CFO Leaders: Financing Disruption At  HUL – Srinivas Phatak
(Photo: BloombergQuint)

CFO Leaders: Financing Disruption At HUL – Srinivas Phatak

In 2004, as India elected its 14th Lok Sabha in an election that served up a serious upset to the incumbent Bharatiya Janata Party government, a young finance leader at the country’s largest consumer goods company Hindustan Unilever Ltd. learnt an important lesson too. Never ignore an event risk.

Srinivas Phatak, then in his early thirties, was trading foreign exchange and bonds for HUL. Just around the time of general elections Phatak took a call on the currency, based mostly on fundamentals. It went south and today he recounts it as one of his biggest failures.

“We had taken a position assuming that the fundamentals were right, and therefore the currency would go in one manner, discounting the fact that the election is an event risk. And therefore, of course, we made some losses. In an overall scheme of things, it’s okay for a company like HUL to handle that. But the question is, I did not think through the risk management framework in its entirety and therefore I took an event risk. So, every time someone asks me, I repeat that. I repeat that in front of everyone, that’s critical. You never do that.”

Since then risk has become a near daily companion for Phatak, now chief financial officer at the company after stints in other Unilever businesses. Few other industries have witnessed the kind of disruption that the consumer business has. The retail trade has transformed — from kiranawallahs to Big Box to e-commerce and now WhatsApp vendors. Besides, retailers sell shelf space but nowadays they also sell their own products — private labels. Products, too, have transformed from being about utility to purpose. And marketing is now data and AI-led.

The 48-year-old has a word of caution on how to assess the financial viability of disruption and innovation.

“When you start to see a financial model, if to create value some fifteen things need to go right and the only way you’ll make money is if those fifteen things go right, intellectually you may say whatever you say but intuitively you know it is going to go wrong.”

Phatak featured on the third edition of CFO Leaders and for over 90 minutes discussed the company’s newest mission — 24-hour delivery to stores, the outcome of nationwide programs such as WIMI and CCBT, and how the consumer giant manages upcycles and... more importantly... downcycles.

Joining the discussion with their perspectives and questions were several finance leaders from across India Inc.

  • M Karunakaran, CFO, Shoppers Stop Ltd.
  • Nilesh Gupta, Managing Director, Vijay Sales Electronics Pvt. Ltd.
  • Vinay Gupta, CFO, Sketchers Retail India Pvt. Ltd.
  • Harmanpreet Singh, Managing Director, Multiples Alternate Asset Management Pvt. Ltd.
  • Satish Meena, Senior Forecast Analyst, Forrester
  • Badri Sanjeevi CFO, RAW Pressery (Rakyan Beverages Pvt. Ltd.)
  • Nitin Khanna, CFO, Inorbit Malls (India) Pvt. Ltd.
  • Rahul Kakkad, Director - Tax & Regulatory, EY
  • Rahul Manek, Founder, Fyre Energy Booster ( Triquetrus Essentials Pvt. Ltd.)
  • Harshil Karia, Co-Founder and Managing Director, Schbang Digital Solution Pvt. Ltd.
  • Anil Talreja, Consumer and Retail Expert
  • Lalit Achrekar, General Manager - Finance, Texmex Cuisine India Pvt. Ltd.

Watch the full discussion here...

Here’s the edited transcript of the discussion.

Managing Disruptions

Menaka Doshi: Very few industries have witnessed the kind of disruption that the consumer industry has seen over the last almost two decades now. Whether it is the retail trade that has transformed from kiranawalas to Big Box to WhatsApp retail now, or it is products that have been transformed from being about utility to purpose, or marketing which is now artificial intelligence-lead. What have these changes meant for a finance leader in the business?

Srinivas Phatak: First you have to start by saying that you can’t independently talk about finance and business. The first principle is that it is an integrated piece. Every aspect of what you have talked about has got bearing in terms of how you run your growth model and how you look at managing your profit and loss account in its holistic sense.

Let’s take a couple of examples — in one manner, today if you see, brands continue to be extremely relevant and powerful. They are the draw. But in another manner, the way you are able to connect to the consumer, the path to the consumer and path to the consumption has changed. It used to be very linear earlier. There are multiple touch points here. You could start with someone accessing a product on the mobile, reading up more on the internet and could buy it in any manner today. Therefore, the whole space has completely changed. And therefore, the real question is that, in many of these (areas) how are we getting ready to be ahead of the curve?

Fortunately to be part of being in Unilever is that you get experience what really transforms in different parts of the world. You have a very good understanding of what e-commerce can do to China or you have seen what modern trade (supermarkets) has done in a European context. And actually if you come back home, you see the biggest change is that you still have a big traditional trade that’s not going to go away and therefore the big opportunity is how you modernise the traditional trade because that is still going to be relevant.

Therefore, when you really look at it from a CFO point of view, if I have to give a simple example; traditionally, we all are very good at talking about fixed capital and how do you want to make those choices. Hopefully, we have got a bit more sophisticated in how we want to spend our marketing expenses.

To be honest, if you ask me the biggest way to look at it is that, how you are investing behind these future-fit capabilities. And how actually they are going to come back to start giving you consumer life cycle value.

If you ask me today, a lot of my time goes in thinking disruption, thinking what aspects of our business can get impacted and therefore are we really betting big? Are we really making those choices or allocations on all those resources for tomorrow even while we continue to protect the core? That’s how you end up thinking.

Biggest Challenges


Menaka Doshi:
What are the three biggest challenges that you have had to face in your time as a finance leader?

Srinivas Phatak: First is the biggest acquisition that we have done in the last 12 months, which is GlaxoSmithkline Consumer Healthcare. At about Rs 32,000 crore, it is clearly perhaps one of the biggest that we have done in the Indian fast-moving consumer goods context. Unilever has done more than 32 acquisitions and GSK is the largest. And 80 percent of this business that we are buying into is in India. Therefore, there is a big play that we are making here and therefore to really look at some of the aspects to it makes it very interesting.

