A Study on Distribution

Strategies of
Hindustan Unilever Limited
By
Rajnikant Gharat
1. Introduction ‐ Hindustan Unilever Limited
Hindustan Unilever Limited (‘HUL’), formerly Hindustan Lever Limited (it was renamed in late June
2007 as HUL), is India's largest Fast Moving Consumer Goods company, touching the lives of two out
of three Indians with over 20 distinct categories in Home & Personal Care Products and Foods &
Beverages. These products endow the company with a scale of combined volumes of about 4 million
tonnes and sales of nearly Rs. 13718 crores.

HUL is also one of the country's largest exporters; it has been recognised as a Golden Super Star
Trading House by the Government of India.

The mission that inspires HUL's over 15,000 employees, including over 1,300 managers, is to "add
vitality to life." HUL meets every day needs for nutrition, hygiene, and personal care with brands that
help people feel good, look good and get more out of life. It is a mission HUL shares with its parent
company, Unilever, which holds 52.10% of the equity. The rest of the shareholding is distributed
among 360,675 individual shareholders and financial institutions.

HUL's brands ‐ like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Sunsilk, Clinic,
Pepsodent, Close‐up, Lakme, Brooke Bond, Kissan, Knorr‐Annapurna, Kwality Wall's – are household
names across the country and span many categories ‐ soaps, detergents, personal products, tea,
coffee, branded staples, ice cream and culinary products. These products are manufactured over 40
factories across India. The operations involve over 2,000 suppliers and associates. HUL's distribution
network comprises about 4,000 redistribution stockists, covering 6.3 million retail outlets reaching
the entire urban population, and about 250 million rural consumers.

We have analyzed the distribution network of HUL from the following aspects:

1. Evolution of HUL’s distribution network

2. Transportation & Logistics

3. Channel Design

4. Initiatives taken for channel member management.

5. Field force management

6. Analytical Framework

7. Financial Analysis
2. Distribution Network of HUL
2.1. Evolution over Time
The HUL’s distribution network has evolved with time. The first phase of the HUL distribution
network had wholesalers placing bulk orders directly with the company. Large retailers also placed
direct orders, which comprised almost 30 per cent of the total orders collected. The company
salesman grouped all these orders and placed an indent with the Head Office. Goods were sent to
these markets, with the company salesman as the consignee. The salesman then collected and
distributed the products to the respective wholesalers, against cash payment, and the money was
remitted to the company.
The focus of the second phase, which spanned the decades of the 40s, was to provide desired
products and quality service to the company's customers. In order to achieve this, one wholesaler in
each market was appointed as a "Registered Wholesaler," a stock point for the company's products
in that market. The company salesman still covered the market, canvassing for orders from the rest
of the trade. He then distributed stocks from the Registered Wholesaler through distribution units
maintained by the company. The Registered Wholesaler system, therefore, increased the
distribution reach of the company to a larger number of customers.
The highlight of the third phase was the concept of "Redistribution Stockist" (RS) who replaced the
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
helped in transshipment, bulk breaking, and as a stockpoint to minimise stock‐outs at the RS level. In
the recent past, a significant change has been the replacement of the Company Depot by a system of
third party Carrying and Forwarding Agents (C&FAs). The C&FAs act as buffer stock‐points to ensure
that stock‐outs 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
improved customer service to the RS.
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 simulation and screening for
transit damages.
2.2. Detail Overview
The distribution network of HUL is one of the key strengths that help it to supply most products to
almost any place in the country from Srinagar to Kanyakumari. This includes, maintaining favorable
trade relations, providing innovative incentives to retailers and organizing demand generation
activities among a host of other things. Each business of HUL portfolio has customized the network
to meet its objectives. The most obvious function of providing the logistics support is to get the
company’s product to the end customer.

DISTRIBUTION SYSTEM OF HUL

HUL's products, are distributed through a network of 4,000 redistribution stockists, covering 6.3
million retail outlets reaching the entire urban population, and about 250 million rural consumers.
There are 35 C&FAs in the country who feed these redistribution stockists regularly. The general
trade comprises grocery stores, chemists, wholesale, kiosks and general stores. Hindustan Unilever
provides tailor made services to each of its channel partners. It has developed customer
management and supply chain capabilities for partnering emerging self‐service stores and
supermarkets. Around 2,000 suppliers and associates serve HUL’s 40 manufacturing plants which are
decentralized across 2 million square miles of territory.
(Fig. 1 – Schematic of HUL’s Distribution Network)
Distribution at the Villages:
The company has brought all markets with populations of below 50,000 under one rural sales
organisation.The team comprises an exclusive sales force and exclusive redistribution stockists.The
team focuses on building superior availability of products. In rural India, the network directly covers
about 50,000 villages, reaching 250 million consumers, through 6000 sub‐stockists.

