A Study on Distribution Management of Hindustan Unilever Limited

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Prof.SGovindrajan
By
PRADEEPNARAIN SANJEEVKUMARJHA SATADRUBAGCHI SOUMITRADHALI g08075 g08086 g08088 g08090 g08095

TARUNKUMARSAHA

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1. IntroductionHindustanUnileverLimited 2. DistributionNetworkofHUL 2.1.EvolutionoverTime 2.2.DetailOverview 3. ChannelDesign

4. InitiativestakentoImprovetheDistributionNetwork 5. FieldForceManagement 6. AnalyticalFramework 7. FinancialAnalysis 8. References

1.IntroductionHindustanUnileverLimited
Hindustan UnileverLimited(HUL),formerlyHindustanLeverLimited (itwasrenamedin lateJune 2007asHUL),isIndia'slargestFastMovingConsumerGoodscompany,touchingthelivesoftwoout of three Indians with over 20 distinct categories in Home & Personal Care Products and Foods & Beverages.Theseproductsendowthecompanywithascaleofcombinedvolumesofabout4million tonnesandsalesofnearlyRs.13718crores. HUL is also one of the country's largest exporters; it has been recognised as a Golden Super Star TradingHousebytheGovernmentofIndia. The mission that inspires HUL's over 15,000 employees, including over 1,300 managers, is to "add vitalitytolife."HULmeetseverydayneedsfornutrition,hygiene,andpersonalcarewithbrandsthat helppeoplefeelgood,lookgoodandgetmoreoutoflife.ItisamissionHULshareswithitsparent company, Unilever, which holds 52.10% of the equity. The rest of the shareholding is distributed 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 names across the country and span many categories soaps, detergents, personal products, tea, coffee,brandedstaples,icecreamandculinaryproducts.Theseproductsaremanufacturedover40 factoriesacrossIndia.Theoperationsinvolveover2,000suppliersandassociates.HUL'sdistribution network comprisesabout 4,000redistributionstockists,covering 6.3millionretailoutletsreaching theentireurbanpopulation,andabout250millionruralconsumers. WehaveanalyzedthedistributionnetworkofHULfromthefollowingaspects: 1. EvolutionofHULsdistributionnetwork 2. Transportation&Logistics 3. ChannelDesign 4. Initiativestakenforchannelmembermanagement. 5. Fieldforcemanagement 6. AnalyticalFramework 7. FinancialAnalysis

2.DistributionNetworkofHUL 2.1.EvolutionoverTime
TheHULsdistributionnetworkhasevolvedwithtime.ThefirstphaseoftheHULdistribution networkhadwholesalersplacingbulkordersdirectlywiththecompany.Largeretailersalsoplaced 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. The RS was required to provide the distribution units to the company salesman. The second characteristic of this period was the establishment of the "Company Depots" system. This system helpedintransshipment,bulkbreaking,andasastockpointtominimisestockoutsattheRSlevel.In therecentpast,asignificantchangehasbeenthereplacementoftheCompanyDepotbyasystemof thirdpartyCarryingandForwardingAgents(C&FAs).TheC&FAsactasbufferstockpointstoensure that stockouts did not take place. The C&FA system has also resulted in cost savings in terms of direct transportation 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.

2.2.DetailOverview
ThedistributionnetworkofHULisoneofthekeystrengthsthathelpittosupplymostproductsto almostanyplaceinthecountryfromSrinagartoKanyakumari.Thisincludes,maintainingfavorable trade relations, providing innovative incentives to retailers and organizing demand generation activitiesamongahostofotherthings.EachbusinessofHULportfoliohascustomizedthenetwork to meet its objectives. The most obvious function of providing the logistics support is to get the companysproducttotheendcustomer.

DistributionSystemofHUL
HUL's products, are distributed through a network of 4,000 redistribution stockists, covering 6.3 millionretailoutletsreachingtheentireurbanpopulation,andabout250millionruralconsumers. There are 35 C&FAs in the country who 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.

 (Fig.1SchematicofHULsDistributionNetwork) DistributionattheVillages:

The company has brought all markets with populations of below 50,000 under one rural sales organisation.Theteamcomprisesanexclusivesalesforceandexclusiveredistributionstockists.The teamfocusesonbuildingsuperioravailabilityofproducts.InruralIndia,thenetworkdirectlycovers about50,000villages,reaching250millionconsumers,through6000substockists.

(Fig.2RuralDistributionModelofHUL)

HUL approached the rural market with two criteria the accessibility and viability. To service this segment, HUL appointed a Redistribution stockist who was responsible for all outlets and all businesswithinhisparticulartown.Inthe25%oftheaccessiblemarketswithlowbusinesspotential, HULassignedasubstockistwhowasresponsibletoaccessallthevillagesatleastonceinafortnight 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

Coverage(IDC)method,companyvanswerereplacedbyvansbelongingtoRedistributionStockists, whichservicedaselectgroupofneighbouringmarkets.

DistributionattheUrbancentres:
Distribution of goods from the manufacturing site to C & F agents take place through either the trucksorrailroadsdependingonthetimefactorfordeliveryandcostoftransportation.Generally the manufacturing site is located such that it covers a bigger geographical segment of India. From theC&Fagents,thegoodsaretransportedtoRSsbymeansoftrucksandtheproductsfinallymake thelastmilebasedonthelocalpopularandcheapmodeoftransport.

