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What's pinching FMCG companies? - Views on News from Equitymaster
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  • Jun 18, 2008

    What's pinching FMCG companies?

    Commodity prices have been spiraling in recent times. Not only crude oil prices, but also prices of wheat, palm oil, milk and metals are making new highs. Even petro-derivatives such as high-density polyethylene (HDPE), used for packaging material, have become more costly. The rising crude prices and skyrocketing input costs have led the fast moving consumer goods (FMCG) companies to make items of daily consumption costlier by increasing their maximum retail prices (MRPs). In this article we shall discuss the impact of the rising input costs on the FMCG companies and their consumers.

    We have taken the companies from the BSE FMCG index under consideration. They are present in different segments such as biscuits, tea, chips, chocolates, healthcare & hygiene products and beverages - both alcoholic and non-alcoholic.

    At the company level: Costs
    Some of the common raw materials needed for the production of FMCG products include wheat flour (biscuits), palm oil (soaps), tobacco (cigarettes), dairy products, sugar, salt, coffee, tea, cocoa (chocolates), barley (beer), malt/alcohol (spirits) and HDPE (packaging). Below are examples of increase in costs of some of these key inputs over the past three years (CY05 to CY07).

    Inputs Increase (%) Source
    Coffee 25.1% HUL
    Tea 21.0% HUL
    Oils, fats and rosins 16.5% HUL
    Chemicals and perfumes 14.9% HUL
    Fresh milk and milk concentrate 24.2% Nestle
    Green coffee 68.6% Nestle
    Vegetable oils 25.0% Nestle
    Skimmed milk powder 46.4% Nestle
    Wheat flour 37.1% Nestle
    Sugar -16.8% Nestle
    Milk power 53.1% GSK CH
    Liquid milk 40.5% GSK CH
    Malt and malt extract 27.0% GSK CH
    Flour (wheat) 40.8% GSK CH

    At the company level: Margins
    In the adjacent graph, we have taken the average raw material cost (as percentage of sales) and gross margins of the companies. As we can see, the gross margins and the raw material costs (as a percentage of sales) have an indirect relation. Since FY05, there has been a gradual decline in their average gross margins due to rising input prices.

  • Learn how to identify a FMCG stock

    Apart from rising inputs costs, the other main reason for this decline is the highly competitive nature of this sector. This has directly affected the companies' pricing powers. The companies have not been able to pass on the rising costs to their customers, as it would affect the volumes of the respective products. An example of the same would be of Britannia's FY07 result. Due to the rise in wheat prices (flour is used in biscuits) the company's EBIDTA margins dropped to levels of 6% from 12% in the previous year. Another classic case would be the declining pricing power of HUL due to increased competition along with high input costs. Though the companies had taken price hikes in recent quarters to offset the hike in raw material prices, going forward further increase in the final product prices may be not easy as it may lead to lower volumes and losing market share.

    At the customer level
    As seen from the adjoining chart, except for sugar, all the household products (MRPs of products from the major companies in the respective segments) have seen a steep rise over the past two and a half years. The price of wheat flour has gone up by 44%, while that of edible oil rose by 65% over the past two and a half years. Even tea and coffee prices have witnessed a jump by nearly 14% and 25% respectively over the same period. Clearly, there are tough times ahead for the ordinary consumer.



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    Aug 23, 2017 12:39 PM