First, it is stated (at HUL) that beauty and personal care is the big deal for the future and here we go and buy a HFD (health food drink) asset.

Second aspect is you really need to be convinced about the strategic rationale — what is the growth potential of this business. Are we buying a brand which is relevant into the future? Are we entering a category which is relevant into the future? And then you really need to pull back and say what’s the size or the price, what’s the ease of the capture, what’s the time to value? That’s again an interesting challenge.

Then when you get convinced on all of these elements, given the size of the deal, you have multiple stakeholders to engage and influence and the beauty is that finally we went in with a share swap agreement. But if you ask GSK global, they wanted cash.

If you marry all of this, we got a beautiful equation, which also means that we need to continue to grow this business in double digits for the foreseeable future and we need to generate about 800-1,000 basis points on margin expansion. It doesn’t get more fascinating. And why it is important? Because we are going back to see how we are going to meet the unmet needs of the consumers in a segment which is under-penetrated. It has got penetration of less than 24 percent. So, if you do this well— we understand the brands, we understand the categories and then we get our might of distribution together—that’s when you really start to unlock value.

Menaka Doshi: But M&A is still a conventional challenge for a CFO?

Srinivas Phatak: We don’t do this all the time and we don’t do it at Rs 32,000 crore all the time. The real deal will be what are you going to do with it in the next one year and how are you then actually going to start to bring all of this to play.

Let’s flip it around, because you started talking about channel in disruption. Let’s try and take that, if you really see, the place which is really getting transformed is channels and the route to market. Let’s try and throw some examples to look at what are some of these challenges and how you look through it. Lot of work that we have done says that, if you are able to service your customer within 24 hours, your ability to get that disproportionate increase to the sales, you are really well positioned (for that).

Menaka Doshi: 24 hours? But that is too long.

Srinivas Phatak: You are not talking about mom and pop shops across the length and breadth of the country?

Menaka Doshi: I am talking about Amazon’s two-hour delivery.

Srinivas Phatak: Let’s get perspective here. Amazon or e-commerce is low single digit (market size), it will grow. It will grow exponentially but let’s also start talking about the length and breadth of this country, which is called India. Otherwise, we all get into very urban Mumbai-centric (views). We will come to that and how we are going to address that. And to be honest, nobody does, today, before 48 hours, we do a lot in 48 hours and others take 72 hours and longer.

The first question is that how you are going to talk about reaching your products in a 24-hour time window to most of your general trade stores. Therefore, what are you going to do? And that is when you play around and say how are you getting a lot of data and analytics to then say what do you want to sell in a particular store? What kind of assortment do you want to put in? And that’s one element where you start from

Second is, look at your typical, traditional supply chain. You will take it from a manufacturing site, you will put it into a big distribution center, from there you will take it to a distributor and the distributor then will start to break bulk and then they will try and deliver - and imagine what happens in the cities, even in the moment you start to break bulk and try and unpack it, you have lost about 8-12 hours. So, therefore how do you do it?

What we are saying is that, can we now, based on the orders break bulk at our main distribution center and therefore you’re able to actually get the goods right through. All that you have to do at a distributor point is perhaps change the truck because a large truck can’t enter the city. Take it into a smaller truck and you are still able to go to the retailer.

Alright, now that you understood the back-end, the guy needs the stocks. So, what do you do? That’s when you say that more than 95 percent of our retail stores today are GPS-tagged and therefore when you use technology to say that from a distributor point how are you actually going to have your trucks move in the most logical fashion to make sure that the stocks still reaches the retailer. So, in a manner you have gone to say what should typically be in a store - mind you the store has only got limited capital and there is two important constraints there: capital and space. So, the more sophisticated you get in terms of what should be in the store, then you figure out right in the backend how quickly can you make that and how can you actually get the technology to map the whole thing. That’s when you really start to make a big difference to the whole value equation.

Now, the question is all of this means, you are creating capabilities. All of this means, you are actually investing money. None of this comes simple and that’s really a good question for you, how many of these modes do you continue to create, how much of my money do I continue to ring fence into all of this?

Menaka Doshi: So in some ways nowadays you are also a logistics business?

Srinivas Phatak: We are absolutely an end-to-end consumer business - means that every aspect of it from the time you order. You are right; we are a branding and marketing company, and in a manner we are also logistics. We are an end-to-end supply chain company.

Menaka Doshi: In achieving this what’s new in the last 5-8 years, that you probably have to focus on a lot more than maybe five years ago?

Srinivas Phatak: 10-15 years ago, we were the premier company in terms of distribution. Then after that it really became par for the course and the question is that how are you creating the next level of competitive advantage. This is just one example.

Menaka Doshi: This is the second challenge about that you are talking about? GSK’s size of acquisition being the first.

Srinivas Phatak: The challenge really is, how are you leading this disruption. You rather disrupt your own model before you get disrupted. Therefore, how do we take everything to do with data and technology and look at demand generation and demand fulfillment. That then starts to become a big deal for us.

And the interesting aspect is this is talked about in general trade, now the question is again how do you it for e-commerce? What is it really for modern trade? Similarly, that then starts becoming a very interesting challenge and the beauty is with every challenge, you got a big value unlocked, if you can get this right you will get a disproportionate value creation opportunity.

Menaka Doshi: When you say you have a target of 24 hours to deliver the goods - where are you right now?

Srinivas Phatak: A lot of it still happens in 24 hours. 48 is the average.

Menaka Doshi: But is your kind of consumption the consumption that would change or go away if you didn’t get there in 24 hours. Therefore, the kind of money and effort you are investing in building out this quasi-logistics business within your giant FMCG business - is that necessary?

Srinivas Phatak: Let me ask you a question. You go into a store, you ask about a particular brand. Let’s assume that the guy doesn’t have it. What are the chances that you actually will wait for that product? And what are the chances that you will go to another store wanting to buy a product? If you want a toothpaste, you want a toothpaste and your brand then. When you look at it from that angle it’s very intuitive, it’s very simple. You need to make sure that the product is available.

