Slow dance of Price Signaling between CPG giants in India

Unilever has been in India for a long time and yet despite a high market share is facing profit erosion. Price cuts to thwart local competition and heavy advertising ( Indian TV channels are flooded with Unilever Ads) are the primary reasons for the Unilever’s low profit. But the size of the 1 billion customers is and the potential are hard to ignore. When one giant wages price war, others are forced to follow in a market where consumers decide primarily on price. Chief among them is P&G that is looking for sales growth in India China. The price cuts are not something P&G, a company that takes pride in selling premium brands at premium prices, is used to. A while back NYTimes wrote:

“It will be a knife fight, it will be brutal,” said William Schmitz, an industry analyst with Deutsche Bank North America. “It will be fought in shampoo, detergent, deodorant, and Unilever and Colgate won’t roll over.”

It is not a surprise P&G would prefer to keep the price premium and not fight the market share battle. In the same NYTimes article, P&G executives stated:

they think their company and Unilever can find plenty of business without engaging in hand-to-hand combat. Even more, P.& G. is confident it can trump the products offered by local and regional companies.

“When two or three companies come in offering these products, it builds awareness of them,” Mr. Geissler said.” Across emerging markets, we can take market share without having to do battle with Unilever.”

This is very subtle but I believe this is price signaling (legal) to let Uniliver know – “You are hurting as well, we can stop this blood-letting”.

The question is whether Unilever is receiving this signal loud and clear and whether its current profit woes will push it to adopt price improvement.

Validation of Hormel Prediction: 37% profit increase from 3% volume increase

Last quarter I said Hormel is going to get hot because their lower price offered them bigger headroom for profit growth. If Hormel improved its prices by 5% and if their volume fell by about the same amount, their revenue may not grow as much but their profits will increase by  $64 million, that is 60% net income growth from 5% price improvement!

This quarter’s earnings are out and validates my claim (although at a reduced level):

For the quarter ended Jan. 24, Hormel reported a profit of $111.2 million, or 82 cents a share, up from $81.4 million, or 60 cents a share, a year earlier. Revenue increased 2.3% to $1.73 billion and volume rose 3%.

Gross margin rose to 18.4% from 16.1% amid reduced commodity costs.

That’s effective price management!

Charging premium price for turkeys, http://bit.ly/5llYQU, through better marketing and positioning. But, price premium doesn’t mean profit

Cupcakeconomics – another example of irrational optimism of entrepreneur. http://www.nytimes.com/2009/11/26/business/smallbusiness/26cupcake.html?_r=1&em=&pagewanted=all,

“SugarBabies” worrying about pricing: (NYTimes) http://bit.ly/O9Kl I read on a post about asking 10k if you’re model material . . . so because I ask for so little, am I ‘on sale’?” wrote one woman. “I don’t think I can accept more than 1k a month plus gifts, because then I will start feeling compelled to do ANYTHING for him.”

This seems a better platform than twitter to make quick posts that are not limited by 140 chars.

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