The current inflationary environment has resurrected the chimera of consumer downtrading, particularly for manufacturers of fast moving consumer goods (FMCG).
Downtrading, a trend that had gained prominence in 2008, refers to the tendency of consumers to move towards cheaper or local brands. Detergent, tea, coffee and toilet soaps were among FMCG categories hit hardest by this trend during the slowdown, as consumers looked for cheaper alternatives. The ensuing chaos saw a number of established companies lose marketshare to smaller, lesser known players.
Analysts, however, believe these companies have done their homework on handling consumer sentiment and fluctuating input costs rather well this time round.
“Our sense is that FMCG companies have learnt from the 2008 crisis and are now far more capable of managing commodity swings,” analysts Nikhil Vora and Varun Kejriwal of IDFC Securities Ltd wrote in their report last week.
This gives reason to believe demand remains robust and the sector would grow in excess of 15% even next fiscal. Indeed, consumer spending on staples hasn’t dampened despite high food inflation and companies hiking product prices, say analysts.
“There is no notable correlation between food inflation and the performance of the sector,” analysts Percy Panthaki and Adarsh Jain of HSBC Securities wrote in their report dated February 25.
One reason for this optimism may be that even as margins continue to be under pressure, most players managed to devise internal cost-cutting measures and report strong volume growth in the last quarter.
Interestingly, larger companies are seen to be in a better position to play with pricing and branding in times of high inflation, given their ability to negotiate while buying raw materials and packaging, even as smaller players struggle to hold prices.
“Also, with better R&D, larger FMCG organisations have the ability to look for alternate materials when certain raw material costs go up,” says Vineet Trakroo, a consumer marketing strategist who has worked with FMCG companies like CavinKare, Pidilite Industries and Beiersdorf.
Analysts maintain, however, that cost efficiencies and a calibrated approach to pricing will have to be a priority even going forward, if companies like Hindustan Unilever, Marico, GlaxoSmithKline Consumer and Britannia are to ensure competition does not eat into their marketshares.
Enhanced research and development initiatives and better procurement and supply chain efficiencies are seen among factors helping the companies ensure cost-savings. Practically all the FMCG companies now have greater emphasis on annual cost-saving targets, analysts point out.
“Our biggest challenge on cost is managing the commodity inflation and therefore, becoming more cost effective, virtually in every operation of the business, is an imperative,” says Vinita Bali, managing director, Britannia Industries. “We have got a number of initiatives, which are virtually in every chain of the business —- logistics, warehousing or transportation or procurement or how we go to market —- so, it is a number of cost effectiveness and efficiency improvement plans that we have got in place.”
Companies are focusing on alternatives to revive margins than merely looking at pricing.
Hair oils major Marico, for example, is hell bent on growing volumes and is ready to trade off margins in the near term. Rather than hike prices, the company will take recourse to internal efficiency initiatives to tackle the rising costs of raw material and other inputs, says Milind Sarwate, chief of HR, finance and strategy, Marico Ltd.
As per analyst estimates, Unilever and Nestle have globally reported cost-savings of a billion euros each last year, amounting to nearly 10-15% of their operating profits.
This year, heightened raw material costs have pushed consumer goods companies to hike prices across categories —- Colgate took a 17% price hike on toothpaste brand Cibaca; Marico raised Parachute hair oil prices by 20-40% and Saffola edible oil prices by 9-12%; Hindustan Unilever and Godrej Consumer Products raised toilet soap prices by 5-10% each; ITC raised cigarette prices by 20%; Dabur raised prices across shampoos, Chyawanprash and toothpastes by 5-8%; Procter & Gamble withdrew promotional offers on detergent brand Tide.
These price hikes, however, have been moderate in comparison to the surge in costs of raw materials used in making the products. In other words, companies have passed on only a part of the increase in raw materials to consumers as they are in no mood to gamble with volumes.
But, this may not be possible for smaller players to replicate. “The ability of smaller players (20-40% of market size) to withstand rising commodity prices is significantly lower than the larger, branded players. Given that these players compete in the price-sensitive segments with undifferentiated and commoditised products, it is much more difficult for them to raise prices. As a result, when the rise in material costs is broad-based, the business becomes unviable for these firms and many are forced to exit the market,” IDFC’s Vora and Kejriwal wrote in their report.
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