FMCG makers try to rein in costs, offer value packs
[2008-5-20]
Chennai, May 18 If it makes you feel any better, you could have been paying far more for your soaps and detergents and other items of daily consumption if consumer goods manufacturers passed on the hikes in inputs costs for them in entirety. But, as they say in unison, by squeezing their supply chain and absorbing some of the cost increases themselves, manufacturers have tried to keep maximum retail prices of goods under check or what they say are reasonable hikes.
Input prices
As Mr Anil Chugh, Senior Vice-President, Wipro Consumer Care, which makes the Santoor brand of toilet soap, points out, crude palm oil prices have increased by 70 per cent in real terms in the international market. “The net impact of this is an approximately 40 per cent increase in raw material prices for soap if you adjust this increase for dollar depreciation during this period. The last ten days have seen rupee depreciation and the international petroleum market has flared up and this will again impact input prices.”
Mr Chugh points out that the increase in the MRP in soap is only 14 per cent (Rs 2 on Rs 14, in the case of Santoor). “While the cost increase is far higher, we have no choice but to relook at all cost buckets and control them so that we can give the best value to the consumer. We’ve done process reengineering and relooked at our supply chain to take out some costs and pass on such savings to customers.” Efforts such as these, he says, haveenabled Wipro to pass on only partial input cost increases to customers.
An approach also followed by the country’s largest consumer goods maker, Hindustan Unilever. As Mr D. Sundaram, Vice-Chairman and CFO, HUL, points out, cost is an important factor though not the only factor in the company’s pricing approach. As he says, “Our pricing principle is based on the value proposition to the consumer in terms of accessibility, affordability, and quality. We look at cost inflation in net terms, i.e., after considering our cost-effectiveness programme. Driving efficiencies across our organisation is key on our agenda. Hence, consumer prices of our products do not necessarily equal the underlying inflation in the relevant commodities.”
Cost reduction
A spokesperson for Britannia Industries says that the company has been taking aggressive and intensive efforts to control costs to minimise consumer impact while providing quality products. Cost reduction initiatives included packaging optimisation, logistics savings, energy conservation and material usage efficiency.
“The prices of key agri-commodities have continuously risen for the past two years. This has impacted the industry due to an immoderate and concurrent increase of approximately 20-25 per cent in the market prices of all key commodities such asflour, refined palm oil and skimmed milk powder.
Britannia is constantly reviewing the cost and impact on the business while continuing to provide quality products to the consumer. Pricing is a dynamic variable and we review our mix, including pricing on an ongoing basis,” said the spokesperson.
FMCG companies
FMCG companies have also found other ways to reduce costs — shift the manufacturing base to tax-free locations such as Baddi in Himachal and Jammu for tax and excise duty savings. The last two Budgets have also been kind to FMCG companies with a reduction in peak import duty from 20 to 10 per cent.
Manufacturers also point out that at the volume or mass market end of consumer goods purchase, value packs are seen increasing in all product categories. Wipro’s Mr Chugh says that in soaps, the single soap sale is on the decline and offers such as a three plus one free or consumer offer packs with a gift are on the rise. “In some markets such as Punjab and Gujarat, the contribution of single packs has come down to as low as 30 per cent in total soap sales,” he says.
Rural markets
In rural markets too, the trend of low price point packs are picking up. They are perceived as offering better value. For example, a 45 gm soap at Rs 6 is equal to Rs 13 for a 100 gm soap. “However, 100 gm soaps are now pegged at an MRP of Rs 16, clearly 23 per cent higher. You can see a similar pricing in shampoo sachets or toothpastes. We clearly see Rs 5 to Rs 6 price point packs picking up in all categories be it in soaps, talcum powder, creams or toothpaste,” elaborates Mr Chugh.
In soaps, for instance, this pack size was contributing approximately 10 per cent to total category sales in January of 2006 but has gone up to 18 per cent in February ’08, just in two years time.
At the other end of the spectrum are brands such as Dabur which aver that its products will be more expensive but they will offer value. As Mr V.S. Sitaram, Executive Director, Consumer Care, Dabur India, says, the company is not targeting the bottom of the pyramid. “Demand for our brands is more price-inelastic. They offer value at that price point and there is an inherent stickiness to the category. People can choose from among a range of brands but are willing to pay a premium.” Other companies such as HUL and Nestle too are using this strategy — holding price lines for mass market categories and brands while launching more high-end products, thus keeping their margins steady.
