HUL: How does brand strength tames inflation beast?

With sharp rises in the cost of raw materials, companies find it difficult to maintain margin. However, Hindustan Unilever Limited (HUL) seems to buck this trend. We explore how does HUL tame inflation beast?

HUL: How does brand strength tames inflation beast?
HUL: How does brand strength tames inflation beast?

Abundant liquidity pumped by central banks across the globe helped the economy get over the crisis of the pandemic. But it has surely caused high inflation across all commodities. Indian companies are no exception to this phenomenon. With sharp rises in the cost of raw materials, companies find it difficult to maintain margin. However, Hindustan Unilever Limited (HUL) seems to buck this trend. We explore how does HUL tames the inflation beast?

Inflation has been really high!!!

Let us look at the price growth of base commodities used by HUL.

Raw Material
Price Increase in last year
Palm Oil
64%
Crude Oil
70%
Aggregate Material Cost per ton
30%

But HUL has consistently maintained its EBITDA (Earnings before interest, tax, depreciation, and amortization) margin.

HUL has been able to maintain its margin despite high inflation in commodity price

One possibility is that they might have reduced discretionary advertising spending and maintained margin. Did they?

Advertisement spend has been broadly constant for HUL 

The answer is resounding. No!!!

Then how??

Ritesh Tiwari, CFO, Hindustan Unilever explained this in their December 2021 earnings call discussion.

Almost 30% of our business comes from packs that operate at magic price points, like INR 1, INR 5 or INR 10. In these packs, our preferred mode of taking pricing is the reducing grammage.

What is reducing grammage?

It is just a fancy way of saying, they have reduced the content of the packet while keeping the price the same. It is also known as Shrinkflation.

This also then explains why their revenue growth is 10%, while volume growth is just 2%. Because they are shipping less quantity per packet now.

Price per packet = Price of the packet ÷ Content of the packet

Rather than increasing the price of the product, HUL has reduced the content of the packet. Consumers do not feel they are paying more. At the same time, the company has raised its price per packet and hence protected the margin.

Only on 30% of the portfolio, what about the rest?

Ritesh explains:

With the significant inflation persisting in crude and its derivatives, we have continued with our calibrated pricing actions in both Fabric Wash and Household Care.

As customers of these segments are not too value-conscious, HUL took price hikes to mitigate the inflation impact.

So it all boils down to who is the end-consumer and how much wallet share the product takes for the consumer. If wallet size is limited, HUL reduces the content of the packet. If wallet size is not limited, it takes a price hike. On strength of its brands, HUL has been able to play its cards well to maintain the margin as well as growth.

This is what we have to say on this. What do you think?

Bonus insight: what is the connection between schools being closed and Horlicks?

Sanjeev Mehta, CEO, HUL says

One of the big consumers of some of our variants of Horlicks are the school kids. And when kids don't go to school, yes, there is very clear evidence we have that the consumption of Horlicks doesn't go as much as it is when the kids go to school. And while they are home, because the mothers have other options rather than just giving Horlicks.