Menaka Doshi: But some of that you have already achieved, over 80 years of being in India. I’d think you’d have already managed to make sure you were in stores in a way that when people wanted to buy it, they could get it.

Srinivas Phatak: Let me pull back. The biggest two constraints in a store—the money locked in and the space. And if I need to be more relevant for the consumers, I need to have more of my stock keeping units there, I want more of my assortment there. That’s how I really start then to do the core and do the market development. If I need to do that, I need to have the right assortment and the right frequency of services.

Menaka Doshi: Have you seen gains from this new effort already? Can you quantify these gains?

Srinivas Phatak: Absolutely. You get to see this (gains), there are many indicators. Look at the stores where you have achieved this versus the stores where you have not achieved it. And therefore, you continue to see that the growth can be at least a couple of percentage points higher.

Menaka Doshi: So this is the second challenge?

Srinivas Phatak: The whole ‘route to the market’ is the second challenge. The example I gave was to bring this to life but the whole route to the market — whether it is general trade, whether it is rural, whether you want to look at e-commerce, whether you have to look at modern trade, that is the biggest challenge—a fascinating challenge for us.

Menaka Doshi: Third one?

Srinivas Phatak: Third one is talent. Something which is very easy (to say) and the question that we continue ask is - how are you getting ready for an HUL that is Rs 75,000 crore.

(FY19 Gross Sales: Rs 37,660 crore)

So, what has held well for you in all these years?
Does it exactly work out for you when you look into the next growth curve that you are likely to hit?
How much of your finance is really finance?
How much is it today about data, technology and therefore your ability to get insights, your ability to synthesise information and your ability then to drive some decisive actions.
Equally with that is then what kind of leadership skills and behavior are you cultivating in your leaders.

A combination of this is going to shape the organisation in the future.

CFO Leaders: Financing Disruption At  HUL – Srinivas Phatak

Route To Market


Menaka Doshi:
How much have you all invested in this entire logistics, data operation in the last five years? Ballpark - to make sure that you are available when a consumer wants to consume?

Srinivas Phatak: Well, that’s something which we have never disclosed in public. At the end of the day, this is a competitive advantage and I am not going to talk about it

Menaka Doshi: A ballpark number?

Srinivas Phatak: Seriously, no. The point is very simple to look at it. You spend about 13 odd percent on BMI - brand and marketing investments. I would never sit and ask whether the one or two or three percent – how effective it was, right? So, we all hope it works and lands well.

So even if you were to spend two to three percent in terms of creating these capabilities, you’re getting a return which is far more tangible and measurable.


Nilesh Gupta:
Is your retailer only stocking for a day that you have to be available in 24 hours? If he’s stocking for 3-4 days then he needs delivery once in that time. He would not need a 24-hour turnaround.

Srinivas Phatak: We are about 9 million outlets in this country. You are right, it depends on the throughput, depends on the size of the store, location…somewhere you have delivery which is a few times in a week, some will get serviced only once a week. There are different models. I think we need to start to de-average it and then start to make sense on how to service. I just gave an example.

Menaka Doshi: So, 24 hours is only for a few stores, I would imagine…

Srinivas Phatak: We are trying to increase it significantly.

Menaka Doshi: So how many stores do you have 24-hour coverage on?

Srinivas Phatak: I am not talking about that.

In the top 6 or 7 cities, we are getting there or at least we are very good with a couple of them; we are getting into the top six cities and the idea is to continue there.

Harmanpreet Singh: There are others also trying to solve the problem at the retail level in terms of capital and space. So let’s say Reliance Mart, Best Price...wholesalers and then there are startups like Jumbotail etc. Do you see them as competition? Because they are building those capabilities and they may provide them to those who need that. Or do you see them as partners?

Srinivas Phatak: The answer is you need to work on both models. In some cases they are absolutely partners and you also need to have a sense of paranoia in terms of how they can disrupt your model. It’s a combination.

For example, we are also doing something called Humara Shop - you go to our website, you order and we are now trying to make the store nearest to your house deliver to you. That is the answer to Menaka’s question on can I beat the 2-hour delivery. In which case you have to partner with some of these guys who manage the delivery ecosystem.

Take another example, we have some partnerships where we are working with some consortium guys who are investing in point-of-sale investment, we are working with banks who are interested in some of the fintech solutions and we come in with FMCG. All of us are finally interested in the consumer life-cycle journey. If I understand the consumer better I can sell FMCG better, the banks can look at financial inclusion, the person investing in this equipment then makes it a business stream, so you need those partnerships.

Badri Sanjeevi: What you are seeing at the retailer’s end and how that affects you? What I mean by that is – today we are seeing that retail organisations such as Future Retail have undergone a large M&A, Godrej Nature’s Basket too… and infact many large modern trade players are also investing significantly in their own brands. So their dynamics, their P&Ls, their way of working is also changing dramatically. How does it affect a consumer product company like you and do you still get all the shelf space that you want for your products? Or is that negotiation getting more and more difficult?

Srinivas Phatak: This is going to be an interesting challenge and will continue for long time. That’s why you need to go back and ask – how relevant are you from a consumer point of view and therefore the strength of your brands is super critical. Second piece is how are you continuing to innovate? Market development, building the segments of the future. Because end of the day if you continue to do well you drive footfalls. The retailer needs you as much as you need the retailer. Because people are not going to go to a shelf only looking for dealer-owned brands, people don’t go only looking for price. If you are able to continue to create that you will definitely have a sizeable share of shelf and you will be relevant, drive footfalls, equally you will have to continue to deal with them because they will want to push their product portfolio and they will have expectation in terms of their terms of trade.

Badri Sanjeevi: What is also affecting CFOs is how predictable is growth across multiple channels, with this kind of a tension between retailers and us? Because that puts pressure on our revenue team to say what new channels are emerging, how to bet against a growth channel which might not be the most profitable channel in the shorter term, whereas what were once the legacy, profitable channels with consistency and predictability of revenues are no longer offering the growth nor predictability.

