Increasing product prices have not dampened the sales outlook of fast moving consumer goods (FMCG) companies. They are likely to post a top line growth of 13-14 per cent for the second quarter this year, according to analysts drawing up their estimates ahead of the Q2 results’ season.
This optimism, they say, is not without reason. A good monsoon has bettered the estimate of the agriculture ministry concerning the kharif crop this year. It says foodgrain production in the ongoing kharif will be 10.4 per cent higher than last year. In absolute terms, total grain production is likely to be 114.63 million tonnes (mt) this year, as opposed to 103.84 mt last year.
This is likely to push up overall agricultural growth. From 0.2 per cent last year, analysts are pegging it in the region of 5.5 per cent this financial year, the highest for the sector in the current (2007-12) five-year plan.
Consumer product firms are clearly drawing strength from these numbers. Over 30 per cent of an FMCG company’s sales come from rural markets.
“With a good monsoon,” explains Anand Shah, senior FMCG analyst at brokerage firm Angel Securities, “the prospect of rural incomes going up is there. This means demand will be good in these areas, implying consumers can absorb price hikes that firms take. In urban areas, demand is intact because food price inflation is under control when monsoons are good.”
By some estimates, close to half the monthly household expenditure in urban India is cornered by food alone. In an inflationary scenario, the expenditure on food goes up significantly, leaving less for allied expenditure.
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Calibrated rises
This year, firms have taken a weighted average price increase of close to four per cent across product categories between April and September. Even then, consumer product companies are bullish on growth. “That is because the approach towards price hikes has been calibrated keeping in mind the end-consumer,” says Anand Mour, senior vice-president, FMCG and retail, Indiabulls Securities. “Price hikes, says Shah of Angel, “have not been steep. It has been taken to deal with input cost pressures primarily. Even then, they have not been significant.”
Take Marico; when the firm chose to raise prices of its flagship Saffola and Parachute brands last month in response to inflation in copra and edible oil, it did so on larger packs only.”The smaller packs, recruiter packs as we call them, have not been touched at all,” said Chaitanya Deshpande, Marico’s head of M&A and investor relations, in a conversation at the time with Business Standard.
A price of a litre of Saffola Gold, a key variant of the Rs 400-crore Saffola brand, was increased to Rs 115 from Rs 112. A five-litre pack of Saffola Gold was increased to Rs 580 from Rs 565 earlier. Parachute’s 100-ml, 200-ml and 500-ml packs were increased to Rs 21, Rs 42 and Rs 92 from Rs 20, Rs 40 and Rs 90 earlier.
Another example is Hindustan Unilever. In response to input cost pressures in palm oil, the company recently raised the price of a 120g pack of Lifebuoy to Rs 16 from Rs 15, while the additional 10g offer on a 100g pack of Lux was discontinued. The product continued to cost Rs 18. A few months earlier, HUL had raised the price of a 75g pack of Lux to Rs 20 from Rs 19, while a 75g pack of Dove was priced at Rs 34 from Rs 33 and an 80g pack of Pears was pegged at Rs 27 from Rs 26.
“Consumers are maturing,” says Mour. “An increase of a few rupees for a consumer of, say, a litre of Saffola will not be as significant as, say, for one who consumes a smaller pack size. Companies realise that downtrading will not happen with a marginal increase at levels where price is inelastic for a consumer. Which is why sales impact has been minimal.”
Across the board, companies have been adopting this strategy — calibrated price raises or grammage reduction. Take Parle Products, leader in the mass-market glucose biscuit category, with its Parle-G brand. The firm has reduced grammage across pack sizes, says its general manager, Praveen Kulkarni, in the past few months.
“A 50g pack, for instance, has been reduced to 38g, while a 100g pack has been reduced to 78g. Their cost remains the same at Rs 2 and Rs 4, respectively,” he says. “We have been feeling the pressure of input costs, especially in wheat and milk. We had to tackle this in some way. The best way we felt was through a grammage reduction, without touching price. We haven’t felt the impact on sales yet. We are hopeful of seeing a volume growth of 15 per cent in biscuits this year.”