(Fig. 2 – Rural Distribution Model of HUL)

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
business within his particular town. In the 25% of the accessible markets with low business potential,
HUL assigned a sub stockist who was responsible to access all the villages at least once in a fortnight
and send stocks to those markets. This sub‐stockist distributes the company's products to outlets in
adjacent smaller villages using transportation suitable to interconnecting roads, like cycles, scooters
or the age‐old bullock cart. Thus, Hindustan Unilever is trying to circumvent the barrier of motorable
roads. The company simultaneously uses the wholesale channel, suitably incentivising them to
distribute company products. The most common form of trading remains the grassroots buy‐and‐sell
mode. This enables HUL to influence the retailers stocks and quantities sold through credit extension
and trade discounts. HUL launched this Indirect Coverage (IDC) in 1960s.Under the Indirect 7
Coverage (IDC) method, company vans were replaced by vans belonging to Redistribution Stockists,
which serviced a select group of neighbouring markets.

Distribution at the Urban centres:

Distribution of goods from the manufacturing site to C & F agents take place through either the
trucks or rail roads depending on the time factor for delivery and cost of transportation. Generally
the manufacturing site is located such that it covers a bigger geographical segment of India. From
the C & F agents, the goods are transported to RS’s by means of trucks and the products finally make
the ‘last mile’ based on the local popular and cheap mode of transport.

New distribution channels

Project Shakti

This model creates a symbiotic partnership between HUL and its consumers. Started in the late
2000, Project Shakti had enabled Hindustan Lever to access 80,000 of India's 638,000 villages .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 micro‐credit, women from SHGs become
direct‐to‐home distributors in rural markets.

The model consists of groups of (15‐20) villagers below the poverty line (Rs.750 per month) taking
micro‐credit from banks, and using that to buy our products, which they will then directly sell to
consumers. In general, a member from a SHG selected as a Shakti entrepreneur, commonly referred
as 'Shakti Amma' receives stocks from the HUL rural distributor. After being trained by the company,
the Shakti entrepreneur then sells those goods directly to consumers and retailers in the village.
Each Shakti entrepreneur usually service 6‐10 villages in the population strata of 1,000‐2,000. The
Shakti entrepreneurs are given HUL products on a `cash and carry basis.'

The following two diagrams show the Project Shakti model as initiated by HUL. 8
Project Streamline

To cater to the needs of the inaccessible market with high business potential HUL initiated a
Streamline initiative in 1997. Project Streamline is an innovative and effective distribution network
for rural areas that focuses on extending distribution to villages with less than 2000 people with the
help of rural sub‐stockists/Star Sellers who are based in these very villages. As a result, the
distribution network directly covers as of now about 40 per cent of the rural population.

Under Project Streamline, the goods are distributed from C & F Agents to Rural Distributors (RD),
who has 15‐20 rural sub‐stockists attached to him. Each of these sub‐stockists / star sellers is located
in a rural market. The sub‐stockists 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
personal products.

Higher quality servicing, in terms of frequency, credit and full‐line availability, is to be provided to
rural trade as part of the new distribution strategy.

The diagram in the next page shows the model of Project Streamline. 9
Hindustan Lever Network (HLN)

It is the company's arm in the Direct Selling channel, one of the fastest growing in India today. It
already has about several lakh consultants ‐ all independent entrepreneurs, trained and guided by
HLN's expert managers. HLN has already spread to over 1500 towns and cities, covering 80% of the
urban population, backed by 42 offices and 240 service centres across the country. It presents a
range of customised offerings in Home & Personal Care and Foods.

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” Mother Depot and Just in Time System

In order to rationalise the logistics and planning task, an innovative step has been the formation of
the Mother Depot and Just in Time System (MD‐JIT). Certain C&FAs were selected across the country
to act 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 service in
a given area are sent to the mother depot by all manufacturing units. The JITs draw their
requirements from the MD on a weekly or bi‐weekly basis.

Leveraging Information technology

HUL customers are serviced on continuous replenishment. This is possible because of IT connectivity
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
locations all over the country, including the head office, branch offices, factories, depots and the key
redistribution stockists. They have also combined backend processes into a common Shared Service
infrastructure, which supports the units across the country. All these initiatives together have 10
enhanced operational efficiencies, improved the service to the customers and have brought us
closer to the marketplace.

RS Net Initiative:

The RS Net initiative, launched in 2001, aims at connecting Redistribution Stockists (RSs) through an
internet based system. It now covers stockists of the Home & Personal Care business and Foods &
Beverages in close to 1200 towns and cities. Together they account for about 80% of the company's
turnover. RS Net is one of the largest B2B e‐commerce initiatives ever undertaken in India. It
provides linkages with the RSs’ own transaction systems, enables monitoring of stocks and
secondary sales and optimises RS’s orders and inventories on a daily basis through online interaction
on orders, despatches, information sharing and monitoring. The IT‐powered 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
outlets across the country. Information on secondary sales is now available on RS Net every day.

RS Net is part of Project Leap. Project Leap begins with the supplier runs through the factories and
depots and reaches up to the RSs. This ensures HUL’s growth by ensuring that the right product is
available at the right place in the right quantities and at the right time in the most cost‐effective
manner. Leap also aims at reducing inventories and improving efficiencies right through the
extended supply chain.

RS Net has come as a force multiplier for HUL Way, the company's action‐plan to not only maximise
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
field force to solely focus on secondary sales from the stockists to retailers and market activation. It
has also enabled RSs to provide improved service to retail outlets. Simultaneously, HUL is servicing
the rural market, key urban outlets, and the modern trade as a single concern.

