The Hindu Business Line : Up the price spiral?

CONSUMERS may have to dole out a little extra from their pockets this New Year. Not only for the purchase of big-ticket items such as cars or electronic appliances, but even for day-to-day common household goods. While the main culprit for the across-the-board price increases appears to be the spiralling prices of key raw materials including steel, aluminium, sugar, plastic and copper, many companies have also realised that rock-bottom pricing does not always lead to profits.

While 2004 was marked by companies falling over each other to lower prices, analysts say that in many of these instances - specifically for the FMCG and food sectors - this strategy appears to have backfired. Lower prices did generate trials but also hurt profit margins to such an extent that companies are now thinking in terms of going back to pre-2004 prices.

Already, the country's largest car maker, Maruti Udyog Ltd, has announced a price hike of Rs 10,000-15,000 across three of its Euro III models (Zen, WagonR and Baleno). The company will soon roll out Euro III variants of the remaining models in its portfolio with a higher price tag.

According to Managing Director Jagdish Khattar, the price increase is mainly on account of upgrade of the engines to meet new Euro III emission norms, which come into effect in 11 major cities from April 1, 2005. "There is no option but to increase prices. The price rise is also on account of increase in steel prices and other component prices, our costs and our vendor's costs," he says.

Meanwhile, other car makers are expected to follow suit with the price hike as they roll out Euro III-compliant variants of their vehicles. Incidentally, the 11 cities where Euro III norms are being made mandatory from April 1 include big car markets such as Delhi, Mumbai, Chennai, Kolkata, Ahmedabad, Bangalore and Hyderabad.

In fact, car makers including General Motors, Ford, Hyundai, Skoda Auto and Tata Motors have already indicated that they will be announcing price hikes soon on account of rising raw material costs. Industry sources say most of the price increases will be in the range of about Rs 4,000-6,000.

Meanwhile, within the FMCG segment, Nestle India has moved away from the Rs 5 price point by increasing Maggi noodles' prices to Rs 6 for a 50 gm pack and to Rs 11 for a 100 gm pack. Its curd has also become more expensive by a rupee even as the company mulls an increase in the UHT milk segment. According to the company, these price hikes have been necessitated by sharp input cost increases.

Further, with price of sugar touching the roof, prices of food products such as biscuits, confectionery, colas and chocolates is also likely to rise.

Says the President of the Indian Biscuit Manufacturers' Association, B. P. Agarwal, "Sugar accounts for 30-35 per cent of the total manufacturing cost of biscuits and the price spiral has hurt the industry badly. Due to competitive pressures the industry may not increase consumer prices immediately but if sugar breaches Rs 20 per kg, we may have to think of a price hike."

The carbonated soft drink (CSD) industry, which has already seen two rounds of price increases since August last year, is also keeping its fingers crossed. Industry sources say that exclusive of glass packaging, sugar accounts for 40 per cent of other direct material costs and if it continues to rule firm, the cola majors may have to hike product prices further. Already, the 200 ml bottle has become dearer by a rupee at Rs 6, whereas the 300 ml bottle is priced Rs 2 higher at Rs 8 in select markets across the country.

Among the major bulk consumers of sugar is the confectionery industry, which has been witnessing a slowdown for some time now. From cumulative growth rates of about 24 per cent till 2001, it is expected to register only about 5-6 per cent sales growth in 2004. And as it operates at specific price points of 25 paise, 50 paise and a rupee, it is averse to hiking prices, consequently facing a margin squeeze.

Lotte India (erstwhile Parrys) Managing Director N.C. Venugopal says, "Sugar comprises more than 50 per cent of the industry's ingredient cost. We are affected but are not increasing product prices immediately because of severe competitive pressures."

Analysts said that while most food companies do not want to raise prices just yet, they are looking forward to this year's Budget for various duty concessions. For example, the biscuit industry has sought exemption from the eight per cent excise duty it currently pays as well as reduction in value added tax to 4 per cent. The cola companies have also sought removal of eight per cent special excise duty to be able to contain input costs.

Again, it appears that sugar is not the only culprit. Prices of essential raw materials such as plastic - used extensively in packaging - have also seen a steep increase over the last few months. Coupled with poor monsoons that adversely affected rural earnings in 2004, these factors have left FMCG and food companies little choice but to pass on some of the increase in costs to the consumer.

But is it only input cost increase that is driving companies to increase end prices? Analysts said that 2004 was characterised by many companies trying to artificially lower prices to bring in more trial consumers. The CSD industry is a classic example of lowering prices to levels that began to hurt the two companies' bottomlines. In fact, under severe pressure from all stakeholders - bottlers, retailers and others - both Coca-Cola and Pepsi had no option but to move away from the 200 ml for Rs 5 offer during the second half of 2004. Analysts expect these companies to announce yet another round of price hikes if input costs continue to rise.

Again, in the case of detergents and shampoos, Procter & Gamble heralded the price war forcing market leader Hindustan Lever to follow suit but this strategy had to be reversed somewhat by the end of the year when both companies hiked prices of the sachets.

Rising input costs and bottoming out of prices is also taking a toll on the margins of electronics and durables companies. The colour television and white goods industry is expected to once again pass on cost input increase to the consumer after having already put into effect a 2-4 per cent price increase in December. According to C.M. Singh, Product Group Head (CTV), LG Electronics, the industry saw a price hike in December after a very long time. Another hike of 3-5 per cent is likely in January with raw material prices soaring. It's a similar case with refrigerators with several major players set to increases prices again by about 4-5 per cent in the current month.

Durables makers had raised prices by Rs 700-1,500 in November-December 2004. In addition, manufacturers have already begun cutting back on the extra freebies and discounts offered on products. But with all this talk of price increases across a cross-section of products, some industry experts do not believe this will happen immediately. Says the Managing Director of discount retail chain Subhiksha, R. Subramanian, "I do not expect a hugely inflationary environment in FMCG in any major category as monopoly categories are not too many. So, I do not see a great scope for a price hike".

Besides, with many FMCG and food companies moving to excise-free zones which would result in considerable savings, the ability of many of these companies to further prune prices may yet play a part in keeping prices at current levels. But in that case, companies will resort to reducing grammage (the weight of the product) while keeping prices constant and go slow on product promotions. Either way, the year ahead may not be ideal for the shopaholics.

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