FMCG companies would try their level best to absorb as much input cost as possible and pass minimal to consumers, that too when push actually comes to shove, said Mayank Shah, Sr. Category Head, Parle Products in an interview. Shah explained that till companies are in a position to absorb the input cost, they will try to do so. Edited excerpts:
Q. Given that the Q4 gross margins of most FMCG companies were under pressure because of the increase in input costs, how do you see this impacting FMCG margins as a sector going forward?
Q4 was difficult for most FMCG companies as far as margins are concerned and primarily because of the input cost. Our expectation is it would remain the same for some more time till we see harvesting happening post this monsoon. It is not so much of a supply-side issue, it is more about the demand side and much of it we will be able to pass on to the consumer. So, while there might be some cost that we may be able to pass on to the consumer, you may not be able to pass on the full increase in cost or input cost to the consumer. In which case you might have to absorb a bit of it and the margin pressure or the pressure on margin would continue in Q1.
Now that dilemma with most FMCG companies, especially food processing companies, is how much they should absorb and how much they should pass on, because given the fragile situation of the economy and demand right now, no company wants to really tinker with the kind of demand that they are getting or they are building up. The last thing that they would like to do is do something that can fizzle the consumer demand. That is the reason why I feel that companies would try their level best to absorb as much input costs as possible and pass minimal to consumer. That too when push actually comes to shove, not otherwise. Till they are in a position to absorb the cost, they will try and absorb the input cost. It is only beyond a point that they would have to or like to pass the input cost increase to the consumers.
Q To what extent do you feel the input cost pressures can also be passed on at this point without impacting demand?
I do not think that without really impacting the demand scenario one would be able to pass on the input cost. There would definitely be some impact on demand and that probably explains the resistance among manufacturers to increase the prices. You would have hardly seen any price hikes happening of late, only in rare situations some companies are taking price hikes. Otherwise, they are not. Nobody is right now looking at taking any sort of price hike because that is definitely going to have an impact on demand given the fragile situation of the economy, given currently the propensity of consumers to spend even on essential items and FMCG, even on food items.
There is little scope of really passing on the input cost without having any impact on demand. As we all know that the prediction of the monsoon is already out and we are expecting a good monsoon. That is something that almost every food company today is hoping for. We will have a bumper crop again and there would be some cooling off in terms of the input cost which would help companies. But right now, I do not think there is any company that would be taking a price hike without having an impact on demand. Almost everybody would have an impact on demand given the situation.
Q Given that in the second wave rural areas have also not been spared, what is the state of rural demand and is the demand continuing to be much higher as opposed to urban?
Right now, we have not seen any impact on demand coming in from rural consumers or rural India and there are two-three reasons behind it. One is the population density in rural India. It is not as high as that of urban India which naturally isolates rural India and it is a natural shield. Because the population density is much lower, the rate of contraction goes down.
Secondly, unlike urban agglomeration or the density which is in urban India, let us say even if one village gets contained or there is high amount of contraction happening and it gets into some lockdown, individually that particular village is not really a very big demand unit, unless you have swats of villages in one area being impacted by contraction or Covid. That way I think rural demand is relatively shielded.
Thirdly and most importantly, even if the rate of contraction goes up, especially when it comes to food and processed food, the propensity of consumers to store some pantry loading, some buying in advance actually helps. So the lockdowns are not as stringent as that of urban India and they are not even required given the lower population density. Hence, the demand for food at least is not really getting impacted.