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Hindustan Unilever needs to woo more rural Indians with Horlicks after $3.8 billion merger

Success of the deal with GlaxoSmithKline unit hinges on rural India sales of malt-drinks

Hindustan Unilever plans to introduce new formats such as sachets and focus on growth in northern and western India.   © Reuters

MUMBAI (NewsRise) -- Hindustan Unilever will have to get more non-urban consumers to warm up to malt-drinks to benefit from its proposed $3.8 billion merger with GlaxoSmithKline's Horlicks nutrition unit.

Unilever, the Anglo-Dutch parent of Hindustan Unilever, agreed to buy the Horlicks nutrition business of GlaxoSmithKline, in a move that will allow India's largest consumer goods company to break fresh grounds in the nutritional drink market.

But the success of the acquisition depends on how many more Indians in the country's rural areas and small towns are keen to drink malt-based supplements such as Horlicks and Boost which have largely been an urban phenomenon.

The demand for malt-based drinks has been slowing in the south Asian country as health-conscious urban Indians turn wary of lactose and sugar intake, preferring alternatives such as natural juices and smoothies under cold pressure or whey protein.

Malt-based products, which started as a nutrition fad several decades ago, is now facing stiff competition from new supplement providers such as Kraft Heinz and Abbott Laboratories in a saturated urban market.

"People are consuming different types of nutritional drinks which act as direct competition to malt-based drinks," said Dhanraj Bhagat, a partner at Grant Thornton. "Moreover, a large part of the rural market is still removed from this."

The overall penetration of the health-drink market in India is as low as 24% with only 14% penetration in rural India, say analysts.

In a statement announcing the deal on Monday, Hindustan Unilever said the company will increase its reach with a special focus on rural markets and emerging channels and expand its offerings to the fast-growing "premium segment."

According to HUL, the health-drinks market in India is likely to see 9% average growth between the fiscal year 2017 and 2022. The company expects to expand this portfolio by double-digits in the medium term.

Research firm Euromontior International expects the malt-based drinks category to grow at 8.8% till 2022, compared with about 12% in five years through 2017.

The growth slowdown has in the past prompted other global malt producers too to reconsider their India strategy. In October, Kraft Heinz said it will sell part of its Indian business, including malt-based drink brands such as Complan and energy drink Glucon-D, to local pharmaceutical and consumer products company Zydus Wellness and its parent Cadila Healthcare.

GSK Consumer Healthcare also sought to exit India to part fund its $13 billion acquisition of Novartis' stake in two consumer joint ventures. In the last fiscal year that ended in March, GSK Consumer's revenue remained unchanged at 46.3 billion rupees ($657 million), more than 90% coming from malt-based drinks.

In the quarter ended in September, Horlicks remained on top of the health food and drinks category with a volume market share of 49.5% and value market share of 43.3%.

Analysts expect HUL to turn the tide with its strong distribution network that is three times the size of GSK Consumer. HUL said it plans to introduce new formats such as sachets and focus on growth in northern and western India and on the premium category to help circumvent the growth slowdown in the segment.

--Dhanya Ann Thoppil

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