Adexa iCollaboration suite

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, reducing inventory buffers, and optimizing planning and scheduling. HUL chose the
Adexa iCollaboration suite for facilitating centralized monitoring of the SCM, live customer /supplier
collaboration, and integrating demand and distribution planning with production scheduling. With
the aggregated view of data provided by the iCollaboration suite, HUL was able to combine sales and
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distribution efforts on the diverse product lines, which resulted in significant savings on the cost side
for inventories and distribution. HUL updates inventory positions, shipments and customer orders on
a daily basis with these software packages and can get a pulse on the market real time.

(Fig. 3 – HUL’s Turnover Compared with Competitors, 2006)

(Fig. 4 – HUL’s Market Leadership across various FMCG Categories) 12
3. Channel Design

Hindustan Lever Limited (HUL) has two types of channel selling ‐

i. Regular (traditional) retail channel,
ii. Direct Selling Channel in the name of Hindustan Lever Network (HLN).

HUL has a well entrenched high distribution model which comprises of C&FAs, Redistribution
Stockists, wholesalers and retailers (as shown earlier). Hindustan Unilever's distribution network is
recognized as one of its key strengths. Its focuses on Product availability, Brand communication, and
higher levels of brand experience.
HUL’s Sales Break‐up through different channels:
Sales Break-up Through Different Channels7%60%33%Modern RetailUrban General TradeRural Areas
Channel Structure (Special Focus is on Jamshedpur)
Typically, the goods produced in each of the HUL's 40 factories are sent to a depot with the help of a
carrying and forwarding agent (C&FA). The company has its depot in every state of the country. The
C&FA is a third party and gets servicing fee for stock and delivery of the products. In each town,
there is at least a redistribution stockist (RS) who takes the goods from the C&FA and sells them to
retail outlets. In Jharkhand the C&FA is in Ranchi and Jamshedpur is serviced by 3 Redistribution
Stockists at Sakchi (M/s Om Prakash Agarwal), Bistupur and Parsudih.
The HUL management realized certain problems with the existing sales model. First, the model was
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
changed the pattern the customers shop. Large retail self service shops are becoming commonplace.
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In response of these problems, HUL redesigned its sales and distribution channel and the new
system is known as 'diamond model' in the company. At the top end of the diamond, there are the
self service retail stores which constitute 10% of the total FMCG market. The middle, fatter part of
the diamond represents the profit‐center based sales team. In the bottom of the pyramid is the rural
marketing and distribution which accounts for 20% of the business. As a result of the new
distribution plan the company has planned to reduce the number of RS in small towns.
Redistribution Stockists:
Total number of RS in Jamshedpur = 3 (at Sakchi, Bistupur, Parsudih). This is going to be reduced to
only one with effect from next month of this year.
􀂃Sales Margin: 4.76% which includes cash discount, unloading expenses from depot,
distribution expenses to retailers, incentive schemes & other incidental expenses.
􀂃Modes of transport used: Rickshaw, tempo.
􀂃Incentive schemes: Before 2000 holiday packages and tours but after 2000 no non‐monetary
incentive for RS.
􀂃Software systems and Information System: UNIFY 8.3 (Developed by IBM & CMC). This
software needs to be synchronized daily and the system updates any information/ incentive
schemes / sales figures etc to and from the common shared platform.
􀂃Areas of Operations: Marked for each of the RS.
􀂃Selling Operations: RSs sells the goods to ‐
o Wholesaler (gets 1.5 % max. discount from RS)
o Retailers (gets 1.0% max. discount from RS)

Wholesaler:
Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme).
Retailers:
􀂃Total retailer base in Jamshedpur: Approximately 1070.
􀂃Sales Margin: Depends on the product
o Soap, detergents ‐ 8% on MRP
o Cosmetics ‐ 10% on MRP
o Food items ‐ 8% on MRP
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Incentive schemes:
Company programs (Scheme Discounts + Cash Discounts)
TPR schemes based on Sales (1 % to 4 %)
Vijeta scheme is not for retailers.
Field Sales Force:
To meet the ever‐changing 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
generation activities among a host of other things.
The important activities that HUL field sales force does are (i) target chasing and (ii) reporting on a
daily basis. Account information is maintained on palmtops given by HUL. During our research and
informal survey of HUL field sales force, we came to know that for the last two years, training is not
being given at all to the sales force.
HUL has limited the network channel selling to categories of Home & Personal Care (HPC) and Food
products with exclusive brands for this channel. That is, these particular brands (products) are all
exclusive to HLN, specifically developed for the Direct Selling channel, and not available in the retail
channel. The general trade comprises grocery stores, chemists, wholesaler, kiosks and general
stores. Hindustan Unilever services each with a tailor‐made mix of services.
4. Initiatives taken to Improve the Distribution Network
HUL has taken the following initiatives to improve its distribution network:
􀂃Setting up of a full‐scale sales organisation comprising key account management and
activation to impact, fully engage and service modern retailers as they emerge.
􀂃Servicing Channel partners and customers with continuous daily replenishment.
􀂃Leveraging scale and building expertise to service Modern Trade and Rural Markets.
􀂃Delayering of sales force to improve response times and service levels.
􀂃Revamping of its sales organisation in the rural markets to fully meet the emerging needs
and increased purchasing power of the rural population. HUL’s distribution network in rural
India already directly covers about 50,000 villages, reaching about 250 million consumers
through about 6,000 sub stockists.
15
 􀂃Implementation of supply chain system that connects stockists across the country, and also
includes a back‐end system connecting suppliers, all company sites and stretching right up to
stockists. IT tools have been deployed for connectivity across the extended supply chains.
Backend processes have been combined into a common Shared Service infrastructure.
􀂃Launching of Project Shakti through which the company is able to extend its operations in
villages. HUL has also included several NGOs and state governments as the initiative helps
rural women to improve their financial position.