Newdistributionchannels
ProjectShakti This model creates a symbiotic partnership between HUL 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 several NGOs 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 government agencies concerned and NGOs. Armed with microcredit, women from SHGs become directtohomedistributorsinruralmarkets. Themodelconsistsofgroupsof(1520)villagersbelowthepovertyline(Rs.750permonth)taking microcredit from banks, and using that to buy our products, which they will then directly sell to consumers.Ingeneral,amemberfromaSHGselectedasaShaktientrepreneur,commonlyreferred as'ShaktiAmma'receivesstocksfromtheHULruraldistributor.Afterbeingtrainedbythecompany, the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village. Each Shakti entrepreneur usually service 610 villages in the population strata of 1,0002,000. The ShaktientrepreneursaregivenHULproductsona`cashandcarrybasis.' ThefollowingtwodiagramsshowtheProjectShaktimodelasinitiatedbyHUL.

ProjectStreamline
To cater to the needs of the inaccessible market with high business potential HUL initiated a Streamlineinitiativein1997.ProjectStreamlineisaninnovativeandeffectivedistributionnetwork forruralareasthatfocusesonextendingdistributiontovillageswithlessthan2000peoplewiththe help of rural substockists/Star Sellers who are based in these very villages. As a result, the distributionnetworkdirectlycoversasofnowabout40percentoftheruralpopulation. Under Project Streamline, the goods are distributed from C & F Agents to Rural Distributors (RD), whohas1520ruralsubstockistsattachedtohim.Eachofthesesubstockists/starsellersislocated in a rural market. 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,intermsoffrequency, creditandfulllineavailability,istobeprovidedto ruraltradeaspartofthenewdistributionstrategy. ThediagraminthenextpageshowsthemodelofProjectStreamline.

HindustanLeverNetwork(HLN)
It is the company's arm in the Direct Selling channel, one of the fastest growing in India today. It alreadyhasaboutseverallakhconsultantsallindependententrepreneurs,trainedandguidedby HLN'sexpertmanagers.HLNhasalreadyspreadtoover1500townsandcities,covering80%ofthe urban population, backed by 42 offices and 240 service centres across the country. It presents a rangeofcustomisedofferingsinHome&PersonalCareandFoods. The New Compensation plan for HLN partners provides new exciting ways of earning substantial income in addition to offering rewards like revenue sharing through the innovative concept of pools

MotherDepotandJustinTimeSystem
Inordertorationalisethelogisticsandplanningtask,aninnovativestephasbeentheformationof theMotherDepotandJustinTimeSystem(MDJIT).CertainC&FAswereselectedacrossthecountry to act as mother depots. Each of them has a minimum number of JIT depots attached for stock requirements.AllbrandsandpacksrequiredforthesetofmarketswhichtheMDandJITsservicein a given area are sent to the mother depot by all manufacturing units. The JITs draw their requirementsfromtheMDonaweeklyorbiweeklybasis.

LeveragingInformationtechnology
HULcustomersareservicedoncontinuousreplenishment.ThisispossiblebecauseofITconnectivity across the extended supply chain of about 2,000 suppliers, 80 factories and 7,000 stockists. This sophisticated network with its voice and data communication facilities has linked more 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.

RSNetInitiative:
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 implemented to supply stocks to redistribution stockists on a continuous replenishment basis. Today, the sales system gets to know every day what HUL stockists have sold to almost a million outletsacrossthecountry.InformationonsecondarysalesisnowavailableonRSNeteveryday. RSNetispartofProjectLeap.ProjectLeapbeginswiththesupplierrunsthroughthefactoriesand depotsandreachesuptotheRSs.ThisensuresHULsgrowthbyensuringthattherightproductis available at the right place in the right quantities and at the right time in the most costeffective manner. Leap also aims at reducing inventories and improving efficiencies right through the extendedsupplychain. RSNethascomeasaforcemultiplierforHULWay,thecompany'sactionplantonotonlymaximise the number of outlets reached but also to achieve leadership in every outlet. RS Net has enabled stockists to place orders on a Continuous Replenishment System. This in turn has unshackled the fieldforcetosolelyfocusonsecondarysalesfromthestockiststoretailersandmarketactivation.It hasalsoenabledRSstoprovideimprovedservicetoretailoutlets.Simultaneously,HULisservicing theruralmarket,keyurbanoutlets,andthemoderntradeasasingleconcern.

AdexaiCollaborationsuite
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,reducinginventorybuffers,andoptimizingplanningandscheduling.HULchosethe AdexaiCollaborationsuiteforfacilitatingcentralizedmonitoringoftheSCM,livecustomer/supplier collaboration, and integrating demand and distribution planning with production scheduling. With theaggregatedviewofdataprovidedbytheiCollaborationsuite,HULwasabletocombinesalesand

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distributioneffortsonthediverseproductlines,whichresultedinsignificantsavingsonthecostside for inventories and distribution. HUL updates inventory positions, shipments and customer orders onadailybasiswiththesesoftwarepackagesandcangetapulseonthemarketrealtime.

