HUL To Ramp Up Ad Spends To Boost Volume Growth

Hindustan Unilever Ltd. intends to ramp up its advertising spends aggressively in the quarters ahead to shore up volumes that rose at the slowest growth in five quarters as higher prices deterred consumers.

"A large share of our gross margin expansion has been reinvested in A&P in the June quarter," said Ritesh Tiwari, chief financial officer at HUL. "And, we expect the intensity of spends to go up to 2019-levels."

Higher spending on advertising underscores comfort on margins for India's largest consumer goods maker. So far, consumer goods companies have slashed advertising and marketing budgets as they resorted to cost cutting to improve profitability amid high inflationary pressure and a slowdown in demand.

HUL's A&P spend was 9.9% of sales in Q1 FY24, which is almost close to the levels seen in Q1 FY22, but lower than 12% of sales prior to Covid.

The increase in ad spends will also help the company tackle growing competition. "The resurgence of small players in the market, who vacated at the peak of inflation, has increased the competitive intensity," HUL said.

The quantity of goods sold gained 3% in the June quarter, the least since the first quarter of fiscal 2023. That was below the 5-6% average estimate of analysts that track the maker of Dove soap and Knorr soup.

The food and beverages category primarily, dragged the overall volume growth. "It's a mix of reasons," said Rohit Jawa, the newly appointed managing director and chief executive officer at HUL. For instance, consumers have been downtrading from premium tea to loose tea, bad weather conditions hurt ice-cream sales on a high base of last year and higher prices of coffee impacted demand as well, according to the company.

However, there are nascent signs of a recovery in the market.

Citing Nielsen data, Jawa said that rural volume growth turned positive this quarter. It rose 2%, albeit on a low base, over the previous year after falling for several months. However, urban markets continue to lead in terms of overall volume growth. On a two-year CAGR basis, the overall volumes remained flat, while rural volumes fell 4%, the data showed.

If commodity prices stay where they are, volumes are expected to see a gradual recovery in the next two to three quarters, Jawa said. "We are laser-focused on our objective to drive volume growth in the quarters ahead."

HUL also stressed that consumption recovers with a lag, as the trade channels take time to de-stock all high-priced inventory. As low-price inventory comes on shelves, the company expects volumes to increase.

The HUL management also sounded caution on weather disturbances, any impact on which, could delay the recovery in volumes. "The near-term operating environment continues to be volatile, with weather-related risks. We need to be watchful of the progress on monsoon and El Nino's impact," said Tiwari.

From an inflation perspective, it has seen meaningful correction in crude and vegetable oil, while rupee has also been stable, HUL said. But there has been no respite from persistent high inflation in coffee and milk.

However, with a large part of HUL portfolio growing, Jawa said the price growth is expected to trail off or even turn negative in the next two-to-three quarters.

To focus on volumes, the company is looking at increasing penetration in categories such as health and well-being, health food drinks and masstige skin care.

"If you look back at our track record, we have grown two-thirds by underlying volume growth and one-thirds by price," said Jawa, adding that he expects that sort of a ratio to return.

Shares of HUL fell and were trading 1.3% lower at 9:55 a.m. compared to a 0.6% decline in the benchmark Nifty 50.