Price hikes have little impact on FMCG profits

The series of price hikes made by Indian fast moving consumer goods (FMCG) firms in 2007 have had limited impact on volume growth in the sector and have had nearly no impact on value growth, data collected by research firm IMRB International suggests.

Soaps, shampoos and detergents saw the highest price hikes, of about 10 per cent, in the last year. Whereas soaps and shampoos saw no decline in volume growth, washing powder volumes have declined by 3 per cent.

"In household care, categories like laundry care (detergent powder) showed a decline mainly due to reduction in the quantity done by many washing powder brands. Companies kept the price constant but to tackle the rising input costs, they reduced the quantity of powder in the same pack. As a result, the category grew in value because people continued purchasing the same-sized packs but volumes suffered," Manoj Menon, insights director, IMRB, explained.

Soaps and detergents form 47 per cent of total revenues FMCG major Hindustan Unilever (HUL). According to the company, it expects no slowdown in consumer demand. Nearly 50 per cent of its growth this year was fuelled by price hikes. 
 

GROWTH PATH Volume and value growth of key FMCG categories
Categories	Volume		Value
	2006 over '05	2007 over '06	2006 over '05	2007 over '06
Personal care
Toilet soap	2	2	5	4
Shampoo	12	12	5	9
Toothpaste	3	2	5	4
Hair oil	2	0	4	2
Household care
Detergent soap	1	5	1	11
Washing powder	3	-3	6	2
Foods
Milk/food drinks	4	8	5	8
Atta	12	6	8	5
Oil	5	4	5	3
Source: MarketPulse - IMRB's Household Panel

Volume growth in the soaps market in 2007 remained constant, at 2 per cent, as in 2006, but value growth declined from 5 per cent 2006 year to 4 per cent in 2007.

Rakesh Kumar Singh, chief operating officer of Godrej Consumer Products (GCPL) said, "Consumers have understood our logic behind price hikes and have remained loyal to our products."

The category that has remained immune to price hikes is shampoos, which has grown both in terms of volume and value. The category registered a volume growth of 12 per cent, same as last year, and value growth of 9 per cent in 2007 over 5 per cent in 2006.

Take for example Procter & Gamble's anti-dandruff shampoo brand Head & Shoulders: For a price hike of 6 per cent (Rs 7) on a 200 ml bottle, the brand's sales grew at 18 per cent (faster than the growth of the category).

Other categories that saw a growth in volume this year are skin creams, tooth brushes, talcum powder, detergent bars, noodles, milk/food drinks, ketchups and tea. Categories where volume growth has decreased are atta, edible oil, coffee, insecticides and toothpaste.

Experts say that consumers have become more value-conscious and less price-sensitive in the mid-priced segment and above. Some companies believe that the role of prices in making purchase decisions depends more on the psychographic profile of consumers than their income profile.

Explaining when exactly the company feels the need to make a price hike, Singh said: "Price hike should protect product profitability. If the price hike is necessitated by rise in input prices and the company's efforts at cost reduction are unable to contain its impact, a price hike should be made. Consumers may understand why vegetable oil prices have gone up but they may not understand why soap prices must be increased."