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P&G and Unilever Battles Reach Fever Pitch

Unilever wrote the playbook for winning in emerging markets. And P&G is now rewriting its own version. No wonder that their bitter rivalry has flared up all over again — in India

Published: Apr 12, 2010 06:24:11 AM IST
Updated: Apr 15, 2010 11:22:35 AM IST
Unilever CEO Paul Polman is sharpening the strategy to win in key emerging markets like India
Image: Michael Buholzer / Reuters
Unilever CEO Paul Polman is sharpening the strategy to win in key emerging markets like India

At his second floor office in Hindustan Unilever’s new headquarters in Andheri, a north Mumbai suburb, Gopal Vittal pulls out two packs of Wheel, a detergent his company makes. One is a familiar, old pack but the other is a new, improved version that Vittal, HUL’s executive director for home and personal care, is now pushing into the market.

The bright, blue packaging looks decidedly more attractive and smells better as well. “We’re holding the price line,” he says. At Rs. 20 for a pack of 675 grams, the Rs. 1,500 crore brand reaches more than a few million homes and forms the belly of the laundry market. Eighty per cent of the category’s volumes come from cheaper detergents like Wheel, Nirma and Ghadi that most middle class Indians use. Of this, Wheel controls 20 percent.

All this because a couple of months ago, Vittal bristled at a challenge thrown in from an entirely unexpected source — the occupants of a large building many call a fortress less than a kilometer away from his office. Most people know of it as Procter & Gamble (P&G), a $79 billion behemoth and the world’s largest packaged consumer goods company. It’s proposition? A new variant of Tide, a detergent it manufactures, called Tide Naturals, at Rs. 25 for half a kilo – Rs 10 less than the original Tide. A couple of weeks later, it sweetened the proposition by offering 25 percent more powder at the same price.

Tide is P&G’s mid-market brand. In just about a decade, it took HUL’s Rin to the cleaners in the mid-priced space with its “outstanding whiteness” proposition. P&G is hoping to do with Tide Naturals to Wheel what Tide did to Rin. Which is why Vittal dropped prices on Rin as well to Rs. 25 for a 500 gram pack. Officials at P&G declined comment. But word is out that there is more action around the corner.

This heightened brand skirmish is a signal Unilever and P&G’s joust may have come to the knockout stage. For some time now, media attention has been focussed on a sideshow: a legal battle between HUL and P&G playing out in Chennai and Kolkata. Whatever be their eventual outcome, much of this shadow boxing may remain just a mere footnote in P&G’s latest battle with Unilever. The real story is about strategic intent; and more importantly, about capabilities to compete aggressively in emerging markets like India.

For ten long years, under AG Lafley’s leadership, P&G has quietly reworked its globalisation game plan. Today, it is perhaps much better prepared to win in emerging markets. Soon after taking over in July last year, the new CEO Bob McDonald articulated the company’s new purpose: Focus on winning consumers in emerging markets. “We are serving 3.5 billion people today… I am confident we can reach at least another one billion or more in the decade ahead,” McDonald said. “If, over time, we increase per capita consumption [of P&G products] in both China and India to the rate we see in Mexico, it would generate an incremental $40 billion in annual sales,” he told the Financial Times.

P&G tends to be clinical and deliberate in plotting long-term strategy. It is obsessed about understanding consumers, spends millions of dollars on consumer research and has formidable capabilities to innovate. Under Lafley’s leadership, it honed its formula with initiatives like “Connect + Develop,” where ideas are sourced from scientists and researchers outside its system.
 
Nobody understands P&G’s philosophy as well as Paul Polman does. In January, Polman was the first outsider to join as CEO of the $40 billion Unilever, the world’s second biggest packaged consumer goods firm. He had spent 20 years at P&G, before moving to Nestle as its global CFO for a three year stint and was a crucial member of Lafley’s team in Europe. That is one of the reasons why Unilever’s board finally chose Polman to lead the company over veterans like Vindi Banga and Harish Manwani.

Now, emerging markets have been Unilever’s traditional grazing ground. More than half its revenues come from markets like India, Brazil, Indonesia, South Africa, China and Vietnam. Yet Unilever remains caught in a tight bind. Its sales growth has lagged P&G and Nestle for many years.

P&G boss Bob MacDonald is sharpening the strategy to win in key emerging markets like India
P&G boss Bob MacDonald is sharpening the strategy to win in key emerging markets like India

Not surprisingly, shortly after he took charge, Polman sent out a message: All attacks from P&G in emerging markets will have to be decisively repulsed. But defending its share is something HUL has been good at. The question is can Unilever find new ways to grow?

On the face of it, it seems his counterpart McDonald has an easier task: P&G is relatively small in many categories across the world largely because it began globalising much later than most of its peers, particularly Unilever. To that extent, P&G has enough headroom to grow: by expanding into new geographies, launching new products within the same category and edging into adjacent categories.
McDonald also has had significant hands-on experience through the Nineties, leading P&G’s businesses in the Philippines, Japan and Korea, including running the hair care business in Asia and the beauty business in Japan. This is an advantage his predecessor Lafley acknowledged while introducing him to the company.mg_24512_growth_story_280x210.jpg

Illustration: Malay Karmakar

But he’s got a significant set of challenges to deal with as well. For the most part, P&G has relied on superior products developed for sophisticated markets. Until now, it hasn’t demonstrated its ability to come up with relevant innovations in emerging markets. Unilever, on the other hand, has established capabilities across emerging markets, having allowed local markets like India to build their own innovation capabilities over the years.

