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BW Businessworld

Packaging Puts The Squeeze On Consumer Cos

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Indian consumer goods firms, already struggling with mounting raw material prices, are increasingly under pressure to manage rising packaging costs that threaten to hurt wafer-thin margins in a highly competitive market.

With prices of kraft paper, aluminium foil, adhesives for corrugated boxes, plastics jumping as much as 25 per cent in the past three months, firms such as Hindustan Unilever, Colgate Palmolive India, Dabur, Emami, Marico and Godrej Consumer have had a tough time safeguarding profits.

Packaging has gained importance in India as rising incomes have changed consumer preference, from loosely sold or not-attractively packaged products, to ones that are packaged well and have good pack quality.

"Margins of consumer good companies have been taking a hit due to rising packaging costs and it looks like it will continue to affect them until crude prices ease as most materials are crude linked," said Naveen Trivedi, analyst with Pinc Research.

"A lot of companies are trying to hedge packaging material costs but if it keeps going up they might not be able to accommodate it for long and that will force them to hike prices again," he added.

Packaging costs make up 7-11 per cent of the total cost of a product for most consumer goods firms.

"Packaging prices for us have increased by up to 3-5 per cent. So the idea is to cut costs and we do that by sourcing products locally as much as possible and try to have packaging units for whichever materials possible, near our plants," Harsh Agarwal, director, Emami said.

Recently, oral care products maker Colgate Palmolive India signed an exclusive long-term agreement with packaging products maker Essel Propack to set up a unit in Goa to cater to the oral care firm's needs.

"Inflation is a concern and industry-wide we are seeing packaging costs rising. This plant is located very close to our plant in Goa, so it is a win-win situation," a senior Colgate official, who cannot be named due to company policy, said.

In the quarter-ending March 2011, Emami's profit from operations before interest and exceptional items fell 4 per cent to 513 million rupees while Colgate saw EBITDA margin impacted by 287 basis points to 24 per cent due to higher packaging costs and rising prices of key inputs.

Managing Costs
Most consumer firms have been forced to consider cutting advertising spends and may also resort to a fresh round of price hikes after the June quarter to manage costs, analysts said.

"Reducing operating costs is what most of the companies are concentrating on. This includes ad spends to a large extent along with other costs such as staff etc to maintain their margins," said an analyst with a Mumbai-based brokerage.

A recent report by Standard Chartered Equity Research said several consumer goods firms had trimmed advertising expenditure by 200 basis points in FY11, a trend, analysts say, is likely to continue.

Hindustan Uniliver (HUL), one of the biggest spenders on advertising among consumer goods firms, marginally reduced its advertising expenses in the fourth quarter of FY11 to 6.23 billion rupees from 6.27 billion rupees a year ago.

Similarly, in the last two quarters of FY11, Dabur cut ad spend from 16.4 percent of sales to around 11.5 percent.

"As regards packaging cost, while the industry has witnessed an over-11 percent inflation, Dabur has managed to contain it at under 3 percent by taking correct positions, which has led to our average cost being far cheaper than our replacement cost," Prashant Kumar, category-head packaging, Dabur, said.