􀂃Launching of HUL Network to leverage the channel of direct selling by presenting customised
offerings in 11 home and personal care and food categories. Started in 2003, it already has a
base of 300,000 consultants across the country.
􀂃Starting of franchised Lakme Beauty Salons and Ayush Therapy centres to offer standardised
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
leveraging non‐conventional media like wall paintings, cinema vans, weekly markets (haats),
fairs and festivals.
􀂃Initiating the concept of Super Value Stores (SVS) in urban areas to partner traditional stores
to provide a range of services ranging from managing their inventory to setting up POS
(point of sale) banners. In addition to this, to boost up traditional retail in the face increasing
in‐roads made by large, modern retailing chains like Spencer’s, Reliance Fresh etc (where
HUL is squeezed harder for discounts), HUL started restructuring some of the selected SVSs
into the form of self‐service retail shops a la modern retails. This is to protect & maintain the
competitive advantage that HUL has over its biggest competitors in the other markets (e.g.,
P&G), with its very deep distribution reach through traditional retail.
􀂃Launching the Unicare scheme with upmarket pharmacies and retailers to sale its premium
brands.
􀂃Undertaking several initiatives for traditional channels in order to improve its capabilities at
the front‐end by developing skills for stockists' sales force. Under 'Project Dronacharya', the
FMCG major continuously imparted training to over 10,000 stockist salesmen.
􀂃Launching of several promotional schemes for existing wholesalers and distributors. For
instance, it has started the ‘Vijeta ‐ Rishta Jeet Ka’ scheme last year to provide a platform for
the wholesaler and HUL to grow the business by earning points and redeeming them.
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5. Field Force Management
The working cycle of a typical HUL field force member is from 21st of every month to the 20th of the
next month. During this period he is given various targets that helps to achieve company objectives
and gives him a chance to prove his performance relative to other.

To start with the field force member is given a particular area and his responsibility is to cater to all
the retailers in that area. While deciding the area for each member of the field force, the company
makes sure that the operating area of each field member doesn't overlap with his other colleagues.
There are various methods used by the company to incentivize the field force ‐ Monetary and Non
Monetary.

In HUL, the field force is evaluated using QOC (Quality of Contribution). It consists of 4 components ‐

1. Secondary Sale (Max points = 2.5)

2. Eco (Max points = 0.5)

3. Focus (Max points = 0.5)

4. FCS (Max Points = 0.5)

QOC

FCS

ECO

SECONDARY

FOCUS17
Secondary Sale ‐ Based on the operating area, each member is given a specific target in terms of
value (e.g., Rs. 15 lacs) for the operating month (21 st – 20th of next month). If he achieves 100% of
the target he gets 2.5 points, if he achieves 95% target he gets 1.5 points. These points are used to
add to the total QOC score as well as linked to monetary incentive.

ECO / Width pack Target – This is used for the penetration/reach of certain products in the existing
market. The following is a typical ECO target assigned to a field force agent:
Lux International – 105 outlets x 1 SKU
Pears Soap ‐ 135 outlets x 1 SKU
Rin ‐ 104 outlets x 1SKU
Breeze Soap ‐ 100 outlets x 1 SKU
The outlets mentioned are within the operating area of the person and 1 SKU = Rs. 27/‐. Based on
this the Field person calculates number of packs he should sell to the retailers. The concerned agent
receives this target around 25th of each month and has to complete this target within the 5 th day of
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 5 th, he looses the
opportunity.
Focus / Depth Pack target – This is mainly used to increase the sales volume of certain products. A
typical ‘Focus’ target is given below:
Lux International – Rs 20,640 /‐ @ Rs 6/‐ per unit
Life Buoy ‐ Rs 70,220 /‐ @ Rs 10/‐ per unit
Wheel ‐ Rs 99,000 /‐ @ Rs 10/‐ per unit
Breeze Soap ‐ Rs 27,000 /‐ @ Rs 10 /‐ per unit
This target needs to be achieved within 20 th of next month. Upon achieving the target the field
person is awarded 0.5 points which is then added to his overall QOC score.
Field Capability Score (FCS) ‐ In this component, the field force persons are required to ensure that
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
person then the number of visit per week is 100 and total number of visit per month = 100x4 = 400.
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The sales person is required to achieve 90% success rate to get 0.5 points for his QOC score and at
least 65% for a satisfactory performance.
Non Monetary Methods
The other purpose of the QOC scores is to highlight the performance of the field person among his
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.
􀂃If QOC score > 4.5 – The person is eligible for 7 star award
􀂃If QOC score > 4 – The person is eligible for 5 star award
􀂃If QOC score > 3.5 – The person is eligible for 3 star award