Input prices
As Mr Anil Chugh, Senior Vice-President, Wipro Consumer Care, which makes the Santoor brand of toilet soap, points out, crude palm oil prices have increased by 70 per cent in real terms in the international market. “The net impact of this is an approximately 40 per cent increase in raw material prices for soap if you adjust this increase for dollar depreciation during this period. The last ten days have seen rupee depreciation and the international petroleum market has flared up and this will again impact input prices.”
Mr Chugh points out that the increase in the MRP in soap is only 14 per cent (Rs 2 on Rs 14, in the case of Santoor). “While the cost increase is far higher, we have no choice but to relook at all cost buckets and control them so that we can give the best value to the consumer. We’ve done process reengineering and relooked at our supply chain to take out some costs and pass on such savings to customers.” Efforts such as these, he says, haveenabled Wipro to pass on only partial input cost increases to customers.
An approach also followed by the country’s largest consumer goods maker, Hindustan Unilever. As Mr D. Sundaram, Vice-Chairman and CFO, HUL, points out, cost is an important factor though not the only factor in the company’s pricing approach. As he says, “Our pricing principle is based on the value proposition to the consumer in terms of accessibility, affordability, and quality. We look at cost inflation in net terms, i.e., after considering our cost-effectiveness programme. Driving efficiencies across our organisation is key on our agenda. Hence, consumer prices of our products do not necessarily equal the underlying inflation in the relevant commodities.”
Cost reduction
A spokesperson for Britannia Industries says that the company has been taking aggressive and intensive efforts to control costs to minimise consumer impact while providing quality products. Cost reduction initiatives included packaging optimisation, logistics savings, energy conservation and material usage efficiency.
“The prices of key agri-commodities have continuously risen for the past two years. This has impacted the industry due to an immoderate and concurrent increase of approximately 20-25 per cent in the market prices of all key commodities such asflour, refined palm oil and skimmed milk powder.
Britannia is constantly reviewing the cost and impact on the business while continuing to provide quality products to the consumer. Pricing is a dynamic variable and we review our mix, including pricing on an ongoing basis,” said the spokesperson.
FMCG companies
FMCG companies have also found other ways to reduce costs — shift the manufacturing base to tax-free locations such as Baddi in Himachal and Jammu for tax and excise duty savings. The last two Budgets have also been kind to FMCG companies with a reduction in peak import duty from 20 to 10 per cent.
Manufacturers also point out that at the volume or mass market end of consumer goods purchase, value packs are seen increasing in all product categories. Wipro’s Mr Chugh says that in soaps, the single soap sale is on the decline and offers such as a three plus one free or consumer offer packs with a gift are on the rise. “In some markets such as Punjab and Gujarat, the contribution of single packs has come down to as low as 30 per cent in total soap sales,” he says.
Rural markets
In rural markets too, the trend of low price point packs are picking up. They are perceived as offering better value. For example, a 45 gm soap at Rs 6 is equal to Rs 13 for a 100 gm soap. “However, 100 gm soaps are now pegged at an MRP of Rs 16, clearly 23 per cent higher. You can see a similar pricing in shampoo sachets or toothpastes. We clearly see Rs 5 to Rs 6 price point packs picking up in all categories be it in soaps, talcum powder, creams or toothpaste,” elaborates Mr Chugh.
In soaps, for instance, this pack size was contributing approximately 10 per cent to total category sales in January of 2006 but has gone up to 18 per cent in February ’08, just in two years time.
At the other end of the spectrum are brands such as Dabur which aver that its products will be more expensive but they will offer value. As Mr V.S. Sitaram, Executive Director, Consumer Care, Dabur India, says, the company is not targeting the bottom of the pyramid. “Demand for our brands is more price-inelastic. They offer value at that price point and there is an inherent stickiness to the category. People can choose from among a range of brands but are willing to pay a premium.” Other companies such as HUL and Nestle too are using this strategy — holding price lines for mass market categories and brands while launching more high-end products, thus keeping their margins steady.
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