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Falling commodity prices bring cheer as well as challenges for large consumer goods companies. Cheer because raw material and packaging costs come down. The crease lines emerge though because small and regional companies make a beeline for the market.
The December quarter was a witness to this trend. According to PB Balaji, chief financial officer, Hindustan Unilever, competitive intensity increased in commodity-linked categories such as soaps and detergents, skin cleansing, and tea. "We noticed the entry of local players in these categories," Balaji said when declaring the third-quarter results of the country's largest consumer goods company on Monday.
Typically, small fast-moving consumer goods players can operate on thin margins and price their products competitively. This tendency to price low goes up when input costs are benign. As Balaji noted, "Local players can enter the market at low price points. This is especially so when commodity prices are falling."
Hindustan Unilever responded by cutting prices of soaps and detergents, its largest category that yields 50 per cent of its revenues, by 5-10 per cent, in the third quarter.
The company also increased advertising and promotional spending by Rs 48 crore, taking it to 12.9 per cent of net sales. Sanjiv Mehta, Hindustan Unilever's managing director and chief executive officer, had said on Monday this was a healthy number. "We're agile. We reacted based on market realities and our price-value equation. The point is consumers have to remain with us," he said about pricing and advertising during the quarter.
While Hindustan Unilever did not cut prices of skin cleansing products and tea in the third quarter, analysts tracking the company said it could consider this option in the fourth quarter if competitive intensity remained high. "Hindustan Unilever had delayed price cuts in 2008, providing regional players room to grow during the last commodity downcycle," said Abneesh Roy, associate director, research, institutional equities, Edelweiss. "They don't appear keen to repeat these mistakes.
Also, Hindustan Unilever could be seeing the benign commodity costs as an opportunity to help consumers uptrade. Price cuts will not only happen in mass brands but in premium brands as well," he said.
In the December quarter, for instance, Hindustan Unilever undertook price cuts across its laundry portfolio, including brands such as Wheel at the mass end, Rin at the mid-end and Surf Excel at the premium end.
Competitors like Procter & Gamble followed suit, lowering prices of Tide and Ariel, operating at the mass and premium ends, between five and 10 per cent, industry sources said. Jyothy Labs, maker of Ujala Blue, was selective, cutting only Henko detergent prices at the premium end during the quarter.
Hindustan Unilever's products reach nearly seven million outlets in the country, according to analysts, the highest for any consumer goods company.
