Impact of the ongoing Russia-Ukraine war on the FMCG sector

The Ukraine-Russia war has made it very difficult for FMCG brands to keep functioning as they have before. The consequences of the escalation increasing to such an extent were unforeseen and have put major FMCG players in a tight spot. Covering aspects of all areas concerning Inventory, Imports, Inflation and Price Hikes - Here are 5 disruptions as the war continues to wage on.

1. Inventory Stock Depletion

Adani and Wilmar LTD which is one of the largest FMCG joint ventures in India between Indian conglomerate Adani and Wilmar - A Singaporean multinational giant with 300 other subsidiaries have inventory management systems in place for at least 45 days for this very reason.

Both the war inflicted countries together contribute 90% of sunflower oil imports. Our country is highly dependent on Russia and Ukraine for sunflower oil supply which accounts for 15% of demand amongst other oils. Now that the situation is still ongoing, analysts suggest if the situation trickles down the effects won’t be felt, however, if it continues, then there might be subsequent price hikes against increasing input costs. This may result in companies substituting the affected oil supply with other oils like palm oil and soybean oil.

2. FMCG Companies face Financial Hit

The whole FMCG industry was beginning to reel from the financial hits of the second wave, in fact, companies were witnessing margins and costs reductions to complement the slowly rising demand for FMCG products, especially in the health and hygiene categories. December-January was effectively seen as recovery months in this period but the war has brought back the eminent possibility of an equal or greater slump.

3. Daily Consumers: High Inflation

Not only are the companies and brands bearing the brunt but also the daily consumers who have little to no options rather than to purchase these FMCG products for daily use. The War will increase prices through rising commodities costs and input costs. The effect of price rise in several products and FMCG related commodities will be much higher due to the rise in crude oil prices. Brands like HUL (Hindustan Unilever) and Britannia have already hiked up prices which are lagging due to contracts in inventory supply disruption.

4. Volume Sales: Staggered Growth

As a matter of fact, the previous financial quarters also have been struggling to keep pre-pandemic levels of figures all due to a steady rise in key commodity and input prices. Shaky demand and supply have affected all brands in the major league like Godrej, Marico and Emami among many other regional and rural companies as well. The annual year on year sales volumes has been flatlined for these brands, remaining stagnant over the Q3 quarter.

5. Declining Supply: Rising Pricing

Hence, the supply chain is considerably important in these matters since the complete blockage between rail, road and air connection to Russia and Ukraine. The overall impact could worsen if the situation does not stop disintegrating further. Price hikes are already expected to rise and keep getting more expensive. Most big companies like Parle and Adani have importer contracts for the next 2-3 months which might be enough to curb an immediate alarm but if the condition persists to continue then even the big players will have to face the same challenges regional players are already facing and suffering as an outcome. Edible Oils, Hydrocarbon derivatives and other raw goods like Honey will have a setback among the FMCG companies. Brands like Dabur and Nestle India have already started witnessing this dreaded trend of inflation with the pricing of a few of their products reaching 10-year highs.

The Steps taken to immediately tackle the issue at hand is by being cautious about any intimation regarding the spike in pricing as an outcome of increased costs to consumers and rather using other techniques such as introducing LUPs that is Low Unit Packs - which is essentially packaging reduction strategy to fit the contents accordingly to the price range without affecting MRP. If that is not possible, then they can switch to slowly introducing marginal price hikes during the month of April and so on.

Overall Impact on Growth

The price hike is more so inevitable in the Petrol and Diesel sector than it is in the edible oils FMCG sector. Unfortunately, this is again related to the low purchasing power of people due to engine oil prices hitting record highs. When there are low disposable amounts to spare, consumers will be price sensitive as a cause and effect.

The FMCG companies will have to resort to calibrated pricing strategies that suit the current tepid demand and sales volume scenario. Analysts predict a further 3-4% hit on the FMCG market as a direct result of crude oil prices increasing. If in the next 10 days the situation has trickled down, the supply chain will get back and the pricing of FMCG goods will eventually come down as well.

Updated On May 26, 2024