Tuesday, April 28, 2009

>FMCG Snippet (CLSA)

Price cut to help maintain volumes & prevent consumers from down trading to cheaper brands…

Margins in Soap & detergent segment to remain intact…

The Story....

The recent announcement of a price cut by FMCG giant, Hindustan Unilever Ltd. (HUVR.IN) (HLL.BO), in order to provide a boost to its volumes, was very much in line with our expectations…

“With the inflation in input costs beginning to recede and prices of key FMCG inputs, such as
palm oil, LAB and packaging material climbing down significantly in the past two months, we believe that HUL will pass on the benefits of the softening in commodity prices to consumers, which will result in a surge in the company’s volumes, going forward.”

(From First Global’s, “Hindustan Unilever Ltd. ((HUVR.IN) (HLL.BO): Passing on of benefits of softening of commodity prices to drive volumes; reiterating Moderate Outperform”, dated February 4, 2009).

Since the benefit of lower commodity prices and consequent price cut was predicted and modeled in, our estimates for HUL remain unchanged. The ongoing recession, which has already led to a reduction in discretionary spending, is now making consumers increasingly price-value conscious even in the case of their daily necessities. HUL has chosen to reduce prices in the lower and mid segment over the premium segment, as the former is comparatively more price sensitive. Moreover, the intense competition from local players in
the soap & detergent arena is keeping HUL on its toes on the price front. In several cases, HUL has opted to increase the package weight/volume, thus bringing down per gram costs, instead of directly reducing prices. It has increased the weight of its Wheel Green detergent powder packet by 50 gm, while the weight of its 115 gm Lifebuoy toilet soap has been increased to 120 gm, resulting in a benefit of 8.3%% and 4.2% for consumers respectively. HUL’s bold move appears to have kicked off a price war, with P&G also taking a price cut of 19.35%, to Rs.50, on its 750 gm pack of Tide detergent. We believe that the price cut will help HUL maintain its volumes, which had declined sharply in Q4 FY09, and also prevent consumers from down-trading to cheaper brands, though the company’s margins in the Soap & detergent segment will not get affected materially.

Cutting prices to lure consumers…
At the beginning of Q1 FY10, which is the peak period for soap & detergent sales, HUL has raised the weight of its Stock Keeping Units (SKUs) instead of changing the price point, as raising prices again after cutting prices could negatively impact sales. Also, companies like to stick to ‘round-number’ pricing like Rs.10/-, Rs.25/- etc. Hence, HUL has increased the weight of Wheel Green detergent powder by 50 gm, but has kept its prices unchanged, while the weight of Lifebuoy toilet soap has been increased from 115 gm to 120 gm without changing its existing price of Rs.15 per piece. Thus, HUL has passed on a relief of 8.3% and 4% on Wheel and Lifebuoy respectively to consumers. The strategy behind the price cut is to enable the company ride out the recession and at least maintain its volumes by retaining
consumers through attractive prices.

To see full report: FMCG SNIPPET