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Sugar: Bitter for FMCG

Sep 1, 2009

With the rainfall about 27% below normal, the sugar crop has been hit badly. According to the agriculture minister, the sugar production for the current year is expected to decline from 26 million tonnes to about 15 million tonnes as against the domestic requirement of 22.5-23 million tones. This has put pressure on the sugar prices with pricing jumping from Rs.17 per kg to Rs. 32 per kg.Now, how has this affected FMCG players? FMCG companies specially the ones with food products as a large part of their portfolios are facing a double whammy. Companies like GSK and Britannia, whose products are considered part of discretionary spending may face a problem in the kitchen. With rising food prices, households to control their rising food bills will start reducing discretionary spending. This is likely to be in the form of either down trading or reducing volumes. In both cases, biscuits and health drinks are likely to suffer. Moreover, increase in raw material prices are likely to affect the companies in the form of margin pressures as in such a scenario the company will find it difficult to pass on any increase in costs. So the double whammy faced by companies here is the reduction in sales along with margin compression.

The government has taken steps to control sugar prices and has cracked down heavily on sugar hoarders. Under this, in its usual far sighted way, the government has ordered companies which use bulk sugar against storing more than 15 days of requirement. Companies generally will have a large inventory in order to protect themselves against volatile prices. In the absence of this, the company will be exposed to the vagaries of the market, hurting both the investors and the consumers.

What we can expect the companies to do? Companies are reacting to the situation in different ways. Companies like Britannia have indicated that the margins are going to be under pressure and to control costs, are planning to import sugar since there is a fight to procure sugar in the domestic market. Some smaller biscuit and confectionary companies have increased the prices between 3-6%. In a bid to sensitise the government on the operational difficulties of FMCG companies, officials from the Confederation of Indian Industry (CII) have requested the government to extend the stocking limit from 15 to 30 days.

In the coming days, we can look at companies reducing advertisement spending and cutting costs in order to protect their margins. We also expect as a last alternative, either resorting to reducing grammage or increasing prices.

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