Moneycontrol Pro Panorama | FMCG companies face a tough task fighting inflation without hurting growth

Representative image

Representative image

Dear Reader,

As a consumer we know it even before an economist or a financial analyst notices it. The shopping cart looks the same on the left side but the right side looks inflated, with prices of essentials rising every other week or month. It’s been like that for some time now.

While household budgets feel the pinch, it’s a problem for consumer companies too as their costs are rising as well. While the bigger listed companies manage better, buying ahead where they can, volatile markets make it difficult and eventually the price increase reflects in their raw material cost.

In good times, FMCG companies view inflation as a friend even. They will pass on the cost increase in full and then add some more to boost profits. While consumers feel the pinch, good times mean a growth in incomes can compensate for it. And, investors are happy as earnings growth sports a cheery look.

But a slowing economy that met with a pandemic has changed the market scenario. Sure, FMCG companies did better than many others, as customers filled their pantries for the lockdown months and sales of categories such as sanititizers, cleaning agents and immunity boosting food products shot through the roof.

But the overall mood has been one of caution. After a second wave hit both urban and rural markets earlier this fiscal, it’s only now that a more normal market situation is emerging. Even in the second wave, FMCG companies did well as the lockdowns were localized and less restrictive than in the first wave. Still, they did face some adverse effects.

This creates an adverse environment for a full pass through of cost increases, leave alone adding some for a profit boost. Domestic companies have been playing a careful game, taking slender price hikes, assessing the impact on sales and then taking some more.

Companies are doing what they think is best to tackle the situation. In today’s edition, our research team’s investment insights include one on Britannia Industries, which is facing pressure on gross margins due to rising costs but plans to take judicious price increases from September.

They have also written on Emami, which has done well despite higher costs, by hiking prices, and is expanding its distribution to grow sales. Read to know what to make of their investment prospects.

The problem is global as it is the price of globally-traded commodities such as crude oil, palm oil, sugar, tea, coffee and of packaging materials (linked to crude) that is increasing. Consumer majors in developed markets are traditionally very careful and slow to take price increases, as they risk consumers shifting to other brands and the dominance of organised retail makes it a more difficult task. CEOs may also have been hoping, as central banks have, that inflation is transitory. While central banks appear to be holding out, CEOs of FMCG majors such as Unilever and Procter & Gamble are rolling out a strategy to combat inflation, including price hikes and cost cutting. They are also talking about higher costs eating into their profit guidance for 2021.

Typically, when this sort of a shift in stance takes place in the global parent, you end up seeing aftereffects in their locally-listed subsidiaries as well. There may be interesting times ahead for the FMCG sector. Read our take on what this means for investors in domestic FMCG stocks here.

Read more investing insights from our research team: 

Contrasting tale of housing finance companies HDFC and LIC HFC — which one should investors bet on?

NTPC: A stock that can provide certainty, consistency and predictability

PI Industries: A sizeable entry into pharma

July auto sales indicate strong rebound in demand

What else are we reading today? 

The mystery of the falling unemployment rate in the midst of a pandemic

Solar modules — Duty doubt must end quickly

India must stop following China on private tutoring

What is driving real estate stocks through the roof??

We should not be too sanguine about a shrinking population (republished from the FT)

Global Inflation Is On The Rise. Why Aren’t Central Banks Worrying?

How to get the Bad Bank off to a good start

Technical picks: Adani Ports, Tata Consumer Products, L&T and ICICI Securities (These are published every trading day before markets open)

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Ravi AnanthanarayananMoneycontrol Pro