Consumer goods (FMCG) sector growth overall the last few years has been good, however pressure due to increasing input costs in the past year have led companies to rethink their strategies.
Input costs had risen in 2007 too which saw the leading FMCG companies increase prices along with price realignment across a broad range of products. However rise in input costs (raw material, energy, logistics, etc.) continues unabated in 2008. From the beginning of 4th quarter of 2007 costs have risen by as much as 30% in some cases. Whilst the budget did provide some respite from rising costs through reduction of excise duty on manufactured goods and on specific packaging material for soaps, detergent and toothpaste these were seen as too marginal to affect either point of sale price or margins in any significant manner.
Costs in the FMCG sector have been affected by changes in both raw material supply and consumer demand factors, as well as, rise in energy prices which has led to a general increase in T&D costs. Supply side constraints caused by a lack of any major yield improvement since the beginning of 2000 in domestic agriculture †growth in agricultural yield in the first 7 year in the current decade has been the lowest since the 1960s - has applied strong pressure on raw materials supply. For the first time since the green revolution, food grain stock with the government is below the buffer level leading to a loss of food self-sufficiency. Efforts to improve stock levels through imports have not been helped by near all-time highs in food prices across the board in the global markets. The problem is further compounded by the fact that international food prices are expected to remain strong in the near to medium term due to global demand-supply gap. Furthermore a large import bill will reduce government’s ability to raise MSP (minimum support price) beyond a certain point due to its impact on the budget deficits and the resultant impact on domestic inflation. On...