Srinivas Phatak: So let me come back with what’s the equation that works for me.

My share in e-commerce and my profitability in e-commerce has to be higher than my shares and my profitability in modern trade which in turn has to be higher than my shares and profitability in general trade.


It’s a nice equation. It’s not the same product that you’ll sell everywhere but if you are able to get the right mix, the right product portfolio and if you manage this equation well, if consumers uptrade you are still relevant, if you are sizable in e-commerce, you drive footfalls, you are relevant to them…

The other element to really ask in our business is – consumer demand is reasonably steady, it is us through promotions and whatever we do, that induce volatility into it. If you give the right value equation to the consumer and you manage it sensibly, then to be honest our business is not one of the most volatile. Therefore your ability to work through what channels mean, what geographies mean, it can be done very well – the biggest advantage now is the amount of data you are able to manage today has gone up exponentially in the last 3-4-5 years. You are right, ten years ago there was a lot of you-think, you-feel…today you can quantify, objectify it..

Changing Role Of Distributors


Menaka Doshi:
You’ve explained in detail the time-to-market challenge and how all of that is impacted by a variety of changes in formats and delivery mechanisms. What is the impact on financial management? How do you look at running your finances differently now because of shortening time-to-market, the multiplicity of platforms, etc.? What has changed fundamentally there?

Srinivas Phatak: Fundamentally if you see, this is not an overnight change. This continues to change, it will into the future. So even today, if you see, we don’t sell on credit. Modern trade we give a little bit of credit, general trade we don’t give any credit. To a large extent, we don’t want a lot of our distributors to hold inventory. Even with the distributor, there are constraints of space and there is the constraint of capital. One element is how do you continue to become efficient in your end-to-end operations in which case the whole cycle then starts to make sense. I don’t need to push credit since I don’t need to hold inventory. I don’t need to hold inventory because I am more agile and responsive. And therefore, the total equation is an end-to-end one. So, that’s one way of looking at it.

Having said that, the interesting piece is really the retailer today. It’s less about the distributor and what you want to do with the distributor. If one of the constraints is the retailer, in terms of space and funding, I think that’s where interesting opportunities are coming up. As you look at a lot fintech solution providers who are coming through and as you partner with some of the banks, you don’t have to necessarily bet your money into it. You have an experience of working with some of them, you have the data to say how consistently and well something works for you, you have an understanding of the size of the business. If you are then able to to bring in extended partners, you can actually create a win-win situation.

Let’s be clear, at the end of it, your ability as an organization to really understand credit as it goes down the chain, is going to be less and less. But if you understand the business you do with them, you may not understand what all happens in the rest of their ecosystem, that’s when you’re able to partner with some banks and fintech solutions. I think we are in the way of experimenting with a few projects to unlock capital.

Menaka Doshi: What metric in your financials gets impacted by this? HUL is amongst the most aggressive companies when it comes to working capital management. You run a negative working capital cycle and have for a very very long time.

Srinivas Phatak: So, what I really look at is, what’s the distributor return on investment (ROI) and what’s the distributor’s attrition. Because that starts to be a very key metric for me. Because, at the end of the day, you have a good amount of visibility of what the distributor makes because that’s a combination of the full cost as well as the capital lock-in. So if you see in our organisation, it's actually finance which takes the responsibility to make sure that we track the distributor ROI and make sure that there is a healthy ROI. Everything that you steer through, you start to see a change there.

Menaka Doshi: What is a healthy ROI according to you?

Srinivas Phatak: Well we work at about to 18 to 24 percent depending on how it is and that’s a good metric to look at. The next step is to see what’s the distributor attrition. If you’re losing distributors, then there is a certain element of the model which doesn’t work. If you continue to look at this, it is a very good metric for you to look at in terms of channels and disruptions and what’s really happening. This is from a general trade perspective. Modern trade is, of course, going to be very different.

Vinay Gupta: In the retail industry we know the cycle is more important, how much rotation you do... the ARS (auto replenishment scheme) is a stress on finance. In tier one cities it is not an issue. What is your experience in reaching tier 2, 3 cities and that too in the remote areas?

Srinivas Phatak: That’s also the reason why over the years we have continued to increase our direct distribution (via distributors) and direct coverage…that gives us a competitive advantage. Because you are not trying to reach through a wholesaler. You go to a distributor, the distributor has feet on street. We actually go to many stores, take orders…the whole thing is digitised and therefore that’s one big competitive advantage for us.

The other thing is that we have invested significantly in the Shakti channel. We’ve got more than 1,20,000 women who actually help us with the same direct distribution in deep rural areas, and today we are digitising that as well. That again is a very big source of competitive advantage.

Cities everybody will target. The game really happens in the many Indias and the mini Indias.


Menaka Doshi:
How much of your distribution is now direct?

Srinivas Phatak: Numerically we have not been quoting that number.

Badri Sanjeevi: What is the definition of direct? Direct to the retailer? Or through one intermediary?

Srinivas Phatak: Through our distributors.

Menaka Doshi: HUL has 3,500 distributors.

Badri Sanjeevi: Is there anywhere you do direct to the outlet?

Srinivas Phatak: Not at a retail level. Because end of the day the way it works is distributor takes the order, we service it. It’s modern trade we do direct but not to the retail stores.

Menaka Doshi: What’s the shift been like? What portion of your sales gets done directly as opposed to the slightly more traditional model of going through the wholesaler?

Srinivas Phatak: As much as I would really like to answer this question, we have kind of stayed away from answering this through and through so I don’t see a reason why I should really do that. Sorry about that.

Menaka Doshi: I want to bring up the data angle. You mentioned both Humara Shop. You have two more data-led programs ‘Shikhar’ and ‘Samadhan’. How much of your distribution or supply chain now is almost, real-time data available to you?

Srinivas Phatak: Let me clarify. There is two of them that you have picked up. There is every aspect of our business today that has got into data and digital.

