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Rising input costs are hurting FMCG companies, and most of them are resorting to price hikes to minimise the impact.

The last six months have witnessed a sharp increase in input costs for almost all fast moving consumer goods companies. While palm oil prices, a key component in soaps, has increased by close to 45 per cent in the last six months, skimmed milk prices too have risen considerably.

As a result, even a company like Godrej Consumer, which functions largely in the mass market of toilet soaps, was compelled to hike soap prices twice in less than six months.

It is not that personal and home care products manufacturers alone are facing the heat. Prices of agri commodities like wheat, sugar and skimmed milk too have seen an upward swing, and are expected to remain so for a while.

Sumeet Budhraja, analyst, Edelweiss Securities, says the rise in skimmed milk prices is impacting food companies like Nestle and GSK Consumer, which are facing pressure on their margins. Similarly, biscuit manufacturers have faced a 20 per cent increase in input costs across key components like milk, wheat and sugar.

While hiking prices has been the most common solution, not everyone is resorting to it. Some companies are also looking at other avenues to manage costs and remain profitable. One reason for this is market share.

Many consumer goods companies, which operate in mass markets, are not keen on hiking prices as it would have an immediate effect on sales.

"In the sub Rs 10 price segment, consumers tend to be very price sensitive, and any change in prices would reflect in decline in sales," says Budhraja.

So while there are companies that chase a higher market share and topline growth at the cost of profitability, there are others that have found another way around it.

Over the last few months, biscuit manufacturers "" Britannia and Parle "" have decreased the grammage of some of their biscuit packs without tampering with prices.

GSK, which has been affected by the rising price of skimmed milk powder, a key component in its biggest brand, Horlicks, too is looking at other cost-cutting avenues to maintain its margins. In the previous quarter, the company's raw material costs have risen to 35.7 per cent of sales.

The company has implemented a programme of staff management to bring down staff costs from14.4 per cent of sales in March 2006 to 13.2 per cent during the first quarter of this year.

Marico, which witnessed a rise in profits in the last few years as a result of a reduction in copra prices, has seen input costs rise by about 8 per cent in the past year.

The company has indicated that price hikes are imminent, having maintained the price of its flagship brand, Parachute, at the same retail price since August 2004.

Rising crude prices have also impacted packing costs, having risen by close to 20 per cent in the past three years.

Analysts expect palm oil prices to stabilise by the end of the year, perhaps even as early as the September quarter, which would provide some relief to companies like Hindustan Lever and Godrej "" the two biggest players in the toilet soaps segment.

The government has announced a 10 per cent cut in import duties on crude and refined palm oil. Also, appreciation of the rupee will help importers.

But for food companies like Britannia, Nestle and ITC, there is unlikely to be any relief, as wheat and milk prices are expected to continue to head north.

However, the government's recent ban on skimmed milk powder exports until September 2007 will help companies like GSK and Nestle.

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SNIPPETS

Foreign brands
British foods company Weetabix, last week, announced plans to launch its breakfast foods range in India. Earlier this year, The Hershey Food Company, the largest chocolate manufacturer in the US, entered into a joint venture with Godrej Beverages & Foods.

These are just two of the many international food brands which are looking at the fast growing processed foods market in India for growth.

Some of the other brands expected in India by the end of the year include Toby' bars, San Remo pasta and Meadow Lea breads from Australia and Ovaltine malted beverages.

A number of Unilever brands like Barilla pasta and Boursin cheese are already present in India through the third party importer route.Companies have taken note of the high growth rates in the market with the organised segment accounting for only $3.5 billion of the $70 billion processed foods market.

As a result, even existing players like Hindustan Lever and Nestle are said to be keen on expanding their processed foods portfolio in India. The boom in the segment is a result of both changing lifestyles as well as growth in modern trade.

Modern retail outlets have seen high volume of sales in processed foods, with even the Class A stores stocking imported brands like Hersheys and a variety of ready to cook mixes.

EMI pinch
Most FMCG companies do not have very fond memories of 2003-04. That was the time when durable manufacturers and finance providers started doling out easy loan options to consumers, as a result of which the monthly instalments for durables started eating into the share of wallet of FMCG companies.

In 2007, the situation is slightly different. With interest rates having gone up, consumer outgo on EMIs has also gone up. But so far, consumer goods sales seem untouched.

D Sundaram, director, IT and Finance, Hindustan Lever, the country's largest FMCG company, says that so far, they have not witnessed any downtrading by consumers.

Last time when EMIs went up, consumers started shifting to cheaper brands or smaller pack sizes even in urban areas, as a result, impacting a company's overall growth and profitability.

But Sundaram cautions that a clearer picture would emerge over the current quarter, once the actual impact of the increased EMIs would start showing. Meanwhile, analysts do not expect too much of a shift in consumer preferences.