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  3. Consumer goods companies fear demand dip due to rising fuel prices

Consumer goods companies fear demand dip due to rising fuel prices

17 May 2011 Evaluate

Consumer goods companies are apprehending a dip in demand due to petrol price hike and an imminent increase in diesel prices that are adding pressure to customers, who are already reeling under the recent spike in interest rates. The firms, which are already facing thin margins, are also likely to face increased operational costs. Consumer sentiment will definitely take a hit for the next 4-6 months as buyers are likely to postpone their purchases due to inflationary pressures. There will be surely a drop in demand.

As expected, if any hike in diesel prices is announced in immediate future, it will increase operational costs for companies, hence impact prices of goods for consumers.

Any increase in distribution cost will lead to increase in product prices. The immediate impact would be on consumer sentiment and will be more psychological than actual as consumers will anticipate an inflationary situation going ahead. This anticipation will make people cut down on spending to certain extent. There will be no slowdown in demand for essential items though discretionary products segments will get affected. Because of rising crude oil rate, packaging material that accounts for about 8-10 per cent of the total cost production for FMCG companies has also already become costlier.

The government is also considering price hike of diesel, LPG and kerosene, which will be decided at the meeting of the Empowered Group of Ministers to be held this week. Earlier this month, the Reserve Bank of India had announced an increase in its short-term lending and bank savings rates. Consequently, leading banks have increased their interest rates by half a percentage point with effect from May 5, making all loans costlier.

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