Rising prices to squeeze FMCG players’ margins - Times of India

Rising prices to squeeze FMCG players’ margins – Times of India

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MUMBAI: As the fast-moving consumer goods (FMCG) industry reels under extraordinary inflationary pressures, experts believe it will continue to grow in both volume and value, but margins will get squeezed. They reckon the current cycle that consumer products companies find themselves in is similar to what the industry witnessed during 2005-2012. At that time, input cost escalations were passed down to consumers through price increases but, despite that, there was no drop in volumes.
Price hikes being taken by companies now, feel experts, would result in value-based growth. But that could come at the risk of a section of consumers resorting to down-trading. However, if the cycle of peak inflation goes beyond 9-12 months, consumer demand could contract.

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Global management consultancy BCG’s MD & senior partner Abheek Singhi said, “In at least the last 20-odd years, we’ve not seen a situation where demand has actually gone down, that is, growth going negative.” Looking at the FMCG sector 2005 onwards, Singhi said the volume growth has been reasonably secular. “More well-penetrated categories like soaps and detergents may grow at a lower rate, while the less-penetrated clock a higher volume growth. But if you look at the periods between 2013 and 2019, the value growths were very different. That’s because pricing was higher in the earlier period, while pricing-led growth was higher in the second time period. From a value-led perspective, the period 2005-2012 was a great time for FMCGs and then you see that coming down. But volume growth did not get impacted within the same categories. Less-penetrated categories in both time periods grew faster than the more-penetrated ones,” said Singhi.
The last time the FMCG sector was in a similar cycle was 2005-2012, when there was price-led value growth. However, margins had come under pressure. “We expect a similar situation to happen, which is value growth and volume growth at similar levels — value growth being higher driven by pricing, margins would come under pressure,” said Singhi.
A Hindustan Unilever (HUL) spokesperson said with many commodities at a multi-year high, there is significant and widespread inflation across many FMCG categories. “Commodity prices have continued to be at elevated levels for almost a year now and have been increasing sequentially. Consequently, consumers have been titrating volumes. This is evident in market volume growths, which turned negative in December quarter (for the categories HUL operates in). Volumes declined in both urban and rural market, but the impact was more pronounced in rural.”
The HUL spokesperson said in this environment, the company’s priority is to provide value to consumers, invest in its brands and protect its financial business model. “We mitigate cost inflation first by driving our savings agenda harder, looking at all cost lines with a laser-sharp focus and removing any non-value-adding cost. Considering the inherent strength of our brands and our execution prowess, we have been able to provide the right price-value equation to the consumer, thereby helping protect our business model in a highly inflationary scenario.”
However, the one thing that can change this dynamic is the number of months for which the commodity cycle stays at the peak. “If it’s a short cycle, then the situation will be more or less what one has seen in 2005-2012. Demand will not get impacted. In a longer-cycle period — which we have not seen — demand could potentially get disrupted. That cycle lasted at the peak for about 9-12 months. Towards the end of that cycle, one saw tapering of demand, but it was flat and not a decline. It was a reduction in growth and not a decline. The important question is if inflation continues for longer, beyond 9-12 months, consumer products players are talking about price hikes in the equivalent of double-digits. If it happens for a longer period, then we are getting into uncharted territory. Discretionary categories could get impacted,” said Singhi.



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