As raw material prices inch up, FMCG firms brace for margin pressure
NEW DELHI : Recent increases in the prices of essential raw materials, including crude oil, palm oil, coffee, and cocoa, could halt the “meaningful" expansion in gross margins that makers of fast moving consumer goods (FMCG) have witnessed over the last few quarters. Faced with such cost pressures, companies are poised to tread carefully before transferring these increases to consumers, mindful of the competitive landscape and the imperative to sustain sales volumes.
A report from BNP Paribas issued on Tuesday highlighted concerns for the sector, noting, "We observe that most raw material prices are seeing some inflation and few are largely range bound over the past few quarters. The cooling of raw material prices had resulted in meaningful gross margin expansion for most companies under our coverage.
We see the increase in prices in the current demand environment as a negative development for the sector." According to BNP Paribas, the phase of margin expansion is now a thing of the past, while revenue growth is expected to remain sluggish. Analysts at the brokerage track monthly prices of over 150 fast moving consumer goods across 20 categories to ascertain pricing action and its likely impact on sales and margins.
Insights into the price movements of several key commodities reveal the breadth of the inflationary pressures. For instance, crude oil prices rose by 2.0% year-on-year in the March quarter.
Within agricultural commodities, maize saw increases of 3.9% year-on-year and 4.6% quarter-on-quarter, exacerbated by anticipated demand surges and governmental procurement plans for ethanol production, analysts at Motilal Oswal Financial Services said in a separate report released Tuesday. Coffee prices jumped 15.3% on
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