Edible oil, tea, coffee, soap to see higher prices this quarter

Top fast-moving consumer goods (FMCG) companies such as Hindustan Unilever Limited (HUL), Adani Wilmar and Tata Consumer Products Ltd (TCPL) are either planning to hike prices of their products in the December quarter or have already brought in some increases in the quarter gone by.

This comes at a time when urban demand for FMCG products has dampened, and rural is just about shaking off its stupor, forcing companies to do a tough balancing act to ensure price rises don’t lead to unhappy customers, and yet not impact volumes and margins.

Meanwhile, even as crude oil prices fell 10% in the quarter, edible oil prices rose following the government’s decision on 14 September to raise the basic custom duty on refined palm oil, refined sunflower oil, and refined soybean oil to 32.5% from 12.5%, with an effective duty rate of 35.75% on refined oils.

Prompted by this move, edible oil and flour maker Adani Wilmar said on Thursday that it is set to raise prices of cooking oil by at least 20% in the current (December) quarter.

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This is likely to impact its December quarter volumes, Angshu Mallick, the company’s managing director and CEO told Mint in an interview. In the September quarter, the company’s edible oil segment revenue grew by 21% y-o-y with an underlying volume growth of 17% y-o-y. The company sells edible oil under the Fortune brand.

Some other FMCG companies may opt for smaller, more frequent price adjustments instead of large, one-time price hikes, as they try to maintain volume growth while ensuring that higher prices don’t scare consumers.

Adani Wilmar said on Thursday that it is set to raise prices of cooking oil by at least 20% in the current (December) quarter.

For instance, TCPL said it has increased packaged tea prices by 3%. “While tea costs have gone up by 30%, we only translated maybe 3% or 4% into consumer price, so there’s a long runway for us to take pricing,” the company’s managing director and CEO Sunil A. D’Souza said in an interview with Mint earlier this week.

D’Souza added that the company doesn’t want to increase prices too much to ensure consumers and demand are not badly hit. “At the same time, we’ve also got to be competitive, making sure that we’re not out of whack with the rest of the category,” he said.

TCPL sells coffee, ready-to-drink beverages, and pulses, among other food products. To be sure, the company has lowered prices on ready-to-drink beverages in response to heightened competition in the market.

Meanwhile, consumer goods major Hindustan Unilever Ltd, which reported a 3% jump in September quarter volumes, may take “calibrated” price increases in its skin cleansing and tea portfolio in the December quarter. Extent of the increase will depend on competitive actions, the company’s management said Wednesday in a post-earnings call.

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HUL sells brands such as Lux, Dove, Pears in skin cleansing; and Brooke Bond and Taj in teas. Growth in the December quarter will be driven more by price increases than by volumes, said the management.

Ritesh Tiwari, CFO of HUL, said price rises in crude palm oil (10% y-o-y) and tea (25%) will result in calibrated price increases in skin cleansing and tea in the December quarter.

“To mitigate these commodity impacts, we do not always pass on the entire cost increase to consumers. Instead, we drive savings programs across all lines of the P&L and only pass on the price increase in a calibrated manner,” he said, adding that the coming increases will be phased over the December quarter.

“We take into account how our competitors react before making the final decisions on pricing adjustments,” said Tiwari.

The demand situation

Companies reported weaker-than-expected sales in urban areas during this quarter, citing increased food inflation and tough comparisons to the previous year’s strong performance.

To be sure, companies have been dealing with patchy demand for over two years now, coupled with rising commodity inflation and increased local competition. The top companies have had to work extra hard to protect market share while also ensuring margins.

Volume growth trends from earlier this year are hardly encouraging. FMCG volumes grew 3.8% y-o-y in the June quarter, slowing down sharply both sequentially and from a year earlier, according to data from market researcher NIQ.

Volumes had increased 7.5% in the June quarter last year. In the March quarter this year, volumes grew 6.5% with rural areas surpassing urban growth for the first time in five quarters. NIQ is yet to release September quarter numbers.

At the same time, companies said that urban volumes dropped in the September quarter.

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This trend could be exacerbated in the near term by the additional burden of price hikes, while also impacting margins. Analysts said FMCG margins would remain subdued in the short-term due to palm oil cost inflation and growth focus.

FMCG volumes grew 3.8% y-o-y in the June quarter, slowing down sharply both sequentially and from a year earlier.

Analysts reckon companies such as Nestle, Tata Consumer Products, and Godrej Consumer Products, among others, will see “slight” pressure on margins in the December quarter.

“With price hikes in the pipeline, companies will benefit via market share gains. However, if any grammage cut happens, then it will have an adverse impact on demand in the near term. During periods of high inflation local players move out as they can’t manage the working capital and don’t have pricing power; this benefits larger players vis-vis market shares,” said Abneesh Roy, executive director at Nuvama Institutional Equities.

The outlier

Some companies are sitting on the fence about raising prices despite zooming commodity costs, lest it impact volumes for the December quarter. Noodle maker Nestlé India, for instance, is dealing with skyrocketing prices of coffee and cocoa prices.

The company is not looking at sharp price increases, chairman and managing director Suresh Narayanan said, addressing the media earlier this week.

“Barring coffee and cocoa, prices of milk and packaging material are stable,” he said. “We will look at very calibrated pricing; if the increase in commodities can be covered by efficiencies; we’d rather not take up the prices.”

The company will focus on prioritizing volume growth. Nestlé reported flat gross margins in the September quarter after expanding in the past four quarters; domestic volumes dropped 1% in the same period on account of slow demand in large cities.