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FMCG: No more price cuts… - Views on News from Equitymaster
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FMCG: No more price cuts…
Nov 28, 2005

Detergent majors, HLL and P&G, have once again raised prices of their flagship products, Surf Excel and Ariel by around 4%-5% respectively. It must be noted that this price hike is the second time in the year and has been taken to protect margins and fight cost pressure. In this article, we discuss about the detergents market in India and its future prospects. Largest market in the FMCG arena
Today, the detergents market in India is valued at approximately Rs 45 bn (Rs 60 bn including bars) and is the third largest detergent market in the world. Although the market is big, saturation levels are quite high, and are hence this market is growing at a slow pace of around 4% per annum. In volume terms, it is estimated to be around 2.3 m tonnes and can be divided into 3 tiers, premium at Rs 60 and above per kg, mid-price at Rs.30-60 per kg and popular, less than Rs 30 per kg. HLL is the market leader in the detergent powders space with Surf Excel (premium), Rin and Wheel (popular) and Sunlight (mid-price) brands. The company commands a 35% market share as it has products in every detergent segment and at every price point. Nirma is the second largest player, while P&G is the third.

That ill-fated day…
Cincinnati-based P&G changed the rules of the game in March 2004 and went on a price-cutting spree, as it wanted its brands to reach to the masses. It slashed the prices of its detergent brands (Ariel & Tide) by as much as 50% in order to garner a bigger chunk of the market. This certainly wasn’t music for the market leader HLL, as it was forced to follow suit and also cut prices of its premium brands. P&G reduced the price of 500 grams pack of Ariel from Rs 70 to Rs 50 - a drop of 28 per cent and the price of 500 grams pack of Tide from Rs 43 to Rs 23 - a fall of 44 per cent. HLL slashed the price of its premium brand Surf Excel from Rs 70 to Rs 50 and price of Surf Excel Blue from Rs 50 to Rs 38. It must be noted that prior to these price cuts, margins for soaps and detergents were as high as 30%, which could be one of the reasons for P&G kicking of the price war, as it expected to garner a higher market share and volumes to compensate for lower prices, which did materialise to an extent.

Positives of the price cut
This price cut had a positive impact on the overall detergents market due to the improved value equation. Today, high quality detergents like Ariel and Tide are available at a far better value equation than earlier and consumers are moving up from lower performing products to Ariel and Tide quality. Also, growth has been due to the high level of activity on the media front leading to these categories being more visible and easier to recall than earlier. HLL’s market share improved by 220 basis points within a month of the price cuts.

Outlook
Higher raw material costs (Linear Alkyl Benzene) have forced these majors to increase prices by around 8% since the price cuts. Thus, to this extent, the companies would stand to benefit, as the pressure on margins would reduce. Going forward, with the price gap between a branded detergent and that from the unorganised market having reduced considerably, it would encourage consumers to avoid un-branded/counterfeit brands. Also, as media penetration increases, so will the demand for these products. However, it is going to be an uphill task to change the mindsets/habits of a billion people.

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