Forget the David fights Goliath story. It's passé. The new story will unfold when a Goliath takes on another Goliath.
For the first time, Hindustan Lever (HLL) will come face to face with ITC in its fiefdom of decades - soaps, shampoos and detergents - which accounts for 45% of Lever's net revenues and operating profit.
Analysts warn of a war more fierce than the one fought between Lever and Nirma in the 80s. Reasons are several. Unlike HLL's smaller competitors in the past, ITC is flush with cash and in no hurry to make new businesses profitable.
In FY05, ITC's tobacco division alone generated around Rs 2,300 crore in cash (operating profit). Against this, HLL's total operating profit during '04 amounted to Rs 1,741 crore.
The comparison between the two becomes sharper when we consider the accumulated cash reserves. At the end of March '05, ITC had accumulated reserves of Rs 7,646 crore, growing 20% annually. In contrast, HLL's reserves has been dwindling, from a high of Rs 3438.8 crore in '02 to Rs 1872.6 crore by the end of '04.
Analysts say that as long as tobacco makes money, Yogi C Deveshwar should not be unnecessarily worried. More importantly, ITC is its own master where the local management takes decision largely on its own.
HLL's management on the other hand is accountable to its largest shareholder, Unilever. Its bottomline and topline are monitored every quarter by Asia Pac or London. Product innovation and brand building is also regionally controlled.
But some say with Harish Manwani on the Unilever board, HLL has the sanction to fight any war to protect marketshare.
Marketing heads of FMCG companies and analysts ET spoke to declined to go on record on the HLL versus ITC story, but most of them concede that it would not be a short-lived war like the one P&G waged on HLL two years ago. The attribute it to ITC's distribution muscle which P&G lacks.
“It would be far more protracted and gruelling this time,” says the marketing head of a prominent fast moving consumer goods (FMCG) company.
“I don't expect ITC to trigger a price war immediately though they may go for some price tweaking putting pressure on our margins. ITC will follow its patent style of bombarding the television, print and outdoor media with high decibel advertising and doling out better margins to the trade,” the official adds.
However, another chief executive of an FMCG company is of the view that ITC has opened too many fronts without consolidating its position in any of them.
It has taken on Britannia in biscuits, Nestle and MTR in ready-to-eat, and a clutch of existing players in spices and food additives.
“You have to be god to take on so many players at one go. The fact that the local management can take its own decisions may not be a such a good thing. Also remember, HLL is a formidable competitor which has witnessed wars across categories. If such a situation arises again, it would deal with it appropriately.”
Says Nikhil Vohra of SSKI, “Unlike Nirma which created a new category, ITC seems to be interested in the mass market, which is heavily populated. But let's remember, it is also the best funded competitor. Combine it with its distribution network, and HLL has a fight in its hand.”
ITC's entry into foods has not been a failure either, adds another marketer. Though biscuit and atta are not making any money, the company has managed to gain significant marketshare.
And the company is not perturbed. The other four divisions (cigarettes, hotels, paper boards and agri-business) generate ten times more cash than the losses of the food business.