Dealers and major distributors of Hindustan Unilever have started destocking high-cost inventory as the FMCG major has commenced price cuts in certain categories with more reductions in the offing.
An HUL spokesperson confirmed the price cuts with commodity prices such as that of palm oil, tea and crude oil having come off their highs.
“Price cuts are taken in large chunks to minimise trade pipeline disruption. Our pricing actions extensively use data and analytics and are based on the principles of Net Revenue Management,” the spokesperson told businessline in response to an email seeking clarification.
Trade sources said that price reductions have been taken in categories such as laundry products, skin cleansers, soaps and in tea. In anticipation, stockists are clearing their high-cost inventory and waiting for fresh stocks to arrive. In such a scenario it is usual to see a surge in secondary sales – from wholesalers to retailers, compared to primary sales that is from the company to wholesalers.
More price cuts are likely to follow as commodity prices have significantly cooled.
HDFC Securities in a note last week said that most crops along with palm oil, crude oil and crude derivatives have all seen meaningful price corrections in recent months, providing relief to consumer goods companies.
The rise in commodity prices over the last couple of years saw FMCG companies having to struggle with unprecedented inflation and soaring raw material costs. Job losses, fewer job opportunities and salary cuts — seen during the pandemic — also meant lower sales volumes and the only way that FMCG companies could protect their margins and bottomlines was through calibrated price hikes once the pandemic ended. HUL said that it had been focussed on protecting its business model while growing its franchise, during the inflationary period.
Not all the cost increase was passed on and HUL did see a negative impact on its gross margin. The company said that during the last two years, the cumulative net material inflation was 30 per cent but its price hikes lagged that. Also, for customers at the bottom of the value chain the price hike was much lower.
Over the last two fiscal years, HUL took a cumulative 18 per cent price increase. In FY23, of the 16 per cent growth in its topline, 11 per cent came through price growth. In the March quarter, the price growth was 7 per cent, showing the deceleration of inflation.