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Rising prices may not hit consumer goods

Rising prices may not hit consumer goods
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First Published: Thu, May 06 2010. 11 27 PM IST
Updated: Thu, May 06 2010. 11 27 PM IST
Mumbai: Despite rising commodity prices and food inflation, shoppers are unlikely to face significant price hikes for packaged consumer goods in the next six months as manufacturers look to boost sales.
Overall revenue growth for the Rs1.18 trillion packaged consumer goods industry slowed to 11.8% for financial year 2010 from 19% in fiscal 2009, according to market research firm Nielsen.
Companies such as Hindustan Unilever Ltd (HUL), Godrej Consumer Products Ltd, Marico Ltd, Dabur India Ltd and Procter and Gamble (India) are hoping to reverse the trend in the next two quarters, experts said.
An India Strategy report in April by domestic brokerage Motilal Oswal Securities Ltd, cautioned that sales would be “muted” and ebitda (earnings before interest, taxes, depreciation and amortisation) margins would be lower, led by price wars, rising input costs and media inflation.
“PAT (profit after tax) growth (will be) in line with sales growth at 13-14% in FY11,” the report said.
“With high inflation and rising commodity prices, companies are under pressure now as they have reduced profitability in base categories due to fierce competition,” said S.K. Alagh, chairman, SKA Advisors Pvt. Ltd and former chairman of Britannia Industries Ltd.
Indeed, in their battle for market share, multinationals HUL and Procter and Gamble Homecare Ltd (P&G) have, over the past few months, been engaged in a bruising price war in the detergents market.
Similarly, the price of crude oil—at $79.97 per barrel as on 5 May—is 48.53% higher from the same date last fiscal, according to data from Bloomberg. Approximately, 30% of raw material and packaging costs is directly linked to crude prices.
In shampoos, where 80% of the market is in sachets, P&G is running promotions of 17% extra on Rs3 packs.
Food inflation has also pushed up input costs. Food and beverage companies such as Britannia and ITC Ltd, which has brands like Bingo and Sunfeast, Pepsi Foods Pvt Ltd, and Coca-Cola have seen their costs go up by over 16% since November 2009.
According to Bloomberg data as of 5 May, prices of sugar and wheat, which are the basic components in some biscuits, have risen 22.29% and 8.07%, respectively as compared to a year ago. Sugar is also used liberally in some carbonated beverages.
“Wheat and sugar account for 55% of inputs costs,” says Pravin Kulkarni, general manager at Parle Products Ltd, which manufactures Parle G and Monaco biscuits, pointing out that about 65% of the biscuit market is in the Rs5 and Rs10 price bands.
However, biscuit makers have raised prices indirectly by reducing package weight by 10% annually in the last two years. Despite that, margins continue to be under pressure, and profitability has decreased 50%, says Kulkarni.
The key this year, say industry insiders, will be the monsoon. “There has been a growth slowdown with rural (markets) driving the growth for us at 18% growth as compared to 13% growth from urban India. Now monsoons are key,” says Dabur India Ltd’s chief executive Sunil Duggal.
Indeed, manufacturers such as Sethi are caught between the proverbial rock and a hard place: they can maintain profitability by hiking prices, or watch volumes shrink as competition grows fiercer in a world where consumers are cutting back in discretionary spending due to food inflation.
“The competition will only intensify as the number of launches increase and companies look at multiple brand, multiple state, multiple regions and multiple countries strategy,” said Vineet Agarwal, president, Wipro Consumer Care and Lighting a division of Wipro Ltd.
With inputs from Ashwin Ramarathinam
sapna.a@livemint.com
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First Published: Thu, May 06 2010. 11 27 PM IST