Besides, as Nirmalya Kumar, professor of marketing at London Business School, says, P&G lacks diversity at the top. If it has to become more successful in emerging markets, it needs to actively encourage management diversity. “They need more Brazilians, Indians, Chinese and Russians in their top management team,” says Kumar. Recognising the need for local managers, P&G has developed a talent pool, particularly from India. Many of these managers now head senior positions within the P&G system. Yet, it remains a lot less diverse as compared to Unilever.

P&G is also predictable in the way it operates. In the late Nineties, it began focussing its understanding the top seven million households who make up SEC A and B. Codenamed Operation Spearhead, it brought in insights on all those who tended to buy the more profitable large packs and could afford consumer durables like washing machines, refrigerators and TVs. This strategy formed the basis for P&G’s initial focus and generated seven consecutive years of double digit growth.

Today, its econometric models suggest India’s rapidly urbanising middle class has hit the tipping point and that it is time to widen the scope of its business. Inside the reclusive Asian hub in Singapore, word is out that its rising star Deborah Henretta, group president for Asia, has begun looking at India in three major segments:  one, two and three. While India One will focus on SEC B+ and above in the top 50 towns, India Two will look at SEC C and class two towns. Finally, India Three will include SEC C and D and towns with populations below 50,000. Each of these segments will be run like separate R&D resources, sales and distribution systems and manufacturing to ensure adequate organisational resources are thrown into the strategy.

 

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Illustration: Malay Karmakar

There are indications this no-holds barred battle will spiral into hair wash, skin creams and perhaps, even toothpaste, especially if P&G decides to bring in Crest, its number one global toothpaste brand, something that it has considered several times since 1994. Its first port of call will be India One, as it has done with brands like Pantene, Whisper, Oil of Olay, and now, Gillette. Some of these brands are now being extended into lower price tiers. For instance, while its mid-tier brand Tide reaches out to India One and parts of India Two, Tide Naturals will hunt for users from India Two and Three.

In the early Nineties, when P&G tried to attack the top end with Ariel, it failed to generate volumes. It then tried to create lower priced variants like Supersoaker. But that strategy was quickly dismantled because as volumes started to rise, Ariel’s equity as a superior brand was dented.

Unilever's Harish Manwani
Image: SAMEER JOSHI  FOTOCORP
Unilever's Harish Manwani

This time around, it took a leaf out of its successful 2004 experiment in India with Whisper. It smartly avoided potential dilution of equity with Whisper Choice, a low priced variant targeted at first time users of branded sanitary pads. Whisper worked because it created communication that was relevant for first time users and did not create any dissonance for users of Whisper Ultra. That enabled it to gain value as well as volume leadership and push Johnson & Johnson, its main rival in the sanitary napkin business, into a corner.

What does all this mean at Unilever? For one, Polman has stopped offering earnings guidance to the markets. This is so that management bandwidth is not focussed on how to generate 15 percent profit margins every quarter and look instead at fixing its business. He is also pushing hard for scale in R&D and asking global teams to execute better in the marketplace.

In some ways, the fact, the Anglo-Dutch giant has begun to look more like P&G, albeit with some basic differences. It has a similar organisational structure with brand development and innovations hubs for different regions. So while its president Harish Manwani heads Asia, Middle-East, Africa and Turkey, it has old warhorse Arun Adhikari, who was director for detergents in the mid Nineties in India, now stationed as head of laundry for Asia.

Given the fact that the market is growing across every segment, Vittal says HUL’s focus will be on managing simultaneous and not sequential growth. “The power structure is changing rapidly. One hundred and forty million low income consumers are coming into consumption. And the 40 million affluent is driving dramatic growth at the top end,” he says.

P&G's Deborah Henretta
P&G's Deborah Henretta
HUL’s power brand strategy has been quietly dismantled and the focus is shifting to a portfolio game. New, high-margin categories like fabric conditioners, face washes and perfumery are dramatically opening up at the upper end. HUL also intends to use micro-marketing for old brands like Rexona and Hamam to strengthen presence in markets where it has been traditionally popular. It will continue to support Wheel, which will generate cash, but remain a low margin business with high return on capital invested. It uses third party manufacturing close to the point of sale, relies on a direct dispatch distribution model and uses different formulations for different states depending on the quality of water.

The thrust on creating big bang innovation platforms is headed by a senior scientist Genevieve Berger, Unilever’s chief R&D officer. That role has been centralised in London with regional centres of excellence, like the one in Mumbai for laundry. It has also substantially reworked its distribution model, after P&G implemented its Operation Golden Eye in the late Nineties.

The focus is now on fewer distributors who enjoy greater scale. But with scale, it is also looking at flexibility to ensure it can develop multiple categories, especially nascent ones. Last month, Vittal says, HUL pushed through another major restructuring of its sales and distribution system, where its own and the distributors’ sales people got organised across specific categories. They make separate calls on retail outlets and promote the entire category. Across the company, managers are now evaluated on their ability to deliver underlying volume growth. This will be the key metric, in line with the objective Polman has laid down: drive market development through new users and greater usage.

But, investors expect this thrust on volumes to impact profit margins. Already Hindustan Unilever’s stock has lost value and come back to (Rs. 240) where it was a year ago.

Clearly, Unilever is attempting a lot more than simply defending its position. Polman expects nothing less from the Indian subsidiary. But then, neither does McDonald.

(Additional reporting by Neelima Mahajan-Bansal and T. Surendar)

 

(This story appears in the 16 April, 2010 issue of Forbes India. To visit our Archives, click here.)

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