India’s central bank should have focused more on Surf Excel if it is to overcome the challenge of inflation. The price of this detergent was increased by 20% in January. While it’s hardly news when most daily-use items are getting expensive, the interesting part was the retail price before the change: for 10 times. Such small bars of detergent are targeted at consumers who are often unable to spend a penny more without cutting back on anything else. To prevent these customers from downgrading to cheaper products, Hindustan Unilever (HUL) relies on “magic price points” – such as 5 or 10-Which helps buyers to stay within a tight budget. HUL Chief Financial Officer Ritesh Tiwari recently said, “About 30% of our business comes from packs that operate at magical price points. For these packs, weight reduction is common. As a result, even Selling the same number of units leads to a drop in volume.”
This is the reason why the highest 11 per cent increase in HUL’s sales in the last quarter of 2021 was due to the increase in prices. Underlying volume grew only 2%. Rivals fared worse. According to NielsenIQ, India’s broader consumer industry saw a decline in volumes, with rural areas seeing a decline of 4.8%, while cities saw a decline of 0.8%.
As India’s largest consumer business, HUL managed to walk a link between volume and price. But then the commodity cost pressure became so intense as to perpetuate the illusion of affordability. Therefore, January’s mark up is a 10 by Surf Excel Bar 12. This dedication of a few small packs to non-magical pricing—along with the 41 mention of “inflation” on HUL’s December quarter earnings call—might have sent a warning to the Reserve Bank of India (RBI): the cost could be weighing heavily. The profitability of large firms was for them to go through the nuances of consumer psychology.
Nevertheless, to delay what seemed like an inevitable hike in interest rates even then, the RBI in February had projected inflation for 2022-23 to remain benign at 4.5%. Its first rate hike – a move of 40 basis points – came on May 4. By then the problem of inflation in India was getting deeper and worse. Last month, a 500ml sachet of Vim dishwashing liquid went over the top 1 less than the magic price point of from 100 4 more.
Pranjul Bhandari, India economist at HSBC Holdings, estimates that nearly half of the increase in input costs in the past six months has been passed on to output prices. The cost pass-through is faster in rural areas, where unregulated prices of kerosene and bulk diesel have risen faster than regulated electricity prices in cities, she says. “As electricity rates are raised over the next 12 months, the urban cost of production and living could impact growth.”
Not only electricity. Demand for services is still trying to catch up to pre-pandemic levels. As contact-based industries such as travel improve, they will pass some cost pressures of their own, mimicking consumer-goods firms. Add expensive food to this list, and it’s unclear whether April’s 7.8% inflation rate will go back to 4% – the midpoint of the central bank’s tolerance range – any time soon. This upsets the view on how high India’s interest rates need to be and how much output growth will have to be sacrificed for prices to come back within the RBI’s target range.
Reassembly and re-packaging don’t always work as envisioned. When companies reduce weight to hedge prices, they also expect consumers to return more often. This doesn’t always happen. Working out magical price points is like running a high-school experiment in ‘titration’, dripping a liquid of known properties into another unknown concentration, and stopping when it changes color. Except that unlike any substance in the laboratory, the consumer is an active participant in the experiment. In a country where the median household income for a family is less than about $2,300, which accounts for only 10-15% of total consumption, a large number of people will be “very aware of the outlay of money and the amount they use to protect themselves.” Wallet because their wallet is so small and so limited,” HUL Chairman Sanjiv Mehta said on the earnings call.
At 8.3%, inflation in the US is also very high, but unemployment is at least at 3.6% and hourly earnings are on the rise. According to the Center for Monitoring Indian Economy, in India, employment grew by about 70 lakh in April itself after a cumulative decline of one crore in the last three months. Of the 900 million eligible to work, only two-fifths are employed or looking for a job.
Perhaps India’s central bank wanted a strong labor market reform ahead of the rate hike. But at least in January—a month before the Ukraine war broke out—it should have caught worrying signs of magic prices. Now it will have to work harder to beat inflation and make up for the loss of its credibility.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.