New players, competition keep consumer goods prices under check

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Price hikes may not be across the board this year

Vinay Kamath
Aarati Krishnan

Chennai, Feb. 22A combination of several factors has helped keep consumer goods prices under check over the past three years.

As Mr R. Subramaniam, Managing Director of discount retail chain Subhiksha explains, most categories have been inflation resistant due to stiff competition be it in shampoos or tea. "Combined with excise and income tax sops offered for manufacture in certain locations such as Uttaranchal, the North-East and Himachal, there has been significant cost savings for manufacturers also so it is not as though their bottomlines have suffered. Also in specific categories emergence of new competition, for example in biscuits a reinvigorated Parle and a rampaging ITC have also been an issue."

Market Share

Detergents have borne the brunt of fierce competition between Hindustan Lever and P&G in 2004 when both had ferocious price cuts to garner market share, a gambit initiated by P&G. The battle between the two had its impact on Chennai-based Henkel India as well.

As Mr Satish Kumar, Managing Director of Henkel, points out, a one kg pack of Henko Stain Champion, its detergent brand, was priced at Rs 90 in 2004.

Henkel was also forced to cut prices of Henko to Rs 75, and has now moved up to Rs 87 a kg, still below 2004 prices. "With oil prices going up too, our prices still do not defray the increase in raw material and packaging costs," he says.

As the accompanying table shows, detergent brands have been raising prices over the past three years.

Real Innovation

A spokesperson for Britannia Industries explains that the biscuit industry has hardly seen any real innovation for many years.

"All players, including new entrants, have offered more of the same and offered it at lower prices. So, in a sense the industry created a pricing wall around itself," she explains. And, on the other hand, she says there has been inordinate inflation in all key inputs over the last two years with inflation of 25-30 per cent in flour, sugar and refined palm oil, while price to consumer has remained almost static. "We have absorbed about Rs 150 crore of input price inflation for the nine months ended December 31, 2006," she adds. This has been met by companies such as Britannia by improving productivity which has helped absorb inflation in input cost partially.

Overall Inflation

Mr D. Sundaram, Director, Finance, Hindustan Lever Ltd, explains that selling prices of FMCG products have risen only by 2-4 per cent annually over the past three years, while the overall inflation rate has been nudging the 5 per cent mark.

Asked whether he sees greater pricing power for FMCG companies in the coming months, he points out that "average" price trends across categories may give a misleading picture as trends may be quite divergent across categories.

He points out that at HLL, most pricing decisions are taken at the SKU or brand level, with multiple factors apart from input costs going into the pricing equation.

"Our decisions on selling prices are based on several inputs both internal and external. After taking a view on input prices for a particular product, we will try and see if this can be offset through cost-savings. If part of it cannot be offset, we will then evaluate a price increase. A decision to increase selling prices for a brand cannot be taken in isolation. It must factor in the competitive scenario how many competitors are present in a particular segment, how they position their products and their pricing strategies relative to our brands," explains Mr Sundaram.

Econometric Models

Apart from tracking and forecasting trends in input costs, HLL claims that it uses econometric models to evaluate the impact of pricing decisions.

For instance, the company regularly tracks the price elasticity of demand for its various products, which measures the sensitivity of demand at various price points. This provides the company with insights on the level of price increases that the market can absorb. Though he does not have a view on whether the overall pricing environment for FMCGs is improving, Mr Sundaram observes that FMCG companies have been able to take higher price increases in the recent times, when compared with the past.

"If you break-down the sales growth for FMCG companies into volume growth and price increases, I would say that price increases today are accounting for a higher proportion of growth than they did a couple of years ago."

A cross-section of the industry feels that this year could see FMCG players increase prices, albeit marginally.

Reports indicate that prices of toilet soaps have gone up a wee bit while biscuit makers too have hiked prices of glucose biscuits riding on higher wheat prices.

Dabur India's Executive Director, Consumer Care, Mr V.S. Sitaram, does not see significant price hikes as he expects input costs, at least for Dabur, to be only marginally higher over the previous year. "With most of the raw materials, we feel the peak has passed," he adds. Also, the company had already raised prices last year.

"While the increases have largely remained in the 4-5 per cent band, in some categories like shampoo and honey Dabur had effected a 10 per cent hike, which was largely to cover the cost push in raw material prices. Prices of several other product lines, including Chyawanprash, Honey, red toothpaste, Babool and Gulabari were also hiked during the year to cover the increase in raw material prices. But we have also been fairly conservative in the quantum of hike," he says.

Retailers too say that price hikes may not be across the board.

"The fact is that FMCGs suffered badly in 2000-02 with downtrading and slow growth; most companies realise that this happened because of unrestrained price hikes previously. Now, they have been cautious as they do not want to create another round of pain," says a prominent retailer.

(This article was published in the Business Line print edition dated February 23, 2007)
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