FMCG companies change raw material mix to cut costs

Fast moving consumer goods (FMCG) companies are changing the product formulation, including alternative raw materials, to make soaps, detergents and personal care products. The move is aimed at cutting costs by as much as 10 per cent and boosting margins.

Companies such as Godrej and others are using multiple active ingredients or surfactants (main chemicals used in making soaps, detergents and personal care products) instead of one and changing their proportion in the formulations to beat the cost escaltion. Over 50 per cent of input costs in the FMCG sector are raw material costs.

N B Godrej, managing director, Godrej Industries, said, “The Godrej group has already begun substituting petroleum-based derivatives with non-edible vegetable oil derivatives to offset the rise in crude oil prices. We have also put up a new plant to manufacture fatty alcohol from vegetable oil, a chief ingredient in soap-making, because using petroleum derivatives is more expensive. This method could reduce costs by 10 per cent.”

Speaking on the sidelines of a soaps and detergents conference organised by the Oil Technologists’ Association of India (OTAI), Godrej said it has become imperative for companies to look at alternatives, which would also include using lower grades of vegetable oils to making fatty alcohol.

Soap and detergent players in India have resorted to price hikes to combat margin pressures, led by a rise in raw material prices. So far, big companies like HUL, have overcome inflationary pressures as a result of higher consumer spending in the country.

However, company heads say if inflation continues to grow for one more quarter, it could then impact the consumer demand severely. This would make it imperative for companies to cut down costs in all ways possible.

Companies also see functional benefits such as more lather from soaps in hard water, which is a key to higher sales in villages, by using multiple active ingredients.

“Among an emerging alternative is methyl ester sulfonate (MES) along with a petrochemical-based active ingredient called linear alkylbenzene sulfonates. This is a trend being witnessed not just in India, but also globally,” said S N Trivedi, president, OTAI.

MES is a surfactant derived from natural oleochemical feedstock. It is more cost-competitive than petroelum -based derivatives and is becoming popular globally.

For example, Unilever’s brand in the United States, Lever 2000, uses a combination of MES and oil-based surfactant soap, which gives it a quality to produce lather even in hard water.

India’s soap-maker Hindustan Unilever could not be reached for comment. Some of the biggest soap brands in India include HUL’s Lux, Godrej No 1 and Wipro Consumer Care’s Santoor.

Most players use LABS as the chief raw material mainly in the proportion of 93:7 (with 93 per cent of LABS). Since crude oil prices have risen by over 50 per cent this year, companies are prompted to use it in the proportion of 80:20.

B R Gaikwad, the director and president of domestic soap-maker VVF said, “Changing a proportion is not easy in India as companies need to seek BIS (the Bureau of Indian Standards) approvals for the same. The fact that it can greatly reduce costs has made companies explore this option. At VVF as well, it is under the development stage. We are also planning to set up a research and development facility to experiment with new formulations.”