Impact of inflation on FMCG companies

by Mahesh Vyas

Fast-moving consumer goods (FMCG) companies, those that sell biscuits and other bakery products, soaps and other toiletries, packaged cooking oil and the type face the double whammy of rising input costs on the one hand and shrinking demand caused by an elevated inflation rate on the other. FMCG companies also seem to be facing adverse terms of trade. Wholesale prices of oils and grains, the two principal components for most FMCG companies have shot up but consumer prices of end products have not increased proportionately.

The wholesale price index for oils and fats in the quarter ended June 2022 was up 13 per cent and wholesale wheat prices were up by 10.6 per cent. In comparison, consumer prices of bread and biscuits were up by a lower 9.6 per cent and 7.6 per cent, respectively, and those of soaps and other toiletries were up by less than 9 per cent in the same quarter.

Statements by FMCG companies suggest that volumes had declined in the June 2022 quarter. For example, Hindustan Lever’s recent investor presentation showed a decline in volumes for two consecutive quarters for its category of products. The company is a leader in a wide range of consumer goods across foods, toiletries and home care. Godrej Consumer and Marico reported a 6 per cent fall in volumes in the June 2022 quarter compared to a year ago. Britannia Industries, a leader in bakery products, reported that its volumes were flat in terms of the number of packets it sold in the June 2022 quarter.

Most industry leaders lamented in their recent quarterly investor presentations that inflation is hurting demand. The inflation grief of consumer goods companies is touching. But, the terms of trade described above are not really severely adverse. The pain is too little and too late, but the moaning is dramatic. The industry had enjoyed elevated profit margin through the pandemic.

Inflation had jumped up to 6.2 per cent in 2020-21 after having remained below 5 per cent in the preceding five years. In this year of the pandemic and high inflation, consumer goods companies recorded their highest ever sales and the highest operating profit margin in well over a decade.

Cosmetics, toiletries, soaps and detergents companies recorded their best operating profit margin at 21.7 per cent in 2020-21 even as sales grew at a healthy clip of 13.3 per cent. This was the fastest topline growth in seven years. It is the weighted average of a sample of over 90 listed and unlisted companies in the industry adding up to sales of about Rs.1.2 trillion. 15 of these are listed companies with sales of Rs.0.7 trillion. These had an operating profit margin of 24.5 per cent. This was also a record.

Extraordinary margins continued into 2021-22 (23.5 per cent) and the topline continued to grow (11.4 per cent nominal and 4.8 per cent inflation-adjusted) when inflation was still elevated compared to the five years before 2020-21.

Operating margins dropped to 22.4 per cent in the March 2022 quarter and to 21.3 per cent in the June 2022 quarter when inflation rose to 6.3 per cent and 7.3 per cent, respectively. This presumably, is the angst of the industry. But, these margins are much better than in most pre-pandemic years. Inflation-adjusted sales growth was positive. Year-on-year, sales grew by 4.7 per cent in the March 2022 quarter and 6.8 per cent in the June 2022 quarter. This suggests that overall, volumes of listed companies have not shrunk as suggested by the industry.

Hindustan Unilever, the leader of the industry said in mid-June that inflation was having a severe impact on its business. Apparently, the company’s response to the threat of inflation was to raise prices of its products. The company raised prices by 9-10 per cent in the March 2022 quarter and then raised them again in the June 2022 quarter.

It is apparent then that above some income level the demand for cosmetics, toiletries, soaps and detergents is price inelastic. And, loss of volumes from the price elasticity of demand from lower-income consumers can be easily offset by the richer consumers paying a higher price. In a way then, it appears that HUL’s strategic response to inflation’s demand destruction causes more inflation.

