Case Study: Can kwality walls beat the heat?

CORPORATE STRATEGY: SEC D

Ice cream majors have aggressive plans to gain bigger market shares. Here’s how
Hindustan Unilever hopes to stay ahead with Kwality Walls. (Author: Sapna Agarwal)

Unilever is the undisputed world leader in ice creams. Its Heart brand ice creams - Cornetto,
Magnum, Ben & Jerry's, Solero, Carte d'Or and Breyers – recorded sales of $11.08 billion in
2008. Annually, the Anglo-Dutch company spends around $70 million on ice cream research.
To strengthen its global position, it last year acquired Inmarko in Russia. In India, the story is
slightly different. Hindustan Unilever, which is owned 51 per cent by Unilever, has a 14 per
cent share of the 100-million litres and Rs 1,200-crore per annum ice cream market, which
makes it the second largest player after Amul (38 per cent market share). The gap is no less
than 24 percentage points. But this perhaps is not the full picture. Hindustan Unilever
executives claim the company's ice cream business is growing at almost 25 percent per annum.
(Last quarter, sales hit Rs 90 crore). Volumes have almost doubled in the last three years. And
the company has taken strategic initiatives to outwit its rivals, most of them homespun players.

Homespun they might be, but the rivals are no rabbits. Market leader Amul has a huge
emotional connection with Indian consumers as it was the nerve centre of the White
Revolution in India. Its ice cream is available in no less than 70,000 stores across the country
- a number it plans to raise to 100,000 in the next one year. Its growth target for the year is 20
per cent. (The market has grown at 15 per cent per annum in the last five years.)

Vadilal, the third largest player in the ice cream market with a share of 12 per cent and a strong
player in western India (Maharashtra, Goa and Gujarat), has drawn up aggressive growth
plans. It will raise Rs 50 crore to expand its capacity by 40 per cent and spread out to new
geographies. "New launches, better availability, accessible prices and better awareness as we
doubled our advertising spends on television have helped us grow 40 per cent this summer,"
says Vadilal Managing Director Rajesh Gandhi.

Mother Dairy (market share: eight per cent) has fanned out from its stronghold of North India
to the eastern and western parts of the country in the last few years. Its strength is the 4,000
pushcarts out on the streets of the country at all times. As a large category of consumers buy
ice cream on impulse, this fleet has helped Mother Dairy grow 35 per cent this summer. Mother
Dairy Chief Executive Officer Paul Thachil makes no bones that this is a strength he plans to
leverage in the days to come. "We will grow our pushcarts 25 per cent and increase our
distribution reach," says he.

Tough fight

Where does this leave Hindustan Unilever? Ice cream volumes have grown at a much faster
pace than the rest of its FMCG business. While overall FMCG volumes were up a paltry two
per cent in the quarter ended June 30, ice cream surged 24 per cent. But this could be because
of the low base of the ice cream business.

IDFC SSKI Managing Director Nikhil Vora says the ice cream category is underinvested and
is likely to remain so for the next three or four years because the profit margins are low – less
than ten per cent. In comparison, FMCG margins are known to be in excess of 15 per cent.
"National players and multinational corporations have yet not made known any sure-shot plan
to invest in this category," says he. It is worth noting that Nestle, another large player in the
global ice cream market, has not entered the category in India.

So far, there has been no evidence of down-trading on ice cream (consumers buying cheaper
brands or smaller scoops), unlike other FMCG categories like personal care, fabric care and
oral care. In spite of the economic slowdown, this is an indulgence consumers are reluctant to
cut. In this scenario, the low margins can best be explained by the high cost of logistics.

Ice cream, according to Vora, cannot ride piggyback on FMCG. The business requires not just
a separate supply chain but also an entirely different cold storage and dealer network,
communication and price points. Sector analysts point out that Hindustan Unilever has not
invested enough to grow the market.

Different approach

That it's an altogether different ball game, Hindustan Unilever seems to have been aware from
day one. That's why, instead of starting from scratch, it entered the market through acquisitions
worth, industry sources say, Rs 150 crore. In 1993, it acquired Dollops ice cream from
Cadbury's. Two years later, in 1995, it bought Kwality from Ravi Ghai and Milkfood from
Jagatjit Industries to become the market leader with an over 75 per cent market share – a
position it has since lost to Amul which entered the market place in 1996.

To regain the lost glory, it decided to focus on the top six metros of the country and has over
the years expanded to the top 30 cities. At play here, says Hindustan Unilever General
Manager (sales and marketing) for Kwality Walls Punit Mishra, is the 30:70 principle – 30
cities account for 70 per cent of the ice cream consumption in the country. "We are interested
in increasing the consumption of ice cream in the markets that we are present in first," says
he.

