Daybreak - Why FMCG giant Hindustan Unilever has never really screamed for ice cream

Episode Date: December 3, 2024

There’s a running joke at Hindustan Unilever's Mumbai Headquarters. If a new hire is assigned to the ice cream division, it’s immediately clear that they aren’t in the company’s inner circle. But if you’re handed Surf Excel, Brooke Brond, or Glow & Lovely, it means you are in the big leagues.Right now, that pecking order is clearer than ever. Just last month, the FMCG giant went ahead and decided to demerge its ice cream business. The decision has already received in principal approval from the company’s board. Assuming that it clears all the other approvals and procedures, it would mean that refrigerator staples like Magnum, Cornetto and Kwality Walls will all come under a separately listed entity. This at a time when the ice cream space has been heating up…not literally of course. New age players like Hocco, NIC and Noto have all entered the market and collectively contributed to a sort of ice cream renaissance. So, shouldn’t HUL be focussing on growing its ice cream business rather than isolating it?Tune in. Listen to the latest episode of Two by Two hereDaybreak is now on WhatsApp at [phone]. Text us and tell us what you thought of the episode!Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.Listen to the latest episode of Two by Two here

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. I'm going to let you in on a running joke at Hindustan Unilever's Mumbai headquarters. If a new hire is assigned to the ice cream division, it's immediately clear that they aren't in the company's inner circle. But if you're handed a brand like Surfwick Excel, Brooke Bond or Glow and Lovely, it means that you are in the big leagues.

Right now, unfortunately, that pecking order is clearer than ever. You see, just last month, the FMCG giant went ahead and decided to demurge its ice cream business. The decision has already received in-principle approval from the company's board and assuming that it clears all the other approvals and procedures, it would mean that popular HUL brands and refrigerator staples like magnum, cornetto and quality walls will all come under a separately listed entity. Let's try and understand why HUL would decide to do something like this.

Its ice cream business is worth well over 1,700 crore rupees, which at first glance seems like a pretty impressive number. But when you take a closer look, you will very quickly realize that it is merely a speck in this massive 6 lakh crore rupee empire. It also doesn't help that growth has been pretty slow for its ice cream business. In over a decade, it has gone from contributing merely 1% to the company's revenue to just 3%. Compare that to a brand like Surf Excel, which just two years ago became the first non-food FMCG product in the country to hit Unicon status,

meaning it crossed $1 billion in sales. You see, HUL wants to bring the focus back to its three core businesses, the trifectors. the trifecta, if I may. Beauty, personal care and home care. The Ken reporter Akriti Bhala explains why. So in every segment where it can primamize or rather convince the customer to level up, that's where Hindustanian never wants to focus on.

For instance, in beauty, women were earlier buying shampoos, face creams, right? But with education around skin care now, they're adding more things to their basket, like face serum, sunscreen. And now mind it, this is a pretty high margin business. Similarly, you look at home care, there are detergent brands like SurfExel, right? Even in this category, people are moving towards liquid detergents.

HUL, in fact, recently announced how Surfxel alone will be a 10,000 crore brand. That's roughly a sixth of their overall business. Overall, the underlying expectation is that the GDP per capita of India will increase from about $3,000 to $4,700 in next eight years. When that happens, then the discretionary consumption will explode, as one of the analysts had told us. The company has realized that these are its real money makers. And at a time when sales have consistently been trailing behind its competitive, like Nestle and Tata, HUL can't really afford to be weighed down by any of its businesses, especially by a high investment and low margin business like ice creams.

