Price Hikes Not Enough To Protect Consumer Goods Makers' Margins

Dabur India Ltd. told BloombergQuint it has raised prices. Its larger peer Hindustan Unilever Ltd., IDBI Capital said in a report, has increased maximum retail price by up to 17%—with its shampoos turning 8-10% costlier in the first six months of the year. Marico Ltd. has also hiked prices, while Britannia Industries Ltd. intends to do so.

The action comes as commodities have turned costlier. Tea has risen nearly 42.8% since March to Rs 185.8 per kilogram as on June 26, according to data from Tea Board India. Palm oil—used to make everything from soaps to shampoos and confectionary—is expected to turn more expensive as the resurgence of Covid-19 infections in world’s No. 2 producer Malaysia threatens to create labour shortage and output cuts.

“Companies will gradually increase the prices to pass on the rise in raw materials costs,” Vishal Gutka, vice president of consumer and retail at Phillip Capital, told BloombergQuint. The pressure of higher input costs will weigh on margins in the first half of FY22, he said. “It will take at least three to four quarters to pass on the entire price rise to customers, assuming raw material prices stay at current levels.”

That won’t be easy. In categories like biscuits, chips and shampoo sachets, it’s difficult to increase prices as they’re typically sold in Rs 5 and Rs 10 packs, he said. And such affordable units, he said, drive sales.

“It’s also impossible for companies to reduce the grammage beyond a point for smaller stock-keeping units,” Gutka said. “They are left with no option but to absorb increase in raw material costs.”

Mohit Malhotra, chief executive officer of Dabur India, concurred. “We’re witnessing an unprecedented commodity inflation of about 5-6% across most our basket, including agri-commodities like edible oils, herbs, spices etc., besides hydrocarbons,” Malhotra said. “We have undertaken calibrated price increases of around 3% to mitigate this impact. However, it isn’t enough to offset the impact completely and we’ll look at another round of price hikes.”

The company expects inflationary pressures to be prevalent in the first two quarters of FY22 before they begin to soften.

The company is looking to cut costs across its chain. It saved around Rs 50 crore through this initiative in FY21, he said, and plans to double that to Rs 100 crore this fiscal.

A distributor for Godrej Consumer Products Ltd.’s soaps said on the condition of anonymity the company hasn’t increased prices across its portfolio.

Queries emailed to HUL, Marico and Godrej Consumer remained unanswered. Godrej Consumer said in its quarterly update domestic sales for the quarter ended June is expected grow in the high teens, driven by higher volumes and price hikes.

Marico increased prices of some packs of Parachute coconut hair oil and all its Saffola edible oil SKUs, according to its website. Some of the Saffola Oats packs also cost more.

While copra, a key raw material for coconut oil, has fallen since April, it still up 20% over a year earlier. While prices of high-density polyethylene—used in packaging—fell 7% over the previous month, the material’s still 53% costlier over a year earlier, Marico said.

The company, however, expects the situation to improve. “As key input costs started easing after peaking at the start of this quarter, gross and operating margins should see significant sequential improvement in Q1 and thereafter trend towards medium-term expectations,” it said in its quarterly update.

Britannia Industries plans a 3% hike to offset inflation in edible oil, packaging material and diesel, IDBI Capital said in a report. Cost of packaging material and edible oil rose between 40% and 62% over a year earlier in the quarter ended June, it said.