The consumer bites

It was with some trepidation that consumer goods companies raised prices earlier this year. But the move, which they feared might stymie demand, seems to have paid off. Consumers are clearly not complaining. That's the story the September quarter numbers tell. The results are not stunning, but the combination of better volumes and price hikes has meant a fairly good increase in the top lines of firms.

Says Hoshedar Press, MD, Godrej Consumer Products, "We increased the price of soaps by about 6-8 per cent some time in May and the benefits are coming through now. So far, we haven't really seen demand slowing down." The Rs 954 crore GCPL's soaps business grew at a brisk 17 per cent y-o-y during the September 2007 quarter while hair colour clocked 12 per cent y-o-y.

Milind Sarwate, chief of HR and strategy at Marico confirms that all is well. Says he, "We have taken price hikes of 3-4 per cent on most products and we don't see any resistance from consumers." Sarwate, however, believes that companies cannot afford to keep on passing on input costs. "We can't have a cost-plus arrangement with buyers, we have to offer them value" he says.

Biscuit maker Britannia, which has a market share of around 32 per cent, too has made the most of the environment rationalising pack sizes and pushing through price hikes for some brands. If the net sales numbers appear strong at 20 per cent,it's because the company has paid out a much lower amount on excise duties this quarter with biscuits that cost up to Rs 100 kg now exempt from excise duties.

Nonetheless, it's done well to post an increase of 14.4 per cent y-o-y in gross sales given the keen competition from ITC which sells under the Sunfeast brand.

It's hasn't been great going for the Rs 2,172 crore Dabur though which has posted a muted growth in sales of just 13 per cent y-o-y . Healthcare and hair oil products have fared poorly and the company has discontinued exports of pulps and food concentrates.

However, other categories such as oral care and juices have done well. Says Abhijeet Kundu, analyst with Edelweiss Securities, " The top line growth has been decent for most companies despite the monsoon being prolonged in some pockets. That means the underlying demand continues to be strong." Kundu believes top line growth should continue to be robust in the second half of the year.

However, companies may not be in a position to take another round of price hikes. Says Sunil Duggal, CEO, Dabur, " We would hesitate to increase prices further because that could result in an erosion of the franchise."

Duggal adds that companies would need to be conscious about consumer downtrading with new products coming in at lower price points. Adds Godrej's Press, "There is competition in some categories. For instance, we have yielded market share of about 200 basis points in hair colour."

While a better top line growth has certainly helped companies protect operating margins, there has also been a conscious effort to rein in costs. Says Hemant Patel, who tracks the FMCG space at Enam Securities, "In Dabur's case it is effective cost management that has helped ease inflationary pressures and pushed up margins by 120 basis points."

Britannia too has managed to keep costs in check "� raw material costs this quarter dropped 300 basis points. For over a year the company had been forced to deal with spiralling costs of key inputs such as wheat and milk.

The Rs 1,557 crore Marico, however, couldn't escape cost pressures. Despite a 16 per cent rise in organic sales , the company saw its margins contract 200 basis points thanks to higher prices of sunflower and safflower oils.

Says Sarwate, "Inputs costs have risen and we have also spent more on advertising. We hope to sustain margins though it might be difficult to increase them." That might sound pessimistic but could turn out to be true. Unless input costs come off, FMCG firms can't hope to do very much better. Pricing power

Strong volume growth

Price hikes help fetch better realisations

Input costs remain high

Small improvement in operating margins