You see, let me put it this way. For a small Kirana store in any neighborhood, stalking magnum ice cream would mean having a refrigerator. And for HUL, it would mean spending big bucks on cold storage to supply ice creams at just the right temperature to Kirana's. Simply put, it's a cold. costly set up for what is essentially a seasonal business. But there is more to HUL's decision than meets the eye,

particularly at a time when the ice cream space has really been heating up, not literally of course. New age players like Hoco, NIC and Noto have all entered the market and collectively contributed to a sort of ice cream renaissance. So shouldn't HOL be focusing on growing its ice cream business rather than isolating it? Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahal Philippos, and I'll be joining my colleagues Tickda Sharma every day of the week

to bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 4th of December. HUL's decision comes at a time when its parent company, UK-based Unilever, has been restructuring its global ice cream operations. Back in March, Unilever's board announced that it is planning to spin off its ice cream business globally. The company said it wanted to simplify its portfolio and focus on its four core business units, beauty and well-being, personal care, nutrition and home care. So HUL's decision is perfectly in line with all of this. But it's important to note here that HOL hasn't always

followed its parent company's lead. Like when Unilever decided to spin off its tea business in 2020, HUL still saw tea as a high growth opportunity in India and decided to hold it. hold on to it. So, what is different this time? Well, for starters, ice cream has never really been a priority within HUL. That's despite the fact that brands like quality walls, cornetto and Magnum have helped the company become the second largest ice cream maker in India behind Amul. So when Unilever decided to separate the ice cream unit, HUL had two options. Either sell the business or demerge and list it separate. Of these, the second option seemed far more favourable.

Manoj Manner, head of research at broking firm ICICI securities, explained to Akrity why that is. He said that within a separate unit, it would be easier for HUL to sell the business if the parent decided to sell the ice cream unit in the future. In fact, that's exactly why Unilever recently shelved its plans to sell the ice cream business to a private equity player. With ice cream out of the equation, HUL wants to double down on its core categories, like I mentioned before.

It seems to be resetting its priorities. You see, in the last decade, HUL's detergent business, which comes under the home category, has contributed to more than one third of its sales. It has really powered the company's rise. And now, it's expecting similar growth in the beauty category as well. It currently contributes about one-fifth to that sales. mix. Now, in both of these categories, beauty and home care, HUL already has massive scale on its side. In the case of ice cream, meanwhile, the return on the capital employed is far lower

than any other FMCG good. Another analyst told Akriti that ice creams also have lower EBITA margins of about 10% compared to 25% for HUL as a whole. But all things considered, the ice cream category has really been having its moment. It is widely being seen as a massive growth opportunity here in India. So, should HUL care? More on that in the next segment. The overall ice cream market in India is expected to blow up in the next few years. And this is largely thanks to both quick commerce and venture capital.

You see, in the last three years to 2024, funding for ice cream businesses have jumped 5x to $21.5 million today. A bunch of new age ice cream brands have also entered. at the fray. So why would HUL want to demurge a business on the brink of explosive growth? Why wouldn't it want to capitalize on this growing market? Well, in the quick commerce space in particular, it's become increasingly clear that the younger generation does not necessarily still want to eat the same ice creams that their parents did. In fact, Akrity spoke to Mira Jhala, the founder of Frogo, which is a dark store network for

frozen fruit brands. She said that these consumers are looking for guilt-free indulgences. They're actively choosing new-age D-2-C products over legacy brands. But at the same time, the larger market for ice cream is still offline. Given the current situation and the growing excitement around ice cream, the likes of Reliance Retail Heritage Foods and Carnatica Milk Federation are all queuing up to enter this category. HUL has a clear advantage here.

It has an ice cream business that is probably. profitable with a massive offline distribution muscle. Now, analysts told Akrity that it could have easily raised its valuation to 5,000 to 6,000 crore rupees. But let's return to that big picture, shall we? The analyst Akrity spoke to added that it would be about 5x its sales multiple or about 30x its ebita multiples, which is all right, but not that great. Now, one analyst said, given that Badilal is the only other listed entity in the ice cream,

space, demurging may not actually be the worst idea. It could actually work out well for HUL, especially now that discretionary spending is very steadily increasing. People are willing to spend more on luxuries like ice cream. But for now, HUL remains a colossus. It's confident that its next phase of growth will come from its core businesses, from detergents, creams, soaps, and not from dairy. The company believes that soap users will shift to box. Body wash, powder detergent users will go to liquid and that is the opportunity that they want to bet on. That is a macro trend that it's willing to tap into. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform.

What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button. on the top of the website. Today's episode was hosted by Rahil Filippos, produced by me Snigda Sharma, and edited by Rajiv Sien.