HUL, don't get Unileverised: The ice cream business melted away, but what’s next?

Fat has forever been a four-letter word. So, it isn’t a surprise that Hindustan Unilever (HUL) has lost its taste for its ice creams business. The real question is, what took it 31 years?

Late last month it finally decided to do away with its creamy layer – jettisoning the ice cream business into an independent listed entity – on the coat tails of its Anglo Dutch parent Unilever Plc that had, back in March, already decided to spin off the division globally to accelerate focus on high growth segments like premium beauty and markets like India (11% of global sales).

Unilever and by extension its Indian arm are essentially a soaps and detergent colossus. It swears by tonnage, not necessarily grammage and has very little patience to nurture new or small businesses.

Even then, this course correction after three decades – 102 years globally -- is unlikely to cut ice. The scoop-out will heighten investor hopes of bolder action on a bloated portfolio spanning mayonnaise-to-masstige-to-Murad skin care and Magnum.

In its defence, ice creams have forever been an oddity for HUL. Even for Unilever, prized brands like Ben & Jerry’s, have gotten embroiled in Middle Eastern politics and have rebelled against its parent. Overall, the category has remained sluggish. Last year, sales grew 2-3% -- the weakest growth for any of its business units in its expansive product basket. Selling Lux soaps or Surf detergents by the carton is no mean feat but installing cold chain back bone nationwide is arguably tougher. There is zero synergy in distribution and supply chain with the rest of the home or personal care products that gets pushed out into the network of kirana or modern retail outlets. Catering to mass segments also bleeds the balance sheet – both returns on capital employed and EBITDA margins of ice creams are amongst the lowest across categories, even amongst food where the business is housed. Constant innovation to keep pace with the changing palette profiles from one chowraha to the next, adds even more complexities in markets like ours, and the challenge quadruples when the business fluctuates depending on the season and the sticker price. Homegrown rivals ITC, Marico, Britannia, Dabur, Godrej, Tatas or Emami have all put their plans in the cold storage while Nestle innovatively scraped up Haagen-Dazs and palmed it to a JV with a PE firm in Europe and US.

That makes it more pertinent to raise questions about missed opportunities and the implications for domestic shareholders when an MNC blindly tows the line of its parent flogging a flavour that has been melting away consistently. Weight loss drugs like Ozempic is now an universal lifestyle choice having much more sway than dollops of butterscotch or blackcurrant and raisins frozen desserts. Morgan Stanley has data to show this is one of the categories weight watchers tend to cut back spending the most.

For most parts, ice cream in India has been loss making. After 30 years, it’s just 3% of HUL’s Rs 60,000 crore FY24 topline, up from 1% a decade ago. Instead of the massive capital sunk, if only HUL had ponied up that cash to bulk up its mainline foods business spices, condiments, ethnic snacks, processed and ready-to-eat- foods or diversified into high margin niche businesses. What stopped Lakme to leverage its early mover advantage and be a trailblazer in online beauty retail like Nykaa? Mamaearth, a brainchild of an HUL alumni, sensed an opportunity in mother and baby care and grew it into a popular brand that till recently had a billion dollar plus market capitalisation, post a mega 2023 listing.

Including dividends, shareholder capital in HUL has swelled 24 times between 2004-24. While that sounds impressive, stocks of consumer companies like Titan have appreciated 464 times in the same 20 years. Asian Paints: 92 times. Even Swiss rival Nestle has been twice as good a performer. HUL is no longer the FMCG bell weather. In fact, it is the worst performing fast consumer in Sensex over two decades; 2nd worst in the Nifty FMCG Index in the last 5 years. Varun Beverages has given more than 10 folds returns, Tata Consumer 3 folds, Marico has doubled, HUL has floundered at 1.3x. Investors clearly have better choices.

Its boss Rohit Jawa needs to reverse this at the earliest, hauling the company – that was once a CEO factory and a laboratory of strategic thinking -- out of a funk that it finds itself in today. Even Unilever CEO Hein Shumacher is busy putting the consumer behemoth into shape, pruning portfolios, people and premiumising, while upping sales projections.

In many ways, liberalisation snuffed out the free spirit of the local outpost. Till then, the quintessentially middle class and professionally run HUL had managers cut from a different cloth. They doubled down on businesses that were unique to India, branching into fine chemicals, seeds, agri-chemicals, fertiliser, exported leather and garments, and made soaps using locally produced minor oils. International businesses like animal fat or feed got tweaked to cater to local demands and business realities and global brands like Vim, Fair & Lovely, Lifebuoy received a desi makeover. Rin adapted and persisted against Nirma’s juggernaut with its laser sharp focus on whiteness and brightness.

Our draconian MRTP regime and FERA raj – foreign shareholding of MNCs in India were capped -- may have played a big role for the local beach head to be an outlier, but the gumption of the local management and their ability to see through a local filter stemmed from their fundamental belief that they ran an Indian company – a jewel in Unilever’s global crown -- whose largest shareholder happened to be an MNC. Unlocking value for local stakeholders were their primary concern when several other boxwalla companies of yore -- Shaw Wallace, Remington, ICI – were capitulating to HQ.

This was also the fulcrum behind Project Millennium of the late 1990s that sought to make the entire group future-ready by incubating new brands and products. Ayurveda, confectionery, water, direct selling and a dozen more ideas piloted in India and taken to the world. Today most of those endeavours have sunk or simply got sold – the latest being water purification under the Pureit brand in November -- as local go-getters chose obsequious to London HQ over operating independence to fast track careers. Only Indulekha, an acquired ayurvedic brand trudges on after its addition in 2015 marked a return to hair oil after a decade. With time, Unilever has fully consumed HUL, upping its shareholding as well as royalty payouts.

Jawa can seek inspiration from the not-so-distant pushback in tea. In 2000, when Unilever chose to pluck the business and sell it, HUL chose not to follow its parent’s lead since it had enough muscular brands Red Label, Taj Mahal, R&D, trademarks and taste, all of which contributed 10%-12% of its India sales. The ice cream demerger is not just about ice creams alone but an opportunity to still stir the pot. Between FY19-24, its revenue has grown at 10% CAGR but Nestle has outperformed so has Tata Consumer. At its scale, HUL desperately needs another core category beyond home care to start firing. And for that it might just pick up the beauty baton. If you believe in former Estee Lauder Cos chairman Leonard Lauder’s Lipstick Index -- consumers choose affordable treats such as cosmetics and perfumes to uplift their mood when the economy stutters – this then is the right time to look spiffy. This fiscal, HUL’s 24% and Nestle’s EBITDA margins are the best in class, but beauty can help it inch upwards even further. Its mid to high single digit volume and revenue growth respectively is still not good enough to glow up from the rut. India needs to put its best face forward, lean in much more on its global brands and seduce shoppers for an upgrade.

Alternatively, if Shumacher continues restructuring by pruning disparate food brands -- Hellaman’s Mayonnaise, Smartypants Vitamins or even Knorr soup, it should also give Jawa and his team something new to chew on: Absence in key categories like biscuits, noodles, staples while obsessing over hot beverages and nutrition has taken the business nowhere. Perhaps India is the place to start taking a bitter, bolder bite.