(Fig.3HULsTurnoverComparedwithCompetitors,2006)

(Fig.4HULsMarketLeadershipacrossvariousFMCGCategories)

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3.ChannelDesign
HindustanLeverLimited(HUL)hastwotypesofchannelselling i. Regular(traditional)retailchannel,

ii. DirectSellingChannelinthenameofHindustanLeverNetwork(HLN). HUL has a well entrenched high distribution model which comprises of C&FAs, Redistribution Stockists,wholesalersandretailers(asshownearlier).HindustanUnilever'sdistributionnetworkis recognizedasoneofitskeystrengths.ItsfocusesonProductavailability,Brandcommunication,and higherlevelsofbrandexperience. HULsSalesBreakupthroughdifferentchannels:
Sales Break-up Through Different Channels

7% 33%

60%

Modern Retail

Urban General Trade

Rural Areas

ChannelStructure(SpecialFocusisonJamshedpur)

Typically,thegoodsproducedineachoftheHUL's40factoriesaresenttoadepotwiththehelpofa carryingandforwardingagent(C&FA).Thecompanyhasitsdepotineverystateofthecountry.The C&FA is a third party and gets servicing fee for stock and delivery of the products. In each town, thereisatleastaredistributionstockist(RS)whotakesthegoodsfromtheC&FAandsellsthemto retail outlets. In Jharkhand the C&FA is in Ranchi and Jamshedpur is serviced by 3 Redistribution StockistsatSakchi(M/sOmPrakashAgarwal),BistupurandParsudih. TheHULmanagementrealizedcertainproblemswiththeexistingsalesmodel.First,themodelwas 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 has changedthepatternthecustomersshop.Largeretailselfserviceshopsarebecomingcommonplace.

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In response of these problems, HUL redesigned its sales and distribution channel and the new systemisknownas'diamondmodel'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, distributionexpensestoretailers,incentiveschemes&otherincidentalexpenses. Modesoftransportused:Rickshaw,tempo. Incentiveschemes:Before2000holidaypackagesandtoursbutafter2000nononmonetary incentiveforRS. Software systems and Information System: UNIFY 8.3 (Developed by IBM & CMC). This softwareneedstobesynchronizeddailyandthesystemupdatesanyinformation/incentive schemes/salesfiguresetctoandfromthecommonsharedplatform. AreasofOperations:MarkedforeachoftheRS. SellingOperations:RSssellsthegoodsto o o Wholesaler: GetscashdiscountsandotherschemespromotedbyHUL(getspointsunderVijetaScheme). Retailers: TotalretailerbaseinJamshedpur:Approximately1070. SalesMargin:Dependsontheproduct o o o Soap,detergents Cosmetics Fooditems 8%onMRP 10%onMRP 8%onMRP Wholesaler(gets1.5%max.discountfromRS) Retailers(gets1.0%max.discountfromRS)

 Incentiveschemes: Companyprograms(SchemeDiscounts+CashDiscounts) TPRschemesbasedonSales(1%to4%) Vijetaschemeisnotforretailers. FieldSalesForce:

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To meet 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. TheimportantactivitiesthatHULfieldsalesforcedoesare(i)targetchasingand(ii)reportingona dailybasis.AccountinformationismaintainedonpalmtopsgivenbyHUL.Duringourresearchand informalsurveyofHULfieldsalesforce,wecametoknowthatforthelasttwoyears,trainingisnot beinggivenatalltothesalesforce. HULhaslimitedthenetworkchannelsellingtocategoriesofHome&PersonalCare(HPC)andFood products with exclusive brands for this channel. That is, these particular brands (products) are all exclusivetoHLN,specificallydevelopedfortheDirectSellingchannel,andnotavailableintheretail channel. The general trade comprises grocery stores, chemists, wholesaler, kiosks and general stores.HindustanUnileverserviceseachwithatailormademixofservices.

4.InitiativestakentoImprovetheDistributionNetwork
HULhastakenthefollowinginitiativestoimproveitsdistributionnetwork: Setting up of a fullscale sales organisation comprising key account management and activationtoimpact,fullyengageandservicemodernretailersastheyemerge. ServicingChannelpartnersandcustomerswithcontinuousdailyreplenishment. LeveragingscaleandbuildingexpertisetoserviceModernTradeandRuralMarkets. Delayeringofsalesforcetoimproveresponsetimesandservicelevels. Revamping of its sales organisation in the rural markets to fully meet the emerging needs andincreasedpurchasingpoweroftheruralpopulation.HULsdistributionnetworkinrural India already directly covers about 50,000 villages, reaching about 250 million consumers throughabout6,000substockists.

15 Implementationofsupplychainsystemthatconnectsstockistsacrossthecountry,andalso includesabackendsystemconnectingsuppliers,allcompanysitesandstretchingrightupto stockists. IT tools have been deployed for connectivity across the extended supply chains. BackendprocesseshavebeencombinedintoacommonSharedServiceinfrastructure. LaunchingofProjectShaktithroughwhichthe companyisable toextenditsoperationsin villages. HUL has also included several NGOs and state governments as the initiative helps ruralwomentoimprovetheirfinancialposition. LaunchingofHULNetworktoleveragethechannelofdirectsellingbypresentingcustomised offeringsin11homeandpersonalcareandfoodcategories.Startedin2003,italreadyhasa baseof300,000consultantsacrossthecountry. StartingoffranchisedLakmeBeautySalonsandAyushTherapycentrestoofferstandardised services, in line with the strategy to leverage the equity of its brands through relevant services. Finding out Innovative ways to reach out to its consumers, particularly in rural areas by leveragingnonconventionalmedialikewallpaintings,cinemavans,weeklymarkets(haats), fairsandfestivals. InitiatingtheconceptofSuperValueStores(SVS)inurbanareastopartnertraditionalstores to provide a range of services ranging from managing their inventory to setting up POS (pointofsale)banners.Inadditiontothis,toboostuptraditionalretailinthefaceincreasing inroads made by large, modern retailing chains like Spencers, Reliance Fresh etc (where HULissqueezedharderfordiscounts),HULstartedrestructuringsomeoftheselectedSVSs intotheformofselfserviceretailshopsalamodernretails.Thisistoprotect&maintainthe competitiveadvantagethatHULhasoveritsbiggestcompetitorsintheothermarkets(e.g., P&G),withitsverydeepdistributionreachthroughtraditionalretail. LaunchingtheUnicareschemewithupmarketpharmaciesandretailerstosaleitspremium brands. Undertakingseveralinitiativesfortraditionalchannelsinordertoimproveitscapabilitiesat thefrontendbydevelopingskillsforstockists'salesforce.Under'ProjectDronacharya',the FMCGmajorcontinuouslyimpartedtrainingtoover10,000stockistsalesmen. Launching of several promotional schemes for existing wholesalers and distributors. For instance,ithasstartedtheVijetaRishtaJeetKaschemelastyeartoprovideaplatformfor thewholesalerandHULtogrowthebusinessbyearningpointsandredeemingthem.

