First, a quick recap of all that happened in the past couple of days, forming a background of our today’s story.
So, National Statistical Office (NSO) on Monday, January 13, released a report on retail inflation, that shows it had gone up to a five-and-half year high of 7.35 per cent in December 2019. This include 60.5 per cent hike in vegetable segment because of Onion crisis, during the month compared to December last year.
Next in the queue is Wholesale prices based inflation which has surged to an eight-month high of 2.59 per cent in December as compared to 0.58 per cent in November. Again, due to sharp rise in prices of food articles like onion and potato.
Back to our story, a few months ago, Suresh Narayanan, chairman and managing director of Nestlé India, told Business Standard that he was worried about the rising prices of agri-commodities such as milk and sugar, which indicated that there were inflationary pressures on the horizon. Commodity prices needed to cool down in 2020 to revive growth in the already struggling fast moving consumer goods (FMCG) market, he said.
But since things aren’t favourable, price hikes are on the cards for a host of FMCG products. And this may stymie the chances of a revival in the sector any time soon.
Sources say that depending on the products, manufacturers are now contemplating a direct price hike in the range of 5-10 per cent, or a reduction in the weight of packed products by about 3-8 per cent.
Well, in view of this, Krishnan Sambamoorthy, senior vice-president at Motilal Oswal said, “Given their broader margins, Nestlé India has the headroom to absorb the rising cost of raw materials to some extent. However, they also have pricing power in markets like baby food, where they are the market leader.”
However, Narayanan of Nestlé believes that the cut in corporation tax rate would help the company absorb some of the future cost burden. However, it may still go for selective price hikes.
Besides, in case of Britannia, which doesn’t rely much on milk and milk products, the inflation in the prices of other commodities may lead the company to revise the prices of several of its products.
Even ITC, one of the largest FMCG firms in the country agreed upon raising prices as a result of commodity price inflation. In case you don’t know, ITC is the largest player in the branded wheat flour market and has a diverse FMCG food portfolio, including brands like Bingo and Sunfeast.
However, your soft drinks and juices will remain immune to the hike, despite the recent surge in sugar prices. Thanks to Coca-Cola and PepsiCo. The former believes long-term supply contracts and operational efficiency will help them mitigate the additional cost, if any.
No doubt, consumers may have to bear the additional cost burden, but speaking of the other side of this inflation, better realisation on farm yields may help the struggling rural economy.
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