In the event of exceptional performance, management representatives from the regional office
come to the zonal office to distribute the awards. The photograph of the award winners is displayed
in the office as a source of inspiration for other sales person.
Target Setting Mechanism and monitoring
The regional office monitors the performance of various zones. A thorough analysis is done at the
end of each month and based on that the weak products are identified or those for which the
demand has weakened. This is the basis of setting ECO and FOCUS targets for the field persons. Each
field person is given a palmtop wherein he can feed the entries on the spot where the transaction is
done. This solves basically the two purposes ‐
a) The field person is freed from the tedious task of maintaining cumbersome records and can then
concentrate on the job (thus IT is replacing some of the field force or other channel members),
b) The sold item is immediately updated in the company information system.
6. Analytical Framework
We tried to analyze HUL’s distribution network in the light of 20 most significant variables that affect
the distribution part of channel management for any organization in the business of marketing &
selling of goods. The variables, their explanations and their impact on the HUL’s distribution network
are given below –

1. Number of Consumers
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. The implication of this is that there will be many layers in the channel in such a

19
 situation and managing such a complex distribution network by keeping tabs on every player will
be a huge task. Moreover, Transport & Logistics (“T&L”) support provided by the organization
needs to be well organized.

Implication for HUL

HUL’s key strength lies in managing its distribution network in India. HUL is India’s largest FMCG
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. It’s 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 (products should be good as always, otherwise they will find no buyers in the long run).
For a comparison, P&G, world’s largest FMCG major, does not find its name in the list of top 5
FMCG majors in India as its strength lies in managing modern retail (biggest example, Wal‐Mart),
but not traditional retail.

2. Geographic Dispersion of Consumers

Again, this is closely related with the previous variable, more so in a large, geographically diverse
country like in India. With the increase in this dispersion level, more intermediaries and more
layers are required in the distribution network so as to effectively reach the length & breadth of
the country. Obviously the T&L management for such an organization would be critical to
accomplish this.

Implication for HUL

For a country as geographically diverse as India, pan‐Indian presence & market leadership can
only be possible when products reach even the remotest parts of the country. HUL is very
successful in achieving and maintaining this reach due to its distribution network.

3. Frequency of Purchase
If the frequency of purchase is high, then transport intensity in “the last mile” (i.e., from
distributor to retailers) increases manifold. For FMCG products, as a thumb rule we can take that
the mean time between two purchases is ~ 90 days. With the introduction of smaller form factor
packaging for FMCG goods (Re.1 /‐ shampoo sachets being a very good example), the transport
intensity increased further.

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 Implication for HUL

HUL has about 4000 redistribution stockists, who supply to approx. 6.3 million outlets across
India. Since manufacturing is done at 40 plants around the country, rationalizing the logistics and
planning is a huge task. An innovative step in that regard has been the formation of the Mother
Depot and Just in Time System (MD‐JIT). Certain C&FAs were selected across the country to act
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
service in a given area are sent to the mother depot by all manufacturing units. The JITs draw
their requirements from the MD on a weekly or bi‐weekly basis and supply to stockists in that
area, who, in turn, supply to retailers.

4. Tendency to Postpone Purchase

If the tendency to postpone purchase is lesser, then the product will be easier to distribute. For
example, products/services like Fire Extinguishers, Life Insurance etc. are such that though these
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
reinforcement in the minds of consumers becomes necessary, sales field force becomes critical
and use of “expert” field force is commonplace.

Implication for HUL

Since FMCG products are used regularly and these products are not “necessary evils”,
distribution network of HUL does not require any expert field force to sell its products. Only the
recent diversification of HUL into Home Water Purification business (“Pure It” brand) needs
dedicated field sales force.

5. Level of Familiarity/Knowledge (of consumer) about the Product

If the level of familiarity of consumer with the product is higher, lower will be the importance of
field sales force and higher will be the importance of channel.

Implication for HUL

Since FMCG goods are very much familiar to consumers, channel and its different members are
very much important to HUL and field sales force’s function is mostly limited to channel
management and ensuring availability of products.

21
6. Degree of Brand Loyalty
If the consumers are more brand loyal, then less “push” will be required from the channel
members to sell the products as there will be sufficient “pull” or demand from the consumers.
This implies that for products with loyal customer base, efforts from the channel members can
be much lesser for final off‐take to happen which in turn leads to lesser margins to the channel
members for those products. For faster moving products (mostly due to brand pull), retailers
may not be averse to slightly lesser margins as rotation of the products is high and thus his/her
ROI is protected.

Retailer’s ROI = InvestmentRotationinM×arg

For a FMCG player with a non‐established brand, margins to channel members and point of sale
(POS) advertising are both important.

Implication for HUL

As HUL enjoys leadership position in many FMCG segments like Soaps, Detergents, Personal Care
products etc with strong brands with continuous “pull”, HUL has less to worry about margins to
channel members or POS advertising. But this situation can change considerably in the face of
rise of a significant competitor having almost the same reach as HUL has (e.g., ITC as it’s eating
into HUL’s market share continuously since it entered FMCG segment).

7. Purchased on Impulse
The impulse purchase products like chocolates, toffees, colas, ice creams etc. follow Say’s Law
which states that “Supply Creates Demand”, implying availability of these products are the most
critical aspect for these to be sold and consumed. This stresses on the fact that T&L for these
products becomes very important.

