A couple of weeks from now, one of India's most admired companies, Hindustan Lever, will announce its annual results for 2000. And with it will emerge the disquieting story of how the consumer-products giant has been pummeled across product categories - for the second consecutive year.

Only this time, it has all the makings of a full-blown crisis. In 1999, Keki Dadiseth's last year as chairman, the first signs of a Lever slowdown had begun to surface. That year, topline growth - which had been consistently over 16% for many years - suddenly dipped to 7%. That meant that for the first time in many years, Lever was in danger of not achieving its stated long-term growth target of doubling turnover every four years, and profits every three. Growth in profitability, estimated at about 15% last year, also slowed down, as it became increasingly difficult to squeeze out any remaining inefficiencies in the system. For a company that prided itself on delivering consistent results year after year, this was an aberration it could do without.

So, when Dadiseth handed over the baton to new chairman Manvinder Singh 'Vindi' Banga on 1 May 2000, it was a foregone conclusion that Banga would move swiftly to put the house in order. After all, he was reckoned to be one of the most able and savvy managers that the Lever system had produced in recent times.

But, if the 2000 results are any indication, reversing the downward spiral is likely to take far longer than Banga would have initially anticipated.

Sources close to Lever House say that last year, HLL's turnover inched up a paltry 4% from Rs 10,142 crore.

Other than the Nirma challenge in the early 80s, there has perhaps been no other time in Lever's history when it has been under such intense pressure. But there's a difference this time: the giant's problem is no longer about warding off a single, nimble rival. It's about tackling threats from a dozen different directions. And to sort out the problems, chairman Banga will have to deal with complex issues, ranging from strategy, structure and competition to the state of the Indian marketplace.

Can Banga pull it off? That's still an open question. "Despite his obvious brilliance, the dice is loaded against him. It's a Herculean task trying to manage an unwieldy company. Especially one that seems to have lost direction after it has been hit by the double whammy of declining profits and stagnant sales," says a former Lever manager, who wants to remain anonymous.

Sure, Banga has prepared a new gameplan to reverse the tide. But before we lift the veil on that one, let's get a glimpse of the events in 2000.

So, What Went Wrong In 2000?

Let's start with the soap saga. Like in 1999, Lever once again underestimated wily Nirma. With the effects of the market slowdown kicking in, rural demand gradually shifted to cheaper, more-value-for-money brands. It is unlikely that Lever did not spot this trend, given that it had made considerable gains through its economy brands, Wheel and Vim bar.

But it seemed unable to get its act together quickly enough to dominate the market. Much of it was because Nirma had changed the rules of the game with the launch of its fighter brand, Nima. All this time, Lever had controlled the Rs 3,500-crore soaps market, with a 70% share. Its growth strategy was focused on deriving greater realisations by upgrading consumers to higher-priced soaps. Things seemed well on course till Nirma started severely undercutting key Lever brands.

By the end of 1999, Nirma's combined share of the toilet soaps market had jumped to 20%. In 2000, the honours clearly went to Nima.With a penetration price of Rs 5, Nima's rose and sandal variants took away share from Lux as well as other brands in the popular soap segment, growing rapidly to about 50% of Nirma's total volumes.

Why couldn't Lever retaliate? After all, it had two fighter brands, Breeze and Jai, to counter Nirma. However, while Breeze did well, Jai came a cropper.

Its perfume-based positioning simply didn't cut the mustard with customers. What's more, Lever's business system couldn't price a soap at Rs 5 to take on Nima. "At that price, we wouldn't have the margins to invest in brand building," says a company executive. Lean and mean Nirma could do it - because it did not have the kind of overheads that Lever had. The result: Nirma's total tonnage catapulted from 80,000-odd tonnes to almost 109,000 tonnes, cornering close to 80% of the market growth.

Nima's heady growth created another problem in Lever's portfolio. The volumes of its biggest brand, Lifebuoy, began to decline.(The Rs 575- crore-plus brand is one of Lever's biggest cash cows, for which it invests about Rs 8 crore on advertising). As a carbolic soap at the low end of the market, Lifebuoy had always seen a natural migration of its consumers to beauty soaps. But every year, new users would also come into the carbolic segment thereby negating any drop in volumes. "Usually, the gains are more than the losses," reveals a senior manager at Lever.

One reason why Lifebuoy attracted new users was its price. But with the entry of Nima, a significant chunk of first-time users moved away from Lifebuoy.Lever's other pillar brand, Lux, too declined in volumes as value-conscious buyers gravitated towards Nima. As Lifebuoy and Lux together contribute close to 35% of Lever volumes (a leak in the MIS department last year suggested the two brands deliver close to 25% of Lever's profits), Lever was in a bind.

Packaged tea, where Lever controlled almost 40% of the market, was another story. The slide in its fortunes started with the adverse impact of additional excise duty on packaged tea, announced in 1998. Even though the move was reversed in 1999, the seeds of trouble had been sown. Now, with commodity prices falling, the differential between loose tea brands and branded packaged tea increased forcing many packaged tea consumers to downtrade. Lever could have rationalised prices - but it was apparently saddled with old stocks that had been bought via speculative trading, when tea prices were still high.

Without enough brand differentiation, Lever was charging a premium that was hard to justify. Sensing that the market was getting away from it, in 1998, Sanjay Khosla, Lever's director-in-charge of beverages, hit upon a smart way to catalyse upgradation from the loose tea market. Enter Lipton Tiger Popular Tea, a brand that had been languishing in the portfolio. Using a blend of tea, tapioca, chicory and jaggery, Lipton Tiger was tested in 1998 and rolled out in mid-1999. Priced at Rs 120 a kg, it was a runaway success - and went onto win the Unilever award for brand innovation. But as it transpired, instead of attracting loose tea users, it gave a new reason for packaged tea users to downtrade, and ended up cannibalising 30% of Lever's own brands like Taaza and Red Label. "It taught us an important lesson that brand innovation should never be done at the lower end of the portfolio," says a Lever brand manager based in Bangalore. The slide continued and by the end of the third quarter of 2000, Lever's share was down to 37.4% in a declining branded tea market.

With tea and soaps adding up to 40% of sales, it put tremendous pressure on profitability. What's more, low-cost rivals made sure Lever had no chance of increasing prices. Every year, during Dadiseth's tenure, Lever would quietly push through a 8-10% price increase. "In low-involvement categories, most consumers seldom noticed the difference. But with the market slowing down and volumes under pressure, even that opportunity dried up," explains a commercial manager.

However, what clearly caught Lever by surprise was the slowdown in personal products. Between 1992 and 1996, the division had experienced hyper growth, clocking a CAGR of 60%. In 1999, the Rs 2,000-crore division grew by 18%. But by the end of 2000, growth had all but tapered off....Continued