How commodity price inflation is prompting FMCG firms to increase prices

Topics Nestle India | FMCGs | FMCG firms

While milk is a smaller component in Britannia’s portfolio, the inflation in the prices of other commodities may lead the company to revise the prices of several of its products.
A few months ago, Suresh Narayanan, chairman and managing director of Nestlé India, told Business Standard that he was worried about the rising prices of agri-commodities such as milk and sugar, which indicated that there were inflationary pressures on the horizon. Commodity prices needed to cool down in 2020 to revive growth in the already struggling fast moving consumer goods (FMCG) market, he said.

However, with commodity price inflation showing no signs of heading down, price hikes on a host of FMCG products are on the cards. And this may stymie the chances of a revival in the sector any time soon.

Poor economic growth and job cuts have led both rural and urban households to cut down on expenditures. As prices of key raw materials such as milk, sugar, wheat, palm oil and potato rise, consumers of dairy products, value-added dairy products, biscuits and confectionery items and potato chips are likely to cut back on their purchases further.

Sources say that depending on the products, manufacturers are now contemplating a direct price hike in the range of 5-10 per cent, or a reduction in the weight of packed products by about 3-8 per cent.

According to Krishnan Sambamoorthy, senior vice-president at Motilal Oswal, companies like Nestlé India and Britannia may consider revising prices of products such as baby foods and biscuits.

“Given their broader margins, Nestlé India has the headroom to absorb the rising cost of raw materials to some extent. However, they also have pricing power in markets like baby food, where they are the market leader,” Sambamoorthy said. Narayanan of Nestlé said that the cut in corporate tax rate would help the company absorb some of the future cost burden. However, it may still go for selective price hikes. 

While milk is a smaller component in Britannia’s portfolio, the inflation in the prices of other commodities may lead the company to revise the prices of several of its products. 

Sanjiv Puri, chairman and managing director, ITC, which is one of the largest FMCG firms in the country, too said recently that the company may have to raise  prices as a result of commodity price inflation. ITC is the largest player in the branded wheat flour market and has a diverse FMCG food portfolio, including brands like Bingo and Sunfeast.

An ITC spokesperson said: “While the increase in commodity prices is a challenge, we evaluate price revisions based on multiple factors.” He added that the manufacturer would continue to focus on “enhancing internal efficiencies and portfolio optimisation”.

Though PepsiCo, the largest player in the branded potato chips market, did not respond to a questionnaire, sources say that it may consider reducing the weights of its packs. Instead of raising prices, which are set at key price points, reduction of pack sizes is a tried and tested formula in the packaged snacks industry. Soap makers are also jittery, thanks to the uptick in palm oil prices. Leading players such as Godrej Consumer and Wipro Consumer are taking a relook at their pricing.

However, the prices of cola drinks and juices may remain stable. Though sugar prices have surged in the past, market leaders Coca-Cola and PepsiCo have shied away from increasing prices. According to a senior executive at one of the cola manufacturers, long-term supply contracts and operational efficiency will help them mitigate the additional cost, if any.

“The trend indicates significant pressure on the margins of FMCG manufacturers and the next two months will be crucial as any further increase in the prices of commodities will aggravate the situation,” said Abneesh Roy, senior vice-president at Edelweiss Securities.

However, the inflation does have one positive impact. While consumers may have to bear the additional cost burden, better realisation on farm yields may help the struggling rural economy. “It has the potential to increase the incomes of rural households, which in turn may improve demand in rural areas – a key concern for most FMCG players,” Roy said. 

During the September 2019 quarter, the volume uptake of packaged food products in the rural market fell by two per cent, compared to a 19 per cent jump in the same quarter in 2018. Data from market analysis firm Nielsen shows that the extent of de-growth was the same for the non-food packaged FMCG category in July-September 2019, compared to a 16 per cent growth during the same period last year.

Moreover, while the rural market comprises some 40 per cent of the sales for the FMCG sector, it contributed a whopping 60 per cent towards the current slowdown. Most market analysts, including Roy, now expects the volume growth in the FMCG sector to revive only towards the end of the April-June quarter of 2020.

THE FALLOUT

*Growing agri-commodity prices pushing FMCG manufacturers towards price hikes

*Cola and juices, however, set to remain immune to inflation as long-term contracts may act as saviour

*Rising prices of commodities may in turn improve income of rural households

*Better household income in rural has potential to improve growth in FMCG market



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