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Price cuts lift FMCG firms out of gloom

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Price cuts lift FMCG firms out of gloom

The fast-moving consumer goods (FMCG) industry in 2004 finally managed to break free of the low-growth syndrome it had been stuck with for the past three years by going in for huge price cuts.

It all started in April when Procter & Gamble cut the price of its detergents, Tide and Ariel, by almost 50 per cent. Arch-rival Hindustan Lever responded with a similar cut in the price of its best-selling detergent, Surf Excel.

As a result, detergent volumes grew by 11 per cent this year, according to industry estimates. Last year, this Rs 5,000-crore segment of the Rs 48,000 crore FMCG industry had grown by only 5-6 per cent.

Of course, both Hindustan Lever and Procter & Gamble claim victory. “Our growth has been higher than the competition,” said a Hindustan Lever spokes- person.

Added Ashok Chhabra, executive director, Procter & Gamble India: “The aggressive pricing strategy has helped us to increase our market share to around 22 per cent from 15 per cent last year.”

The price war soon spread. Next was the turn of shampoos. Here, the lead was taken by Hindustan Lever, which dropped the prices of its brands like Clinic All Clear and Sunsilk by as much as 40 per cent.

Procter & Gamble, Dabur and others matched the price cuts. In the end, the Rs 1,200 crore shampoo market is estimated to have grown by 7 per cent this year.

While the jury is still out on who won and who lost, the price corrections have certainly helped the FMCG industry, plagued by downtrading for some years, to revive its fortunes.

"Dabur has achieved strong double-digit growth in 2004. There was a definite turnaround for the sector this year and if rural demand stays the way it is now, 2005 will witness better growth," said PD Narang, executive director, Dabur India.

A study by Assocham concludes that during the October-December 2004 quarter, the industry grew by as much as 5.1 per cent--a fast clip if you consider that the annual growth rate has not exceeded 2 per cent in the past three years.

All year-end indicators point to a sharp revival in consumer demand in categories with low penetration largely driven by companies re-working the value proposition by introducing low-priced packs.

The late revival of the monsoon and the robust performance of the urban economy helped as well. Take the example of biscuits, which turned out to be the fastest growing segment of the FMCG industry with the production of large organised players increasing by as much as 24 per cent.

According to ICRA, aggregate biscuit sales this year rose by 9 per cent and net profit for companies in the category grew by 55 per cent.

The only cloud on the horizon for the industry was the spiraling cost of key inputs like sugar, wheat, edible oil and packaging material. For several FMCG companies, input costs shot up by as much as 15 per cent.

Some companies responded by revising their prices. In the market for beverages, which grew by almost 10 per cent, there was a price correction by both Pepsi and Coke.

In August both raised prices of 200 ml bottles from Rs 5 to Rs 6, and last month the two companies also raised the prices of the 500 ml plastic bottles from Rs 15 to Rs 18.

"Pepsi experienced steady double-digit growth in 2004 as a result of strong marketing activity, backed up by aggressive pricing action, significant improvement in supply-chain logistics and extended coverage to urban and semi-urban areas. Our profitability also went up after increasing product prices in August," said a PepsiCo India spokesperson.


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