In 2008, when commodity prices were going through the roof, Hindustan Unilever (HUL) decided it needed to up prices to protect its margins. After all, margins, more often than not in the past, had been the FMCG major’s priority. So it reduced fill levels (the net grammage of packs was reduced) and also upped prices on some products. Not surprisingly, customers stayed away.
Says Hemant Patel, who tracks the FMCG space at Enam Securities: “The price difference between some of HUL’s soaps and Godrej No. 1 had widened so much that Godrej ran away with all the volumes. Even now Godrej’s soap volumes are growing in high double digits.”
In a bid to make amends, HUL trimmed prices across categories anywhere between 8 per cent and 20 per cent. Some of it happened by default — the excise duty was brought down twice in quick succession in December 2008 and then again in February 2009. By end-January, HUL’s management was clear about its strategy: It told analysts that volumes would play a dominant role in HUL’s growth in the second half of the year.
Will they? HUL has three things going for it. For one, the economic downturn doesn’t seem to have hit the FMCG space too hard — while some amount of down-trading may be happening, it’s not significant. Two, purchasing power in rural markets is still strong. And three, commodity prices have been easing so costs will come off, cushioning any adverse impact on the margins.
However, industry watchers aren’t convinced the price cuts are enough to boost volumes dramatically because the competition, especially regional players, have been more nifty in passing on the cost benefits. They believe more cuts may be needed to lure customers. HUL’s headline numbers in the December 2008 quarter were good — the top line rose a smart 21 per cent. But almost all of that came from price increases — volumes were up a paltry 2.3 per cent. The key soaps and detergents business, which accounts for nearly 45 per cent of revenues, posted a smart 25 per cent rise in sales, but volumes fell. If HUL wants to maintain market share, which it has been losing in several categories, it may need to rethink its prices.
