The recent surge in prices of essential raw materials such as crude oil, palm oil, coffee, and cocoa is posing a challenge to the gross margins of fast-moving consumer goods manufacturers. Companies are cautious about passing on these increased costs to consumers, considering the competitive market and the need to maintain sales volumes.
BNP Paribas reported that most raw material prices are experiencing inflation, which is reversing the trend of margin expansion seen in recent quarters. Revenue growth is expected to remain sluggish as a result.
Analysts are closely monitoring the prices of over 150 fast-moving consumer goods to gauge the impact on sales and margins. The increase in prices of key commodities like crude oil, maize, coffee, and wheat is indicative of the inflationary pressures faced by companies.
While some companies have implemented price adjustments in response to rising raw material costs, others are taking a more cautious approach. Parle Products and Godrej Consumer Products Ltd are among those closely watching the impact of price hikes on products like candies, biscuits, and soaps.
In the past two years, consumer goods manufacturers raised prices significantly to offset raw material cost increases, leading to improved margins but also dampened consumer demand. However, in recent months, there has been a decrease in the frequency of price adjustments, with some companies opting to lower prices or offer more value per purchase instead.
Analysts warn that inflation in certain categories is making a comeback, posing a new challenge for FMCG companies. The upcoming earnings announcements for the March quarter are expected to reflect these challenges, with BNP Paribas anticipating a weak performance and potential downside risks to earnings estimates due to higher raw material costs.