Implication for HUL

HUL has only one product in this impulse purchase category ‐ Kwality Walls (ice cream). HUL is
#2 after Amul in this FMCG segment. To increase this brand’s sale & market share, availability,
visibility and consumer mind share has to be increased and improved as well.

8. Level of Involvement (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.

Implication for HUL

As FMCG products are generally Low Involvement Products, HUL has to bother more on ensuring
availability of the products, rather than supply of information.

9. Purchased as a Basket of Goods

The products which are generally bought together by consumers as a basket of goods (e.g., Rice,
Flour powder, Cooking oil etc at the beginning of the month) are to be made available together
for final off‐take.

Implication for HUL

This aspect partly applies to HUL’s products as some products like shampoos, soaps, detergents
may fall in a basket. Efficient distribution network of HUL ensures availability of all such products
at each selling point (individual retailer).

10. Speed & Complexity of Decision Making Process

If the speed is low, then the complexity of the decision making process is higher and greater is
the importance of field sales force and the salespersons’ skill, knowledge and quality.

Implication for HUL

For FMCG products, complexity of decision making process is not there and so, speed of decision
making is high. This means that for HUL, field sales force is of limited functional usage.

11. Present of Expert Influencer in the Decision Making Process

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
subcontracted and the expert influencer becomes another customer of the network, apart from
the end‐user. In that situation two groups of sales force are needed to cater to both the
segments.

Implication for HUL

For FMCG goods, role of expert influencer is limited. But companies try to associate brands with
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
 seeking to subcontracted and make consumers more loyal to the brand. These are true for HUL
also (e.g., Pond’s Intitute).

12. Element of Crisis Purchase Exists

If element of crisis purchase exists in the buying decision of a product (for example, bulbs &
tubes), then its availability becomes critical.

Implication for HUL

None of the products of HUL fall under this category. Nevertheless, availability of products of
HUL is necessary for other reasons.

13. Element of Risk Aversion Exists

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,
channel members can “unsell” a brand by giving explicit or implicit suggestions. This implies that
in such a case, selling depends on many cases how the company is taking care of channel
members (“keeping them happy”) such that they are not lured by other competitors or directed
by grievances so as to unsell the brand. This situation is prevalent mostly in Consumer Durables
(like TV, Refrigerators etc.). In FMCG goods, the situation does not exist per se.

Implication for HUL

HUL is not affected for its FMCG products by this variable. For water purifier “Pure It”, this can
have considerable impact if its sale starts to happen through channel members rather than by
field sales force as is happening now.

14. Perishability of the Product

If the product is perishable (having small shelf life; examples – newspaper, milk, fruits etc), then
the dimension of “speed” in reaching the end consumers becomes critical & T&L assumes great
significance for the company.

Implication for HUL

The FMCG products that HUL sells are not perishable by nature, but have limited life. So this
aspect is not critical for HUL.

15. Time Band Associated with the Purchase of the Product

If there is seasonality/cyclicity for the demand or purchase of the product (examples –
newspaper, milk are most on demand in the 1 st three hours of the day; cooking oil, rice etc

24
 grocery items are most on demand in the 1 st week of the month), then high T&L and
infrastructural requirements are needed for the “last mile” for the time band when demand is
maximum. It is possible to have idle capacity in the areas mentioned above outside the peak
required time band.

Implication for HUL

For some of the products of HUL, the above stated variable is significant. For example, in Food
segment, Branded Atta – ‘Annapurna’; in segments like Laundry Detergents, Shampoo & Hair Oil
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
increases in the 1st & 4th week of a month for the products mentioned above. This is over and
above the regular replenishment of stocks at retailers done by distributors. Festivals like Holi etc.
may also increase the demand for personal care items like soaps, shampoos etc for a short
period and distribution network should be geared up not to miss any such opportunity.

16. Fungibility
Fungibility is the property of a good or a commodity whose individual units are capable of
mutual substitution. Examples of highly fungible commodities are crude oil, wheat, orange juice,
precious metals, and currencies. Fungibility has nothing to do with the ability to exchange one
commodity for another different commodity. It refers only to the ease of substitution of one unit
of a commodity with another unit of the same commodity for all intents and purposes.

Fungibility is different from liquidity. A good is liquid and tradable if it can be easily exchanged
for money or for another different good. A good is fungible if one unit of the good is
substantially equivalent to another unit of the same good of the same quality at the same time
and place. It is said that commodities are fungible, goods tangible, services intangible,
experiences memorable & transformations are effectual1.

As an example, one Rs. 100/‐ bank note is interchangeable with another. Cash is fungible. A
barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of
the same crude oil. Oil (of the same type) is fungible.

Fungibility does not imply liquidity, and liquidity does not imply fungibility. Jewels can be readily
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). In contrast to diamonds, gold coins are fungible. They are also liquid, especially under a

25
 gold standard. The combination of fungibility and liquidity is one of the reasons why gold has
successfully served as money for thousands of years.

Further, a fungible thing can become non‐fungible under some circumstances. For example, 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
viewpoint which sees it differently than its intended purpose.