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5.FieldForceManagement
TheworkingcycleofatypicalHULfieldforcememberisfrom21stofeverymonthtothe20thofthe nextmonth.Duringthisperiodheisgivenvarioustargetsthathelpstoachievecompanyobjectives andgiveshimachancetoprovehisperformancerelativetoother. Tostartwiththefieldforcememberisgivenaparticularareaandhisresponsibilityistocatertoall theretailersinthatarea.Whiledecidingtheareaforeachmemberofthefieldforce,thecompany makessurethattheoperatingareaofeachfieldmemberdoesn'toverlapwithhisothercolleagues. TherearevariousmethodsusedbythecompanytoincentivizethefieldforceMonetaryandNon 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) SECONDARY ECO QOC FCS FOCUS

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Secondary Sale Based on the operating area, each member is given a specific target in terms of value(e.g.,Rs.15lacs)fortheoperatingmonth(21st20thofnextmonth).Ifheachieves100%of thetargethegets2.5points,ifheachieves95%targethegets1.5points.Thesepointsareusedto addtothetotalQOCscoreaswellaslinkedtomonetaryincentive. ECO/WidthpackTargetThisisusedforthepenetration/reachofcertainproductsintheexisting market.ThefollowingisatypicalECOtargetassignedtoafieldforceagent: LuxInternational PearsSoap Rin 105outletsx1SKU 135outletsx1SKU 104outletsx1SKU 100outletsx1SKU

BreezeSoap

Theoutletsmentionedarewithintheoperatingareaofthepersonand1SKU=Rs.27/.Basedon thistheFieldpersoncalculatesnumberofpacksheshouldselltotheretailers.Theconcernedagent receivesthistargetaround25thofeachmonthandhastocompletethistargetwithinthe5thdayof next month. Upon completion he gets additional 0.5 points added to his QOC score along with monetary incentive associated with it. However if this is not met within 5th, he looses the opportunity. Focus/DepthPacktargetThisismainlyusedtoincreasethesalesvolumeofcertainproducts.A typicalFocustargetisgivenbelow: LuxInternational LifeBuoy Wheel BreezeSoap Rs20,640/@Rs6/perunit Rs70,220/@Rs10/perunit Rs99,000/@Rs10/perunit Rs27,000/@Rs10/perunit

This target needs to be achieved within 20th of next month. Upon achieving the target the field personisawarded0.5pointswhichisthenaddedtohisoverallQOCscore. FieldCapabilityScore(FCS)Inthiscomponent,thefieldforcepersonsarerequiredtoensurethat the scheduled visit/outlet billing is such that at least 15 items are demanded per order. If this is achieved the retailer gets a discount of 1% on the billed amount and on the other hand the field person gets an additional score of 0.5 which is added to his QOC score. Each scheduled visit per outlet is one per week. For example if there are 100 outlets within the operating area of a field personthenthenumberofvisitperweekis100andtotalnumberofvisitpermonth=100x4=400.

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Thesalespersonisrequiredtoachieve90%successratetoget0.5pointsforhisQOCscoreandat least65%forasatisfactoryperformance. NonMonetaryMethods TheotherpurposeoftheQOCscoresistohighlighttheperformanceofthefieldpersonamonghis peers. Based on the QOC various awards are distributed to the field persons at the end of every month. These awards are also known as MOC Star awards. MOC stands for Monthly operating Cycle. IfQOCscore>4.5Thepersoniseligiblefor7staraward IfQOCscore>4Thepersoniseligiblefor5staraward IfQOCscore>3.5Thepersoniseligiblefor3staraward In the event of exceptional performance, management representatives from the regional office cometothezonalofficetodistributetheawards.Thephotographoftheawardwinnersisdisplayed intheofficeasasourceofinspirationforothersalesperson. TargetSettingMechanismandmonitoring Theregional officemonitorstheperformanceofvariouszones.Athoroughanalysisisdoneatthe end of each month and based on that the weak products are identified or those for which the demandhasweakened.ThisisthebasisofsettingECOandFOCUStargetsforthefieldpersons.Each fieldpersonisgivenapalmtopwhereinhecanfeedtheentriesonthespotwherethetransactionis done.Thissolvesbasicallythetwopurposes a)Thefieldpersonisfreedfromthetedioustaskofmaintainingcumbersomerecordsandcanthen concentrateonthejob(thusITisreplacingsomeofthefieldforceorotherchannelmembers), b)Thesolditemisimmediatelyupdatedinthecompanyinformationsystem.

