Soap Opera: FMCG players kick off price war to bring back what’s lost

• Top FMCG companies have cut prices of soap, detergents and hair oils.
• Competition has gone up in the sector after many smaller, regional players making a comeback.
• FMCG players said last quarter that they had to cede some of their market share to smaller players.
• At the time, rise in agri commodity prices is making some of them hike prices of items like coffee and other beverages.
  

After facing the onslaught of smaller and regional players in the last quarter, FMCG majors are on a path to cut prices to boost volumes as well sales. This pricing action is being seen mostly in categories that contribute large volumes and with a high share of unorganized players — like soaps, detergents, hair oils and edible oils.

Hindustan Unilever has taken price cuts to the tune of 9-10% in soaps, Procter & Gamble too cut detergent prices by 11%. Patajali slashed its soap as well as hair oil prices, as per a recent report by Kotak Institutional Equities.

Top FMCG players said at the end of the April-June quarter that they had to cede some of their market share to smaller players. As per Nomura, their impact on market share on organized players is under control as of now, but needs to be watched closely.

A lot of these players have shut up during the pandemic, but have ‘mushroomed’ back.

“As the raw material prices have come down and have remained stable, there is increased competition from smaller players. Hence, most FMCG companies have undertaken price cuts to pass on the raw material benefits, and at the same time, they have increased ad spending to protect their market share,” Preeyam Tolia, senior research analyst of FMCG at Axis Securities told Business Insider India.

Moreso, the volume growth trend has slowed down for most FMCG players due to slower-than-expected growth in the rural areas. Besides, the trend of downtrading had taken over during the era of high inflation last year, when players had to increase their prices.

In Q1, even as volume growth remained tepid, the profitability of FMCG companies was high due to softening of prices of certain raw materials. Palm oil prices were down 2% month-on-month and by 26% year-on-year. Copra/coconut oil prices (updated until July 2023) remained in deflation, down 8% month-on-month and by 11% year on year.

“Currently crude and palm oil used to make soaps and inputs such as soda ash used in detergents are showing a downward price trend, that is the reason many soap brands have reduced the prices to increase their volume and are passing on the margin benefits to consumers,” said Sraboni Haralalka, executive director at Wodehouse Capital Advisors.

Can price cuts help?

Most experts believe that the benefits of these price cuts on volume growth can be seen with a lag, in the second half of the current fiscal year. A few however believe volume growth itself might not be enough for companies that have been banking on pricing-led growth in the last few quarters.

“Most other categories did not resort to any pricing action (apart from soaps, detergents, hair-oil, edible-oils), leading to anniversarying of pricing and lesser contribution to overall value growth. We expect no or negligible contribution from pricing in coming quarters; optically lowering overall value growth for the sector,” said Nomura.

Added to that, the ability to take a next round of price cuts might also be lowered, experts believe as the prices of crude are inching up again. While crude oil prices were down by 14%, they have jumped 8% on a month-on-month basis – showing that the trend might see a back up.

“We must look at the impact of the recent increase in crude oil prices. Any further increase in crude oil price would delay the price cuts and, hence, volume recovery,” says Tolia.

Shampoo, coffee & toothpastes get pricier

While tea and biscuits prices have remained steady, the prices of coffee have inched up due to hardening agri commodity prices — especially in the case of cereals and milk in the last few months.

“Prices remained stable in dairy except for Nestle, which increased the prices of its milk powder and curd by 2% and 5%, respectively. Nestle took another round of around 3-5% of price increases in its baby food portfolio, taking cumulative increases to 6-11% in the past six months,” said Kotak Institutional Equities.

Health food drinks witnessed price rises of around 2-8% by Abbott, Danone and Mondelez. “Agri-commodities products have surged up. Food companies such as Nestle and Britannia may either increase product prices or take a hit on their margins and focus on volume growth,” said Haralalka.

Products like confectionery, toothpastes and shampoos also saw price hikes from players like Vicco, HUL, Dabur and P&G. Also price rises are seen in face and body washes, deodorants, air fresheners, men’s grooming and feminine hygiene – especially in areas where end consumer purchasing power is high. The margins in personal care products are higher and consumers don’t downgrade as easily as they do in the laundry or hair oil segments.

The year of FY24 is expected to be a year of volume growth as FMCG companies are fighting to bring back their ‘small pack’ consumers. At the same time, inflation on the horizon is presenting a very cloudy picture for companies – making them re-think their pricing strategy in a way that ensures volume and margins hold steady.