FMCG companies strive to combat inflationary pressures

FMCG companies are adopting various measures and techniques to fight inflation. The companies wish to keep their margins stable or improve them further, which can help them achieve good growth going forward. Rising input costs is one of the major headwinds affecting the profitability of all FMCG companies. Though they have partially passed on the prices to their customers, they are still suffering and are unable to show good performance.

In this situation, the companies have 2 options available to them. The first is to use raw material substitutes, and the second is to drive the firms in an efficient manner, avoiding extra expenses. The former selection could affect the quality of the product, in turn affecting the consumer, and companies would be faced with the fear of losing them. The latter seems to be the appropriate solution, and has been adopted by the companies. This is evident from their Q2 FY12 results.

The table below shows the ratios of raw material expense to sales, advertising expenses to sales etc., which will give a clear view of the situation.

From the table, we can see that the raw material to sales expenses have increased substantially. Marico has suffered the highest increase in this regard, as its raw material to sales ratio has increased by 1500 bps to 57%. This increase resulted from the rise in the prices of copra (the key raw material for Marico), which was up by 50% in Q2 FY12 on a YoY basis.

Companies have also lowered their advertising expenses. Advertising expenses for Marico and Dabur have come down by 252 and 231 bps respectively. Needless to say, if a company spends less on advertising, the product awareness declines. Thus, the companies may see the slowing of sales and also a loss in their market share. For this reason, companies usually keep their advertising budget as per the industry's competitiveness.

Employee expenses and other expenses have remained more or less subdued as a percentage of sales, when compared with those of last year. This is true of companies except for Godrej Consumer, whose 'other expenses; has seen a rise in 12% on a YoY basis.

We, at DSIJ, believe that FMCG companies will continue their cost efficiency techniques for at least a couple of quarters. While inflation has shown signs of cooling, the demand for consumer goods also seems to be slowing. A leading newspaper recently reported that the rural demand in India is slowing down, as consumers are facing affordability issues. We believe the coming quarters will be challenging for the FMCG companies, as they have to adopt a strategy that has  a combination of price and volume growth to sustain themselves in this tough environment.