You talked about the ‘Shikhar’ app. Now, what is the Shikhar app? It is an app which is available to the retail store. They can simply place an order, and in case you don’t have a salesperson calling you, they can actually place an order and you’ll be able to service them. We’ve taken it up to about 13 cities. Rolling out the app out was the easiest because the data comes in, but then you still need to service. It comes back to - the guy who has placed an order; he doesn’t have to wait indefinitely to get that and if you work it through, there are some challenges. But now, we have progressively scaled up and we’ve come out to 13 cities and we are continuing to expand that.

Again, some key metrics. How many orders received? Are they repeat orders? Or is it that people have used the app and not come through; more importantly if they have placed an order, how have we serviced, what kind of time frames have we serviced, have orders dropped? I think all of these become critical metrics and KPIs which we need to monitor to make sure that it is a sustainable solution. We are in 13 cities and we will expand.

Samadhan is actually something which is happening in one city, which is Chennai- that’s where are creating this huge distribution centre which will enable us to do the packing at the centre. And once we do that…

Menaka Doshi: You explained this earlier. And you will do direct delivery to the customer? Not to the retailer, to the customer.

Srinivas Phatak: What we said that is, we will have to change trucks because even though we have taken out goods from the distribution centre, we will pack them out as per the requirement of a store, so we’ll pretty much pre-pack what the store wants. We may still have to come to a distributor point to make a shift into a smaller truck but the distributor is not going to be doing all of that.

Menaka Doshi: In all of this do you envisage at any point going straight to the consumer?

Srinivas Phatak: In that manner, all you are doing is what? Into the future, the whole role of the distributor will change. Today, they break bulk, they basically go and distribute. They offer credit so obviously there is one important chain, that is distributors offer credit to the stores. We don’t, but the distributor does.

The rate at which all of this is changing, into the future, you could have a very different looking distributor. We don’t know if it is a two-year phenomenon or a five-year phenomenon.

You take the app, you will get the orders, and the full algos that you conduct at the back end. You can almost decide not to go to a distributor point to do this changing of trucks. It could be anywhere else and you make sure you reach the stock directly into the stores. Second question is, with the explosion that is happening to the digitisation of the economy - in the foreseeable future you can can also start to see how you can get credit out of the equation. There are multiple solutions coming through.

Menaka Doshi: How do you get credit out of the equation?

Srinivas Phatak: He doesn’t have to be the person to give the credit.

Menaka Doshi: But it’s not going to be you, it is not going to be him, so?

Srinivas Phatak: It could be us; it could be with a banking partner.

Menaka Doshi: But you have stayed away from giving credit (to distributors/stores).

Srinivas Phatak: We are now looking into the next five years; there could be alternate models. In all of this you should never say never to any of these solutions. It doesn’t mean that we’ll open our books and start giving credit. That’s the easiest thing to do but I don’t think it is a sustainable solution.

A lot of banks, financial inclusion institutions, fintech partners are coming in, we will find solutions to say, how we will get that credit out and how do you have a full trail of the digital cash which is happening? Because today, it is all cash. A lot of it tomorrow, into the future, will become digital.

Then it comes down to the interesting question of how do you look at the distributor? The distributor then starts to become someone who is really reading for you - market development. You still have to educate the stores in terms of market products. You can have a very interesting job to say, how do you want the products to be visible in a store? How do you want to make it really more consumer facing, a very interesting way you could go.

That’s how I think it will go. Do I know whether it will go there in 12 months? Definitely not. If it will go in 36 months, probably yes. But we will have to learn it a few times and do and undo models before we get there.

Financing Disruption


Menaka Doshi:
Isn’t this a business strategy challenge and less a CFO challenge? Where does your role kick in, in something like this?

Srinivas Phatak: It is very simple. First, there is a cost and an investment. Second is, if you want to bring in a lot of data and technology, you work with the external ecosystem to bring that in. Third is that, if you are doing anything about the partnerships - how do you get that to work? If you want to think about funding and financing in a different way, how do you get that to work?

The point in all of this is, if you step back, you need to have the courage of conviction to start saying that we will continue to invest in this. You’re not going to see money in the first six months, twelve months, maybe eighteen months. Or for example, in some cases, even three years. How comfortable are you with that? You need to get extremely comfortable to saying that what is this consumer lifecycle value, what is the cost of not doing this versus cost of doing it.

We are used to saying that if I invest in a fixed asset, what’s the return on investment? What’s the financial key performance indicator? That’s very easy. The moment you start to get into many of these (new) things, the question is, can you hard code some of the financial metrics?


Menaka Doshi:
It is a little ephemeral or ambiguous.

Srinivas Phatak: Absolutely. That is why I’ll link it back to why I said it’s ‘finance into the future’. How comfortable can you be with some of this ambiguity? How well can you think about risk and risk management? That’s not how traditionally finance has been tuned - you look at a lot more certainty, Welcome to the new world, it is all about dealing with ambiguity.

M Karunakaran: You spoke about e-commerce, is the consumer behaviour different when she orders through e-commerce and the general trader?

Srinivas Phatak: it’s a very broad generalisation. Today e-commerce is still low single digit in terms of total business. The expectation for e-commerce is different. Obviously consumers are looking at a better experience, a better product story, a little more premium and prestige - in our categories atleast. Look otherwise even the cost to serve will not justify if you are trying to sell a soap or shampoo. Clearly the people who purchase via e-commerce, they read up a lot, they do a lot of price comparison but more importantly they have a lot more understanding of the product and what they are looking for. That’s why you need to have a very differentiated portfolio for e-commerce.

M Karunakaran: You also spoke of the three trades. I heard you say the profit in e-commerce – expectations are higher whereas in our industry it’s completely reverse.

Srinivas Phatak: I’ve got a very different product portfolio that I will sell. That’s why I said I’m not going to sell a kilo of Wheel in e-commerce but I will definitely want to sell my high-end shampoos, skincare and the works. End of the day if you are going to have a model which is a 2-hour delivery model the unit economics will never work for you if you are trying to sell a product which is 100 bucks.

