The Hindu Business Line : FMCGs: Price hikes, forward purchases save the day

With the cost of almost every input ranging from palm oil and milk to packaging material zooming upwards, FMCG companies have had plenty of cost-side pressures to contend with over the past year. But many of them have emerged relatively unscathed, thanks to strong volume growth, timely procurement strategies and, in many cases, the consumer’s willingness to take price increases.

Though raw material costs take away 45-55 per cent of net sales for FMCGs, companies have a cushion in the form of advertising and promotional spends that account for 10-12 per cent of sales. However, intense competition and frenetic new launches have made sure that players couldn’t cut corners on adspend. Price increases, therefore have been the order of the day.

The extent to which margins of FMCG companies were impacted by rising input costs was dictated by the product segment in which they operated and the breadth of their brand portfolios. Companies operating mainly in “staple” FMCGs such as Godrej Consumer (soaps) and Colgate Palmolive (toothpaste) faced a dent in profit margins because of higher material costs, as price increases didn’t match cost escalation.

On the other hand, companies operating in the health and wellness space — Marico and Nestle, for instance — held their profit margins, as input cost increases were comfortably passed on to consumers, almost in full.

Companies with large product portfolios and a presence across price points — Hindustan Unilever and Dabur to name two — also managed to offset margin pressures through shifts in the product mix. While a slew of premium hair care and skin launches bettered HUL’s product mix, new launches of ayurvedic OTC products and the recently merged foods business helped Dabur.

Crude linkage

For raw materials such as palm oil and packaging material, where prices bear clear linkages to crude oil, companies made forward purchases or built up additional inventories in the latter part of 2007 and in the first quarter of 2008, to guard against a further rise.

As a result, forward purchases of palm oil helped Godrej Consumer (which has one of the most seasoned procurement teams in the vegetable oil business) protect its margins from the July spike in prices. Dabur India, for which packaging is a key input, had covered most of its requirements for the June quarter through forward purchases in the March quarter itself.

These companies have also been quick to foresee the correction in oil prices post-July and have refrained from forward contracts in recent months.

However, after this challenging phase, FMCG makers may have less to worry about on the raw material front over the next few months, as a range of inputs — palm oil, packaging plastics and petroleum derivatives have seen a 20-30 per cent price correction, tracking the meltdown in crude oil prices.

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