Small FMCG companies take big steps as commodity prices fall

Regional soap and detergent manufacturers in Maharashtra and West Bengal have already cut prices by 5% in last few weeks even as national players vacillate

Small and regional consumer goods companies appear to be in a better position to pass on gains from the on-going commodity price deflation than national players. The price of crude oil has been rapidly shrinking in the global market, bringing down all key derivatives linked to it.

In the last six months, inputs such linear alkyl benzene (LAB), used in making detergents, to high density polyethylene (HDPE), used in packaging material, have come off their peaks as per-barrel crude price dropped 23%.

The situation is no different on the agri-commodity front, with palm oil, used in making soaps, down 15% in the last six months, while the price of copra, used in making hair oils, has grown at a slower rate (8%) in comparison to the year-ago period (two-fold).

This commodity price deflation will mean significant gains for fast moving consumer goods (FMCG) companies both small and large. Small soap and detergent manufacturers in states such as Maharashtra and West Bengal have already passed on price cuts to the tune of 5% in the last few weeks, industry sources said.

C R. Joarder, president of the West Bengal chapter of the Small-Scale Soaps and Detergents Manufacturers Association confirmed this saying that the commodity downcycle has allowed smaller players to take price cuts. He said that more price cuts were in the offing depending on the price movement of key inputs. Executives at the Maharashtra chapter of the body could not be immediately reached for their comments.

Even as smaller companies get into action mode, national-level players have not indicated whether they will pass on commodity price gains to consumers. "We will hold our price lines for now because when commodity inflation was high we did not take price hikes commensurate to it," says Sunil Duggal, chief executive officer, Dabur India.

Adi Godrej, chairman, Godrej Consumer Products Ltd (GCPL), says, "Passing on gains will depend on the brand and category. While there could be some passing on, our margin profiles have to be kept in mind at every stage and what the market dynamics are at that point. These are decisions that are carefully thought through."

Marico, the maker of the Parachute brand of coconut oil, has said that it will get a clearer picture on pricing by February next year, when the new copra season begins. Hindustan Unilever's chief financial officer P.B. Balaji also offered no indication during the company's second quarter results two weeks ago whether it was taking price cuts in categories such as soaps and detergents, where input price pressures have been receding fast.

But analysts say that smaller companies are most likely to react faster than their bigger rivals as they look to gain share on the back of lower prices. Joarder says that a commodity downturn allows smaller companies to compete more effectively.

Duggal of Dabur points out otherwise. "There is a long-term impact on brand equity when you tinker with price. There are inventory challenges because those who have stocked up products with a higher price tag want to be compensated. The company may also have to change the (price) labels of some products in the warehouse, which is not easy to do, not to mention the impact on margins. Smaller players have no such issues, but players do," he says.

But the biggest challenge, says Gautam Duggad, vice-president, research, Motilal Oswal, for larger players is the loss of pricing power, which impacts revenue growth. "FMCG companies prefer moderate inflation because they can take price hikes, which results in higher price-led growth. This also helps stave off competition because in a scenario where commodity prices are falling smaller, regional players get back into the marketplace, increasing competitive intensity. This impacts market share of bigger players."

Large companies are expected to respond to the pricing challenge posed by smaller players by increasing promotional spends on their brands. Consumer offers and grammage hikes are expected to go up in the coming months in respond to price cuts by small companies, analysts said.