Consumer goods companies feel margin squeeze on raw material cost

If last year it was the pandemic that had disrupted business plans, in 2021, a steep rise in raw material prices is turning consumer goods makers jittery. With a range of commodities and other raw material turning costlier, manufacturers across categories are now left with no option but to hike prices, despite the risk of losing consumers.

After the initial spurt in demand after lockdown, manufacturers were hoping for a smooth run in the next few quarters. While the festival sales have been encouraging for most categories, a steady increase input costs since November has emerged as a key concern for most. From edible oil, milk and pulses to television (TV) sets and smartphones — as costs inflate beyond what manufacturers can absorb — consumers will have to cough up more for a range of essential items in the months to come.

Take edible oil, for example. The largest category in the country’s massive food products market is about to witness a price hike in the range of 5-10 per cent as raw material is costlier by over 10 per cent since mid-2020. Milk powder, used as a key ingredient in a range of packaged items like dairy whitener, milk-based drinks, ice creams, and confectionery, has become dearer by double digits. This has the potential to increase pressure on margins of leading manufacturers like Nestlé, Hindustan Unilever, and Amul, among others.

According to Pawan Agarwal, chief financial officer (CFO), Marico, to keep margins intact, the firm initiated a comprehensive cost-optimisation plan. “While in July-September we cut down on A&P expenditure, the recent exercise is aimed at cutting costs by Rs 150 crore,” he said.

Ayurveda major Dabur is witnessing a rise in prices of key ingredients like herbs that it uses extensively across product categories. “Our efforts will be to absorb raw material price increase through synergies and cost efficiencies, and undertake only selective and judicious price hikes, which will also depend on the competitive scenario in the market,” said Lalit Malik, CFO, Dabur India.

It is not just the food and personal care companies that are concerned about the recent trend. Makers of essential electronics items like notebooks, TVs, home appliances, and smartphones are busy re-calculating cost-to-price equations too.

With prices of TV panels up 200 per cent, many firms have begun to pass on the additional burden to consumers. According to Avneet Singh Marwah, chief executive officer (CEO) of Superplastronics —the manufacturer of Kodak and Thomson smart TVs — for the 32-inch category, prices have already gone up over 50 per cent.“The global panel market is controlled by six leading companies, which also control rates. We request the government to reduce Customs duty to nil,” said Marwah. 

Moreover, with 100 per cent rise in the price of premium plastics, used in electronics and appliances, the cost burden has become unbearable, rued manufacturers. “Prices across the industry have gone up 6-7 per cent in January and may go up 10-11 per cent towards the end of the April-June quarter,” said Manish Sharma, president and CEO, Panasonic India and South Asia. With all key inputs for handsets — components, plastic, metals, and cardboard — now costlier, smartphones are set to become pricier. 

Said Sanjeev Agarwal, chief manufacturing officer, Lava International: “There is huge shortage of some components as well as the rise in prices is almost 10-50 per cent of their value,” he said. 

Executives at leading smartphone brands said the shortage in supply of chipsets is impacting their production plans, apart from forcing them to raise prices. 

With no end in sight yet, most manufacturers are expecting the ongoing crisis to spill over to the April-June quarter as well.