Hindustan Unilever Ltd (HUL) wants to cut costs across the board, from advertising and marketing to supply chain and indirect costs, a top executive said.
The move to cut expenses helps address profitability, which has been under pressure due to rising input costs and increasing expenses even as volume growth has returned.
The “efficiencies programme“ will see annual advertising and promotion spend at India's largest consumer packaged goods company by sales come down by 5-7% in one year, according to Gopal Vittal, executive director, home and personal care.
The company's advertising and promotion spend was `2,391 crore, or close to 14% of its `17,500 crore sales in fiscal year ended March 2010.
“If we could get 5% to 7% reduction or savings in the overall pot of money, that will be a job well done”, said Vittal, referring to the entire advertising and promotion spend.
Consumer companies such as HUL, Godrej Consumer Products Ltd, (GCPL) and Procter and Gamble Hygiene and Health Care Ltd have been consistently increasing year-on- year advertising and promotion spends as a percentage of sales for the last two years.
For the Indi- an subsidiary of Unilever Plc, advertising and promotion spends as a percentage of sales increased from close to 10.55% in fiscal 2009 to 13.66% in fiscal 2010.
Similarly, for GCPL advertising and promotion expenses as a percentage of sales increased from 8.58% in fiscal 2009 to 12.22% in fiscal 2010.
In fact, in the last quarter of fiscal 2011, between January and mid-March, HUL's ad volume for television actually in- creased over the year-ago period, according to AdEx India--a division of TAM Media Re- search.
To be sure, rising expenses have been met with an increase in volume growth. For the first time in calendar year 2010, the company had double-digit volume growth, breaking a run of 40 quarters during which volume didn't expand by more than single digits.
Besides advertising and pro- motion expenses, HUL will also take a fresh look at product sup- ply and manufacturing costs.
In the new scheme, HUL first sets the target price for a product, decides on margins and then reworks its costs accordingly, he said. A target price is a price that the consumer is willing to pay in a highly competitive industry.
Analysts, however, are still not impressed.
“The focus on cost savings will not drive growth”, said Nikhil Vora, managing director, IDFC Securities Ltd. According to him, HUL needs to reorient itself to the changing environment and learn to live with lower profitability and focus on top line growth instead.
HUL stock has underperformed both equity bellwether Sensex as well as the sectoral index on the Bombay Stock Market in past three months.
Since January, HUL stock has shed 12.37% against Sensex's loss of 4.34% and FMCG index's 2.09%.
Since January, HUL stock has shed 12.37% against Sensex's loss of 4.34% and FMCG index's 2.09%.
(Source -: mintlive)