.

AnotherimportantthingtorememberthatvaluedensityofFMCGgoodsisrelativelylower,causing

share of transportation costs in the overall cost structure to be relatively higher. This implies

dispersedmanufacturing, locatingmanufacturingplantsnearer tomajormarkets.Soone location

manufacturing to get higher economies of scale and on the other hand, trying to serve

geographicallydiversemarketsmaynotbeeconomicallyattractive forFMCGsector.Comparedto

HULs 40 manufacturing plants across India, Nirma, the 2nd

largest FMCG major in soaps and

detergents category, has 6 manufacturing plants, all located in and around Gujarat. So,

transportationcostofNirma,ifittriestocatertopanIndianmarketwillbehigher.Thisissupported

bythefactthatNirmashigherdistributioncostpercentagethanHUL.ForP&G,thesamereasons

significantlyaffectitsdistributioncostwhichishighestforthegroupanalyzed.


32/32

32

8. References

1. B.JosephPine,JamesH.Gilmore(1999),TheExperienceEconomy:WorkisTheatre&EveryBusinessaStage,PublishedbyHarvardBusinessPress,254pages.

2. HULWebsite(http://www.hul.co.in/)3. HULCLSAConference,InvestorPresentation(24thSept.,2008).4. ReckittBenckiserWebsite

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

5. ColgatePalmoliveWebsite(http://www.colgate.co.in/app/Colgate/IN/HomePage.cvsp)

6. EmamiGroupWebsite(http://www.emamigroup.com/Brands)7. CMIE8. Wikipedia
http://www.hul.co.in/http://www.reckittbenckiser.com/site/RKBR/Templates/Home.aspx?pageid=1http://www.colgate.co.in/app/Colgate/IN/HomePage.cvsphttp://www.emamigroup.com/Brandshttp://www.emamigroup.com/Brandshttp://www.colgate.co.in/app/Colgate/IN/HomePage.cvsphttp://www.reckittbenckiser.com/site/RKBR/Templates/Home.aspx?pageid=1http://www.hul.co.in/

12950828 distribution management of hindustan unilever ltd

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