Commodity inflation took a heavy toll on fast moving consumer goods (FMCG) companies during the third quarter, with most reporting a gross margin contraction of 200 to 500 basis points. Gross margin is the gross profit as a percentage of sales. The higher the production costs, lower the gross profit and, hence, gross margins.
Hindustan Unilever, for instance, saw gross margin contract by 220 basis points during the December quarter, while Harsh Mariwala-controlled Marico saw its gross margin come down by 520 basis points.
On an average, companies took price raises of about 5-10 per cent in most categories, barring hair oils, where it was steeper at about 15 per cent. But this was clearly not enough in the face of runaway input costs.
Crude, for instance, moved up 22 per cent, while copra and palm oil spiked by over 30 per cent during the quarter, said Amnish Aggarwal, senior vice-president, research, Motilal Oswal Securities. Copra is a key input in hair oils, while palm oil is used to make soaps.
While companies were measured in their response to price hikes during the quarter, a fallout of this was that volumes were sustained.
Volume growth, according to Kaustubh Pawaskar, FMCG analyst at brokerage Sharekhan, was in the region of 10-15 per cent. “This is in line with what most firms reported in the September and June quarters of this fiscal,” he said.
But as inflationary pressures grow, he says, this would be difficult to sustain. “That is because as product prices increase, consumers, who are already battling food inflation, could cut back on allied expenditure or they could simply downtrade,” he said. “Secondly, pushing growth in highly penetrated categories such as soaps and detergents can be difficult in the face of severe competition.”
Companies are already feeling the pinch. GSK Consumer Healthcare, for instance, during its interaction with analysts after the announcement of its third-quarter results, had said it expected volume growth in the fourth quarter to moderate to about eight-nine per cent from 15 per cent.
Dabur, said analysts, also expected volume growth to moderate in the fourth quarter. It had reported volume growth of 10 per cent during the third quarter.
