For the fabric care market players, raising prices risks losing market share given how price sensitive buyers are. Fabric care giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL) both announced plans to increase prices to combat rising commodity prices in China, and so we expect neither to lose market share. [1]
Fabric Care Business
Fabric care comprises of laundry detergents and large manufacturers compete on price for the much coveted market share and so push for higher sales volumes.
While the use of skin cremes, deodorants and shampoos are often discretionary, almost everyone washes their clothes! This makes fabric care the most penetrated product segment and lends to its huge market size. As a result, for a fabric care manufacturer to grow in excess of population growth rate (~1.2%), the company must take market share from others players in the market.
Despite big claims in advertising, there isn’t much differentiation between products for the consumer and price becomes the single most important deciding factor. This drives many manufacturers to sell acceptable quality at the minimum possible prices. This also explains why economies of scale from higher volumes are targeted and why the bigger players manage to survive in this segment with razor-thin margins.
Why Price Hikes Won’t Affect the Big Guys
1) Everyone is Fighting Inflation
Inflationary pressures from higher raw material costs are prompting the price hikes, which will affect everyone.
2) The 2 Biggest Players are Raising Prices Simultaneously
Given the scale and financial muscle of the leading players, they are better placed compared to local/regional players to absorb gross margin pressure over a longer period. Being the first one or the only one to increase prices would lead to market share losses; however when major companies like P&G and Unilever raise prices simultaneously, often the entire market reprices and market share remains similar.
We currently value Procter & Gamble with a $75 and Unilever with a $35 Trefis price estimate of their stock.
Notes:- P&G, Unilever up China prices, fuel inflation fears, Yahoo Finance, March 28′ 2011 [↩]
