Consumer power bails out FMCG majors

Despite rising input costs, firms rode higher volumes to put up a decent show in Q4

MUMBAI: Does a 10% increase in prices of your personal products impact the way you consume these products?

For Mihir Bijur, a 27-year-old bachelor from Mumbai, it doesn’t. “No, it would not change my consumption. I would still buy it. In a world of rising economies and big monthly expenditures, I don’t think people even know the average price of soap and hair oil ….so they will not even realise the price hike” said Bijur.

For soaps, shampoos, toothpaste and even biscuits, consumption, it seems, is not likely to go down if prices are increased. Customers just take the hikes in their stride.

Where hygiene and personal care products are concerned, it seems manufacturers command good pricing power.

May be that is a reason behind the excellent performances recorded by fast moving consumer goods companies. Domestic FMCG firms recorded a 22% growth in sales in the January-March 2008 quarter, the highest in nine years. Pricing power has improved and so have margins, despite rising input costs.

All companies reported double digit growth in sales in the last quarter of FY08. While Hindustan Unilever turned into an analysts’ favourite from an underperformer and Nestle bounced back with a healthy performance, Marico and ITC zipped forward with new product launches and forays into new businesses.

So, one reason for good volumes growth, despite price hikes, is the changing lifestyles of the consumer, leading to a surge in demand for FMCG products. But are there others?

Yes, say Morgan Stanley analysts Hozefa Topiwalla and Divya Gangahar in their report dated May 5, 2008. “Despite input cost pressures, most companies were able to expand gross margins via judicious price hikes and prudent purchase management, including forward covers, product reformulation, and use of substitutes,” they said.

Also, there are more. For example, volumes growth for HUL came owing to extended winters — leading to higher sales of skin-care products — and product re-launches. Good growth in higher-margin products such as Pond’s and Lakme helped improve performance despite a 23% increase in advertising and promotional spends in the last quarter.

According to a report by analyst Anand Shah of Angel Broking Firm, Hindustan Unilever saw profit before tax margin increase by 150 basis points to 13.4%. Margins in the personal products segment rose by 20bps to 24.7%, despite higher advertising and promotional spends.

“Margin expansion has come about partly through price increases and partly through cost cutting. Everybody is trying to cut costs and overhead expenses. Even weight reduction has helped sustain margins, if not increase them,” said Akhil Kejriwal of Enam Securities.

Interestingly, Nestle’s story is even brighter. It hiked prices despite a fall in raw material costs.

“Better absorption of fixed costs and lower staff and other expenses led to Nestle’s operating profits margin expanding by 211 bps. In the last three months, Nestle’s cost inflation index has dipped 7% on our estimates, owing to a decline in prices of its key inputs like milk, coffee and wheat. In addition, Nestle has taken a weighted average price hike of around 9% in the last year and demonstrated very strong growth momentum in the last four quarters,” Morgan Stanley’s Topiwalla and Gangahar stated.

The focus for most fast moving companies has become increasing profitability and not just sustaining growth. And success is being met. Rising prices of palm oil, crude oil, malt, milk, sugar is a hard reality now. But, rising volume sales and higher margins for consumer goods companies is a reality too.

s_tanvi@dnaindia.net