The FMCG sector is already grappling with fluctuating prices of crude oil, palm oil, and other essential raw materials.
New Delhi: The ongoing conflict in the Middle East has begun to impact global economies, including India's. Indian Fast-Moving Consumer Goods (FMCG) companies are particularly vulnerable to this geopolitical crisis. Potential increases in the cost of oil, packaging, logistics, and other essential raw materials have put companies on high alert. If the situation remains tense for an extended period, Indian consumers may have to loosen their purse strings further for everyday necessities.
The biggest threat stemming from the war: Increased raw material prices
The biggest concern for FMCG companies is the cost of raw materials. The supply and prices of raw materials used in manufacturing goods like soaps, shampoos, biscuits, cooking oil, snacks, and detergents are directly dependent on the international market. The Middle East conflict is particularly impacting oil production and supply chains, potentially increasing transportation costs and input material prices.
According to Krishna Khatwani, a senior official at Godrej Consumer Products, a rise in oil prices will increase the production cost of the company's products. Godrej manufactures products such as Godrej Cinthol soap and Goodnight, which utilize oil-based inputs. He believes this increased cost could ultimately be passed on to the consumer, increasing the burden on the general public.
Anticipation of increased packaging costs
The impact of the Middle East crisis is not limited to crude oil. The prices of packaging materials, which are made from plastics and other petrochemical products, could also rise sharply. Angelo George, CEO of Bisleri International, warned that disruptions to the Middle East's energy infrastructure will make plastic-based packaging more expensive. Products like Bisleri, where packaging costs constitute a significant portion of the total cost, could be directly affected.
Hopes for improved demand seem to be fading
The FMCG sector has been grappling with declining demand for the past year. However, recent interest rate cuts by the Reserve Bank of India, tax breaks in the Union Budget, and indications of a timely monsoon had led companies to expect a surge in consumer demand. But the Middle East conflict appears to be undermining these positive signs.
Mohit Malhotra, CEO of Dabur India, stated that while the retail inflation rate had recently declined and the good start to the monsoon season presented the possibility of market improvement, geopolitical tensions could now worsen the situation. Dabur produces products like Real juice, honey, and hair oil, all of which are affected by crude oil prices.
Urban markets most affected
Experts believe that if oil prices remain high for an extended period, urban consumers will be the most affected. While rural consumers tend to continue consumption to some extent even with price increases, urban consumers tend to reduce purchases even with small price hikes. This could directly impact the profits of FMCG companies.
Companies also state that they typically maintain a six-month stock of raw materials. However, if the conflict prolongs and supply chains are disrupted, these reserves could be depleted quickly, forcing them to purchase raw materials at higher prices.
Crisis in exports as well
Bisleri recently planned to begin manufacturing and distribution of its products in West Asia and Africa through a partnership with a major retail chain in Dubai. However, the conflict could impact this partnership. Disruptions to international supply chains and insecurity of trade routes raise concerns about export delays and increased costs.
Hope for government support
Companies have urged the central government to provide support through tax relief if the situation deteriorates. Measures such as reviewing taxes on petroleum products and providing input tax credit exemptions to the packaging industry could help mitigate the crisis. Furthermore, demands to exclude the FMCG sector from the Essential Commodities Act may resurface.
What is the outcome for the general public?
If the conflict prolongs and oil prices rise above $100 per barrel, consumers may have to pay more for everyday goods within the next three months. Prices of products like soap, detergents, cooking oil, packaged food, bottled water, snacks, and biscuits could increase by 5 to 15 percent. This increase could also push up retail inflation, putting further pressure on the Reserve Bank of India to raise interest rates.
