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With raw material prices under check, companies can spend the extra margins to drive up sales growth through higher advertising and sales promotion. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)
With raw material prices under check, companies can spend the extra margins to drive up sales growth through higher advertising and sales promotion. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

Food companies harvest cheaper input costs

Consumer food stocks have fallen in past one month, but that could change if they capitalize on soft commodity prices

Weak economic growth and high retail inflation are a bad combination for processed food companies. People spend less and cut down on discretionary consumption. The saving grace for them has been a softening trend in wholesale commodity prices. This was visible in the June quarter, when sales grew ahead of material costs, and fortunately for them the trend continued in the September quarter, too.

Wholesale prices of agricultural products commonly used by food companies as of August, compared with January, have either shown very small increases, or are trading flat and have even declined. Many are still higher over last year, but in recent quarters, prices have not flared up.

This holds true for commodities such as sugar, wheat, milk, palm oil, and even tea and coffee. Even the increase in prices of some products—a 3.8% increase in palm oil prices, for example—is bearable. Broad retail inflation is at much higher levels. Even if companies raise prices by a little, that should be enough to cover cost increases without affecting volume growth.

Companies such as Nestle India Ltd, Britannia Industries Ltd, GlaxoSmithKline Consumer Healthcare Ltd and Tata Global Beverages Ltd are among the large publicly traded consumer companies that are focused on food products. Then there are diversified companies with food as one segment, such as Hindustan Unilever Ltd and ITC Ltd. All these companies are likely to benefit.

With raw material prices under check, companies can spend the extra margins to drive up sales growth through higher advertising and sales promotion. That can play a critical role when demand is weak. In the June quarter, for example, the biscuits market’s revenue growth slowed, but Britannia did well because of a better product mix and higher spending on advertising and promotions. GSK and Nestle, too, have reinvested savings in material costs in improving sales growth. One consequence of this reinvestment, however, is that profit growth may not reflect the savings in costs.

In the near term, the outlook for commodity prices continues to be good. Sowing has risen by 6.8% in the kharif, or summer, season. If price increases of consumer food products are kept to a minimum, sales growth should trend up. The weak link is if commodity prices start rising. The 2014 general elections are another risk, as populist measures could also cause a spike in agricultural commodity prices. Consumer food stocks have lost steam in the past one month, but that could change if they can capitalize on soft commodity prices.

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