HUL To Britannia Not Done Yet, You Will Be Paying Even More For Noodles To Shampoos
Consumer goods makers have increased prices as raw material costs continue to rise, squeezing their margins. And they may not be done yet even as it threatens to hurt consumption.
From Hindustan Unilever Ltd. to ITC Ltd., makers of soaps to staples, have taken hikes across categories to ease the burden of commodity inflation. And some like have guided for even more increases in the months to come.
Exchange filings and BloombergQuint’s conversations with distributors revealed that products across categories have turned costlier so far this fiscal. Paints saw the maximum jump, followed by soaps and shampoos.
Companies usually refrain from sharing pricing data. This year, however, has seen a global commodity surge, triggered by pandemic-driven supply disruptions. That has made everything from palm oil used in soaps to titanium dioxide that goes into making paints costlier. Companies including HUL, Nestle India Ltd., Asian Paints Ltd., Dabur India Ltd., and Parle Products Pvt. have said that input inflation is like never before.
"The September quarter inflation was unprecedented at over 9%," Mohit Malhotra, chief executive officer at Dabur India, told BloombergQuint. "We had expected it to soften in Q3 but there are no signs of any softening as of now."
Dabur gets the bulk of its hair care volumes from the lower-priced portfolio, and that’s where it has seen maximum inflation. “We aren’t taking very aggressive price increases because demand is still recovering…," Malhotra had told analysts in a post-earnings call. "But if inflation continues unabated, we may look at another round of price increase in Q4."
Mayank Shah, senior category head at Parle Products, told BloombergQuint that edible oil has jumped 60-65% over a year earlier, while wheat flour and sugar prices are up 8-10%, making it difficult to absorb the costs.
For Britannia, the pace of rise in raw material costs during the current year is higher than the cumulative inflation in the past six years, led by palm oil that has surged 54%. Besides, industrial fuel and packaging material have jumped 30-35%.
RS Sodhi, managing director of Gujarat Cooperative Milk Marketing Federation Ltd., which owns Amul, told BloombergQuint that after milk, “35-40% higher cost of energy, logistics and packaging is forcing us to raise prices of dairy products”.
While tea prices fell from their peak, offering some relief to packaged goods makers like Tata Consumer Products Ltd. and Hindustan Unilever, they are still higher than the 2019 levels of Rs 135.63 per kilogram.
increased prices by 4% across products between July and September. The maker of Good Day biscuits said in its earnings call that it will take a 7.5-10% hike in the remaining months of the fiscal.
HUL products cost 11.5% more in the first half of FY22. The maker of Dove soaps and Clinic Plus shampoos “continues to price up in the categories” such as skin care and hair care where input inflation remains high.
Parle opted for an 8-10% increase. The winter portfolio of Emami Ltd., the maker of Boroplus cream, has turned 3.5% costlier.
Godrej Consumer Products Ltd., the owner of Cinthol brand, has taken “bolder price hikes of 10-11%” effective December. Dabur India, known for its namesake honey and chyawanprash, raised the maximum retail price across of its portfolio by 3-4%.
In the discretionary category, Asian Paints, India’s largest paintmaker, raised prices by 9% effective Nov. 12. The , the management said in the second-quarter earnings call, was higher than the cumulative rise of 6% in the past six months. And the company on Tuesday announced an additional hike of 4-5% starting Dec. 5. That would take the total increase to 19%.
Products from peers Berger Paints Ltd. and Kansai Nerolac Ltd. have also turned costlier.
Companies passing on higher costs to consumers reflected in the prices of goods leaving domestic factories, an indicator of input cost pressures on manufacturers. The reading rose 12% in October compared with 11.4% in the previous month and a subdued 2.2% a year earlier, according to the Wholesale Price Index data.
Price Hikes Alter Consumption Pattern
At the peak of Covid-19 in 2020, the growth for fast-moving consumer goods industry was driven by rapid increase in consumption of sanitisers and handwashes, which cost more than an average FMCG product per gram on an average, according to K Ramakrishnan, managing director (South Asia) at Kantar Worldpanel. In 2021, the households that are buying these categories have dropped significantly, but value is still outgrowing volume because of the hikes the manufacturers have taken across the board, he told BloombergQuint.
Households, on an average, paid 6.5% more per kilo or litre of FMCG items consumed in the quarter ended September, it said.
And rising retail prices are impacting consumption trends.
According to a NielsenIQ study with 4,600 shoppers across 19 key metros, 80% have indicated that food prices have increased over the last one year. Two in five shoppers are buying less than what they would normally, 29% are switching to cheaper brands, and 21% are choosing private brands for the price advantage.
Hikes Not Enough To Protect Margins
The burden of inflation may vary across income groups as companies try to shore up volumes.
According to distributors BloombergQuint spoke with, it is mostly the larger packs of 1kg and above that have become costlier. Medium-sized stock-keeping units have seen a modest rise.
The companies have reduced grammage of affordable packs of Rs 5-25, which drive volumes in rural areas. For instance, Nestle India cut the weight of its Rs 25 KitKat pack to 36g from November from 37g earlier.
But there's a problem.
“Execution of grammage reduction usually takes more time than direct hikes in maximum retail prices and that could mean that the near-term margins may remain under pressure,” according to Abneesh Roy, executive vice-president, institutional equities, Edelweiss Securities.
And even direct increases in MRP won’t bring a respite, for now.
Almost all companies flagged margin pressures in their September-quarter earnings. “The inflation is up 50-55% year-on-year and the industry cannot pass on this quantum of price hikes to customers as it will impact consumption,” Sameer Shah, chief financial officer at Godrej Consumer Products, told analysts in a post-earnings conference call. “For the next two months, there will be a bit of contraction in the operating margin.”
Mohan Goenka, executive director, Emami, concurred. “There has been a cost pressure over the last few weeks particularly on the waxes, so we have taken some price increases... but definitely, we would see some decline in our gross margins in Q3."
For Nestle, gross margin contracted for the first time after four consecutive expansions due to high input costs of nine out of 13 items including coffee, wheat, edible oils, and milk.
“In addition, rising cost of packaging materials, fuel and transportation costs are likely to keep margins under pressure in the near term despite focus on cost optimisation and efficiencies,” said Amnish Aggarwal, head of research at Prabhudas Lilladher, in a note.
Madan Sabnavis, chief economist at CARE Ratings Ltd., expects consumer price inflation to remain above 5% post-November, when the base effect will diminish. "Measures such as the recent cut in excise duty on fuel, imposition of stock limits and waiver of basic import duty on edible oils may offer some relief to the consumers even as soaring prices of fuel and edible oils in the global markets continue to weigh on overall inflation," he told BloombergQuint.