India’s largest fast-moving consumer goods player Hindustan Unilever (HUL) has said its consumers will see prices of soaps, detergents, and shampoos coming down over the next few weeks. Here are edited excerpts from HUL Chief Financial Officer Ritesh Tiwari's exclusive interview with CNBC-TV18.

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Q: With inflation cooling off, we have seen some grammage increases in price cuts that have been taken. Is it safe to say that price increases are behind us? And will we see more benefits of inflation and the commodity prices cooling off being passed on to consumers?

A: At an aggregate level, the answer is an absolute yes.

Q: So largely skin cleansing categories saw price cuts and grammage being increased. Will other categories follow soon?

A: Let me give some examples. We saw the highest amount of inflation impact in the skin cleansing, soap business, laundry business and hair care. Now there's a meaningful correction which has happened, so we have taken price cuts. In many places, we have done volume increase by either giving a soap free with a bundle of soap or adding more grammage to an existing soap or for that matter adding more powder to a pouch of laundry. In terms of hair, we have decreased the net price a consumer pays for buying a shampoo bottle.

There are very few elements of the portfolio where we have done price increases. That is limited I would say to a portfolio called HFD or health food drinks where milk prices, cereal barley those materials, soft commodities, as they call them, agri materials, we have seen prices of those commodities going up and, hence, we have taken price increases. But at an aggregate level, overall, we do see the price growth impact is coming off.

Q: How are the trends for pack sizes?

A: In the entire period of high inflation, we did not see downgrading, apart from tea. Typically, consumers continued to buy the brands that they love to consume. But they either traded up or traded down for value. When it came to price point packs, consumers traded down to smaller pack sizes to combat the impact of inflation. But when they saw good value in larger pack sizes, for example, laundry, they bought bigger pack sizes. As we are seeing inflation coming off, I do expect a correction to happen of going back to their comfortable pack sizes.

Q: Do you think that urban will continue to do better than rural and drive growth?

A: I believe that urban will have a higher contribution to overall FMCG growth. Two-thirds of the Indian population lives in rural areas, and one-third lives in urban areas but the consumption of FMCG is the other way around -- two-thirds of the consumption is from urban areas and one-third from rural areas. Within Hindustan Unilever as well, our premium portfolio sold well ahead of the rest of the portfolio. Hence, I do believe that next few quarters going ahead, urban will continue to be driving the overall FMCG growth.

Q: What is the margin expansion outlook also looking like?

A: There are different kinds of margins which are relevant to focus on depending upon the economic cycle and commodity cycle that we are in. At this point in time, the most important element is gross margin, which is sales minus the cost of making materials and products. In the last two-three years, we have dropped 600 basis points (bps) of our gross margin. This was because cumulatively over the last two years, there was 30 percent inflation in commodity cost and against that we took an 18 percent price rise. So, the 12 percent price versus cost gap had a tell on our gross margin.

The good news is with a good job done continuously in the business on savings, driving savings across all the lines of the P&L and commodities coming off in the last quarter that we declared results, our gross margin, which had taken us 600 bps hurt, has improved in last two quarters by 300 bps. So almost half of the total margin decline has come back. Further job, of course, needs to be done. If I look at the last few quarters more than 23 percentage, we do believe it's a very healthy margin. And at this point in time, the focus will be volume growth, gross margin, maintaining a competitive price value equation, and investing in advertising sales promotion.

Q: Do you think that the ice cream sales will be impacted this summer season?

A: We are still in the middle of the summer. In any which case, the per capita consumption of ice cream is very low. So, there is headroom for us to grow. More importantly, we are working on ice cream to see how can we de-seasonalise this category. Given the temperature variation in the bulk of the country, there is no reason why ice cream should only be consumed during the summer period. Will it (consumption pattern) change overnight? The answer is no. But we want to build an innovation cycle for the ice cream business, which lasts far beyond the seasonal impact only. We have seen good success and you saw our quarterly results last year, not only in season, we had good growth, but also outside the peak ice cream season in the June quarter that we ended up seeing because of summer, we also had fabulous growth outside that season as well and that effort will continue. So, ice cream, going forward, will not be only a seasonal June quarter story.

