HUL Has The Muscle To Boost GSK’s Nutrition Business

A slowing business in a slowing category. That's what Hindustan Unilever Ltd. will get if its parent Unilever Plc buys the consumer unit of Glaxo SmithKline Plc., including the malted-milk brand Horlicks. Brand experts and analysts say given its reach and size, India's largest consumer goods maker can still extract value.

Horlicks has a potential to grow, according to brand consultant Santosh Desai. “This acquisition will bolster HUL's food portfolio as the nutrition and health category still remains a gap.”

No deal has been announced yet. GSK Consumer Healthcare Ltd., the maker of Horlicks and Boost malt drinks, confirmed the talks but said there was no assurance of a sale. HUL informed exchanges that it evaluates mergers and acquisitions from time to time. That came after Bloomberg reported citing unnamed people aware of the development that Unilever edged out Nestle SA in the race and offered to pay $3 billion for about 70 percent of GSK Consumer Healthcare.

Glaxosmithkline's Indian healthcare business reported a flat revenue growth at Rs 4,377 crore in the year ended March—most of it coming from nutrition products like Horlicks and Boost. And industry forecasts are not upbeat.

The health drink category is expected to grow at 3.7 percent till 2022 compared with 11.5 percent in five years through 2017, according to Euromonitor International.

That's partly because sugary malt-drinks are priced on the higher side, according to Dhanraj Bhagat, consumer and retail partner at Grant Thornton India LLP. Companies also don't invest heavily on brand promotion to bring in more consumers, he said.

While Horlicks leads India's Rs 7,873-crore malt drink market, according to Euromonitor International, it competes with Mondelez International's Bournvita.

Still, HUL has no nutrition drink in its portfolio. A possible acquisition will increase the contribution of the food and beverages business to 27 percent of its Rs 34,619-crore sales, according to Macquaire, compared with 18.1 percent as of March.

Bigger Reach

GSK Consumer Healthcare has a retail reach of 1.8 million stores and a direct distribution network of 800,000 outlets, according to JPMorgan's report released after the second quarter earnings. Malt drinks are still largely an urban phenomenon with demand remaining untapped in smaller towns and rural areas. The company rolled out smaller packs. That's where the distribution network of HUL will help.

The maker of Red Label tea sells its products directly through 3.5 million retail stores and an overall reach of seven million outlets, according to Sanjay Manyal, senior research analyst at ICICI Direct. That will increase the reach of Horlicks across the country, especially for lower-priced packs and sachets, he said.

GSK Consumer Healthcare also sells Horlicks-branded biscuits but its contribution to the revenue is minuscule. Desai said the potential acquisition could give HUL an entry into India's Rs 26,000-crore sweet biscuit market.

GSK Consumer Healthcare's advertising and promotion spends were 12.5 percent of its sales in the year ended March. That's higher than HUL's 11.8 percent.

Still, it's not enough for a category and a product that has been stagnating, according to Bhagat. “The acquirer will have to re-evaluate sales and distribution strategy and also invest in promotions.”