Financial Daily from THE HINDU group of publications
Monday, Mar 15, 2004

News
Features
Stocks
Cross Currency
Shipping
Archives
Google

Group Sites

Home Page - Soaps & Detergents
Marketing - Insight
Corporate - Outlook


Surf war may be a pinprick, but ripple effect may hurt HLL

Aarati Krishnan

THE recent price cut of about 20-25 per cent on its premium detergent brand - Surf Excel - will cause barely a ripple in Hindustan Lever's bottomline. But there will be a bigger impact on HLL, if the price war is followed by a loss of market share in the detergents business. Or worse, if the war spreads to other FMCG categories.

Surf has an 8 per cent value share in the detergents market. Before the price cuts, Surf contributed about Rs 400 crore to HLL's annual sales of Rs 9,919 crore. Industry sources place the gross margins for premium detergents at about 40-45 per cent, and for mid-priced powders at about 30 per cent. The price cuts will narrow this gap.

A rough computation (see Table) suggests that the impact of the price cut on HLL's sales and profits, could range from about Rs 30 crore to Rs 85 crore, depending on the sales mix between sachets and large packs in Surf Excel and the volume growth, if any, driven by the price cuts. This could translate into an impact of between 0.5 to 1 per cent on HLL's total sales and between 1 to 3.5 per cent on its operating profits.

HLL says it is difficult to put a number to the likely impact of the price cuts. "It is not appropriate to make any estimates without factoring in the opportunity for increased consumption and upgradation through this move," says HLL. It also asserts that no further price adjustments are on the cards, either for Surf or Rin, its mid-priced detergent.

On its part, HLL is also likely to do its bit to ensure that the price cuts do not hurt its profit margins. There is a possibility of further cost-cutting and savings in adspend. In the near term, the softening prices of detergent inputs will also provide a cushion.

The price cuts are also expected to pep up volume growth in the premium segment. Users of low priced powders such as Wheel, Nirma or even Rin, who now make up 81 per cent of the market, could be tempted to upgrade to Surf Excel Blue, that is now priced just a tad higher than the mid-priced brands. If experience is a guide, this is likely. A price cut of 12 per cent on Surf Excel in January 2003 led to volume growth of 15 per cent. This would suggest that the 20-25 per cent price cut taken now, should expand volumes by much more.

But it is not clear if HLL will corner the lion's share of the volume expansion, as its price cuts have not been as aggressive as arch-rival P&G's. Even after the recent price cuts, Surf Excel Blue is priced at a significant premium to P&G's Tide. Weighed against this, is the fact that Surf reaches many more households than does Tide. While HLL's detergent sales were at about Rs 1,800 crore in 2003, P&G's were at Rs 200 crore - Rs 300 crore. HLL's retail reach of about a million outlets also dwarfs P&G's, as of now.

With its limited basket of products and the aggressive 26-50 per cent price cuts it has taken, P&G is likely to take a much bigger battering on its finances from the detergent wars than HLL, in the near term. But as P&G's detergents business in India is with the unlisted company, there will be fewer questions asked about its finances, even if its strategy backfires or takes a long time to pay off. As a listed company, and a widely-tracked one at that, HLL is under greater pressure to deliver short-term performance.

More Stories on : Soaps & Detergents | Insight | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page



Stories in this Section
Surf war may be a pinprick, but ripple effect may hurt HLL


Drug access vs MNCs: New theory aims to resolve debate
Steel industry says price hike forced by rising input costs
PF arrears soar to Rs 1,377 cr — PSUs are drag on recovery
Pvt banks in a scramble to manage wealth



The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line