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Friday, Jan 09, 2004

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FMCGs: Cuts both ways

Aarati Krishnan

IT APPEARS to be a mixed blessing for companies operating in the fast moving consumer goods (FMCG) segment. Companies manufacturing soaps, detergents, shampoos and personal products, such as Hindustan Lever, Colgate Palmolive India, P&G, Gillette and Godrej Consumer, will stand to gain from the reduction in input costs brought on by the lower effective import duties on a range of raw materials.

With the peak Customs duty down from 25 per cent to 20 per cent, the effective import duty on inputs such as surfacants, linear alkyl benzene and oleochemicals will be pegged down, from 50.8 per cent to 39.2 per cent.

This may provide some succour to the players at a time when input prices have been on a sharp upward spiral. Intense competition has forced most of these FMCG players to either hold selling prices, or effect reductions in the current year, impeding their pricing power. But for those who derive a significant part of their revenues from toilet soaps (Godrej Consumer and to a lesser extent HLL), any hike in the Customs duty on crude palm oil and crude palm stearine from the current 30 per cent to 65 per cent, mooted this week by the Food Ministry, may prove a big dampener, if implemented.

Since most FMCG products are subject to the peak rate of Customs duty, this move may bring down some of the barriers against import competition. But this may prove more of an opportunity than a threat to the multinational players.

There is already a trend of companies sourcing premium FMCG products for the Indian markets from South-East Asia, and this reduction in import duties may make it cheaper for companies to do this.

Dairy and agricultural products are outside the purview of this reduction, so it may be status quo for companies in the food processing sector, such as Nestle India and Britannia for their packaged food or dairy products.

But there may be an indirect impact on FMCG companies from the current proposals. A significant reduction in the selling prices of products such as computers, mobile phones and durables may not augur well for the FMCG industry.

For this may only accelerate the trend of diversion of consumer spending from FMCGs to other big-ticket purchases, leaving consumers with a smaller budget for their grocery purchases.

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