In January this year, India’s largest consumer products company, the ₹45,311-crore Hindustan Unilever (HUL), increased prices of its soaps, shampoos and detergent brands by 3-20%. Within a couple of weeks, the FMCG major came up with a second round of price increase, this time not just in home and personal care brands but also in the food portfolio.
With commodity prices such as crude and palm oil more than doubling through FY22, and freight rates almost trebling, the company had little choice but to undertake calibrated price cuts, HUL MD and CEO Sanjiv Mehta said during the second- and third-quarter earnings announcements. “Commodity prices have been unprecedented and two-third of our business is exposed to commodities,” Mehta had said in the Q3FY22 earnings call.
Mehta had hoped that inflation would moderate by the second half of 2022. But little did he anticipate the geo-political turn of events since January. With the Russia-Ukraine war bringing global supply chains to a complete halt, prices of crude derivatives and commodities such as wheat hitting a 10-year high, and crude rising to $130 a barrel before moderating to $120, analysts wonder whether HUL would be mulling a third round of price hikes to make ends meet.
HUL, however, is not an exception. Be it Godrej Consumer Products Ltd. (GCPL), Procter & Gamble or Dabur, all of them are battling inflation and volatility. GCPL, says CFO Sameer Shah, has increased prices by 10-11% across its personal wash portfolio in the past six months, and could even look at more. “This is a temporary phase, so we are trying to stay calm. We can’t just blindly increase prices as it will not just impact consumption but also our market share,” explains Shah.
Even food companies such as Nestle and Amul have raised prices. Prices of Maggi noodles and Nescafe coffee have increased 9-14% and 4%, respectively, in the last one month alone. Similarly, Amul milk is now 3-4% costlier.
But even though Nestle and Amul are not directly impacted by oil prices, why did they go for price hikes? According to industry experts, with prices of crude derivatives (plastic, nylon and synthetics) going up 25-50%, packaging costs have come under pressure. “Products such as Maggi noodles use wheat and wheat prices are at a 10-year high. Similarly in dairy, animal feed cost has increased globally. Here again, wheat is an important ingredient. We import a substantial amount of animal feed. These companies would have also taken into account hikes in transportation costs since they knew diesel and petrol price increase was due,” says Aditya Jha, senior agriculture and dairy industry expert.
“The thumb rule is for every $10 barrel rise in crude price there will be a 24 basis point (bps) impact on inflation, which is a direct impact. There is an indirect effect on transportation and supply chain, another 26 bps,” adds Sachchidanand Shukla, chief economist, Mahindra Group.
But in price-sensitive sectors such as FMCG, regular hikes in MRPs can be counter-productive. To mitigate risks, companies are experimenting with strategies ranging from cutting down trade margins, substituting ingredients as well as tightening distribution in order to ensure they don’t stock out.
A 25-50% hike in packaging cost would have played a role in food companies’ decision to increase prices, says Anand Kripalu, MD and global CEO, Essel Propack. It is not easy for brands to switch to cheaper packaging, he adds. “You can’t afford to offer lower quality and service to consumers. Even if you want to try alternative packaging, you have to develop fresh laminates which meet both storage requirements as well as tactile needs of consumers. None of these is an easy quick-fix over costs or products.”
Are Consumers Downtrading?
In a small kirana store in Bilkheria, 60 kms from Bhopal, Farzana Bir is busy making small newspaper pouches, while her 20-year-old son, Yousuf fills detergent powder in those. “With detergent prices increasing, consumers don’t want big packs. They even prefer buying 500 ml packs of edible oil as 1-litre packs have become expensive,” explains Bir. Edible oil prices, says Arvind Mediratta, CEO, Metro Cash & Carry, have gone up by 30-40% in the past month.
Bir says consumers aren’t buying shampoos and face creams as much as they did earlier. “They end up using soap for washing hair.” In fact, the price-sensitive Indian consumer never hesitates to cut costs wherever possible each time there is a price increase. No wonder price hikes are the last resort for Indian marketers.
Down South in Karnataka’s Mandya district, there are unusually long queues at co-operative stores. “Demand for co-operative produce (staples and grocery) has gone up as their rates are lower. Consumers are even buying edible oil from these stores since it is cheaper,” says Madan Padaki, founder and CEO, 1Bridge, a rural distribution start-up.
With bigger brands forced to either hike prices or cut down on grammage, there is a distinct trend of consumers, especially those in Tier-II and III cities, switching to regional brands, says Padaki. Consumers have no qualms about giving up a brand like Hamam or Lux in favour of a local variant, he adds. “Local brands have always been cheaper than their national counterparts. Even after price increases due to inflationary pressures, they cost less.”
According to Prem Kumar, founder of retail tech platform Snapbizz, while consumers are downtrading, the median basket size hasn’t changed much. “Spends are just ₹30-40 lesser than earlier. We are seeing a large number of regional brands and smaller packs making their way to the basket. These brands are lower priced, and hence, they have a distinct advantage.”
