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Consumer Products | Tweaking prices and packaging

Consumer Products | Tweaking prices and packaging
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First Published: Sun, Jul 20 2008. 01 05 AM IST

Updated: Mon, Jul 21 2008. 04 20 PM IST
As consumer spending turns sluggish and input costs rise, manufacturers of consumer goods — whether durables or fast moving — are looking beyond price increases to protect profit margins. From improving productivity to pushing their products in rural markets, firms are pulling out all the stops to keep cash registers ringing.
Steep increases in the price of crude oil and other commodities have pushed inflation to a 13-year high and raised the manufacturing costs of fast moving consumer goods (FMCG) and consumer durable industries. As raw material and packaging costs make up 40-45% of the overall market value of products, any fluctuation in prices is reflected in the end product.
“It is evident that there is a slowdown. The consumer durables sector has been hard-hit because of inflation and rising input costs. The prices of steel, copper, aluminium and plastics have gone up by 60%, 27%, 30% and 30%, respectively,” George Menezes, chief operating officer of Godrej Appliances Ltd, says.
And, in order to maintain profitability, firms have increased prices, which is making consumers dig deeper into their pockets. While LG Electronics India Pvt. Ltd (LG) increased prices across product categories in June, Samsung India Electronics Ltd raised the price of its computer monitors by 5%. In the FMCG category, Dabur India Ltd recently raised the prices of its products by 5% and Godrej Consumer Products Ltd (GCPL) is expected to follow soon. Hindustan Unilever Ltd (HUL) has made some products, such as soaps, more expensive.
V. Ramachandran, Director of marketing, LG Electronics India
Manufacturers have also tweaked package sizes — reducing weight while maintaining price bands — in order to indirectly pass on the burden to consumers. “Britannia Industries Ltd had done that — reduced the grammage but kept the price same. Many other FMCG companies have followed. It is an indirect way to protect the margins without going for a price hike, as that could result in a dip in demand,” Sameer Deshmukh, an analyst at IL&FS Investsmart Securities Ltd, says.
No margin pressure
For now, price hikes have done their bit in stemming the erosion of margins, analysts say. “As of now, firms, especially in the FMCG sector, are not facing any margin pressure, at least not in the short term, as the price increase had been more than the actual increase in the cost of raw material,” Deshmukh says.
However, another round of price increases may be around the corner if input costs continue to rise. “To protect the margins, the industry will have to resort to price hikes. Many of the players have done it already, and will have to wait and watch in the future also,” LG’s director of marketing, V. Ramachandran, says.
“LG had increased the prices of its products in the range of 4-6% in June, but this does not seem adequate,” adds Ramachandran, who foresees another round of price hikes in August or September, which could further impact sales.
Firms are also trying to lower the per-unit cost of production. “We are enhancing our productivity and localization to manage the rising input costs and have managed to hold on to our price lines so far,” Ravinder Zutshi, deputy managing director of Samsung India, says. “However, going forward, I think we will be looking at a price hike for select product categories.”
While some firms have resorted to better working capital management, some believe in offering innovative products to consumers. “We introduced five-star rated products (for energy efficiency) in the market; adopting ways such as innovative offerings, network and supply chain planning to drive in better efficiency,” Menezes says.
Efficiency push
“In the current context of international petroleum and commodity price increases, businesses need to be resilient to manage the situation. At HUL, we look at continued efficiency and cost-saving programmes covering the entire gamut of our businesses, combined with judicious and sensible price increases in the market context and leveraging of opportunities to upgrade the product mix,” an HUL spokesperson says.
“Since there is nothing that can be done about inflation, and we cannot even pass all the burden to consumers, companies will have to manage costs effectively,” Jude Magima, executive vice-president, supply management, Dabur India, points out. “Like at Dabur, we received an approval from the board to participate in futures trading and also (for) adopting e-sourcing,”
The consumer durable industry’s performance declined in April-May. Refrigerator sales grew by only 7%, compared with 33% in the same period last year, in terms of value. In air conditioners, value growth in April-May was 12%; down from a phenomenal 83% a year earlier (see table).
At the same time, a weakening rupee has made imported products more expensive for the consumer. “The durables sector may be more severely hit as consumers postpone or defer purchase of durables, particularly since financing options are also likely to become more expensive,” Preeti Reddy, vice-president and business head, Mindscape, Technopak Advisors Pvt. Ltd, says.
Steady sales
While customers are postponing purchases of so-called white goods such as refrigerators, demand in the FMCG sector has not been dented much. Because FMCGs are more of a daily necessity, there is no decline in overall sales. “Consumers here can react in two ways — downgrade their purchases, buy lower-priced brands and/or move to aggressively priced private label brands (particularly in the case of staples); or spend more on small indulgences — ice-cream sales are believed to go up when times are bad,” Reddy says.
George Menezes, Chief operating officer, Godrej Appliances
Organized retailers agree with this. “Consumer durables sales have been affected in the last few months but, in the case of FMCGs, the household budgets remain the same; it is just that the product mix has changed,” Ashu Phakey, president, Subhiksha Trading Services Ltd, says.
For retailers, this does not matter much as they do not take a direct hit. “The net value of business is not getting affected because of down trading,” Satyaki Ghosh, vice-president (north), Spencer’s Retail Ltd, says.
“FMCG is heading for a possible down trading. The soap category is flat by volume, and growing by value only due to price increases,” says H.K. Press, executive director and president, GCPL. “The all-round inflation, especially in foodstuff, is putting pressure on family budgets. Those who have committed to instalments for various durable/housing purchases are facing increasing EMIs (equated monthly instalments) and, so, money available for the monthly basket of purchases is shrinking.”
Rural markets
Firms are now looking to leverage growth in the rural economy. Rural and semi-urban markets hold a lot of potential, according to firms that are trying to bridge the demand gap (if any) in the urban centres by pushing their products in non-urban markets. “Videocon is trying to push its products into the rural market. We are asking banks to give rural credit on consumer durables and focusing on local advertising,” says Venugopal Dhoot, chairman and managing director, Videocon Industries Ltd.
Dabur, too, is looking to gain from the rising aspirational levels of rural consumers. “While urban demand for aspirational products is intact, the recent spike in commodity prices has resulted in more money in the pockets of rural consumers, which is pushing higher rural demand,” V.S. Sitaram, executive director, consumer care division, Dabur India, says.
“The growing aspiration is now backed by more money in their pockets. This positive sentiment is expected to continue with indications of the monsoon being normal this year. And this could offset any potential downside in urban markets,” Sitaram adds. Around 50% of Dabur’s consumer offtake is in rural markets.
Keeping fingers crossed
Manufacturers, however, say that while current inflationary pressures are a cause of concern, they believe the sluggishness in the market is just a short-term phenomenon. “I do not see a slowdown for the sector in the long term,” Zutshi says.
Dhoot says consumers have cash in hand and are still buying. “Money is going in the hands of people and, with rising disposable incomes, I do not see any problem on the demand side,” he says.
On the FMCG front, Dabur maintains that demand has remained steady, price hikes notwithstanding.
“Indian consumers’ sentiment is surely a bit low but, as a nation, we still rank second in the Nielsen Global Consumer Confidence survey,” Amita Shetye, director, client solutions, Nielsen Co., says. “Consumers are cautious; but their approach is more like ‘wait and watch’, rather than taking immediate drastic action. We may see in future consumers considering revising their household essential consumption rate if the scenario stays like this for long.”
Manufacturers, too, are keeping their fingers crossed.
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First Published: Sun, Jul 20 2008. 01 05 AM IST