Packaged goods firms flag inflation risk as costs jump

Supply concerns sent crude prices soaring to more than $105 a barrel on Thursday as Western nations imposed sanctions on Moscow.

“The price increase will have a huge impact on most of our products. In addition to that, vegetable oil, which is used in several FMCG products like anti-caking agents, soaps, etc., will also experience inflation. The rise in input costs, directly or indirectly, will cause brands to hike prices,” said Krishnarao Buddha, senior category head at biscuit maker Parle Products.

Both Russia and Ukraine have clout in global trade flows of grain and vegetable oil, analysts at S&P Global Platts said in a note on 24 February. Rising uncertainty in the region around port closures and blockages on vessel navigation are expected to keep prices of commodities such as sunflower oil, corn and wheat elevated in the near term, they added.

Rising oil prices, in turn, affect a range of input costs, ranging from transportation to packaging.

The inflationary trends are also likely to pinch consumer spending, making it difficult for companies to pass on price increases.

“Organizations will have to take measures to absorb some of the cost through aggressive optimization initiatives and perhaps pass on some of the pressure to consumers in a calibrated manner,” said Saugata Gupta, managing director and chief executive officer, Marico Ltd.

Margins of consumer durable and appliance makers will also come under pressure. “Ebitda margins of the white goods and durables sector have been negatively correlated with crude oil prices historically,” analysts at ICICI Securities said in a note to clients on Friday. They said that consumer durable manufacturers have passed on the increase in costs with a lag of two-to-three quarters. However, there is also a sharp margin recovery whenever crude oil prices have declined in subsequent years.

Salil Kappoor, business head, home appliances, Orient Electric Ltd, said the company has significantly moved manufacturing of its appliances closer home over the past few years and imports are not a big concern. “However, if the crude cost goes up, it further affects the pricing of plastic…and (if) other commodities also get affected, there will be a cost increase,” he said. Higher prices crimp demand, he added.

Dinesh Chhabra, CEO, Usha International, a maker of fans, cooking appliances and sewing machines, said the surge in crude oil prices is likely to increase import costs. “Given that Ukraine is a major source of minerals like copper, it could also result in a scarcity of these minerals,” he added.

Companies also flagged growing supply bottlenecks. “Lead time is also likely to increase due to supply and logistics problems, as ETA (estimated time of arrival) of vessels around the globe will be hit badly,” said Avneet Singh Marwah, CEO, Super Plastronics Pvt. Ltd, an exclusive brand licensee of Thomson TVs in India. He said sea freight prices will surge, as there will be a shortage of vessels.

However, Manish Sharma, CEO at Panasonic India and South Asia, said the company’s finished goods and raw material inventory is robust, and it is confident of meeting consumer demand. “There are no immediate plans to announce any further hike in prices, but we are watching input costs closely for any escalation over short-term,” he said.

Packaged consumer goods companies have already taken several rounds of price increases to offset commodity inflation and higher freight costs. Prices of biscuits, soaps, cooking oil and beauty products have already gone up. Makers of white goods and household appliances, too, have initiated price hikes for air conditioners and televisions.

Ukraine is among the top five global producers of barley, accounting for 18% of global barley exports in 2022. This could negatively impact India’s top beer makers.

“Any major escalation could affect global barley supplies…While Indian brewers (barring the case for some premium brands) largely source barley locally, prices in India can move in tandem with global prices should there be a disruption in supplies,” analysts as brokerage Motilal Oswal Financial Services said in a note on 22 February.

Angshu Mallick, managing director and CEO, Adani Wilmar Ltd, said Russia and Ukraine account for 90% of India’s sunflower oil requirement. Ukraine is the largest supplier with a 70% share. The country’s requirement is roughly 2.5-3 million tonnes per annum, around 15% of all oils. “As long as there is a 7-10 days’ delay, India will pull through as we have an inventory of 45 days,” he said.

“However, for other oils, like palm and soya, as of now logistics is not affected, so we don’t foresee edible oil supply issues at large, but we will have a challenge in terms of high volatility,” he said.