The Hindu Business Line : Pricing power

Prices in the FMCG sector have risen, but not across all categories and SKUs. Competition has been making it difficult for market players to pass on the rise in input costs.

"Companies still believe in playing safe and would ideally like to touch only those SKUs which are not price-sensitive."

Hindustan Lever recently hiked the prices of some of its detergents.

Taking its chances in a resurgent FMCG industry, Hindustan Lever Ltd recently decided to hike the prices of its large packs of Surf Excel Quick Wash by 6 per cent and those of Surf Excel Blue by 3 per cent. This is the third price increase by the FMCG major after a price war with Procter & Gamble in early 2004 upon which it was forced to cut prices. Pricing power seems to be back in the FMCG industry with HLL showing the way. However, competitive pressures persist and most players are still wary of exercising their pricing power.

After recording double-digit growth in 2005, the FMCG behemoth has become bolder. "We obviously thought the time was right and that is why we hiked prices. There were cost-related factors and we did because we had to do it," stated Nitin Paranjpe, Executive Director, Home & Personal Care, HLL.

Former HLL Chairman Vindi Banga endorses Paranjpe's views. On the sidelines of launching wife Kamini Banga's first book (The 86 Per Cent Solution) recently, Banga said, "I believe pricing power is back at 100 per cent in the industry. This is because the market has exploded since companies and brands have got stronger."

However, it's not that pricing power is back with a bang. As Nikhil Vora, analyst at SSKI Securities, says, "In the past three years, FMCG companies did not enjoy inflation-adjusted price increases. Now with a rise in demand, there is some pricing power coming back."

A former HLL hand, Jitu Mehta, now President, RPG Retail, feels likewise. Mehta, who handled HLL's ice-creams portfolio, said, "Earlier, in spite of costs catching up, FMCG companies could not neutralise costs and were forced to bring down prices due to competitive pressures. Now, probably, they are in a position to improve and restore their margins."

While many companies have not openly declared their price hikes, there are already some increases at the distribution level. "Today volume growth is between 10 and 15 per cent for various categories. We are aware of HLL, Nestle, Dabur and Cadbury taking small, measured hikes," says Shriram Iyer, Executive Vice-President, Edelweiss Securities.

But not all FMCG companies are in a hurry to hike their prices. While some are adopting a wait-and-watch approach, others are sceptical of revealing their pricing strategy. P&G is keeping its cards close to its chest. When asked about increasing prices, Shantanu Khosla, the company's Managing Director, said, "These are strategic decisions which are part of the business plan. There are no comments at this stage."

In fact, power pricing is not being exercised across all SKUs and brands. In HLL's case, it is the larger packs of its detergent brands that have seen price increases. Claims an analyst at a leading broking firm, "Consumer companies are still wary of competitive pressures. Companies still believe in playing safe and would ideally like to touch only those SKUs which are not price-sensitive."

FMCG companies have been treading softly in the matter of hiking prices. In an interview to moneycontrol.com, Adi Godrej, Chairman, Godrej Industries, recently said: "Pricing power is definitely coming back. Today, it is an even better situation on the pricing power front, but how much we can take prices depends on the category and the brand. It is not something which is going to be possible across the board, but certainly we will be able to take prices up in some strong brands." Godrej Consumer Products hiked prices of its powder hair dye sachets from Rs 7 to Rs 8 about a year ago

Even in the case of Marico, it is only the smaller brands such as Hair & Care and Parachute Jasmine which have witnessed minor increases. Saugata Gupta, Marketing Manager at Marico, says, "We have made certain price increases for some of our smaller brands. At the same time, we believe that price increases are justified only if we give value to our consumers."

Kaushika Madhavan, Manager, KPMG India says, "Pricing power is not really back. There is still intense competition in the market, except in some categories (say, beverages), so players are finding it difficult to pass on a price increase. The past few years have seen most of input prices of FMCG organisations going up. This is putting pressure on the bottomline. However, intense competition has led to very little being passed on to customers. Implementation of VAT has in some cases been beneficial to FMCG organisations. Also, setting up manufacturing units in tax-free zones (like Uttaranchal) has led to organisations getting some relief - these have resulted in postponement of price increase. The question is how long this can be sustained if the input prices keep rising."

The need to raise prices is also being viewed as protection of market shares. In fact, recently Harish Manwani, Chairman, HLL, clearly mentioned that judicious price increases would take place and that his company would focus on market share. However, it is volume share which must get protected more than value share, especially in a growing economy such as India.

Observes Sunil K. Alagh, Chairman, SKA Advisors Pvt Ltd, "Volume share must take precedence over value share in a growing economy like India. Companies should not be sacrificing volume share for getting higher value share by hiking prices. Every time a company increases prices it runs the risk of losing volume share."

As demand picks up in the FMCG industry, companies have been growing at a faster rate and market shares have been getting adjusted in the process. As Amit Adarkar, Director, Synovate India, says, "In the long run, growth matters. Any strategy which delivers long-term growth makes eminent sense. In certain cases, a price correction would help in boosting width of consumption. In certain cases, it could be a new innovation. So, one can't trade value and volume share, at least in the long term."

So are FMCG companies getting back to their `correct' pricing? Madhavan of KPMG claims, "There are very few categories in India where an FMCG organisation can sustain a superior profitability - so largely we would witness a revision rather than a correction."

As FMCG companies continue to exercise their pricing power, the industry is on a roll. According to the latest report on the FMCG industry by ICICI Securities, the FMCG sector's growth momentum is likely to sustain with overall sales also surging. This coupled with pricing power and higher fiscal benefits will boost the profitability of the sector, says the report. The last quarter of the previous fiscal, it says, has registered a strong year-on-year profit growth for the sector - the highest in the past six years. This should give enough reason for the FMCG industry to take some chances with its pricing strategies.

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