Monoplositic Copetition

By HARSH JOSHI

India's store shelves groan under the weight of consumer brands. About 900 new food and beverage brands alone have been launched there in the past two years. Yet while shoppers enjoy ever more choice, it is getting harder for companies such as Procter & Gamble and Hindustan Unilever to preserve profit margins.

Enemy No. 1 is the increasing cost of raw materials ranging from wheat to palm oil. This also happened in 2008. But competition has intensified at a tremendous pace since then as more multinational companies target Indian buyers, alongside a host of small, regional businesses. Besides food, the number of brands for toiletries such as skin cleansers has nearly tripled since the fiscal 2008. Those of detergents and deodorants have multiplied more than four times, research by Kotak Institutional Equities shows.

Hindustan Unilever, which once comfortably commanded a majority of the market, now struggles to pass on cost increases to buyers while also maintaining market share. Price wars aren't uncommon, such as one between P&G and Hindustan Unilever last year that degenerated into legal tussles for controversial ads denigrating each other.

There is no easy way out. Manufacturers could be forced to cut costs in other ways, such as reducing the discounts they offer retailers. But that would risk driving retailers toward other suppliers.

Alternatively, consumer-products companies could cut the size and weight of items. Some manufacturers have tried to partially pass on the pain to buyers through straightforward price increases. Hindustan Unilever raised the prices of some soaps as much as 10% in the March quarter, but this was after the cost of key ingredient palm oil rose more than 40%. But higher prices, or smaller portions, can hurt demand, so such moves will likely be small and cautious.

Hindustan Unilever's operating profit margin may have fallen by 0.4 percentage point in the first quarter. The hit to Marico, a company that sells...