Sucheta Dalal :Rising food prices to affect sales of consumer products
Sucheta Dalal

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Rising food prices to affect sales of consumer products  

December 24, 2009

Rising food prices are likely to affect sales of consumer products as consumers will have to spend more money on food articles, said analysts.

"With spiralling food prices, the 'wallet-share' of consumers is expected to tilt towards food products and away from consumer products," said Anand Rathi Financial Services Ltd, in a research note.


Higher food prices would also result in more working-capital for retailers (kiranas) and it could lead to some de-stocking by them. "We expect that this might impact new products and slow-moving ones. This trend would drive revenue for companies with a greater proportion of small stock-keeping units (SKUs). Furthermore, it might compel companies to raise retail margins and incentives", the note added.

India faced the curse of drought and floods in 2009 that saw consumers paying towering prices for vegetables, pulses, sugar and foodgrains. India's annual food inflation declined 1.3% to 18.65% for the week ended 12th December from 19.95% the week before.


With the economy on an upswing, analysts said rising food prices should prompt the government and the Reserve Bank of India (RBI) to shift their focus on controlling inflation, otherwise manufacturing inflation would also go up. However, the authorities feel that food inflation cannot be controlled by the monetary policy alone.


"It is food inflation which is a substantial part of inflation right now. So there is not much that can be done by other policies, including monetary policy," finance secretary Ashok Chawla had said.


The sharp rise in the WPI inflation driven by the relentless increase in prices of primary food articles is likely to be a key concern in the near future. Moreover, with the revival in global economic activity, the demand for crude oil is likely to witness an increase in 2010, leading to a rise in international oil prices. This, in turn, is expected to exert upward pressure on the domestic prices of minerals oil.


With the lower base of November 2009, prices of most raw materials have been rising. The prices of most agro-products have gone up by more than 30%. Especially, sugar prices in November rose 90% to Rs3,456 per quintal compared with the same month past year. However, some items like copra and soda ash continue to be sold at 26% and 13% lower prices, respectively, from a year ago. Liquid paraffin and LAB prices are also lower by 48% and 12%, respectively from last year. In November, palm oil has shot up 58% to $718 per tonne on a year-on-year basis.


During November, coffee prices rose by 46.8% to Rs9,567 per 50kg from the year-ago period; however, on a month-on-basis, it has fallen by 19%. "The month-over-month drop in coffee prices would benefit Nestle and Hindustan Unilever.

Higher prices of agricultural products are expected to hit Britannia. Lower prices of crude oil derivatives are expected to help personal-care companies like Hindustan Unilever, Emami, Dabur and Marico. Higher packaging material costs are expected to affect all companies," said the note from Anand Rathi Financial Services.


Food price inflation is generally stoked by supply-side concerns rather than demand-side concerns. Therefore, the food price inflation should be tackled by removing the bottlenecks in the supply side, like increasing the supply of food stocks in the market.


Attributing rising prices to supply-side constraints, Suresh Tendulkar, former chairman of the Prime Minister's Economic Advisory Council (PMEAC), had said that the RBI could take steps to withdraw liquidity to tame rising prices. The apex bank is slated to announce review of its annual credit policy next month.


RBI, however, might look at ways to curb this inflation spike creating second order impacts like wage hikes due to stoking of inflation fears. Persistence of this trend may result in increase in the interest rates or tightening of liquidity to erase any minimal contribution done from the demand side.


"The food articles inflation is already at an alarmingly high level and given its deeper socio-economic implications, it has the potential to derail overall economic recovery if timely action is not taken,” said Kaushal Sampat, chief operating officer, Dun & Bradstreet India.
Yogesh Sapkale


-- Sucheta Dalal