A sustained rise in sugar costs caused by a drop in domestic production may force fast-moving consumer goods companies to increase prices of products including biscuits and chocolates, experts said.
The prospect of higher product prices comes soon after FMCG companies passed on the benefit of lower raw material costs to consumers.
“If sugar prices continue to rise, companies may face challenges as the cushion provided by passing on benefits to consumers from reduced input costs might diminish,” said Mayank Shah, vice president at Parle Products, the maker of Parle-G biscuits and Hide & Seek chocolate chip cookies.
Read more: Sugar stocks turn bitter as govt steps in to check prices; analysts say worries overrated
The government estimated sugar production will decline to 32.3-33 million tonnes in the 2023-24 season (October-September) from 37.3 million tonnes in the previous season. Sugar production in the first three months of the 2023-24 season declined 7.7 percent to 11.2 million tonnes, the Indian Sugar Mills Association was cited as saying in media reports.
The monthly average retail price of sugar in India rose 6.8 percent to Rs 44.68 per kg in December 2023 from Rs 41.83 per kg in January 2023, according to the price monitoring division of the Department of Consumer Affairs.
Sustaining sales
Shah said FMCG companies had already adjusted margins to drive sales after competition from smaller and regional companies and the unorganized sector. As the pandemic ebbed, smaller companies seized the opportunity presented by declining input costs to re-enter the market aggressively, he added.
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Analysts said companies that grappled with rising sugar prices have already adjusted prices in the previous quarter. Last year's inflation prompted product price increases averaging 20-22 percent.
However, a subsequent decrease in prices of key raw material such as edible oils led companies to pass on about 13-14 percent of the benefits, after incorporating the rise in sugar prices. This strategy aimed to balance competitiveness, considering the impact of reduced input costs and the need to sustain sales growth amid fierce market dynamics, the analysts said.
Sugar is relatively regulated in India and subject to government intervention regarding pricing and availability. This poses a challenge for companies that often need to purchase sugar from the open market.
“Many companies engage in open market procurement, but they also benefit from a degree of backward integration that involves sourcing a portion of the sugar needs from their own sugar factory, showcasing a level of self-sufficiency and integration in the supply chain,” said Shah.
Analysts noted that companies may implement price hikes as one strategy to navigate the uncertainty around sugar prices. Another approach would be to optimize sugar usage or procure it at lower prices from overseas.
“Additionally, taking forward cover in sugar is another method. However, these are the available alternatives. Ultimately, price increases are necessary to offset input costs that may pressurize the margins of the companies,” said Ajay Thakur, an analyst at Anand Rathi Institutional Equities.
Analysts said prices of other commodities have remained stable and might help to offset the surge in sugar prices.
“For biscuit companies like Britannia and Parle, sugar is an important category but as other commodity prices like edible oil and wheat have been stable, it might also offset the surge in sugar prices,” said Preeyam Toila of Axis Securities. “Nestle’s chocolate portfolio might be affected mildly.”
Shah noted that while the current situation does not pose a major challenge, sustained increases in sugar prices could compel companies to raise prices to offset the impact on their cost structures and margins.
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