6.AnalyticalFramework
WetriedtoanalyzeHULsdistributionnetworkinthelightof20mostsignificantvariablesthataffect the distribution part of channel management for any organization in the business of marketing & sellingofgoods.Thevariables,theirexplanationsandtheirimpactontheHULsdistributionnetwork aregivenbelow 1. NumberofConsumers In retail business dominated by traditional stores like Kirana Stores etc (Indian retail business falls in this category), higher the no. of consumers, higher will be the no. of channel intermediaries.Theimplicationofthisisthattherewillbemanylayersinthechannelinsucha

19 situationandmanagingsuchacomplexdistributionnetworkbykeepingtabsoneveryplayerwill be a huge task. Moreover, Transport & Logistics (T&L) support provided by the organization needstobewellorganized. ImplicationforHUL 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, covering about 6.3 million retail outlets reaching the entire urban population, and about 250 million rural consumers in India. Its said that HUL is able to touch the lives of about 2 out of every 3 Indian consumers. This achievement is due to the sheer strength of its distribution network(productsshouldbegoodasalways,otherwisetheywillfindnobuyersinthelongrun). Foracomparison,P&G,worldslargestFMCGmajor,doesnotfinditsnameinthelistoftop5 FMCGmajorsinIndiaasitsstrengthliesinmanagingmodernretail(biggestexample,WalMart), butnottraditionalretail.

2. GeographicDispersionofConsumers Again,thisiscloselyrelatedwiththepreviousvariable,moresoinalarge,geographicallydiverse country like in India. With the increase in this dispersion level, more intermediaries and more layersarerequiredinthedistributionnetworksoastoeffectivelyreachthelength&breadthof the country. Obviously the T&L management for such an organization would be critical to accomplishthis. ImplicationforHUL For a country as geographically diverse as India, panIndian presence & market leadership can only be possible when products reach even the remotest parts of the country. HUL is very successfulinachievingandmaintainingthisreachduetoitsdistributionnetwork. 3. FrequencyofPurchase If 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.

 ImplicationforHUL

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HUL has about 4000 redistribution stockists, who supply to approx. 6.3 million outlets across India.Sincemanufacturingisdoneat40plantsaroundthecountry,rationalizingthelogisticsand planningisahugetask.AninnovativestepinthatregardhasbeentheformationoftheMother 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 of markets which the MD and JITs serviceinagivenareaaresenttothemotherdepotbyallmanufacturingunits.TheJITsdraw theirrequirementsfromtheMDonaweeklyorbiweeklybasisandsupplytostockistsinthat area,who,inturn,supplytoretailers. 4. TendencytoPostponePurchase Ifthetendencytopostponepurchaseislesser,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. ImplicationforHUL Since FMCG products are used regularly and these products are not necessary evils, distributionnetworkofHULdoesnotrequireanyexpertfieldforcetosellitsproducts.Onlythe recent diversification of HUL into Home Water Purification business (Pure It brand) needs dedicatedfieldsalesforce. 5. LevelofFamiliarity/Knowledge(ofconsumer)abouttheProduct Iftheleveloffamiliarityofconsumerwiththeproductishigher,lowerwillbetheimportanceof fieldsalesforceandhigherwillbetheimportanceofchannel. ImplicationforHUL SinceFMCGgoodsareverymuchfamiliartoconsumers,channelanditsdifferentmembersare very much important to HUL and field sales forces function is mostly limited to channel managementandensuringavailabilityofproducts.

 6. DegreeofBrandLoyalty

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If the consumers are more brand loyal, then less push will be required from the channel memberstoselltheproductsastherewillbesufficientpullordemandfromtheconsumers. Thisimpliesthatforproductswithloyalcustomerbase,effortsfromthechannelmemberscan bemuchlesserforfinalofftaketohappenwhichinturnleadstolessermarginstothechannel members for those products. For faster moving products (mostly due to brand pull), retailers maynotbeaversetoslightlylessermarginsasrotationoftheproductsishighandthushis/her ROIisprotected. RetailersROI=

M arg in Rotation Investment

ForaFMCGplayerwithanonestablishedbrand,marginstochannelmembersandpointofsale (POS)advertisingarebothimportant. ImplicationforHUL AsHULenjoysleadershippositioninmanyFMCGsegmentslikeSoaps,Detergents,PersonalCare productsetcwithstrongbrandswithcontinuouspull,HULhaslesstoworryaboutmarginsto channelmembersorPOSadvertising.Butthissituationcanchangeconsiderablyinthefaceof riseofasignificantcompetitorhavingalmostthesamereachasHULhas(e.g.,ITCasitseating intoHULsmarketsharecontinuouslysinceitenteredFMCGsegment). 7. PurchasedonImpulse Theimpulsepurchaseproductslikechocolates,toffees,colas,icecreamsetc.followSaysLaw whichstatesthatSupplyCreatesDemand,implyingavailabilityoftheseproductsarethemost critical aspect for these to be sold and consumed. This stresses on the fact that T&L for these productsbecomesveryimportant. ImplicationforHUL HULhasonlyoneproductinthisimpulsepurchasecategoryKwalityWalls(icecream).HULis #2afterAmulinthisFMCGsegment.Toincreasethisbrandssale&marketshare,availability, visibilityandconsumermindsharehastobeincreasedandimprovedaswell. 8. LevelofInvolvement(LOI) Level of involvement (i.e., time & effort spent by the consumer) generally depends on the product cost. If LOI is higher, lower is the importance of availability and more critical is the

22 supply of information as consumer decision process depends more on elaborate information search. ImplicationforHUL AsFMCGproductsaregenerallyLowInvolvementProducts,HULhastobothermoreonensuring availabilityoftheproducts,ratherthansupplyofinformation.