The outcome of product fungibility is that the more fungible a product becomes, higher is the
chance that parts of the distribution channel it can be replaced by IT. A good example of this is
dematerialization (Demat) route for share trading now where there is no physical existence of
shares.

Implication for HUL

As branded FMCG goods are not fungible per se (branding is done to “decommoditize” &
differentiate the product), the importance of channel members will continue.

17. Degree of Customization Possible

Degree of customization directly affects economies of scale; higher the customization, lesser the
economies of scale. Also, criticality of sales field force increases with customization levels of the
offering.

Implication for HUL

For FMCG products of HUL, which are mass produced, such customizations are not possible and
thus with higher economies of scale, lower criticality of field forces from the standpoint of
customization of product offerings, costs are lower in these respects with HUL.

18. Negative or Positive Reinforcing Product

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
critical aspect for positive reinforcing products to reaffirm the positive feelings.

Implication for HUL

“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
displays to reaffirm the feelings. Consumers are willing to pay higher for these brands.

26
19. Value/Volume Ratio (Value Density) of the Product
This ratio is very important for both the company and the retailer for its two critical aspects –
T&L cost and retailer ROI/sq. cm (retailers are actually in real estate business in true sense).
Higher the ratio, better it is for both company and the retailer as higher ratio signifies lesser T&L
cost per unit volume transported for the company and greater ROI per unit of shelf space for the
retailer.

Implication for HUL

In general for FMCG goods and for HUL as well, value density is relatively lower. In addition to
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, reducing handling costs). Since value density is less, transportation costs will be higher
and thus it is of economic sense to have manufacturing plants located closure to major markets.
This is the reason HUL has various manufacturing plants (40 in totality) located across India. 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. Financial Analysis
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
HUL’s. For example, main economic activity of HUL as defined in that database is ‐ “Cosmetics, toilet
preparations, soap & washing prep”. Obviously, one major FMCG company in India, ITC, does not
come under this purview as its major economic activity is Tobacco business which is nearly 85% of its
total revenue. But for the sake of comparison, we have included ITC also as its non‐ tobacco FMCG
business revenue in FY ‘08 was Rs. 2511 Cr., nearly as high as Nirma, the second largest player after
HUL in HUL’s chosen category. But the figures for advertising, marketing & distribution expenses of
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
company’s sales & distribution function is dissimilar. Other major FMCG players not included in the
analysis are Nestle, Amul, Britannia & Tata Tea, which are mostly into the Food & Beverages 27
segment where HUL has relatively lesser presence (Processed Foods & Ice‐cream segments together
constitute only approximately 5% of HUL’s total sales). In Tea, HUL is present significantly, though.

In the following pages advertising, marketing & distribution expenses of major FMCG goods (in HUL’s
category mostly) are being shown. It is to be understood here that marketing expenses here include
commissions, rebates, discounts, sales promotional, expenses on direct selling agents &
entertainment expenses whereas distribution expenses include outward freight.

Exhibit 1: Annual Spend in Advertising, Marketing & Distribution functions in FY ‘08

AnnualAnnualAnnualAnnualRs. CroreRs. CroreRs. CroreRs. CroreMar-08Mar-08Mar-08Mar-08Sl. No.Company
NameSalesAdvertising expensesAdvert. Exp. As % of SalesMarketing expensesMarketing Exp. As % of SalesDistribution
expensesDist. Exp. As % of
Sales1HUL14937.881422.99.536.070.04731.414.902Nirma2651.1540.961.5471.872.71136.915.163Dabur2128.17248.111.6
621.41.0166.843.144olgate-Palmolive1597.3256.5116.0600.0035.362.215Reckitt
Benckiser1334.76207.8515.579.340.7055.884.196P&G
Home1079.57119.4511.0644.314.1070.546.537Godrej922.7861.46.6542.374.5932.273.508Emami586.42102.9217.5527.464.
6814.862.539P&G Hygiene & Health556.0257.9510.4240.857.3537.246.7010Henkel430.3300.0040.949.5116.43.8111Henkel
Marketing417.7900.0065.6415.7117.634.2212ITC21467.38427.831.9968.170.32548.42.55

Exhibit 2: Advertising Expenses as percentage of Sales

Advertising Expenses as % of
Sales9.531.5411.6616.0615.5711.066.6517.5510.420.000.001.990.002.004.006.008.0010.0012.0014.0016.0018.0020.00HULNirmaDaburColgae-
PalmoliveReckittBenckiserP&GHomeGodrejEmamiP&GHygiene &HealthHenkelHenkelMarketingITCAdvertising Exp. as % to Sales 28
We can see here that Nirma, Godrej & Henkel (ITC also) have less advertising expenses (as % to
sales) than HUL. Importantly, Henkel has zero advertising expenses in 2008, which may explain the
fact that awareness level in consumers for Henkel brands is low. HUL advertising is done mainly in
case of soaps (for example – “Dove”; done mainly to reaffirm that it’s not a soap!), shampoos,
deodorants (“Axe”), laundry detergents (“Surf Excel”, “Rin”) etc. With the introduction of home
water purifier (“Pure It”), considerable advertising & promotional expenses have gone into it.

