FMCG (fast-moving consumer goods) companies have been struggling with subdued demand for over a year now. With no significant improvement in the economic scenario, relief appears unlikely in coming days.
What’s worse, faced with a depreciating rupee and rising crude oil prices, consumer companies have been forced to hike prices of essentials by 2-15%, including those of soaps, detergents, personal care, oral care and other items.
For instance, Hindustan Unilever (HUL) increased the prices of the 120 gm pack of Lakme Peach moisturiser by Rs 20 to Rs 175 and Pond’s dreamflower talc from Rs 125 to Rs 135.
Analysts believe this set of price hikes may not go down well with consumers, given the current subdued demand scenario.
Nitin Mathur and Vivek Veda of Espirito Santo Securities say that following rupee deprecation, FMCG companies are mulling another round of price hikes to pass on input cost increases. “We believe price increases will not be taken well by consumers and see a heightened risk of downtrading.”
Downtrading refers to consumers opting for cheaper variants.
Most consumer companies have been maintaining that though the rate of premiumisation or uptrading has slowed, consumers have not been downtrading much. However, analysts believe that some amount of downtrading has been witnessed in this period of prolonged slowdown.
A report by ZyFin, a financial information company, says that the consumer outlook index for August 2013 has fallen to the second lowest score in the past two years.
Other analysts agree that the rate of price hikes does not augur well for the sector and companies may even see volumes slipping further.
Naveen Kulkarni and Ennette Fernandes of Phillip Capital said, “We believe that consumer companies will have to take significant price hikes to mitigate the impact of rupee depreciation, but the current operating environment, marked by flagging demand and worsening of consumer sentiment, is not conducive to price hikes. Thus, increase in produce prices is more likely to lead to a significant decline in volume growth.”
Agrees Abneesh Roy of Edelweiss Securities. He believes that some amount of downtrading can be witnessed in some categories as a result of price hikes. “But the bigger hit will be on volume growth. The increased sales promotions and discounts that were offered on account of softer raw material prices across the categories have now reduced or rolled back. Going ahead, this is also going to affect volume growth.”
Slowdown in growth, high inflation, lack of employment generation and now the price hikes are likely to pile on extra pressure on consumers’ wallets in the coming days, experts said.