Rahul Manek: I just want to point out that while we are talking to the CFO of a very, very large FMCG company, most of the questions are around service. I just wanted to highlight how important service has become.

Srinivas Phatak: if you just dial back and say the best way to describe it as a route to market. Whether its B2B or B2C and therefore I was trying to link it back to saying the path-to-purchase is becoming very different. And therefore you’ll have to think end-to-end and some parts you can do it and some parts you need partners.

Nitin Khanna: When you talk about end-to-end, your nearest competitor is talking about the entire value chain, including introducing fintech, giving EMIs…I’m talking about the Biyanis (Future Retail). Your shelf life for certain products has also been reduced because they are introducing the entire value chain. Their motto is to become biggest FMCG player. So, are you also looking at investing in real estate. Because that’s one piece where I find that as a retailer he scores more, he gets his own product, he provides benefits to consumers…do you see that as one piece missing in your strategy?

Srinivas Phatak: Short answer. NO.

Managing Costs And Margins

Satish Meena: You spoke earlier about the constant need to expand your margins as you innovate, as you are participate in a distribution disruption. If you look at your margins in the perspective of product margins versus landed margins, do you see the shape of these margins change for you over time? What I mean is that -- at a product level you are investing in more premium products knowing that you are working towards 24-hour distribution, expanding e-commerce presence, having to give away more distribution margin....

Srinivas Phatak: It’s not a one-to-one relation. End of the day I am branded FMCG, I’m not retail. Should mix be an important contributor to our margins, absolutely. What is it likely to give you – every year 20-30 bps. Because premiumisation will take a certain time. The question is I have got so many levers to actually play the full value chain -- there is money in materials, in extended supply chain, a classic one today post-GST is your ability to completely have a very different manufacturing footprint and a very different distribution footprint. We’ve shared that we are actually going down from about 40 odd distribution centres to about 20. So the number of kilometres you will travel on the road (matters). Somewhere we’ll tough upon ad spends…today as you are able to bring in more sophistication in how you are targeting your consumers you are able to generate a lot of funding and fuel from there. Then look at our own administrative and overhead cost, you get a growth leverage you also get the leverage of so much disruption which is happening terms of solutions.

In our own business our savings, gross savings, is actually gone up from 4 percentage of our turnover to 7 percentage.


We’ve now talked about it for the third year in a row. And that actually is also giving us a lot of ability to invest. Again, I’ll say don’t look at this as a cost and that as a savings. End of the day you have to invest in all these capabilities if you want a future-proof business and then the equation works.

Menaka Doshi: On Ebidta margins - You have seen an improvement of almost 800 basis points over seven years. Is there continuing room for Ebitda Margin improvement?

Srinivas Phatak: Just let’s wind back. There are three divisions and it is important to understand where I have seen the biggest change in margin expansion. I’ve got three divisions; one is home care business. Second is beauty and personal care and third is foods and refreshments. Home care business, it’s about a third of our total business, we used to make low single-digit margins and today, we have moved the needle to the range of about 16 to 17 to 18 percent.

Menaka Doshi: That is through premiumisation?

Srinivas Phatak: Through multiple things—a whole reconfiguration. We have invested back into product quality, we’ve gone into a very different portfolio which sells in different parts of the country and the whole WIMI (Winning In Many Indias) strategy and, therefore, how you’re making those choices. Clearly, there is premiumisation—whether it is Surf or whether it is liquids (liquid detergents). A complete rejig of supply chains—where do you source from, where do you sell to—a lot of work has happened there. That is where we have moved almost 8-9 percent in absolute margin increase.

Menaka Doshi: That’s the bulk of your margin expansion?

Srinivas Phatak: If you say, 700-800 basis points, close to 300 or 350 comes from this part of the business. Second, if you look at our beauty and personal care business, it has had very good growth. It has a margin profile of 25 percent, give or take, 200-300 bps here or there. Again, a very healthy space to be in. Our foods and refreshments business, which used to be close to double digit, has moved to 15-16 percent. So, the whole space of how you’re playing the portfolio has really helped. But again, I talked about our savings agenda going up from 4 percent to 7 percent (of turnover) is again a big enabler.

Menaka Doshi: But you can continue to extract margin growth from these divisions?

Srinivas Phatak: So, the question for us is, if we look into the future, the real opportunity will come as to how fast can you grow? The benefits of growth and growth leverage will continue to give you margin expansion, not necessarily have to drive margin expansion. Will we be aggressive in our savings agenda? Of course, we will be. Because we have to invest back in these future capabilities.

Menaka Doshi: Is this savings agenda largely through raw material management and things like that?

Srinivas Phatak: All of it. Today, there isn’t a line of our profit and loss which doesn’t go through (scrutiny).

Menaka Doshi: How long can you continue to extract savings?

Srinivas Phatak: What typically happens is—you get newer abilities and newer capabilities to unlock some of this. At the end of the day, can we sustain 7 percent of savings forever? Of course not. The question today is, many things which were not feasible earlier, are feasible today.

Menaka Doshi: Where has the 7 percent savings coming from? Can you give me a real illustration of what has worked best for you.

Srinivas Phatak: Supply chain counts. Let’s take our non-material suppression costs. Factory, distribution, supply chain.

We are changing the footprint of our factories, we are doing more automation in the factories, we are able to bring in more technology into the factories. The number of kilometers that goods are travelling on the road is coming down, it’s fascinating when you have the capabilities that you are creating, they will unlock this.


Menaka Doshi:
What proportion of your margin expansion has come from savings and how much has it come from things like premiumisation?

Srinivas Phatak: Every year, I get about 20 to 30 basis points of margin expansion from premiumisation.

Nilesh Gupta: Another gain in margin is if they go direct to the customer, if they succeed in that. As a retailer I would be really concerned if brands go directly to the customers. On this account do you think companies are geared to go directly to customers? Selling to the customer is one part. Servicing the customer is a totally different ball game.

