Last week, Hindustan Unilever Ltd (HUL) hiked prices of a few of its detergent brands by 1-9%. Shareholders welcomed the news, as it would lower the impact of rising input costs. The move appears to signal a change in parent Unilever Plc’s approach to pricing.
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In February, in an investor presentation, Unilever said it expected a more rational approach to pricing in 2011 and its long-term focus is on improving underlying operating profit margin. Having worked hard to regain volume growth and market share in 2010, Unilever wants to get profitability on track.
But implementing this in developing markets will be difficult. In China, consumer companies (Unilever was one of them) put off a price hike after getting a request from the government to reconsider. In India, it’s not the government but competition that will queer the pitch for price hikes.
Even as HUL hiked detergent prices, rival Procter and Gamble Home Products Ltd lowered shampoo prices. The Procter and Gamble Co. (P&G) is taking aim at India’s home and personal care markets.
In a recent investor presentation, P&G outlined several marketing initiatives for India. Its growth opportunities for Asia all relate to expanding the business by growing share, markets, categories and brand extensions. Price hikes do not appear to be a focus for the company.
Neither was it for Unilever, but rising commodity cost is driving the change. Unilever said it expects commodity cost hikes to the extent of about 4 percentage points of sales in 2011 compared with 2010. It will seek to offset this by cost savings and price hikes.
P&G is in a similar situation. It, too, plans to save on costs, but will not change its near-term strategy due to macro factors. It may, however, do so in the longer run. That will mean the threat from P&G to Unilever’s position in key markets such as India will not abate soon.
In the Indian market, competition is high in three key categories—soaps, detergents and personal care products. This is not just from P&G, but from other multinational, national and regional firms.
In such a scenario, the only sustainable price hikes are those designed to cover higher costs. Improving margins appears to be a luxury that the industry cannot afford yet. Cost savings and falling raw material prices, accompanied by stable product prices, appear the only realistic means for achieving margin improvement.
The HUL stock is up 28% from about a year ago, but is down 14% from its high in January. One represents the improvement it has made to its business, and the other, the challenges that still remain to be tackled.
Photo by Harikrishna Katragadda; graphics by Paras Jain/Mint
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