9. PurchasedasaBasketofGoods Theproductswhicharegenerallyboughttogetherbyconsumersasabasketofgoods(e.g.,Rice, Flourpowder,Cookingoiletcatthebeginningofthemonth)aretobemadeavailabletogether forfinalofftake. ImplicationforHUL ThisaspectpartlyappliestoHULsproductsassomeproductslikeshampoos,soaps,detergents mayfallinabasket.EfficientdistributionnetworkofHULensuresavailabilityofallsuchproducts ateachsellingpoint(individualretailer). 10. Speed&ComplexityofDecisionMakingProcess Ifthespeedislow,thenthecomplexityofthedecisionmakingprocessishigherandgreateris theimportanceoffieldsalesforceandthesalespersonsskill,knowledgeandquality. ImplicationforHUL ForFMCGproducts,complexityofdecisionmakingprocessisnotthereandso,speedofdecision makingishigh.ThismeansthatforHUL,fieldsalesforceisoflimitedfunctionalusage. 11. PresentofExpertInfluencerintheDecisionMakingProcess Roles of sales field force vary depending upon whether expert influencer (e.g., doctors) is present in 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 to make the buying behaviour shift from picking/variety

23 seekingtosubcontractedandmakeconsumersmoreloyaltothebrand.ThesearetrueforHUL also(e.g.,PondsIntitute).

12. ElementofCrisisPurchaseExists If element of crisis purchase exists in the buying decision of a product (for example, bulbs & tubes),thenitsavailabilitybecomescritical. ImplicationforHUL None of the products of HUL fall under this category. Nevertheless, availability of products of HULisnecessaryforotherreasons. 13. ElementofRiskAversionExists If 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,channelmemberscanunsellabrandbygivingexplicitorimplicitsuggestions. This implies that in such a case, selling depends on many cases how the company is taking care of channelmembers(keepingthemhappy)suchthattheyarenotluredbyothercompetitorsor directedbygrievancessoastounsellthebrand.ThissituationisprevalentmostlyinConsumer Durables(likeTV,Refrigeratorsetc.).InFMCGgoods,thesituationdoesnotexistperse. ImplicationforHUL HULisnotaffectedforitsFMCGproductsbythisvariable.ForwaterpurifierPureIt,thiscan haveconsiderableimpactifitssalestartstohappenthroughchannelmembersratherthanby fieldsalesforceasishappeningnow. 14. PerishabilityoftheProduct Iftheproductisperishable(havingsmallshelflife;examplesnewspaper,milk,fruitsetc),then thedimensionofspeedinreachingtheendconsumersbecomescritical&T&Lassumesgreat significanceforthecompany. ImplicationforHUL The FMCG products that HUL sells are not perishable by nature, but have limited life. So this aspectisnotcriticalforHUL. 15. TimeBandAssociatedwiththePurchaseoftheProduct If there is seasonality/cyclicity for the demand or purchase of the product (examples newspaper, milk are most on demand in the 1st three hours of the day; cooking oil, rice etc

24 grocery items are most on demand in the 1st week of the month), then high T&L and infrastructuralrequirementsareneededforthelastmileforthetimebandwhendemandis maximum. It is possible to have idle capacity in the areas mentioned above outside the peak requiredtimeband. ImplicationforHUL ForsomeoftheproductsofHUL,theabovestatedvariableissignificant.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 increasesinthe1st&4thweekofamonthfortheproductsmentionedabove.Thisisoverand abovetheregularreplenishmentofstocksatretailersdonebydistributors.FestivalslikeHolietc. may also increase the demand for personal care items like soaps, shampoos etc for a short periodanddistributionnetworkshouldbegearedupnottomissanysuchopportunity.

16. Fungibility Fungibility is the property of a good or a commodity whose individual units are capable of mutualsubstitution.Examplesofhighlyfungiblecommoditiesarecrudeoil,wheat,orangejuice, preciousmetals,andcurrencies.Fungibility hasnothing todowith theabilitytoexchangeone commodityforanotherdifferentcommodity.Itrefersonlytotheeaseofsubstitutionofoneunit ofacommoditywithanotherunitofthesamecommodityforallintentsandpurposes. Fungibilityisdifferentfromliquidity.Agoodisliquidandtradableifitcanbeeasilyexchanged 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, one Rs. 100/ bank note is interchangeable with 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 (diamonds are not fungible). Indian rupee bank notes are 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 gold standard. The combination of fungibility and liquidity is one of the reasons why gold has successfullyservedasmoneyforthousandsofyears. Further,afungiblethingcanbecomenonfungibleundersomecircumstances.Forexample,an old coin or a currency note may assume a value 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. Theoutcomeofproductfungibilityisthatthemorefungibleaproduct becomes,higher isthe chancethatpartsofthedistributionchannelitcanbereplacedbyIT.Agoodexampleofthisis dematerialization(Demat) routeforsharetrading nowwherethereisnophysicalexistenceof shares. ImplicationforHUL As branded FMCG goods are not fungible per se (branding is done to decommoditize & differentiatetheproduct),theimportanceofchannelmemberswillcontinue.