Q: Personal care is one category that, on an industry level, has been a laggard the entire year. But that's not been the case for HUL. Has the premium portfolio within personal care been driving growth? How have you outpaced the overall market trend for personal care?

A: This market will start fragmenting which is why what we have done is segmented our own skincare portfolio into different demand spaces - skin lighting, number one; number two is glow, number three, the entire space of moisturizers. So, we have ensured that our portfolio is segmented into many more different demand spaces. And in each of the demand spaces today, we are market leaders.

We did see an impact overall for the industry during the pandemic and during the high inflation period. When the discretionary category saw an impact mass skincare saw a higher impact compared to premium skincare. Now the good news is that as we are seeing inflation coming off overall, it should start helping the recovery of discretionary categories like skincare. But our story has been a story of growing formats, a story of growing more brand presence. We launched five brands in the last year and a half in that space. Some of them are DTC brands, some brands have also gone offline.

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Q: The homecare category has been performing well, what have been the drivers behind that growth?

A: As I mentioned earlier, during the period of high inflation, we have seen that the premium portfolio has been more resilient. And we have that tailwind in our home care portfolio, which has a higher contribution from premiums. And the tailwind helped us to outpace the market significantly last year.

Q: And now do you see the mass part also growing because you spoke about passing on the benefits of the lower commodity prices...

A: There are 2-3 dimensions out here. The headline growth that we had for home care was driven by price. The price growth component for homecare will keep reducing, and total growth will be lower compared to what we had last year. Will we keep growing, but the scale of outpace will be different compared to what we had last year. This was also the period when trusted brands got a larger share of the business. As commodities overall have started to come off, we will see more players coming into the market.

Now in terms of pricing actions, you do pricing actions across the portfolio, when commodities come off, you take the price off of the premium portfolio, you take the price off of a popular portfolio, and you also take the price off of the mass portfolio and the reason you do that because the overall price gap and the price difference between different brands and different price points that should not become larger. So, hence pricing actions happen across every part of the portfolio.

Q: Can we expect more price cuts going forward?

A: Large categories like laundry, and skin cleansing; commodities have, in the last couple of quarters significantly come off and we have started passing the benefit meaningfully to consumers. Of course, at any point in time, the key element for us is maintaining a competitive price value equation. There is always a little further job to be done but also depends upon how commodities will further incrementally play off in the next few quarters. But whatever price cuts we have done, there is always a trade pipeline, and for that matter consumer pantry pipeline. And by the time consumers start experiencing the lower price of products, it takes a few months.

Q: Going forward are you looking at more M&As?

A: One must be very mindful that you only acquire when you can create more value compared to what owners have been doing. And we have been very mindful of our own potential to create value before deciding to acquire or buy something. So, in that way, we have a very measured approach in that space. So, I would say the approach is always to look at the demand space and then see what portfolio we can use and play with to ensure we create a fabulous business in that demand space.

Q: So, the demand space that you are looking at right now, is the health and wellbeing and the other one is the masstige category of the beauty.

A: That is right.

Q: Not only DTC brands, but larger companies like Reliance have entered the FMCG. Do you think this has or will trigger a price war?

A: There is enough room for multiple players to coexist and create value – that is one reality of the FMCG market, which is why in India FMCG is not a zero-sum game. If you look at India, almost every global multinational is in the country, there are fabulously large Indian businesses that operate in FMCG extremely successfully, there are a great number of local and regional brands that have fabulous products, and there are equally new-age DTC brands. If I look at price points, almost every brand, and every category has different price points.

From here onwards, the way I see the intensity will continue but there is huge value to be created. Now, one of the points I keep talking about is that, yes, we do focus on competition, but our obsession is with consumers. What can we do with our consumers to ensure that we bring best-in-class products. Coming to Reliance, we have a fabulous relationship with Reliance. They are our suppliers of key ingredients, and they are also our customers, we have a fabulous relationship with them. Competition has always got the best out of Hindustan Unilever.

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First Published:Jun 5, 2023 5:03 PM IST