Mitigating Risks
So, how can the FMCG industry mitigate risks? Shah of Godrej says indiscriminate price increases could impact brand equity and market shares. Also, in a price-sensitive market like India, a large part of FMCG revenues come from lower unit packs (LUP), priced between ₹2 and ₹15. “Companies are struggling with profitability as a lot of their sales come from low unit packs, and their dependence on this segment has increased,” says Mediratta of Metro Cash & Carry. He calls the ₹2-15 category the magic price-point which no marketer wants to meddle with, since it gives them the much-needed volume growth. “Brands have also over-engineered and over-optimised packaging, so now they are resorting to cutting down trade margins even in LUPs,” he adds.
The LUPs have margins of ₹2-5. In the case of bigger packs, like a 500 ml or 1 litre pack of shampoo, trade margins are as high as 40-50%. It is in this category that margins have been slashed to 25-30%, says Mediratta.
“We are selectively evaluating margin reduction, as our margins are already on the lower side,” says Shah of GCPL. The company has adopted a portfolio approach of evaluating costs. “We are also looking at a price hike in our non-personal wash portfolio where inflationary challenges are relatively on the lower side but the appetite of consumers to absorb (in products such as handwashes, sanitisers and hair colour, which are targeted at premium users) price increase is high. Hence, our approach is to raise prices across the pyramid, so that our volumes don’t get impacted,” he adds.
Edible oil is among the worst impacted due to the Russia-Ukraine war. Around 90% of India’s sunflower oil imports come from Russia and Ukraine and the supply chain has been completely disrupted due to the war. Sunflower oil constitutes 15-20% of all premium oil brands in India, and Angshu Mallick, CEO, Adani Wilmar (makers of Fortune oil), says though the company had 45 days of inventory, if the war continued, they would have to resort to blending other oils such as rice bran oil or soyabean oil.
Premium edible oil brands, says Sanjeev Asthana, CEO, Ruchi Soya, have stopped selling in bulk quantities. “They are focusing more on smaller packs and calibrating the demand in such a way that they are able to extend the supply chain of sunflower oil.” If the war is not called off by April, the supply chain of sunflower oil will be in further disarray. “The sowing of sunflowers usually happens in April and harvest around August. If the war isn’t called off, we have to look at alternative supplies of 1-2 million metric tonnes of sunflower oil,” explains Asthana.
With the war showing no signs of ending, Asthana says the gap created by sunflower oil will have to be filled by soyabean or palm oil. “We will be working on securing supplies of soya from South America as well as the U.S. We are also looking at securing supplies of palm oil through contracts from Indonesia and Malaysia.” India imports 2 million metric tonnes of sunflower oil from Russia and Ukraine. Though the disruption of the sunflower oil supply chain looks stark, supplies of palm oil and soyabean oil haven’t been easy either. There has been a 10-15 million tonne shortage of the soyabean crop globally, especially in South America and Argentina. Between sunflower oil and soybean oil, prices have gone up by $300-500 per metric tonne. Palm oil has also been facing supply chain issues at shipping ports in Indonesia and Malaysia.
“With demand moving towards soya and soya itself falling short, there has been a spiralling impact on commodity prices. However, this situation will not last long. It’s a war premium that we are paying and the moment the war ends prices will be back to earlier levels,” says Asthana, who, however, expects a definitive movement towards soyabean oil. With the mustard crop being a huge success this year, Ruchi Soya also expects a significant movement of consumers towards mustard oil.
The industry, though, isn’t too optimistic about consumers changing their edible oil. “Consumer behaviour is sticky. People from Gujarat or Kerala may not want to migrate to mustard oil. There is a cultural affinity to what you are using in your kitchen, so, I don’t see that playing out in a large way,” says Shukla of Mahindra. He instead expects the government to take a hit on its balance sheet. “They will try to lower customs duties to soften the blow.”
So, is inflation and volatility here to stay at least for the short-to-medium term? Economists expect this trend to continue for the next 6-8 months. “Manufacturers need to hedge risks to the extent it is possible. They need to get into forward contracts to buy at a particular price,” says Madan Sabnavis, chief economist, Care Ratings.
“It is going to lead to a cascading impact and you need to work with your Tier-II and III suppliers in whichever segment you are in,” says Sabnavis. “You need to think of securing alternatives and back-ups,” adds Shukla of Mahindra.
In fact, both economists believe a fourth Covid wave will be a bigger threat to the economy than the geo-political situation. “If monsoon doesn’t play truant, we should see this as a temporary challenge. We are seeing green shoots in terms of economic activity picking up. As long as the virus is contained, we are going to see recovery,” says Shukla.
The FMCG industry, meanwhile, is keeping its finger-crossed, anxiously waiting for the war to be called off.