FMCG prices jump as companies fight to contain commodity inflation

Companies are also looking for change in product mix and cost saving measures

Companies from packaged foods to consumer staples such as soaps, detergents, and hair oils have hiked prices between 5 and 7 per cent in the past few months to mitigate input cost pressures. In tea, the price hikes have been even sharper, as much as 10-15 per cent, sector experts said as firms fight to contain commodity inflation.

But even as price hikes are an inevitable reality of runaway input costs, they are not the only tool available to fast-moving consumer goods (FMCG) firms to fight commodity inflation. Some other measures include a change in product mix as well as aggressive cost saving measures. Firms seem to be going for these tactics too, as price hikes remain “judicious” by most.

“I don’t think companies, whether food or non-food, can take sharp price hikes. While demand in rural areas remains robust, purchasing power is limited in the hinterlands. Urban areas, on the other hand, are slowly seeing a revival. We are responding to the trend by changing the product mix to margin-accretive products such as creams and cookies as consumers slowly demand indulgence items,” said Mayank Shah, senior category head, Parle Products.

Market researcher Nielsen IQ said in its quarterly update for the October-December 2020 period that food categories as a whole saw a 10 per cent volume growth versus last year, led by a boost in demand. “The growth was widespread, with staple foods reporting an 18 per cent growth in the December quarter versus a year ago. Indulgence categories too ticked well,” Nielsen said. The home and personal care market, on the other hand, also staged a “consumption-led recovery” in the December quarter, clocking 5 per cent volume growth versus a year ago, Nielsen said.

The uptick in premium and discretionary products is prompting companies to slowly shift focus to them. Consider what Mumbai-based Marico proposes to do with value-added hair oils, which contributes 24 per cent to its domestic FMCG business. In the third quarter, this business saw a volume growth of 21 per cent, after a weak first half of FY21, prompting the firm to tweak its strategy for the future.

In an earnings call after its third-quarter results last month, Marico’s management said it was focusing on broad-based growth in value-added hair oils with brands such as Shanti Amla, Nihar Naturals and Parachute Advansed Coconut Oil.

“These brands have both higher margin and higher realisation potential. They will therefore drive value share at an accelerated pace along with premiumisation in the segment. We will push growth through innovation in the portfolio,” Saugata Gupta, managing director and chief executive officer, Marico said. As such companies, including Hindustan Unilever (HUL), Godrej Consumer, Dabur, and Emami have indicated that their emphasis will be on premium personal care products as demand slowly comes back in urban areas.

“In the September quarter, urban demand was in negative territory. But in the past three months, it has turned positive, albeit at lower levels. The urban demand will increase, depending on the vaccine roll-out,” Sanjiv Mehta, chairman and managing director, HUL, said. Of course, the shift to premium products is being carefully laid out as demand remains fragile in urban areas, led in part by an increase in Covid cases in the past few weeks. FMCGs have also put in place robust programmes to cut costs over the past few years to protect margins. This is now being pressed into service aggressively.

For instance, Dabur India expects savings of Rs 80-100 crore through Project Samriddhi in the next two years.

Mohit Malhotra, chief executive officer, Dabur India, said the company was exploring all avenues to manage costs in the post-pandemic world, including distribution, sales, marketing, and travel expenditure.

Analysts tracking Godrej Consumer, too, said that the company was looking to balance growth and costs, as inflationary pressures rise.
 

Organised FMCG players are also counting on smaller players to exit the market as inflationary pressures increase. That will leave a wider market for them to play around in the future.