Price Hikes Temper Volumes, Erode Margins Of Consumer Firms In Q1

The first quarter of FY23 may fail to bring any respite for fast-moving consumer goods makers who are struggling to maintain profitability. Steep price increases are already tempering demand and squeezing margins.

India’s largest consumer goods maker Hindustan Unilever Ltd., Dabur Ltd., Nestle India Ltd., Britannia Industries Ltd., and ITC Ltd., among others, have that price hikes would persist to offset unprecedented raw material inflation, crimping household budgets.

Consumers are already for lesser quantities and small packs of groceries to soaps, hoping for prices to cool down. That comes as multiple rounds on hikes to offset input inflation have turned everything from staples to soaps costlier in the past year.

According to the FMCG companies, first-quarter growth will primarily be price-driven with steady volumes expected to return in the second half of the fiscal. Margins, too, are projected to remain under pressure, the companies indicated in their presentations after the fourth quarter results.

Hindustan Unilever has been forced to opt for grammage reduction in 30% of its portfolio, which consists of packs that operate at “magic price points” of Re 1, Rs 5 or Rs 10, Sanjiv Mehta, chairman and managing director, HUL, told analysts in a recent post-earnings call. “As a result, even the same number of units sold leads to a volume decline.”

While commodity prices are expected to taper off as the geopolitical crisis settles down, “it’s very difficult to put our finger on when this will happen,” Mehta said. The owner of Surf Excel brand expects a “decline” in margins in the short-term as price versus cost gap increases.

Biscuit maker Britannia also relies on Rs 5 and Rs 10 packs that help buyers stay within tight budgets and prevent downtrading to cheaper products.

“Consumers sometimes just have Rs 5 to spend, and if we do not provide them that then they will move to some other products,” Varun Berry, managing director at Britannia, said in a post-earnings call. “However, there is no way that any other activity can fulfill the pain that inflation is going to give us. It will have to be a price correction.”

According to him, about 65% of the price hikes had come through weight cutting in fourth quarter ended March. In the ongoing first quarter of FY23 ending June, it might end up being higher than that.

A further decline in volume or the number of packs sold comes on the back of a 4% drop for the fast-moving consumer goods sector in the three months through March, and 2.6% contraction in the December quarter, with rural areas slowing down more than urban ones, according to Nielsen data.

Marico’s Managing Director Saugata Gupta said that while the near-term demand outlook is uncertain, the second half of this year should look better.

Factors such as a good monsoon and rabi harvest, higher agri commodity prices boosting farmers’ income, and if the government spending of Rs 7.5 lakh crore on capital expenditure is front-ended, could contribute to rural recovery, Gupta said during an earnings call.

He expects margins to remain subdued in the near term, although there is a degree of comfort for Marico given that copra prices should remain benign throughout the year as it constitutes half of its raw material basket, he said.

“Overall, we are hopeful of coping with all the stress factors in Q1 and get into a rhythm, when things start easing out from August-September because of base correction as well as relative demand and input cost stability.”

Suresh Narayanan, chairman and managing director, Nestle India Ltd., also hinted that the pressure on margins is yet to bottom out. “Continued inflation is likely to be a key factor in the short to medium term.”

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