Dec 15, 2008

Business - India;FMCG prices set to decline

Namrata Singh

MUMBAI: With inflation finally cooling off and input costs touching a new low, indications are that prices of fast-moving consumer goods (FMCG),
especially that of soaps and detergents, may come down.

However, since most companies are said to be holding on to old stocks of raw material, based on forward contracts that were booked in a rising crude market, they are said to be waiting for their stocks to be replenished. "The question is, who will blink first,'' said an FMCG company official, when queried about a possible price drop.

There is a buzz that market leader Hindustan Unilever Ltd (HUL), with its prudent cost management strategies, might take the lead and drop prices. This is likely to take place in the next couple of weeks, or even in first few weeks of the new calendar year.

It is learnt that HUL's move may even trigger a price war, especially in laundry. When contacted, an HUL spokesperson said: "As a policy, we do not comment on market speculation or on forward looking questions. We, therefore, have no specific comments to share on this.''

It has been six months since crude oil began its journey southwards, after touching a peak of $147 per barrel on July 11, this year. It is currently trading at around $45.

FMCG companies usually book forward contracts for three months, but since the crude was heating up at a breakneck pace, and with global banks putting out reports that crude prices could even touch $200, some companies even went ahead and booked in haste for six months between May-July.

"It is highly unpredictable. Even now, when we are booking in a falling crude market, we are unsure whether we are buying it cheap or expensive. We do not know where the bottom lies. Our product stocks made from inputs in a rising crude market would get replenished only by February-March next year,'' said an official from a homegrown FMCG company.

Another industry official argued that since companies did not always take prices up in tandem with rising input costs, they are unlikely to immediately reduce prices to the extent of the decline in raw material costs. On an average, major players in the FMCG sector such as, HUL and Godrej Consumer Products had taken prices up by about 10%-15% during the year.

The last price increase was taken by HUL in the September quarter of the current year, on select products across categories.

If input costs continue to fall, and inflation stays put at a single-digit level, industry analysts do not rule out an industry-wide price correction, triggered by a competitive overture by a leading player.

However, it is unclear as to whether companies would pass on the benefit of cost reductions to dealers (in the form of their margins being raised) or consumers (with maximum retail prices dropping), or both in equal measure.

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