Farm to Fork: Food firms wait for commodity prices to cool further

The second of a four-part series focuses on how food companies are yet to pass on the benefit of the decline in input prices to consumers

Though commodity prices have moderated in the recent past, consumers may not stand to gain from it anytime soon, as food companies say that they are waiting for a further reduction in input prices before they pass on the benefit to consumers.  

The last two years of the pandemic have led to cascading effects of spiralling commodity prices, leaving food companies with no choice but to opt for multiple price hikes and grammage cuts of products ranging from snacks to biscuits to coffee.  

The companies res­orted to reducing grammage in smaller packs while taking direct price increases in large packs. However, even though they passed on the input price hikes to consumers in a phased manner, their margins continued to remain under pressure.

That’s not all. Higher prices have taken a toll on demand, leading to weak volumes for the industry.

Namkeen and wafers manufacturer, Balaji Wafers, reduced the weight of its Rs 5 pack by 2 gm and that of its Rs 10 pack by 5 gm. Said founder Chandu Virani, “We will not increase the grammage, nor will we reduce prices. We barely made any profits in the last two years.”  

He also said that the company will get the benefit of lower commodity prices, especially that of edible oil, only after 10-15 days.

Parle Products, which sells the popular biscuit brand Parle-G, will also not reduce the price of its biscuits. Instead, it will wait to see how commodity prices pan out. It witne­ssed an impact of 250 to 300 basis points on its margins in the last six months after prices, which were already inching up, climbed higher, due to geo-political tensions.

“There is still a lot of uncertainty going on and we will wait before we take any fur­ther pricing decision,” Mayank Shah, category head at Parle Products, said, adding that further price increases, which the firm had earlier plan­ned, are now on hold.

“However, only if (input) prices correct by another 20 per cent from current levels, will we look at giving offers and promotions,” Shah said.
 

The company resorted to product price hikes last year as commodity prices continued to rise.From its peak, CPO (crude palm oil) Kandla prices have come off by 31.2 per cent, wheat Delhi prices have cooled off by four per cent to Rs 2,321 per quintal from its high of Rs 2,411 per quintal and sugar M-grade Kolhapur prices have also reduced by 5.5 per cent. Yet, they are 3 per cent to 29 per cent higher on a year-on-year basis (see table).

Britannia Industries also took price hikes of 10 per cent in FY22. The company also reduced grammage as an indirect way to increase prices in most of its stock keeping units (SKUs). Rising inflation has also impacted demand in the last few months.

“In India, the sector has continued to witness tepid demand as rising retail inflation exerted pressure on the share of wallet for FMCG companies,” Marico said in its June 2022 quarterly update (on July 5) ahead of its earnings.

Adding that consumers switched to smaller packs in essential categories, the company said that the performance of its brand, Saffola Oil, was impacted in the April-June quarter due to significant downtrading visible from super premium to the mass segment in edible oils.

“In the given context, India business volumes declined in mid-single digits… Excluding Saffola Oils, the India business posted marginal volume growth,” the company said, adding that its international business maintained strong momentum, delivering high-teen constant currency growth.

In its quarterly update, FMCG company Dabur, too, said that consumption pressure continued across the sector in the April-June quarter on account of unprecedented inflation. This has impacted the share of the income available for spe­nding on consumer staples — a trend visible in both urban and rural markets, it said.

Britannia Industries told investors after its March 2022 quarter results that it will take higher grammage cuts instead of increasing pri­ces. In FY22, the ratio of gramma­ge reduction/price increase was 65 per cent. Companies that sell commodity-based products such as edible oils, however, typically pass on cost increases/ decreases to customers without any lag. Hence, there is very limited impact on their margins.

For example, Adani Wilmar pas­sed on the price reduction in oil seeds to its consumers by reducing the cost of its edible oil packs. The company gets over 80 per cent of its revenue from the sale of edible oils.