Consumer staple firms may extend cost-cutting measures in FY22 to avoid adverse impact on operating margins

September 20, 2021 2:48 PM

Cost savings were in focus for consumer staple companies to avoid margin pressure as raw material prices remained inflated.

FMCG companies, consumer staplesEmployee costs increased for all the major staple companies on account of annual increments and the implementation of various safety measures against COVID-19

By Vaibhav Agrawal

Consumer companies are operating under a better environment after countering the dual impact of supply chain and demand disruption followed by sharp inflationary pressures in FY21. Cost savings were in focus for consumer staple companies to avoid margin pressure as raw material prices remained inflated. The companies managed to bring their overall operating cost down (ex-RM), largely driven by conscious efforts to cut spends and improved volumes in the essential categories.

Most companies also restricted their A&SP spends in FY21. While the A&SP spends were back to normal amid a better economic environment and improved mobility in 2HFY21, for the entire FY21, most companies saw a decline. Among the other key line items that saw the bulk of the savings were freight & forwarding charges, power & fuel costs, repairs, processing charges and other miscellaneous expenses.

On the other hand, employee costs increased for all the major staple companies on account of annual increments and the implementation of various safety measures against COVID-19.

Most FMCG companies are also increasing the prices of their products. Inflation in crude and derivatives impacts all companies with higher packaging costs, with higher impact for detergent companies. This directly affects Jyothy Laboratories, Godrej Consumer and Hindustan Unilever (HUL). HUL and Dabur have already hiked prices in soaps, detergents, select foods etc since there’s a continued price hike in palm oil. HUL has increased prices by 2-4% for Wheel and Surf Excel. P&G increased the price of Tide Plus by 5%. Meanwhile, the edible oil segment is also witnessing a price hike due to price volatility in edible oil. Marico has raised the price of Saffola Gold by 7%.

While the operating environment has improved drastically, inflationary pressure on raw material prices continues to linger. It will force the companies to continue with cost-saving measures in FY22 as well as to avoid any further adverse impact on operating margins. Some of the FMCG companies have already announced cost savings targets for FY22.

Dabur has set a cost-saving target of Rs 100 crore, Marico has also given cost-cutting guidance in the range of Rs 125-150 crore. Emami is expected to save costs to the tune of Rs 80-100 crore. Emami has stated that it plans to retain decent margins in FY22 as a result of strict cost control and volume-led growth. According to the company’s most recent annual report, the Kolkata-based firm would aim to absorb input costs through increased operational efficiency and prudent price rises.

Britannia Industries is well-positioned to maintain growth and is confident in its ability to address the changing situation thanks to its efficient supply chain, inherent brand strengths, technology and research capabilities, and cost-cutting initiatives, according to the company’s latest annual report.

Bajaj Consumer Care is also not expected to invest in the near term. Edelweiss report highlighted that the company is tactically ramping up distribution in South India and Maharashtra to push its other mainline products. In fact, the coconut oil market is tough to crack given it is ruled by Marico (Parachute oil). Marico makes huge benefits from the scale and direct sourcing. The coconut margins are less for smaller players like Bajaj Consumer.

(Vaibhav Agrawal is CIO, Teji Mandi. Views expressed are the author’s own.)

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