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FMCG: Resorting to price hikes - Views on News from Equitymaster

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FMCG: Resorting to price hikes

Jul 16, 2008

As seen in the last article , FMCG companies witnessed higher raw material prices in recent quarters. However, they have been able to manage costs by resorting to hiking prices and cost management. Changing sales mix (led by growth in high margin products), rational price hikes and sourcing have aided the FMCG companies. While the raw material prices witnessed double-digit growth, FMCG companies took price hikes on the final products to offset these costs. In order to beat the effects of high inflation, these companies are taking to small and low-priced packs. Better pricing environment and higher consumerism benefited the companies.

Hikes taken by the companies across categories
Toilet soaps:
Palm oil prices increased by 17% YoY till May 2008. HUL in order to protect its margins resorted to reducing the weight of its products and increasing the prices of certain products. The hike done was in detergents and soaps. Godrej Consumer Products (GCPL) also hiked its product prices following market leader Hindustan Unileverís (HUL) move to selectively raise its soap prices. However, GCPL did mention that it is witnessing pressure on volumes.

Soaps segment Mar-07 Jun-08 % change
Cinthol Lime (125 gm) 19 21 10.5%
Dettol (125 gm) 26 29 11.5%
Dove (100) 35 40 14.3%
Godrej - Shikakai (100) 14.5 16 10.3%
Lifebuoy Clear Skin (125 gm) 22 25 13.6%
Lux Creamy White Soap (75 gm) 15 17 13.3%
Source: Equitymaster/ CMIE

Detergents: In the laundry segment, both HUL and P&G raised its prices. Both the companies over last few years were engaged in price wars to capture market share. However, in recent times the price hikes indicate better pricing scenario.

Hair oil: In the hair oil space, Marico in the last few quarters has taken a 6% hike, while Daburís Amla oil has become expensive by 4%. Wholesale prices of copra and coconut oil have shot up by 50% from around Rs 4,000 to Rs 6,000 a quintal on the back of short supply of copra in the recent quarters. Unseasonal rains in Kerala and Tamil Nadu have disrupted supply of copra even as the season has just begun.

Oral care: On the oral care front, both HUL and Colgate have taken an average price hike of around 4.5% during the last month in their flagship products across pack sizes.

Foods: On the beverages front, on account of rising tea and coffee prices, Nestle, Tata Tea and HUL have resorted to increasing the prices of their products. While in FY08, the hikes in tea brands were taken in the range of 3% to 12%, in the last 6 months, HUL has taken another hike of 5% in the Brooke Bond brand. In the coffee segment, both Nestle and HUL have increased the prices of Nescafe and Bru in the range of 7% to 14%.

Beverages Mar-07 Jun-08 % change
Brooke Bond Red Label (250 gms) 58 60 3.4%
Tata Tea (500 gms) 98 102 4.1%
Tata Tetley (250 gms) 51 57.5 12.7%
Nescafe Jar (25 gms) 32 39 21.9%
Bru (50 gms) 47 50 6.4%
Nescafe Sunrise (200 gms) 145 173 19.3%

Nestle has already raised prices of most of its products by more than 11% last year and also reduced weights of some products by 9% to 12% to absorb the escalations. For Probiotic dahi (curd), it raised the prices two months ago by Rs 2. It is further planning to increase prices between 5% and 15% for different products because of escalation in raw material costs and inflation depending on the situation. Tata Tea is also in the process of raising the prices by Rs 4 to Rs 6 per kilo across brands. As for ITC Foodsí strategy, it is also increasing the prices of select brands by 5% to 7% due to rising input costs.

Going forward
At present, barring soaps, demand slowdown across categories in the FMCG sector is not being witnessed inspite of rising inflation and prices. On account of under penetration, rising income, and the retail boom, the volumes of shampoo, skin care products, hair colour and toothpaste have remained strong. Further, launches of high end products have also aided growth. However, the companies have indicated that if further price hikes take place, the growth might be affected as rural areas play a strong role in the demand for FMCG products.

Also, increasing competition and protecting market share would be the key deciding factor for increasing the prices further. Hence those companies, which have the ability to maintain and increase the market share, offset cost pressures without sacrificing volumes would be the best pick in current scenario.

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Mar 25, 2019 09:03 AM