Posts Tagged ‘Inflation’
The new flagship programme from the UPA government is the Food Security Act (FSA). The scheme proposes to provide BPL families with 25kgs of grain (Rice & Wheat) per month at Rs. 3 per kg. This is a bold step towards right to food for the poor.
Two major problems with this act now are:
1. Definition of a BPL family
There is no fixed definition of a BPL family. Everybody has their own definition for their own stakes.
We all know the efficiency of our Public Distribution System (PDS) with leakages, corruption, and with lesser capacities. There is little trust that the existing PDS can deliver this to the needy.
Impact of FSA on the FMCG companies
The Food Corporation of India (FCI) will need substantially more wheat to supply three out of four Indian households, meet the new buffer stocking norms that stipulate larger quantities, and also keep aside a strategic reserve for emergencies. Unlike rice, wheat cultivation is limited to less than a dozen states.FCI already buys one out of every two bags sold by Indian farmers. In Punjab and Haryana, it buys virtually every kilo for sale. To meet its new obligations, FCI will have to redouble purchases across Uttar Pradesh, Rajasthan, Madhya Pradesh and Bihar.
When a commodity is in short supply, a bidding war breaks out with simple supply-demand economics. Companies would bid for the supplies and will be ready to pay more than the minimum support price (MSP), which the govt pays the farmers. This is one of the things expected to benefit the farmers, but it has to be executed well. Overall, the price rise is guaranteed with our faulty PDS, corruption, leakages, pests, unfavourable climate etc. One may say, we could increase the wheat production. This is not easy as our National Food Security Commission is yet to achieve its targets for the year, and from the last few years productivity has increased only by a margin. The only hope for production increase is that the farmers when paid well will invest in high-yield seeds that can increase the productivity per hectare.
Meanwhile, FMCG companies that manufacture biscuits, atta, and other food FMCG are under tremendous pressure. With already existing food inflation hitting them hard, most FMCG companies made a price increase. Most of the consumers for these categories are price sensitive and are switching to alternatives and the volumes are going low. With this status quo,the FMCG companies will be forced to increase the prices once again. This means you’re biscuits, packaged atta, and other food FMCG is going to become costlier.
Companies that are more lean and have a value perception are more likely to come out successful. This is a big challenge for the companies and it is to be seen who will emerge out of this battle.
The last few years were a golden period for the FMCG industry. The economy was growing at a faster rate, imput prices were low, and inflation was low. This year the food inflation is very high around 12%, and the raw material cost has increased upto 15 to 20 percent compared to last year. The operating margins which are typically about 20 percent in the last few years have seen a drop to almost 16 percent.
High food inflation has an adverse affect on the FMCG industry. People will spend less money on discretionary items which will hit he FMCG industry. They say the fate of HUL is dependent on the monsoons. A good monsoon will not give any inflation worries and also increases the consumption power creating demand for hair oil, biscuits, soaps, shampoos, laundry, and toilet soaps.
High input costs
High input costs are another worry for existing woes. The cost of milk powder and sugar has gone up by 35 percent and 19 percent YOY and Nestle India is really struggling on its margins. The wheat used in ITC’s biscuits is up 10-15 percent thi year, the Copra used by Marico cost 10 percent more, the coconut and palm kernel oil used by Godrej Consumer has risen by 15-20 percent, and the menthol used by Emami has gone up by 20 percent. The heavy rains in Kerala might have caused the cost of Copra to increase and it doesn’t seem to be temporal. So, maintaining the margins this year is a tough task. Some of the FMCG players say that they will not increase the price of Low Unit Packs (LUPs) but may increase the prices of higher priced stock-keeping units (SKUs). The packaging cost which is very important in the FMCG sector has shot up by around 10 percent this year. They are expected to stay that way caused by the strong crude prices at $80 per barrel.
Rural Market is the way
Urban Markets are showing lower growth as compared to the rural hinterland. It is estimated that the big daddy Hindustan Unilever (HUL) gets almost 50 percent of their revenue from rural India , and Dabur gets almost 55 percent, and Marico gets 25 percent of their revenue from rural India. The Urban Markets are saturated with more and more competitors and less margins for the companies. For example, Toothpaste has a rural penetration of 40 percent as against 72 percent in the Urban areas. The underpenetrated categories such as toothpaste can be taken advantage of by companies like Colgate and HUL. Colgate started an initiative to educate people about the advantages of toothpaste and influence conversions from toothpowder and others. The volume growth in such categories will be fast.Shampoos showed a growth of 8.9 percent (Jan to May’10) compared with an urban volume growth of 2.5 percent.
The government schemes which have been launched over the past few years had helped in increasing the disposable income, in turn the purchasing power of rural India. Schemes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which aim to put around Rs. 40,000 crores in the hands of the rural poor, leaves a large population with higher disposable incomes. This leads to some basic changes in the consumption patterns of greater consumption of personal care and above basic food requirements.