As crude prices tumble on hopes of a US-Iran peace deal and the reopening of the Strait of Hormuz, India’s packaged consumer goods makers are cautiously optimistic that months of cost pressures may finally begin to ease.
However, any relief is unlikely to reach consumers before September.
Parle Products, among the country's largest packaged food companies, expects lower oil prices to eventually reduce packaging, manufacturing and freight costs, but says the industry is still waiting for prices to stabilize before making any pricing decisions. “We expect the impact to be positive as lower crude prices could help improve consumer sentiment,” Mayank Shah, chief marketing officer at the company, told Mint.
Marico Ltd expects the normalization in the geopolitical environment to lead to relief in the crude-linked input costs as well as global logistics. "That said, the extent and timing of any significant benefit will depend on how fast the supply chains stabilize. The consumer demand has continued to remain stable in the current scenario, although factors such as monsoon outcomes will remain important factors to monitor in the near term,” a Marico spokesperson told Mint.
Brent crude hovered below $80 a barrel on 17 June after tumbling 15% over the previous four sessions, its longest losing streak of the year, while West Texas Intermediate traded around $77 a barrel. It had touched a high of over $112 in early April.
For India’s consumer economy, this could eventually translate into lower packaging costs, reduced freight expenses and fewer supply-chain disruptions. However, inventories bought at elevated prices and existing supply contracts mean any benefits could take weeks—and in some cases a full quarter—to filter through the system.
Slow cost relief
The immediate impact would be on packaging, conversion, and fuel-related expenses.
Mint reported in March that plastic prices were being pushed higher by stockpiling and disrupted procurement cycles, tightening the supply of packaging materials. Food and beverage makers are already exposed to expected near-term margin hits.
Nikhil Doda, co-founder and chief operating officer of beverage firm Lahori Zeera, said suppliers entered the peak summer season with elevated inventories, while fresh imports would take several weeks to reach India even after prices ease. As a result, it could take two to three months for costs to normalize. Lahori Zeera implemented selective price increases of 2-5% on certain stock-keeping units during the period of elevated input costs.
Lakshman K. Iyer, chief executive of Srichakra Polyplast, which supplies recycled PET packaging material to packaged consumer goods companies, said the packaging supplier operates on a 30-45 day inventory cycle, while customer contracts are often locked in for three to six months, delaying the pass-through of lower feedstock prices.
Thimmaiah Napanda, managing director of Alternicq (formerly Manjushree Technopak), said the company and its customers spent the past quarter prioritizing supply security amid uncertainty around raw material availability. As a result, many companies built inventories at elevated prices that will take time to work through.
Companies are also likely to rebuild margins before passing on any benefits to consumers, Napanda added.
Consumer durables makers are equally cautious. Shekhar Bajaj, chairman and managing director of Bajaj Electricals, said manufacturers would remain in “wait and watch” mode until there is clear evidence that the Strait has reopened and geopolitical stability has returned.
“Luckily, our products [small appliances such as toasters and mixer-grinders] are seen as necessities,” Bajaj told Mint. “So while there is an impact on margins due to inflation, we won’t have negative growth as we have seen in other countries. The El Niño is what I am worried about. It is almost certain that there will be a drought this year. This will have a much bigger impact on consumption than the closing of the Strait of Hormuz.”
Relief for consumers
The June quarter has already absorbed much of the damage from the West Asia war, according to experts.
“If the supply of key resources and commodities is not constrained, pressure on companies is likely to reduce. Financial year Q1 has already gotten negatively impacted,” Rishav Jain, managing director and co-lead (consumer, consumer technology and retail) at Alvarez & Marsal India.
“If the supply situation remains stable, the following quarters could potentially witness a revival and could eventually extend to consumers as well.”
Any easing in raw material and energy costs could eventually trickle down to consumers, though brands typically pass on such benefits through larger pack sizes, promotional offers and discounts rather than outright price cuts, Jain added.
Parle Products, for instance, chose not to pass on recent cost increases to consumers, preferring instead to absorb the impact until commodity prices stabilized. Shah said uncertainty around where crude-linked costs would ultimately settle made it difficult for manufacturers to recalibrate pricing.
Parle Products’ revenue in the June quarter is growing at mid-single digits, down from the high double-digit growth it saw a year ago, said chief marketing officer Mayank Shah.
(Soumya Gupta and Neethi Lisa Rojan in Mumbai contributed to this story.)