How FMCG makers coped with inflation

Only briefly beset with worries about inflation hurting growth, FMCG stocks have charted a remarkable recovery from their lows of February 2011. The 27 per cent jump in the BSE FMCG index since then has been fuelled by increasing evidence that FMCG companies have not been all that badly bruised by price rise, in its various forms.

Though prices of FMCG raw materials have shot up by anywhere between 15 and 60 per cent in a year, players have displayed a modicum of pricing power to pass on these in part or in full, to their consumers. Also, such price increases have not visibly deflated demand, thanks to urban consumers spending more on beauty and wellness, rural ones aspiring to emulate the former and the rosy outlook on income and hiring. Better realisations combined with growing volumes helped most players report good sales growth.

However, all FMCG makers have not fought an equal battle with inflation. It was the size of the portfolio, pricing power and competitive intensity, which decided whether players were able to expand their profits to match their growing topline.

Managing the mix

Companies operating in two or more categories and those straddling many price points have been at a distinct advantage over narrowly focussed players during the recent inflationary phase.

This is because, even as raw material costs have shot up across-the-board, pricing power has differed across categories. Players in cosmetics, health drinks, hair oils and processed foods, for instance, were able to take price increases through the year, without worrying much about this hurting demand.

For instance, faced with a 60 per cent plus rise in the prices of Parachute raw material copra, Marico Industries took calibrated price increases on the brand through the year that totalled to over 20 per cent. That may have resulted in a marginal slowdown in volumes. However, given the structural trend of consumers upgrading from loose to branded oils, the company is confident of regaining those volumes once copra prices moderate.

It was another story, however, in soaps and biscuits, where leading brands are locked into a low unit price and cater to the mass market. Worries about price-sensitive consumers prompted these manufacturers to resort to a mix of cost cuts and grammage reductions to manage input costs. In detergents and shampoos, a bruising battle for market shares had already made price increases difficult. As a result, players focussed on these FMCG categories such as Henkel or Nirma came off much worse from inflation than those with diversified portfolios such as Hindustan Unilever or Dabur India.

Take Hindustan Unilever, which ceded significant profit margins in soaps and detergents in 2010-11, but made up by holding on to or even improving its margins in personal products, beverages and processed foods, where it had sizeable pricing power and expanded its premium offerings (Dove, Vaseline, Axe) too.

In the case of Dabur India, despite cost pressures in shampoos, a thriving portfolio of hair oils, foods and health supplements allowed it to hold its operating profit margins rock steady at 19.9 per cent for 2010-11.

Diversifying overseas

Diversification also paid off for companies that forayed into overseas markets such as Africa, South East Asia and West Asia. Godrej Consumer, Marico and Dabur have garnered dominant shares in niche products (such as hair extensions, hair creams, hair oil and insecticides) in these markets, shielding at least one leg of their business from turf battles. International operations for these FMCG companies are growing faster than the Indian one and have even allowed companies to enjoy superior pricing power. After a series of African and South Asian buyouts, Godrej Consumer's international business now contributes 35 per cent of its consolidated revenues, with operating profit margins at a respectable 19 per cent. Godrej may have been much more vulnerable to the recent cost pressures, had it restricted itself to its original portfolio of soaps and hair colour for Indian markets.

Economising on costs

Efficient procurement, stocking up on inventory and forward covers on inputs have been time-tested strategies adopted by FMCG makers to deal with a fluid raw material scenario. But the March quarter of 2010-11 brought evidence that they are could now be taking a hard look at their spends on advertising and promotions (A&P) as well. Unrelenting competition has resulted in FMCG companies ramping up their adspend to sales ratio from 8-9 per cent five years ago to 12-14 per cent now, but the March quarter of 2010-11 hinted at a break from this trend. In segments such as soaps and detergents, cost pressures have had players come to a sort of tacit agreement on reducing promotions. Whether this economy on adspends is here to stay, however, remains to be seen.

Even as FMCG makers have come up with myriad ways to deal with input cost inflation, the recent correction in prices of palm oil, crude oil and a host of petrochemical derivatives, do suggest a reprieve. If inputs costs remain at lower levels, and that's a big ‘if', that may allow players to re-focus on profitability. Companies at the premium end of the market may simply hold on to their price-lines and allow margins to expand.

The gains can always be redeployed to support new launches in segments such as skin care, hair care, foods or grooming. For players at the mass end, an input price correction would offer room to reinstate profit expansion that has been so hard to come by in the past year.

COMMENT NOW