Mumbai: High food price inflation and competition for market share has led to a loss of pricing power for makers of packaged consumer goods, which are expected to report slower revenue growth and a decline in profitability for the quarter ended March

A Mint survey of five brokerage houses—ICICI Securities Ltd, India Infoline Ltd, Prabhudas Lilladher Pvt. Ltd, Motilal Oswal Securities Ltd and Angel Securities Ltd—shows that companies may have sustained sales growth by volume during the quarter, but likely took a hit in value terms.

Discretionary consumer spending fell, especially at the low end of the market, as food price inflation rose to its highest in a decade in February and hovered in the high teens for most part of the quarter ended March. Intensifying competition to drive volume growth likely lowered profitability for the three months, compared with the two previous quarters.

According to market research firm Nielsen, retail sales growth of personal-care and household products fell to 10% in January-February from 22% in the same period a year ago.

Smaller brands have also seen their cost advantage being hit. “Inflation/increasing raw material cost have taken off cost advantage of regional (smaller) brands," a Nielsen spokesperson said.

Raw material prices for palm oil fatty acid distillate, used in soap industries, have increased 57% in the past four months and milk and packaging costs are on a steady uptrend, Motilal Oswal said in a 7 April report, but pointed out that sugar prices have declined 20% from their peak in mid-January. “Even advertising rates are up 10-15%," the report said.

Graphic: Naveen Kumar Saini / Mint

“We estimate 18.6% PAT (profit after tax) growth against 24.8% in the previous two quarters," it said.

With food inflation at 18%, companies such as Britannia Industries Ltd have had a tough a year.

Sugar prices have almost doubled over the last 12 months from Rs17 to Rs32 per kg and milk and wheat are more expensive.

“Our biggest challenge is (that) we have not taken price increases to take the cost increase in inputs," said Vinita Bali, chief executive officer of Britannia Industries, in an interview published in Mint on Monday. “Margins dilution has been there in the last year. Margins are under pressure."

Higher food prices have primarily affected the urban middle class, urban poor and rural households, said Dalip Sehgal, managing director, Godrej Consumer Products Ltd.

“As such, all the categories that have a large mass component like detergents, soaps, shampoos recorded a slowdown," he said, but added that categories such as liquid detergents, deodorants and packaged food that cater to higher income segments have done well.

The pressure to increase volume sales has also led to a public and legal spat between two of the largest consumer goods firms, Hindustan Unilever Ltd (HUL) and Proctor and Gamble Home Products Ltd (P&G), over whose detergent washed the whitest. Both have cut prices by 10-30% across their detergent brands.

Other firms are adding to the competition as they move into new categories to boost market share. For instance, GlaxoSmithKline Consumer Healthcare India Ltd, HUL and ITC Ltd have all entered the instant noodles segment.

Competition is also expected to intensify in the chocolate and biscuit segment once Kraft Foods Inc.—which acquired Cadbury Plc in January—finalizes its plans for India using Cadbury’s deep network.

“Competitive pressures have increased. The detergents war between P&G and HUL has spilled into shampoos as P&G has launched a new promo of 20% more in shampoos," said Anand Shah, sector analyst at Angel Broking.

“Soon other sector companies will retaliate and this may soon spill to soaps and other home and personal care categories. Besides the volatility in input costs has also returned but companies are unable to pass on the same," he added.