Srinivas Phatak: The question is its not a one versus other model. E-commerce is low single digit, will it go big, ofcourse it will go big. Do I have any idea if it will be 10,12,15 (percent of the market)? I don’t know. Modern trade could be today 12-15-17 percent - will it go to 30-40? Maybe. But general trade in this country is still going to be relevant – maybe 40, 45 percent. It is a big channel.

Today everyone wants to talk about big cities but they are missing the India opportunity.

They all want to talk about premiumisation but the amount of people who are coming into the consumption basket at the bottom end is sizable.

Upcycles And Downcycles

Menaka Doshi: Preparing for upcycles and downcycles - we are in a soft patch right now. What are some of the things you might have already started putting in place?

Srinivas Phatak: The question is, is there moderation to growth? The answer is there is moderation to growth. And equally, one needs to be clear that there is no a silver bullet that you can start to fire today to start doing it (fixing growth). Therefore, in FMCG the beauty is that it’s about everyday-brilliant-execution and you need to be prepared to see where you want to go.

What are some of the things that we’ve done, and therefore, today honestly, I don’t have to do anything differently barring one or two things.

First thing is our portfolio. It is a very clear strategy for us and therefore its very linked into finance and I’ll make that link for lest it only be a strategy thing. Every part of our business has a portfolio which straddles the pyramid either from a benefits point of view or from a price point of view. I’ll give you a classic example of haircare. Four brands; Clinic, Sunsilk, Dove, TRESemmé. If you throw a little bit of herbal in, you get Ayush, and Indulekha. So, I’ve got six in that sense. Price starts from Rs 1 to about Rs 432. You need to make money. All of them make money but not every pack will make money. If you continue to have that mix running well for you, you will make more profits on certain packs. You will make less profits on certain packs. But in the aggregate, you’ll continue to have a value adding equation. Now look at the situation. Today, if there is uptrading, you’re there. Let’s say there is downtrading, you’re still there. You are relevant with the totality, and therefore, this is one element we continue to do in every part of our business.

Second, let’s look at the terms of our ability to go direct and therefore why is distribution important. The more and more you directly distribute, you’re controlling the assortment, you’re controlling what actually goes on the shelf and therefore your ability to sell better to the consumer. Therefore, distribution becomes important.

Third, lets talk about speed and agility. We are just not looking at growth moderating or not; along with that comes what happens to currency, what happens to commodities. Depending on how this equation plays, there is a danger and that is why we are paranoid about it. It can be a difficult equation. That’s why we’ve continued to invest behind product and supply chain capabilities.

For more than 50 percent of our products today, I can change grammage and price online.


So therefore, your ability to continue to service the markets (improves); if I want to take down price, take up price, I don’t need to run a long inventory. Therefore, your ability to be responsive to what you need is again a place which completely distinguishes you.

I just gave you three (examples). I can talk about many others and the last one, maybe I should. In this period, where do you need to give the value? If you need to give the value, give the value to the consumer and not necessarily to the trade. That’s one of our learnings when economic environment gets difficult is, give value to the consumer.

Menaka Doshi: Which is a price cut in simple English?

Srinivas Phatak: Either a price cut or you are giving more product for the same price. That I think starts to work very well for us. I got four things and none of these, if you really see, are things we do because today there is so called moderation. These are principles which we work on everyday.

Menaka Doshi: And you mentioned one or two levers that you might want to kick in if you start seeing a soft patch around the corner. What are those?

Srinivas Phatak: Look you can’t. All I can say is, if there is demand softening, what are you going to do? There is no point in trying to induce volatility to try and put more. What will I do?

Menaka Doshi: There is discounting, price cutting

Srinivas Phatak: I would not do any of that. If you ask us, we will double up our efforts on market development. I’ll do more sampling; I’ll continue to drive more innovations. I’ll tell you why. When the turnaround happens, I’ll be the fastest to recover. The beauty of FMCG is that, you’re not the first to get impacted when the economy is impacted. But when you see a turnaround, you’re the first to benefit because people come back to products of everyday consumption.

Menaka Doshi: So, I think some of the best companies, for instance it’s not just HUL but Nestlé etc., we’ve seen them maintain advertisement expenditure, maintain investments knowing fully well that we are entering a soft patch because that’s when you can capitalise the most on the turnaround, right?

We talk a lot about downcycles but when you can see in the future of the economy, or the future of the geography, a pick up in growth and change in the way people consume, are there again some levers that would you want to be able to use or play with? That might help you gain or benefit the most.

Srinivas Phatak: That’s again the whole concept of WIMI - it is really de-averaging the country. Even today when you talk about, there are still many parts of the country which are still growing fast. When we look at the aggregate number and say look, is there moderation, is there acceleration, is there slowdown, at any point in time there are geographies which are doing well, there are parts of your portfolio which are doing well, there are channels which are continuing to do well. So, the question then becomes - whether you are, therefore, making some of your resource allocation choices differently?

It is not necessarily that you’ll spend the same BMI everywhere? You could dial up TAMSAT if that is working really well for you or you can actually flip your own model to say, look if I can see some parts of rural India doing well, you can actually dial up on how you can spend on some of village melas and fairs to actually capture the benefit.

Menaka Doshi: That’s been the consequence of WIMI? What has been the single most important impact of breaking the market down into 14 such geographies, customising products, strategies, distribution and reach for each of these. What has been the single most important impact on finance function because of this?

Srinivas Phatak: How do you handle this complexity? So, we used to have four regional branches. Today, we have one branch, which is really the information engine. So, if you want to manage this, it’s very easy for people to split it into 14, you can split it into 20. But we do all of that planning at that level of granularity as a business.

Therefore, for us as a finance function, (the question is) how are we having the capability at a centralised function. I need to manage, if I need to give credit, there are disruptions, I give credit. It’s not as if I never give credit. That’s one example of how you’re going to do it.