17. DegreeofCustomizationPossible Degreeofcustomizationdirectlyaffectseconomiesofscale;higherthecustomization,lesserthe economiesofscale.Also,criticalityofsalesfieldforceincreaseswithcustomizationlevelsofthe offering. ImplicationforHUL ForFMCGproductsofHUL,whicharemassproduced,suchcustomizationsarenotpossibleand thus with higher economies of scale, lower criticality of field forces from the standpoint of customizationofproductofferings,costsarelowerintheserespectswithHUL. 18. NegativeorPositiveReinforcingProduct Negative reinforcing products are those which are bought to avoid/reduce the problem (ex. insurance, washing machine, car battery etc). Positive reinforcing products are those which gratify the senses (ex. Perfumes, Chocolates, Vacation etc). Shopping experience becomes a criticalaspectforpositivereinforcingproductstoreaffirmthepositivefeelings. ImplicationforHUL Axe & Rexona deodorants are distinctly positive reinforcing products from HUL, including others like Lux, Lakme etc. So these are seen in most shopping malls etc. with high visibility displaystoreaffirmthefeelings.Consumersarewillingtopayhigherforthesebrands.

 19. Value/VolumeRatio(ValueDensity)oftheProduct

26

Thisratioisveryimportantforboththecompanyandtheretailerforitstwocriticalaspects T&L cost and retailer ROI/sq. cm (retailers are actually in real estate business in true sense). Highertheratio,betteritisforbothcompanyandtheretailerashigherratiosignifieslesserT&L costperunitvolumetransportedforthecompanyandgreaterROIperunitofshelfspaceforthe retailer. ImplicationforHUL IngeneralforFMCGgoodsandforHULaswell,valuedensityisrelativelylower.Inadditionto this fact, increasing trend towards using smaller pack sizes increases the packaging density (increased packaging density increase cost to some extent, but favours mechanized handling greatly,reducinghandlingcosts).Sincevaluedensityisless,transportationcostswillbehigher 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.FinancialAnalysis
We have taken data from CMIE database while analyzing the performance of marketing & sales (including distribution) functions of HUL and comparable companies. By comparable, we mean those companies whose main economic activity, as defined in the CMIE database, is the same as HULs.Forexample,maineconomicactivityofHULasdefinedinthatdatabaseisCosmetics,toilet preparations, soap & washing prep. Obviously, one major FMCG company in India, ITC, does not comeunderthispurviewasitsmajoreconomicactivityisTobaccobusinesswhichisnearly85%ofits totalrevenue.Butforthesakeofcomparison,wehaveincludedITCalsoasitsnontobaccoFMCG businessrevenueinFY08wasRs.2511Cr.,nearlyashighasNirma,thesecondlargestplayerafter HULinHULschosencategory.Butthefiguresforadvertising,marketing&distributionexpensesof ITC as percentages to its total sales may not be directly comparable to those figures of HUL 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

segmentwhereHULhasrelativelylesserpresence(ProcessedFoods&Icecreamsegmentstogether constituteonlyapproximately5%ofHULstotalsales).InTea,HULispresentsignificantly,though. Inthefollowingpagesadvertising,marketing&distributionexpensesofmajorFMCGgoods(inHULs categorymostly)arebeingshown.Itistobeunderstoodherethatmarketingexpenseshereinclude commissions, rebates, discounts, sales promotional, expenses on direct selling agents & entertainmentexpenseswhereasdistributionexpensesincludeoutwardfreight. Exhibit1:AnnualSpendinAdvertising,Marketing&DistributionfunctionsinFY08
Annual Rs. Crore Mar-08 Sl. Company Name No.
1 HUL

Annual Rs. Crore Mar-08 Advertising expenses

1422.9

Sales
14937.88

Advert. Exp. As % of Sales

9.53

Annual Rs. Crore Mar-08 Marketing expenses

6.07

Marketing Distribution Exp. As % expenses of Sales

0.04 731.41

Annual Rs. Crore Mar-08

Dist. Exp. As % of Sales

4.90

2 3 4 5 6 7 8 9 10 11 12

Nirma Dabur Colgate-Palmolive Reckitt Benckiser P&G Home Godrej Emami P&G Hygiene & Health Henkel Henkel Marketing ITC

2651.15 2128.17 1597.3 1334.76 1079.57 922.78 586.42 556.02 430.33 417.79 21467.38

40.96 248.1 256.51 207.85 119.45 61.4 102.92 57.95 0 0 427.83

1.54 11.66 16.06 15.57 11.06 6.65 17.55 10.42 0.00 0.00 1.99

71.87 21.4 0 9.34 44.31 42.37 27.46 40.85 40.94 65.64 68.17

2.71 1.01 0.00 0.70 4.10 4.59 4.68 7.35 9.51 15.71 0.32

136.91 66.84 35.36 55.88 70.54 32.27 14.86 37.24 16.4 17.63 548.4

5.16 3.14 2.21 4.19 6.53 3.50 2.53 6.70 3.81 4.22 2.55

Exhibit2:AdvertisingExpensesaspercentageofSales
Advertising Expenses as % of Sales 20.00 17.55 16.06 16.00

18.00 15.57

Advertising Exp. as % to Sales

14.00 11.66 11.06 10.42 10.00 9.53

12.00

8.00 6.65 6.00

4.00 1.54 0.00 0.00 HUL Nirma Dabur ColgateReckitt Palmolive Benckiser P&G Home Godrej Emami P&G Hygiene & Health Henkel Henkel Marketing ITC 0.00 1.99

