Cos Bet Demand Hit Post Note Ban was Transient, Raised Prices of Products
of some products in the OctoberDecember period, mostly to protect margins as input costs rose. In the last week of December, ITC increased prices of two of its best-selling mid-market cigarette brands by nearly 15%. United Spirits increased prices in Karnataka, Maharashtra and West Bengal, which together account for more than 40% of total sales volume. This helped moderate the adverse impact of demonetisation on its December quarter performance.
Dealers said lubricant makers Castrol and Gulf Oil both raised prices while Amul and Danone did so for some dairy products. Amul raised prices of milk variants by 3% while Danone raised them by 7%, according to a Kotak Institutional Equities report. Amul butter became 5% costlier.
The currency swap didn’t stop Maruti Suzuki, Tata Motors and Ashok Leyland from making their customary annual price increases this month across models, having doled out significantly higher-than-usual discounts in December. Maruti Suzuki’s price hikes ranged from Rs 1,500 to Rs 8,000 in Delhi.
Rising input costs have been a threat to the margins of FMCG companies. For the past two quarters, growth in HUL’s raw material costs have outstripped that of revenue. Some of GCPL’s soaps became costlier and the company is also cutting consumer and trade offers.
Soap brands like Lifebuoy Total, Vivel and Cinthol became costlier by 3-4%. Detergents also witnessed some upward movement, with Rin Advance detergent bar going up 6% and Surf Excel Quickwash detergent powder rising 4%. After more than a year of price cuts in shampoos, some brands rose, led by market leader HUL—it lifted Clinic Plus, Dove and Sunsilk prices 2-15%, a Kotak Institutional Equities report said. According to HUL, price in- creases hit sales in the personal wash segment. But this prospect didn’t deter companies from raising prices, indicating the confidence they have about the impact of demonetisation being transient in nature and of regaining consumer demand lost due to the cash crunch, experts said. It also reinforced the argument that during tough times, companies seek to protect the bottom line.
Since demonetisation was going to take a toll in any case, companies used the opportunity to judiciously raise prices to beef up realisations and profitability, analysts said. Besides, increasing realisations ahead of the implementation of the goods and services tax (GST) later this year also provided some cushion for any negative impact. In the process, the market seems to have lost some of its competitive spirit, seemingly putting the consumer at a disadvantage.
“There is a lot of rationality in competition now,” said an analyst with a foreign brokerage. “If one company, say the market leader, increases prices, other companies follow suit rather than taking the opportunity to keep their prices lower and grab market share.”
In some segments, especially in consumer staples, promotions or discounts were discontinued so there wasn’t necessarily an increase in the maximum retail price (MRP).
HUL also raised prices of select variants of Taj Mahal and Red Label tea by 2% and Nestle’s Nescafe 50 gm pouch was up 4%.
To be sure, not all consumer goods companies have raised prices. Asian Paints and Jyothy Laboratories were among those that didn’t increase prices in the last quarter. Both reported 3% volume growth each.
However, the trend of rising prices is likely to persist.
“We will see price-led growth on top of the gradually recovering volume growth recovery,” said themanagementof GCPLduring an earnings call. HUL’s management said on its earnings call that input cost inflation is expected to continue and the company will keep raising prices to mitigate the impact. It has maintained its pledge toward structural improvement in margins.
“Another 5% price increase is required to completely get back on track of modest margin expansion given that volume growth will take some time to come back to over 5% levels,” Elara Capital said in a note on HUL.