Biscuit To Soap Makers May Not Cut Prices Even As Palm Oil, Crude Cool

Makers of biscuits to soaps are unlikely to lower prices anytime soon even as two key commodities, palm oil and crude, cool. Instead, companies may hike prices more.

Consumer goods makers including Hindustan Unilever Ltd., Nestle India Ltd., Dabur Ltd., and Britannia Industries Ltd., have faced pressure on margins in the past several quarters as commodities soared. They raised prices and shrunk pack sizes at the risk of slowing demand. Yet, they couldn’t fully catch up.

HUL hinted at more increases in the quarters ending June and September, reiterating worries over profitability. “Inflation would likely impact the gross margin and EBITDA margins over the next two quarters. HUL intends to use price hike as the last lever,” Jefferies said in a June 19 note quoting Ritesh Tiwari, chief financial officer at the maker of Dove soaps.

Consumer goods makers aren't ready to ease prices when edible oil makers reduced them by up to 15%. That came as palm oil, used in soaps and biscuits to noodles, has dropped to $1,200 a metric tonne from the peak of $1,800-1,900. Crude and its derivatives, a key input for making detergents, have also retreated from $130 to below $104.5 a barrel.

About 15-20% of costs of packaging and light liquid paraffin, used in hair oils and cosmetics, are linked to crude.

“Deflation in crude and palm oil and their derivatives is positive, but its sustainability remains to be seen,” said Abneesh Roy, senior vice-president at wealth management and advisory firm Edelweiss Securities. “If the downtrend continues to below $100, margins of most FMCG companies, including HUL and Asian Paints, could start expanding from Q2 FY23. The second half of the fiscal could potentially see a sharp expansion as huge price hikes have already been taken.”

Pressure on margins was evident in the earnings for the three months to March. Cost of materials of HUL, India’s biggest consumer goods maker, surged 18% year-on-year to Rs 4,501 crore. Its gross margin narrowed 331 basis points, while operating margin contracted 80 basis points to 24%. Net profit margin shrunk 79 basis points to 17.13%.

And HUL isn’t alone in maintaining prices. Wipro Consumer Care and Lighting Pvt., the maker of Santoor soaps, doesn't plan to cut prices either.

"The pace of price hikes will come down but there won't be price cuts," said Anil Chugh, president, consumer care business. "We have been passing on just half the entire commodity inflation burden earlier and instead took a hit on margins and cut costs in operations."

Parle Products Pvt., too, does not see immediate cuts. “Price hikes taken so far don't factor in the inflation in inputs costs like wheat, sugar, etc. entirely,” said Mayank Shah, senior category head, Parle Products. “But there won't be further hikes if the correction in palm oil prices sustains."

Yet, bid to protect margins is coming at a cost.

The overall fast-moving consumer goods market contracted 1% between February and April, according to Kantar. That’s the period when the average price paid per kilogram of consumer goods rose 10.1% over a year earlier. The average pack size purchased shrunk 15% and the number of units purchased jumped 15%.

“Both these points indicate that as prices rose, the consumers balanced that with purchasing smaller packs,” Kantar said.

Even the ongoing first quarter of FY23 may not provide any relief as steep price increases are already tempering demand and squeezing margins.

Companies including Wipro Consumer and HUL hope for a monsoon boost as deficiency declined to 5% in the last five days. And Roy said rate hikes, liquidity dry-up, and risk-off could help aid the deflationary trend.

HUL, however, isn’t prepared to lose market share it gained at the expense of smaller peers as commodity costs rose. In FY22, HUL saw the biggest increase in more than a decade.

“Inflation has impacted smaller brands more and hence aiding market share gains. Once inflation softens, HUL intends to be proactive in its product price cut strategy, unlike staggered hikes, to ensure competitiveness,” Jefferies quoted Tiwari as saying.

“The smaller brands invariably make a comeback when inflation pressure recedes and hence,” he said. “HUL intends to show agility.”