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HUL: Price war at its best again?
Apr 20, 2009

How many times have you noticed it when the price of a bag of cement has gone up by Rs 50, a rod of steel has gone up by Rs 20 or a T-shirt has gone by Rs 100? Probably very rarely. However, when it comes to buying biscuits, toothpastes and soap bars, even a 5% change in price immediately comes to your notice because of the frequency at which you buy these products. It is due to this reason that price wars are so intense amongst FMCG players. FMCG major, Hindustan Unilever (HUL) has a large portfolio of soap based products where the price war is rampant. The first price war was fought between HUL and Nirma during the 1970ís. HUL earlier focused on the urban middle class and elite class. The segment was ruled by its brand Surf. Meanwhile, a Gujarat based entrepreneur launched a detergent called Nirma, targeting the poor rural sector at a price of Rs 3.5 per kg against Surfís price of Rs 15 per kg. HUL in response launched operation STING to inhibit Nirmaís growth and came up with equivalent quality detergent Wheel. While the war with Nirma has ceased, competitive pricing has continued till date with HUL having recently slashed the prices of its key soaps and detergent brands through a combination of an increase in the weight of some packs and a reduction in the maximum retail price (MRP).

HUL price cuts
Product Earlier Now % change
Lifebuoy (Rs 15) 115 g 120g -4.2%
Wheel Active Blue† Rs 10† Rs 8 -20.0%
Wheel Green (Rs 10 SKU) 275 g† 300 g† -8.0%
Wheel Green (Rs 20 SKU) 560 g† 600 g† -6.7%
Rin Advanced (new SKU) 750 g effective price cut of 4.8%
Source: Business newspaper

Earlier, at the start of the year, the company had reduced the prices to pass on the relief of the excise cut and fall in raw material prices to consumers of its high-penetration brands. While price of Wheel Active Powder was reduced from Rs 75 to Rs 67 for a 2 kg pack, the price of Lifebuoy was cut from Rs 13 to Rs 12 for a 90 gm bar. It also increased the grammage of Lux soap, from 60 gm to 75 gm a bar, keeping the price constant.

The combined price cuts takes the total weighted average price cut for HUL to 2.3% up till now. The pricing strategy done by the company is in line with the competitors and the decline in the input cost inflation.

Competition: In 2004, a major war was started with global major Procter & Gamble (P&G) first by slashing the prices in the sachet segment and later extended this to larger packs. With an aim to migrate soap consumers to detergents and low-end detergent consumers to move to the high-end brands, global major P&G applied the China strategy and reduced the prices of its detergent brands Ariel and Tide by 20% to 50%. This had forced HUL to follow suit by reducing the prices of Surf Excel and Surf Excel Blue.

However, last year, after 5 years long battle, the price war had come to an end. On account of strong demand and spike witnessed in raw material prices, both HUL and P&G took price hikes. In fact, P&G increased its prices by 13% to 14%, making Tide a premium product compared to HULís Rin Advanced.

In recent times, P&G took a price cut of its 750 gm pack of Tide detergent by 19.5% bringing it to Rs 50. HULís launch of 750 gm Rin Advanced priced at Rs 50 was in response to this. Wipro slashed the prices of its flagship brand Santoor by 7%, while ITC increased its soap sizes by 25%.

Raw materials: The prices of key raw materials have come down from their peak last year. While palm oil prices were down by 42%, soda ash and LAB saw a 19% and 42% drop respectively. Further, excise duty cut also aided lower costs.

Volumes: On account of double digit price hikes in the segment, HUL witnessed decline in volumes during the fourth quarter. The sharp price hikes and reduction in pack sizes led to a 2% to 3% volume decline. Soap segment is one of the mainstay categories of the FMCG industry and accounts for 49% of HULís topline.

Market share: HUL lost some market share in its soap brands due to down trading. The market share stood at 50.3% in the September quarter, down from 53.2% a year earlier and 52.7% at the end of June. However, the FMCG major still remains the market leader in the category by a wide margin as compared to its peers with Godrej Consumer placed second with a market share of 9.5%, followed by Wipro Consumer Careís 8.4%.

Going forward
The recent economic slowdown and credit crisis has led to a decline in the consumer spending. Also down trading as been witnessed in certain segments specially soaps and detergents. Hence to retain the market share and safeguard volume growth, companies are reducing the prices. And HUL is no exception. We believe that going forward, the price war may continue in a bid to maintain volumes and pass on the lower prices of the raw material to consumers.

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