Second is, if you want to manage 3,500 distributors, again, using data and technology, your ability to monitor their ROIs and how you want to do it, with inputs coming from these fourteen clusters, becomes an important piece.

Third, it is all right for the business to say ‘we want to move monies here, we want to spend there, we see these pockets.’ Now, there is the sales and operating data, there is a financial cost to serve. At the end of the day, they both come together. If I had unlimited money, I can go and sell anything anywhere in the country. I don’t. Therefore, how do you marry the sales and operating part of your business to your cost -to-serve? When you start to make some of these resource allocations, it again comes back to us.

Menaka Doshi: This is conceptual. I want real-life illustrations of what has changed in your life since you went fourteen regions.

Srinivas Phatak: I am really struggling to answer because I’ve said we gone from five branches to one national branch.

Menaka Doshi: But you are doing everything in that one branch?

Srinivas Phatak: 14 financial plans.

Menaka Doshi: Each cluster has an individual financial plan?

Srinivas Phatak: Not always on a month-on-month basis but periodically you do that. Once a quarter then you really see how it's making sense for you because, more importantly, what is your cost to serve? So, we do that.

You get better value for the whole thing. How do you drive growth, how do you get your mix, how do you take costs out; therefore, the P&L. So that again is an element which works for you.

Second, is your whole ability to look at an innovation case. Let’s give a real example. If I want to now launch an innovation, how do I do it? Where does it go? How does it play out? Another element in terms of Jarvis, which we’ve talked about, is pricing. Pricing is a big role for finance to play just given the complexity.

Now, we use all of this modelling with the data and decide how you right-price a particular product and therefore, you’ll see that our similar packs across geographies will have different prices.


Now that comes down to the model. Finance has a big role to play in terms of, how do you model that and again, are you being true to the model. It's very easy for people to follow a model when you like the results, it's very easy for people to walk away from the model when you don’t like the results. That’s where I think finance then starts to come in. That’s not a simple WIMI answer. That’s a WIMI, CCBT answer because, I’ve got fourteen geographies, fifteen categories.

Menaka Doshi: CCBT - Country Category Business Teams?

Srinivas Phatak: Yes, absolutely. Country category business teams. That’s an acronym and jargon. That’s how you really run the company in a manner that you are actually running this whole company in a grid and therefore, category cluster then starts to become a unit for you to look at from a financial performance angle.

Menaka Doshi: Is this a purely India innovation in the Unilever network? Or have you done this across Europe or other regions?

Srinivas Phatak: So, this I think, clearly I’ll give credit to Sanjeev and his predecessors. This pretty much started in India, became big. Having said that, there are also parts that we do in the Middle East. Again, that’s also a place where we do this well. But India, I think by far would be the place where it has become more sophisticated.

Menaka Doshi: So, this 800 basis point improvement in the Ebidta margin, how much has come from the ability to manage finance on a 14- cluster, 15 CCBT level? Is there any way to quantify the financial benefit of breaking it down in this fashion?

Srinivas Phatak: I don’t think we’ve done that, and I don’t think I’ll get an ROI if I dissect it in that lens.

Menaka Doshi: How do you gauge that this has really helped you? What is the metric you use to gauge that this has benefited the way you work?

Srinivas Phatak: Let me give you an example.

Central India was the new branch that we created. That’s been our fastest growing branch with this WIMI focus and CCBT focus for four years now. I don’t need any other metric when that’s my fastest growing branch.


We’ve said that it's been growing at about one and half times our company average. We’ve said that publicly.

Success And Failure

Menaka Doshi: Let me close this out by asking you to share maybe one tremendous success of your career and one terrible failure. You can go with the failure first so we can end on a happy note.

Srinivas Phatak: The terrible failure - this was actually pretty early in my career, it was important. I used to trade foreign exchange and bonds for HUL. I still remember taking an event risk and this was the elections, 2003-2004.

Menaka Doshi: In India? You were punting on elections in India?

Srinivas Phatak: We were not punting on the elections. We had taken a position assuming that the fundamentals were right, and therefore the currency would go in one manner, discounting the fact that the election is an event risk. And therefore, of course, we made some losses. In an overall scheme of things, it’s okay for a company like HUL to handle that. But the question is, I did not think through the risk management framework in its entirety and therefore I took an event risk. So, every time someone asks me, I repeat that. I repeat that in front of everyone, that’s critical. You never do that.

The second thing is, I still remember, from not too long ago.

When we are looking at some innovations, you need to be very clear about does the proposition work. When you start to see a financial model, if to create value some fifteen things need to go right and the only way, you’ll make money is only if those fifteen things go right, intellectually you may say whatever you say but intuitively you know it is going to go wrong.


Of course, it went wrong. So, the question again, for my learning is why did I not back my instincts along with data and therefore why did I not stop that innovation?

Menaka Doshi: Fabulous success?

Srinivas Phatak: Fabulous success - I think if I really look it is that I really enjoyed my role as the CFO for the supply chain company for North America and Latin America. We invested more than a billion in that period of time to completely rechange the supply chain. Take significant costs out. Amazing opportunity to work at the same time between a ‘D’ market (developed market) which is North America. which was about omnichannel and how are you really getting prepared for the new world. And then I had the other crazy counterpart which is Latin America. If we think this place (India) is volatile then you have twenty of them being volatile in that whole space. And while we were doing this, we actually implemented ERP (enterprise resource planning) in twenty countries having already burnt our fingers in the first country which didn’t go well. So, we pulled that off, thanks to the team I worked with.

Menaka Doshi: Was that easier or tougher than GST in India?

Srinivas Phatak: It was seriously bloody tougher than GST in India when you are doing that gamut. On a lighter note, I always say this - that someone decided to take an Indian, base that person in Switzerland and get him to handle North America and Latin America supply chain finance; it doesn’t get crazier than that.

But again, it was a fascinating experience because you spent a lot of time on the road, a lot of time with people from very different cultures and countries and you had a massive agenda. So, if there is one role which continued to give me many sleepless nights and a lot of stress and strain, it was absolutely that.

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