Hindustan Unilever Ltd. has warned of inflationary pressures as raw material and supply-chain costs are likely to impact its margin in the near to medium term. Yet, India's largest consumer goods maker has been able to increase prices to protect its profitability.
"Our focused actions on net revenue management and savings have enabled us to manage inflationary pressures and deliver a healthy bottom-line performance," the company said in its second-quarter commentary after its volume growth eased over a year earlier.
"When the environment is normal, you focus on volume growth to ensure that your consumers don't leave. When that environment becomes extraordinary, you don't focus on volume growth as much as you look at the share that you don't want to lose [in] the consumer franchise," said Sanjiv Mehta, chairman and managing director at HUL. "You look at the consumer franchise, you look at the penetration of your products in the household and you look to protect the business model. That's what we do."
Or simply put, chase growth when everything is normal but protect profit during a tough phase.
In the last five quarters, price increases have outpaced volume growth for HUL, driving net sales of the company. And the pandemic aided that.
Consolidation by formal players in the absence of significant competition from the informal market amid Covid-19 restrictions allowed the company to increase prices and also gain market share at the same time.
Usually, market share gains comes at the expense of profit as companies offer competitive prices to win new consumers.
"Our business fundamentals remain strong and we continue to gain market share and penetration in more than 75% of our business," said Mehta during the post-earnings call with analysts. "The strength of our brands, our execution progress has enabled us to take price increase in a calibrated manner, leading to a sequential step up in consumer pricing. We have been able to provide the right price value equation to the consumers."
Prices of HUL's main raw material, palm oil, rose further in the second quarter to record levels, the company said.
The company, however, also focused on cutting costs to protect its margin. The strength of its brands allowed HUL to undertake savings by taking out cost that do not add value to its customers, it said.
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