Given the cold storage infrastructure in the country, it is perhaps easier to manage the supply
chain in just 30 cities. But this leaves the rest of the market open to rivals including local
brands. Both Vadilal and Mother Dairy with its battery of pushcarts have an eye
on the non-metro markets. It could give them the first mover's advantage in the cities and
towns where Kwality Walls is not yet present.

Mother Dairy, by the way, has developed a strong portfolio of local flavours which could work
well in the upcountry markets. On its part, Hindustan Unilever too has come out with ice cream
in litchi and coconut flavours at different price points.

Meanwhile, Hindustan Unilever has segmented the market in to three categories: Kids,
teenagers and families. So, there is the Paddle Pop range for kids, Cornetto for teenagers and
Red Tub for families. "A way to build scale is through focus," says Mishra. "The segmentation
has allowed us to create more consumption opportunities focused on segments like family
weekend for the Red Tub selection, teenage hangouts for promotion of Cornetto and fun and
adventure for kids with Paddle Pop."

With this segmentation, the Kwality Walls range now plays at the sensitive price points of Rs
5 and Rs 10 with Paddle Pop. The Cornetto range targeted at the youth is priced between Rs
20 and Rs 30. The take-home category is priced between Rs 160 and Rs 210. Thus, it has
products at all price points of the spectrum.

But rivals have caught on to the segmentation. Amul, for instance, launched its 2-litre
takeaway home offer last year and has now become the market leader in the category. "The
offer accelerated our growth pace to over 20 per cent as against the compounded annual growth
rate of 10 to 12 per cent for the last five years," says RS Sodhi, chief general manager of
Gujarat Cooperative Milk Marketing Federation which owns the Amul brand. To press home
the advantage, Amul has come up with 1-litre packs of its Exotica range this summer that has
Binge Roasted Almond, Choco Bliss, Choco Chips and Fruit Salsa Santra Mantra flavours
priced between Rs 120 and Rs 140.
New segments

Between kids and youth on the streets and adults at home, a large chunk of ice cream sales
gets taken care of. Impulse purchase from youth and kids accounts for 50 per cent of the
market. Family consumption adds another 35 per cent. Fifteen per cent of the market is in-
parlour sale - a new segment that has showed up in the last few years. This is dominated by
niche regional players like Naturals in the West, Nirula's in the North and premium players
like Baskin Robbins and the homegrown Italiano Gelato.

Hindustan Unilever wants to have a play across the entire ice creams pyramid and has its Swirl
parlours at the upper-end to take on competition in the artisanal ice cream segment. The Swirl
chain was started in 2004-05. The parlours do not sell the Kwality Walls range but create
mixes like Cornetto Swirl which tie in with the mother brand. A single serve of 250 ml here is
priced at Rs 60. "Retail is a big part of our strategy. Here the focus is experience, visibility and
the power of the brand. It is the theatre of ice cream," says Mishra. He plans to grow the retail
footprint of the Swirl parlours from 68 to 500 in high footfall areas like malls over the next
three to four years.

But competition is in no mood to give up without a fight. With the advent of modern trade,
Baskin Robbins now covers 500 modern retail stores along with its retail foot print of 370
outlets. "We will add 100 retail outlets during the year and also grow our modern trade
footprint. Modern Trade now contributes to 15 per cent of our overall revenues and we see
this growing to 20 per cent in the next couple of years" says Ashutosh Goyal, general manager
(marketing), Baskin Robbins which has established its leadership in the premium ice cream
category in the modern trade channel.

Amul too entered the segment this year with its Scooping parlours where it serves sundaes,
thick shakes and an exclusive range of ice cream. "We will have 1,000 franchises by the end
of the financial year, up from the current 250, and thereon add 1,000 every year for the next
five years," says Sodhi who expects retail to contribute to 20 per cent of Amul's ice cream
revenue in the next three to five years.

Across the world, consumers have turned health-conscious. They want to cut down calorie
intake because of the alarming spread of lifestyle ailments. And India is no different - it has
the largest population of diabetics anywhere in the world. Consumers have begun to look for
health and goodness in whatever they consume and ice cream is no exception.

Here, the lead has been taken by Amul. It has developed a portfolio on the health and wellness
platform with its probiotic and sugar-free category last year. Its sugar-free probiotic Frozen
Food contains 50 per cent less fat and half the calories than normal ice cream. "We expect this
category to account for ten per cent of the ice cream market in the next three years," says
Sodhi.

Hindustan Unilever too has got in to the act this year with the launch of its Selection range
which comes with just 99 calories in 80 ml. This, in fact, is a segment where the company can
draw on the expertise of its parent, Unilever. With growing health consciousness, Heart-brand
is developing products that are lower in fat, sugar-free, lactose-free, as well as low-carb
options and those with more nutritional goodies like calcium and fruit. It has come out with
new pack sizes which allow lower consumption. About 40 per cent of the research budget goes
to enhance properties of health and wellness. Clearly, there is nothing better than a well-
stocked parent.

Conduct a thorough analysis of the customers, competitors, market and