Small & regional players are increasing competition says HUL CEO

• HUL says that it has seen dips in market share in mass segments due to rising competition
• Rural market volumes turned positive this quarter after seeing decline for the last few quarters.
• In spite of price cuts, consumption habits will recover only gradually as benefits will reach consumers with a time lag.
  

Hindustan Unilever, the country’s largest fast moving consumer goods major, disappointed the Street with lower than expected volume growth, and the management too indicated pain ahead in the sector, thanks to growing competition. With raw material prices cooling down by 5.2% YoY, competition from small and regional players has surfaced. Typically, smaller players find it hard to survive when raw material costs are high, but with input costs declining, consumers are downtrading to cheaper alternatives. Interestingly, last quarter Sanjiv Mehta of HUL had said that it would not enter a price war and would pass on benefits of lower input prices to consumers.

“There has been a resurgence of small and regional players in select categories due to softening commodity prices – many of whom had vacated the market during the peak of inflation,” said Rohit Jawa, CEO of HUL said in an earnings concall on late Thursday.

Without giving too many details, Jawa said that they had seen dips in market share in certain mass segments. Subsequently, the FMCG major’s volumes for the quarter grew at 3% even as analysts expected them to grow anywhere between 4.5-6%.

The company had missed estimates on sales growth and net profit also, which grew by 7% and 8%, respectively. The stock had been beaten down in early Friday trade, and was down by almost 3% as of 12:30 pm.

Rural market limping to recovery

Apart from commodity prices, the rural market and its volume decline has been troubling most FMCG majors. The management has given mixed commentary on the outlook as well, adding that urban markets continue to lead its growth.

“Rural market volumes, which have been declining in double digits over the last few quarters, have just turned positive this quarter. But this growth has come on the back of volume decline in June 2022. On a two year compounded annual growth rate (CAGR) basis, the total growth is marginally negative,” said Jawa.

Analysts too have their doubts on rural market recovery. “Despite all challenges, the management guided for gradual recovery in rural demand as the worst of inflation is behind; however climatic conditions (heat wave and El Nino) continue to be key monitorable,” said a report by PhillipCapital.

The rural market presents conflicting signals — with increased demand for MNREGA jobs and higher remittances to rural areas from urban areas is increasing. “Despite all said and done, favourable base shall definitely aid the cause, said PhillipCapital.

Price versus volumes

Most players have reduced prices to pass on the benefits of lower commodity prices, and that’s already shaved off pricing growth on a sequential basis, the company said. HUL also said that it has taken price cuts in the soaps category. “In anticipation of price reduction, we are seeing traders reduce stock levels,” says Jawa.

As of now, most of its sales growth had been led by price hikes, and that would change. “We believe, in ensuing quarters, price growth would remain flat to negative and HUL would focus on volume led growth going ahead,” said a report by Dolat Analysis and Research Themes (DART).

The impact of price cuts on volumes will also be slow. “There is a time lag between price reductions and reaching the customers. Volumes will recover gradually due to higher levels of cumulative inflation that consumers are seeing and consumers and consumption habits will recover gradually,” said Jawa.

Margins & media spends

To battle slow rural markets, more competition and even bring back downtrading consumers, HUL has already increased its advertising and promotion spends for the quarter.

As more players become active in the market, it will also push up media intensity. HUL’s advertising and promotion spends in Q1FY24 were at 9.8% and grew sequentially from 8.7% and on a YoY basis from 9.3%.

“HUL is confident to further step-up its A&P spends to pre-Covid level and continue to invest competitively in brand building and market development. We believe that the benefit of gross margin expansion would be passed on through A&P expenses. Consequently, HUL will take slightly longer to achieve peak margins going ahead,” DART said.

The management had said that they intend to provide price-value equation to consumers, and managing business business dynamically to drive savings harder.

“Management expects operating margin to improve in FY24 owing to improved product mix and operating leverage, with caveat raw material index stays at current levels. In our assessment, management seemed to be more confident about margin recovery than consumer demand,” said PhillipCapital.

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