2.00

28

We can see here that Nirma, Godrej & Henkel (ITC also) have less advertising expenses (as % to sales)thanHUL.Importantly,Henkelhaszeroadvertisingexpensesin2008,whichmayexplainthe factthatawarenesslevelinconsumersforHenkelbrandsislow.HULadvertisingisdonemainlyin case of soaps (for example Dove; done mainly 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 (only 1.54%). ITC is altogether a different story. Cigarettes & other tobacco related products which constitute approx. 85% of its sales, all relate to intoxication or habitual consumption patterns having intensely brand loyal consumers and thus almost no advertising(surrogateadvertisingisdone)isneededeithertoreaffirmthebrandsorintroducenew consumers to the brands (there is regulatory angle as well). Current consumers of these tobacco products are the biggest advertising agents that ITC has and of course, they do it voluntarily and without knowing what theyre doing. But while 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,Cokeandothers. 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 & expensive celebrity endorsers like Amitabh Bachchan, Kareena Kapoor, Govinda etc. On the other hand, we see regular advertising streams for Colgate toothpastes and other oral care products, in which category ColgatePalmolive is the market leader. ReckittBenckiser advertises considerablyforitsbrandslikeHerpic,Mortein,Vanish,Clearasil,Dettol,Strepsilsetc,whichisthe reasonforitshighadvertisingcostaspercentageofsales. MarketingExpenses Asstatedearlieralso,marketingexpenseshereincludethefollowing commissions rebates

 discounts salespromotional expensesondirectsellingagents entertainmentexpensesetc. Exhibit3:MarketingExpensesaspercentageofSales

Marketing Expenses as % to Sales 18.00 15.71

29

16.00

14.00 Marketing Exp. as % to Sales

12.00

10.00

9.51

8.00

7.35

6.00 4.59 4.10 4.00 2.71 2.00 0.04 0.00 HUL Nirma Dabur ColgateReckitt Palmolive Benckiser P&G Home Godrej Emami P&G Hygiene & Health Henkel Henkel Marketing ITC 1.01 0.00 4.68

0.70

0.32

Here we see that the marketing expenses of HUL are among the lowest in the market (only the second lowest after Colgate Palmolive which has very good brand pull for its Colgate toothpastes).ThisprovesthatHULisabletomaintainconsiderablebrandpullthroughadvertising. ITCagaincomesamongthelowestitstobaccoproductsrequireverylittlepushandhaveveryhigh rotations.Also,ITCmostlydealswithsmallretailersanddistributors(paancigaretteshopsowners) whohavemarginalbargainingpower. AnotherrevelationisthatHenkel,whichhaszeroadvertisingexpenditure,hasthehighestmarketing expenses among all others. But this strategy to push the products through the channel partners may not be a good one for Henkel as it might be losing out for the lack of visibility and thus consumer mind share and brands such as Margo, Fa, Neem toothpaste etc are losing out in the market. Further, it is also a pointer to the fact that Henkels largest business share is in industrial

30

chemicals (adhesives, sealants e.g., popular brand Loctite; this segment constitute ~44% of worldwide sales of Henkel) and for B2B, advertising per se is not that much important. For B2B , important is directselling approach, which generally requires negotiations, volume discounts etc, whicharereflectedinhighestmarketingexpenses(aspercentagetosales)comparedtoothers. P&G is in between the extremes and with considerable advertising expenses also, it is unable to createsufficientpullforitsproductsinIndia(asevidencedbythefactthatmarketingexpensesare also relatively higher) or its getting stuck for the lack of sufficient distribution muscle a la HUL in traditionalretailinIndiaandsuffersfromlackofreachandavailabilityattheendconsumerlevel. As mentioned earlier, both ColgatePalmolive and ReckittBenckiser both enjoys very good brand loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (#1 in antiseptics),Herpic,Morteinetc.Thisiscorroboratedbythefactthatthesecompanieshavesomeof thelowestmarketingexpenses(aspercentagetosales)inthegroup,asshowninthechart. DistributionExpenses Distributionexpensesincludetheoutwardfreightcosttothecompany. Exhibit4:DistributionExpensesaspercentageofSales

Distribution Expenses as % to Sales 8.00

7.00 6.53 6.00 Distribution Exp. as % to Sales 5.16 5.00 4.90 4.19 4.00 3.50 3.14 3.00 2.53 2.21 2.00

6.70

4.22 3.81

2.55

1.00

0.00 HUL Nirma Dabur ColgateReckitt Palmolive Benckiser P&G Home Godrej Emami P&G Hygiene & Health Henkel Henkel Marketing ITC

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,brandedattaetcinthefirst&lastweekofthemoth. ITC(tobacco),Henkel(largelyB2B)aremostlyprotectedfromthisimplicationofthevariable. AnotherimportantthingtorememberthatvaluedensityofFMCGgoodsisrelativelylower,causing share of transportation costs in the overall cost structure to be relatively higher. This implies dispersed manufacturing, locating manufacturing plants nearer to major markets. So one location manufacturing to get higher economies of scale and on the other hand, trying to serve geographically diverse markets may not be economically attractive for FMCG sector. Compared to 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 bythefactthatNirmas higherdistributioncost percentagethanHUL.ForP&G,thesamereasons significantlyaffectitsdistributioncostwhichishighestforthegroupanalyzed.

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. CMIE 8. Wikipedia