Britannia proposes to do the same. It proposes to raise prices by 6-7 per cent in the July-September 2022 quarter since price increases of the previous quarter were not enough. During April-June 2022, the company’s operating profit margin had dropped to 13.3 per cent compared to 15.6 per cent and 19 per cent clocked in 2021-22 and 2020-21. The 50-odd listed and unlisted bakery products companies have seen their average operating profit margin rise dramatically from about four per cent in the past to 13 per cent in 2020-21. Margins of half a dozen listed bakery products companies have risen similarly from about four per cent to 19 per cent in 2020-21. These corrected to 15.5 per cent in 2021-22 and to around 13 per cent in the June 2022 quarter. Britannia’s price hikes seem to protect these elevated margins.

Inflation hurts the lower end of the FMCG market as consumers in the lower income brackets are forced to allocate larger budgets for fuels and other essentials. Discretionary spending on cosmetics and even toiletries, etc can take a hit. Industry leaders’ plea to bring down inflation is possibly to bring those budgets back into consumer goods.

Recent news reports suggest that FMCG companies may pause their price hikes as commodity prices have eased. Apparently, they wouldn’t like to lose the lower end of the market if margins can still be protected. A fall in input costs may enable that in the coming quarters.

The operating profit margin of a little over 100 FMCG companies rose from 15.8 per cent in the March 2022 quarter to 16.4 per cent in the June 2022 quarter. Operating profit margins increased by 0.6 percentage point when the consumer price index rose by a record 5 points (from 166.5 to 171.5) in this quarter. Quarterly data of the last seven years indicates that an increase in consumer price inflation is positively correlated with an increase in the operating profit margins of these FMCG companies. If inflation is a threat to FMCG companies they manage this threat very well.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.5 -2.7
Consumer Sentiments Index
Base September-December 2015
76.2 -0.5
Consumer Expectations Index
Base September-December 2015
74.6 0.0
Current Economic Conditions Index
Base September-December 2015
78.7 -1.1
Quarterly CapEx Aggregates
(Rs.trillion) Sep 21 Dec 21 Mar 22 Jun 22
New projects 3.41 4.02 8.19 4.34
Completed projects 1.29 2.77 1.29 1.18
Stalled projects 0.28 0.08 0.43 0.27
Revived projects 0.39 1.98 0.32 0.28
Implementation stalled projects 0.26 0.66 0.09 0.29
Updated on: 26 Sep 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Sep 21 Dec 21 Mar 22 Jun 22
All listed Companies
 Income 27.5 23.4 20.8 40.3
 Expenses 26.7 21.3 19.9 41.7
 Net profit 55.7 35.4 30.4 20.5
 PAT margin (%) 9.6 9.0 8.9 7.3
 Count of Cos. 4,703 4,750 4,651 4,568
Non-financial Companies
 Income 35.7 29.2 24.9 50.3
 Expenses 36.1 28.8 25.8 53.4
 Net profit 58.1 19.2 10.1 7.6
 PAT margin (%) 8.7 7.5 7.7 5.8
 Net fixed assets 4.9 2.1
 Current assets 11.1 15.1
 Current liabilities 0.9 11.8
 Borrowings 12.2 3.4
 Reserves & surplus 12.6 11.2
 Count of Cos. 3,394 3,439 3,375 3,346
Numbers are net of P&E
Updated on: 26 Sep 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -1.1 25.6
 Expenses 0.4 -3.3 23.9
 Net profit -6.1 72.0 63.6
 PAT margin (%) 2.0 4.3 8.9
 Assets 9.0 9.8 9.7
 Net worth 4.8 11.8 14.3
 RONW (%) 3.3 6.7 12.7
 Count of Cos. 32,686 30,979 5,135
Non-financial Companies
 Income -1.1 -2.1 32.3
 Expenses -0.9 -4.0 31.7
 Net profit -22.4 59.3 59.7
 PAT margin (%) 2.2 3.9 7.8
 Net fixed assets 11.4 2.3 2.0
 Net worth 2.1 10.3 14.7
 RONW (%) 4.6 7.5 14.1
 Debt / Equity (times) 1.2 1.0 0.7
 Interest cover (times) 1.9 2.4 4.9
 Net working capital cycle (days) 82 87 52
 Count of Cos. 25,868 24,352 3,741
Numbers are net of P&E
Updated on: 20 Sep 2022 10:23AM