Barring FMCG, few signs of pricing power

Consumption-led sectors haven’t had it this bad in a while. While input costs are ruling high or rising further, demand remains sluggish, eroding the companies’ pricing power and piling up pressure on their margins.

Durables and auto companies appear to be the hardest hit by this trend, though fast moving consumer goods have managed to hold their own so far.

Pricing power refers to the ability of a brand to hike product prices without risking market share loss or losing consumers to competitors and cheaper alternative brands.

“Consumer durable manufacturers such as air conditioner companies or manufacturers of electrical goods have shown a slowdown in demand as seen in their results,” said Gaurav Dua, head of research at Sharekhan.

The slowdown makes it that much more difficult to pass on the increase in input costs.

“There is pressure with input costs but the industry is likely to hold back prices in the current scenario as we approach the festive season,” said Ruchika Batra, general manager, Samsung Electronics.

The story is no different for the automakers.

“It would be difficult for the manufacturers to take hikes this year. However, there is pressure on bottomline due to rising commodity prices. Also, with yen appreciating, there is a concern for the companies importing from Japan,” said Shashank Srivastava, chief general manager - marketing, Maruti Suzuki.

Hardly surprising many carmakers are offering discounts and attractive interest rate schemes to snare buyers in.

“It should be the best time to buy a car as companies are offering heavy discounts on different models. As far as Maruti is concerned, we have tried to give as much discount as possible. But discounts are now at their peak. We are not in a position to give further discounts,” said Srivastava.

“In a depressed market, you need to create interest to revive the sales. That is why we have seen the discounts continuing for the past 3-4 months. With the kind of discounts happening, I think it is definitely the right time to buy a car,” said P Balendran, vice president, General Motors India.

What’s good for the buyers, though, isn’t half as good for the manufacturers.

Margins of auto companies tracked by brokerage firm Motilal Oswal Securities have fallen 180 basis points year on year and by 10 basis points on a quarter-on-quarter basis, Navin Agarwal and Rajat Rajgarhia of Motilal Oswal noted.

The analyst duo  sees costs starting to come off ahead. “Margin contraction on account of RM (raw material) cost push, (has been) partly diluted by better operating leverage. RM cost has stabilised at higher levels; expect moderation in the coming quarters.”
Still, hiking prices may be easier said than done.

“There is expected to be some correction in input prices given the global demand contraction evident in every economy. However, margins are not expected to bounceback soon. In fact, we expect a further fall in margins before they rise again,” said Rajat Rajgarhia, director research at Motilal Oswal Securities.

“Companies have found that there is no demand if they increase prices... This situation is not expected to change for the next quarter at least,” said Nishcal Maheshwari, head of research, Edelweiss Securities.

Only FMCG companies have done well in terms of pricing power so far. Despite a series of price hikes throughout last fiscal, consumer demand has remained strong, with most companies recording positive volume growth.

Hindustan Unilever Ltd (HUL), Colgate Palmolive, Marico and ITC have, in fact, effected average price hikes of 5-10% on their flagship brands as recently as in July and August, while GlaxoSmithKline Consumer is planning to pass on prices.

Among others, quick-service restaurant chain Jubilant Foodworks is expected to take its annual price hike in August.

“FMCG companies have been an exception at least in the previous quarter. They were able to hold on to their margins because of the presence of some strong brands,” said Maheshwari.

“There is a fair amount of pricing power that consumer companies have enjoyed,” said Harsh Agarwal, director, Emami Ltd. He, however, added that the pricing power is not even across companies. “It will differ for different categories and brands.”    

Packaged foods, skin care products, household insecticides, over the counter products and health supplements are some categories where leading brands have the highest pricing power. That’s an upshot for companies like Emami, Nestle, GlaxoSmithKline Consumer and Godrej Consumer Products, which derive over 60% of their revenues from brands that are niche and market leaders.

Compare this to the highly penetrated and intensely competitive categories such as biscuits, soaps and detergents, where the market leaders — Britannia Industries, Hindustan Unilever, etc — have to deal with relatively low pricing power.

Overall, analysts estimate volume growth for FMCG companies to be in the 8-9% range.

In recent years, categories like shampoos and oral care have seen heightened competition, forcing even the market leaders to take recourse to price cuts.

Analysts see the players in these segments having low pricing power for the next few years. Detergents, soaps, shampoo and oral care — the categories being eyed by Procter & Gamble (P&G), ITC and L’Oreal — are especially vulnerable to margin decline.