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The headline may seem strange at a time when raging inflation is the topic in vogue and is giving nightmares to policymakers of all shades. First, this is not deflation in the macroeconomic sense, but simply referring to the air going out of some FMCG product prices. Recent news reports said prices of some popular soap brands are being cut by as much as 15 percent.
Second, lack of data means we don’t really know if overall FMCG sales growth is also declining. The early updates from some FMCG companies point to slower growth, especially in rural areas, but to what extent is not clear. Once all major earnings are in, we should get a better idea of the big picture here. Later NielsenIQ’s retail sales data will be an additional data point to consider.
One objective of companies in cutting soap prices could be to encourage higher consumer demand. Another could be competition, to ensure that consumers don’t shift loyalties, which a 15 percent price reduction in a competing brand can well engineer. Between the two, encouraging growth can be considered an overarching objective.
The steady and sometimes sharp increase in product prices in the past few years have broken the back of low-income consumers. Companies have passed on increases in prices—of inputs ranging from food products, chemicals, oils, crude-derivatives, packaging and freight—after they could absorb them no more. This has led to demand destruction at the lower end of the consumer pyramid by income for sure and even among middle-income consumers. Companies have spoken about how premium products have done exceedingly well, implying that the lower-priced categories have not done as well.
The external environment has brought good news for FMCG companies. Palm oil prices have fallen sharply and continue to do so. Crude oil prices have fallen below $100 a barrel and that should see their derivatives turn cheaper, too. The entire edible oil complex has seen prices decline. The government’s nudge in the case of edible oils has seen companies respond with price cuts. Even with the rupee depreciation, there is room for price cuts. But products reliant on products where prices have increased, such as wheat or dairy, price cuts are unlikely.
When prices were being hiked, companies did it gradually, but the cuts are being delivered quite swiftly. Investors may wonder if this is lack of pricing power, but when demand is not robust what choice do companies have? But they can expect to see this phenomenon across categories where input costs have declined, from detergents to shampoos—particularly the ones used by the masses. The idea of sharp cuts is to bring the fence-sitting consumer back into the fold.
Thus, while the sharp decline in prices could hit one part of the sales growth equation, an increase in volumes due to a demand revival can compensate for it. And, given that a large part of India’s consumers are from India’s urban poor and from lower income groups in rural areas, their purchases amount to a substantial number for FMCG companies.
If price cuts land but even after that demand does not revive, then companies will be staring at a bleak future. Hopefully for companies and their investors, the number-crunchers who convinced company managements to take such sharp price cuts have got their price-elasticity calculations right.
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Ravi Ananthanarayanan
Moneycontrol Pro
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