From cookie king Britannia to soap titan HUL, inflation is eating profits away — so, you may have to pay even more for daily essentials
- Despite consistent sales, Britannia’s profit margin shrank significantly compared to the Q1 of last year.
- The century-old company has blamed inflation and crude oil prices for its receding profit margins in Q1 of FY2022.
- Just like its competitors, Britannia too is looking to increase its price over the next quarter.
AdvertisementInflation is biting even for some of the country’s largest companies. For instance, even though the $11.3 billion king of the cookies business, Britannia, was able to show some decent sales between April and June this year, its profit margin shrank significantly compared to the same quarter of last year.
The same has been true for other giants like Marico, which makes the edible oil brand Saffola, as well.
Varun Berry, the chief executive (CEO) of Britannia, wants to increase prices of Britannia products. The inflation rate has increased to around 6-7% compared to April-June 2021. Meanwhile, fuel prices have increased another 1-2%, which has hit the company’s supply chain.
“It’s a very high inflation number that we are currently sitting on. A situation like this, just necessitates [price increase]. Cost efficiency can never take care of this kind of inflation. Two-three percent we can usually take care of, but this necessitates price increase and that’s why we move forward with that,” Britannia’s chief executive officer Varun Berry, said in a call with analysts on August 2.
Basically, Britannia managed to offset about half the rise in input prices by cutting costs.
"While Britannia continues to gain market share, relative market share (versus Parle) has fallen in recent quarters. We believe Britannia needs to step up the pace of new launches and category forays to drive sustained acceleration in revenue momentum," said Kotak Institutional Equities in its report dated August 2.
There were two reasons why the Britannia shares rallied on Monday. The 1% drop in revenue from sales was better than the estimated contraction and that the company wants to improve margin with price revision. And, it has the might to do so.
In fact, Britannia is not the only company that has witnessed such a trend. Another FMCG brand Marico — which makes popular products Parachute oils, Set Wet, Livon and Saffola — noticed such a dip in their profit margins despite the overall increase in sales.
While India’s biggest FMCG brand Hindustan Unilever has managed to pave its way out of this circle with little to no impact, all thanks to its strategic pricing practices taken up last year. The company too has admitted that the inflation and rising input cost has been putting its business under pressure as well.
From Britannia to Hindustan Unilever, consumer product set to be more costly
Hindustan Unilever has already increased the price of some of its flagship products like Lux soap and Lifebuoy by 9% over the last one year. Lux, which used to cost ₹22 in April 2020, was priced at ₹28 in May 2021. The company had also indicated this price rise in its earning call for April-June quarter of FY2021.
“We are taking some judicious price increases in parts of our portfolio. Some of it has already landed and some of it will land in due course because the quantum of inflation is a lot. And also, we'll do it in parts of the portfolio where it makes sense,” Srinivas Phatak, former chief financial officer (CFO) of Hindustan Unilever said. He has currently taken up a global finance role at Unilever’s London head office.
Even companies like Nestle India, Colgate Palmolive, Emami, Tata Consumer Products, Wipro Consumer Care have taken up such pricing practices over the last one year to overcome the inflation troubles.
*bps stands for basis points. 100 basis points make one percent.
|April-June margin squeeze
Advertisement“As the market leaders, we are always the first to take price increases. The market leaders always have to initiate that. We are not ones who believe in price wars or taking advantage of situations like this. We believe in taking the price at the right time and that’s what’s got the entire industry to the situation, where the industry is making a lot more margin than what we have ever made in the past,” said Britannia’s CEO Berry said.
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