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FMCG players not to reduce prices; focus on margin recovery, more ad spend

By Kritika Arora

Softening in the prices of key commodities like palm and crude oil has brought some respite to the fast-moving consumer goods (FMCG) companies, with many of them expecting a recovery in margins in the coming quarters. However, it is unlikely that the firms would pass on the benefits to customers in the form of price cuts or offers and discounts on products.

Prices of the raw materials in the FMCG space have increased 70-80% in a year and it is only in the last 10-15 days that commodity prices have softened 15-20% from the peak, said Mayank Shah, senior category — head at Parle Products, adding that commodity prices are still very high.

“Only if the input costs go down by another 10-15% further, then the companies can look at taking price cuts or giving some offers to customers,” Shah told FE. But that is still far away, he added.

“We will invest in category development initiatives in the near-term to drive consumption and will pass on the benefits to consumers through price drops in the long-term,” said Sameer Shah, chief financial officer at Godrej Consumer Products.

Input costs in the FMCG space, including palm, crude oil, packaging and logistics costs, have risen tremendously in a year because of which FMCG companies have taken price hikes on products in the last few months to the tune of 30% to pass on that cost to customers.

Incessant price increases have impacted volumes so much that many FMCG firms are expecting single-digit volume growth this fiscal compared with double-digit growth in FY22.

However, raw material prices like palm and crude oil have started to soften in the last 10-15 days as key suppliers Malaysia and Indonesia have become competitive on exports and recession fears, respectively. As a result, the company executives and analysts expect margin pressure to start easing now.

Godrej Consumer in its recent quarterly update said that with correction in palm oil derivatives and crude oil, it expects a recovery in consumption and gross margins going ahead.

Analysts believe that margin recovery could drive companies to either raise trade margins, increase advertising spending or deploy resources in new product categories. But rolling back the prices and giving discounts and offers is unlikely, they said.

Given the inflation, consumers have been downtrading, and from a brand point of view, stability in prices would mean the ability to retain customers and even grow it, Manoj Menon of ICICI securities said.

Sameer Shah of Godrej Consumer said that they will increase their advertisement spending on the back of gross margin recovery.

Ad spends are around 7-8% of sales for Godrej Consumer currently which will now go up by 150-200 bps, and much of it will be funded by gross margin recovery which will, in turn, result in volume growth, said Shah.

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