HUL v/s Star: Yeh Rista Kya Kehlata Hai?

Hindustan Unilever is a big interest area for many like me. By me, I mean the MBAs who eat and drink marketing. I am not one though.
HUL is the biggest FMCG giant in India with a sales turnover of Rs 22,800 Cr for the year ended March 2012. It is the market leader in categories like Soaps, Detergents, personal care etc. Apparently, it needs a lot of advertisements too to promote its various products. As per a report, FMCG companies have 9 out of 10 Ads on TV. I couldn't agree more. Sometimes, I forget that I was watching some movie before the slew of Ads began asking me to buy soaps, shampoos, detergents, face-wash, fairness cream and what not. The Ads give a substantial revenues (northwards of 40%) to the broadcasters like Star, Sony, Colors, Zee etc. The Ad slots are quite expensive as the competition to grab consumers' attention has intensified many-fold since cable has become affordable long back. A prime time slot of 10 sec Ad fetches the broadcasters something between Rs 80,000 to Rs 1,00,000. During important events like a Cricket World Cup final (or for that matter a Football World Cup Final), the rates go through the roof. A daily soap like 'Yeh Rishta Kya Kehlata Hai' garners more eye-balls (i.e. higher TVRs) hence they go a little expensive than the rest.
Star TV (having a basket of 15 channels) owned by Rupert Murdoch , rules the roost in the Indian Small Screen market with an approximate share of 35%, reaching around 400m viewers weekly. Thus, by default, Star TV and HUL are natural Complementers. HUL spends huge amount on Ads (as much as 12% of its sales) and a huge chunk is diverted towards Star.





Courtesy: www.thehindubusinessline.com

The FMCG companies have increased their TV Ad spending since 2008. A look at the figure shows that the companies have increased their spending to an average of 12.1% of their sales for FY11 as compared to 11.9% spent last fiscal.


Reasons for increased ad spending:


1. New product launches
2. Softening of some specific commodity prices
3. Focus on global businesses



But recently, HUL has stopped advertising on Star network of channels. Another FMCG major, P&G has been away from Sony Entertainment Channels for the last 8 months. The reason?



Higher Ad-Slot Rates asked by the Broadcasters.
 
In a year when the consumer sentiments are somewhat damp due to the continuous slowdown in the economy, these FMCG companies have maintained a healthy profit margins. But, going ahead can get tough and they know it well. On top of that, if the broadcasters ask for hefty price appreciations on their Ad-slots, it is deemed to hit the companies in the wrong way.


HUL spends about Rs700 Cr on Hindi GEC TV Ads, approximately 30% of its total Ad outlay. P&G's expense is pegged at around Rs 250 Cr. But its not that the broadcasters get anything they ask for. Just because of the huge spendings that these companies do on TV Ads and also because of the increased competition in the number of channels, they ask for hefty discounts of as much as 40% and get it.






 

The GfK Media research establishes that TV reaches three quarter of the population while other forms like print & online media are still far behind. But the average return on investment through Online advertisements exceeds that through TV advertisements (approx Rs 43 to Rs 75 for every Rs 100 spent)





Now, the interesting question is "Who will win this battle of the market leaders of their own domains?"


Is Star more dependent on HUL or vice-versa?
The answer is very simple but lets put a number to it through a fill in the blanks exercise.


 I call it a Fill in the blanks exercise because there are few data which are authentic and the rest is an approximation or a Guesstimate!


"Media Partners Asia, a Hong Kong-based research group, expects Star’s revenue in India to grow to $530m in the financial year ending June 2010, up 15 per cent, with operating profit of $105m, up 11 per cent."


Based on the above report, I assume a 15% compounded YOY revenue growth & 11% compounded YOY profits growth for Star for year 2010-11 & 2011-12.
Lets have a look at the calculations:

Star's Approx sales for 2012 ( at $1=Rs 55)	Rs 3855 Cr
Star's Operating profits for 2012	Rs 711.53 Cr
Zee's Ad Revenue FY12 @44% of Revenue	Rs 1337 Cr
Giving Star a premium of 15% for Ad-revenue	Rs 1538.5 Cr
HUL's total Ad spending (approx)	Rs 2000 Cr
HUL's Ad spending on Hindi GEC	Rs 700 Cr
Star holds about 35% market share. Lets say HUL spends according to the market share. Star's revenue loss	Rs 245 Cr
As per GfK research, every Rs100 on TV Ads earn Rs 43*, so, Rs 245 Cr earns HUL a revenue of --	Rs 105.35 Cr
Star's sales hit	6.35%
HUL's Expected sales for FY12 (12% growth over FY11)	Rs 25536 Cr
HUL's sales hit	0.41%

        *Incremental Income. A TV presence helps the brand to be present on a consumer's
          mind. For simplicity, here we are assuming that won't be affected in short run for
          a company like HUL.


Thus it is easy to see who is more powerful in this battle of Ad slots.
Probably, a boycott from the FMCG major may prompt the other companies to do the same to the broadcasters. Advertisements still making a major portion of their revenues, they don't have much choice but to fall in line. Any such dispute between Star and HUL or Sony Entertainment  Television and P&G is bound to help the other players  like Zee Entertainment Ltd. from the broadcasters space and ITC, Nestle, GSK in the FMCG space. However, since similar incidents have occurred earlier too, between Star and HUL, a compromise might be just around the corner for the mighties of their land.
Well, till the time, you enjoy your soaps with lesser Ads.  ;)