Of late, we see very little of Nirma advertisements. This is apparent from its advertising expense as %
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
(surrogate advertising is done) is needed either to reaffirm the brands or introduce new 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 they’re doing. But while moving faster into non‐tobacco FMCG business riding high on its
strength of distribution network matching or surpassing in some cases that of HUL, ITC has started
aggressive advertising campaigns (“Fiama Di Wills” shampoo, “Vivel” soap, “Sunfeast” biscuits,
“Bingo” snacks etc), directly focusing on marquee brands of HUL like “Sunsilk” & “Lux”, increasing
the heat on Britannia for biscuits and taking on “Kurkure” & other snacks and chips from Pepsi, Coke
and others.

Advertising expenses as percentage to sales is highest for Emami, which owns brands such as
Navratna hair oil & talc, Boroplus cream & talc, Himani Fast Relief, Fair & Handsome, Sona Chandi
Chawanprash, Menthoplus etc, each of which is advertised heavily in the mass media (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 Colgate‐Palmolive is the market leader. Reckitt‐Benckiser advertises
considerably for its brands like Herpic, Mortein, Vanish, Clearasil, Dettol, Strepsils etc, which is the
reason for its high advertising cost as percentage of sales.

Marketing Expenses

As stated earlier also, marketing expenses here include the following –

􀂃commissions
􀂃rebates
29
 􀂃discounts
􀂃sales promotional
􀂃expenses on direct selling agents
􀂃entertainment expenses etc.

Exhibit 3: Marketing Expenses as percentage of Sales

Marketing Expenses as % to
Sales0.042.711.010.000.704.104.594.687.359.5115.710.320.002.004.006.008.0010.0012.0014.0016.0018.00HULNirmaDaburColgate-
PalmoliveReckittBenckiserP&GHomeGodrejEmamiP&GHygiene &HealthHenkelHenkelMarketingITCMarketing Exp. as % to Sales

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). This proves that HUL is able to maintain considerable brand pull through advertising.
ITC again comes among the lowest its tobacco products require very little ‘push’ and have very high
rotations. Also, ITC mostly deals with small retailers and distributors (‘paan‐cigarette shops owners’)
who have marginal bargaining power.

Another revelation is that Henkel, which has zero advertising expenditure, has the highest marketing
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 Henkel’s 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 direct‐selling approach, which generally requires negotiations, volume discounts etc,
which are reflected in highest marketing expenses (as percentage to sales) compared to others.

P&G is in between the extremes and with considerable advertising expenses also, it is unable to
create sufficient pull for its products in India (as evidenced by the fact that marketing expenses are
also relatively higher) or it’s getting stuck for the lack of sufficient distribution muscle a la HUL in
traditional retail in India and suffers from lack of reach and availability at the end consumer level.

As mentioned earlier, both Colgate‐Palmolive and Reckitt‐Benckiser both enjoys very good brand
loyalties and market leadership for their key brands like Colgate toothpastes and Dettol (#1 in
antiseptics), Herpic, Mortein etc. This is corroborated by the fact that these companies have some of
the lowest marketing expenses (as percentage to sales) in the group, as shown in the chart.

Distribution Expenses

Distribution expenses include the outward freight cost to the company.

Exhibit 4: Distribution Expenses as percentage of Sales

Distribution Expenses as % to
Sales4.905.163.142.214.196.533.502.536.703.814.222.550.001.002.003.004.005.006.007.008.00HULNirmaDaburColgate-
PalmoliveReckittBenckiserP&GHomeGodrejEmamiP&GHygiene &HealthHenkelHenkelMarketingITCDistribution Exp. as % to Sales 31
We have seen that T&L plays a very important role for HUL & others who have pan‐Indian presence
in FMCG business. Colgate‐Palmolive, Emami & ITC has some of the lowest distribution expenses (as
% to sales figures) & P&G has the highest. HUL is lower in this respect than Nirma & P&G, but higher
than Henkel. This can be explained somewhat from the impact of the variable, Time Band of
purchase, on the increased transport intensity for HUL in the last mile for some of the products like
household personal care, laundry detergent, branded atta etc in the first & last week of the moth.
ITC (tobacco), Henkel (largely B2B) are mostly protected from this implication of the variable.

Another important thing to remember that value density of FMCG goods is relatively lower, 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
HUL’s 40 manufacturing plants across India, Nirma, the 2 nd largest FMCG major in soaps and
detergents category, has 6 manufacturing plants, all located in and around Gujarat. So,
transportation cost of Nirma, if it tries to cater to pan‐Indian market will be higher. This is supported
by the fact that Nirma’s higher distribution cost percentage than HUL. For P&G, the same reasons
significantly affect its distribution cost which is highest for the group analyzed. 32
8. References
1. B. Joseph Pine, James H. Gilmore (1999), The Experience Economy: Work is Theatre &
Every Business a Stage, Published by Harvard Business Press, 254 pages.

2. HUL Website (http://www.hul.co.in/)

3. HUL CLSA Conference, Investor Presentation (24th Sept., 2008).

4. Reckitt – Benckiser Website

(http://www.reckittbenckiser.com/site/RKBR/Templates/Home.aspx?pageid=1)

5. Colgate – Palmolive Website (http://www.colgate.co.in/app/Colgate/IN/HomePage.cvsp)

6. Emami Group Website (http://www.emamigroup.com/Brands)

7. CMIE

8. Wikipedia