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By Likha C. Cuevas-Miel, Reporter
SOARING food and fuel prices have begun hurting
consumer firms, squeezing their margins, as they compete to keep,
much less grow, their share of the market at a time when basic
commodities are eating up a bigger portion of people’s incomes.
Last month, inflation shot up nearly four-fold
to 8.3 percent—a three-year high—from 2.3 percent last year.
This brought the inflation rate in the first four months to 6.2
percent, breaching both the Bangko Sentral ng Pilipinas’ (BSP)
forecast for the month of between 6.4 percent and 7 percent, and its
full-year target of between 3 percent and 5 percent.
The surge in prices was due to the hefty
increases in food items, which were up 12 percent. The price of
rice, the country’s staple, jumped 24.6 percent.
Add to that the skyrocketing price of oil in the
world market, breaking a new record high of $127 a barrel early this
month. In the Philippines, prices at the pump breached the
psychological P40 a liter for diesel and P50 a liter for unleaded
gasoline.
As people increase expenditures on rice and
fuel, companies in the consumer business are holding off price
adjustments to avoid losing customers.
“We recognize with the impact of inflation and
food basket being affected, we really need to drive ways of keeping
milk affordable,” Wilfred Steven Uytengsu Jr., Alaska Milk Corp.
president, said.
Consumers can no longer cope
“Last year was a good example and a great
learning for us that there is a certain elasticity [beyond] which
the consumers can no longer cope. If you just look at the average
person who [feels the] impact of higher cost of comm-uting, the
higher cost of putting rice on the table—we’re still competing
with the same share of [people’s] wallets. And of course rice will
still be the primary commodity, which every household needs to put
on the table. We will be negatively affected by that if we put price
increases across,” Uytengsu told stockholders this month.
In the first quarter, Alaska saw its gross
margin drop to 6.51 percent from last year’s 14.47 percent. Its
net income fell by almost 50 percent to P86 million due to the
40-percent surge in cost of sales and operating expenses to P2.022
billion as the price of skimmed milk, a key raw material, rose to
$5,000 per metric ton. The company also expects tin plate prices to
go up by as much as 40 percent.
Even Southeast Asia’s biggest food and
beverage concern is not immune to costlier raw materials. Its food
unit, San Miguel Purefoods Corp. began offering “favorable selling
prices.” At end-March, soybean meal, wheat, imported beef, pork,
palm and coconut oil, milk fat and milk powder, “continue to weigh
down on the company’s profits,” pushing cost of sales 20 percent
higher, and pulling down its gross margin by about 1.6 percentage
points to 15.03 percent.
San Miguel Purefoods said it “managed to
temper the impact of higher costs on the bottom line through
intensified productivity and cost-efficiency measures.”
Weakening peso adds to pressure
The peso’s strength vis-a-vis the dollar last
year provided a measure of relief to some companies that import
their raw materials. The local currency was Asia’s best performer,
rising about 19 percent vis-a-vis the greenback. Companies therefore
have to fork out a smaller amount of pesos to buy the dollars
required for importation.
But the peso in recent months has weakened, as
widening risk aversion led investors to pull out from emerging
markets like the Philippines, and shift to dollar-denominated assets
and other inflation hedges.
Firms like Universal Robina Corp. (URC), maker
of the popular C2 tea drink and Jack ‘n’ Jill snack foods, still
had to jack up prices as commodities like wheat, soya and coffee hit
records in recent months. Lance Gokongwei, URC chief executive, said
the price of wheat has more than doubled since last year, pushing up
production costs by at least 10 percent for noodles, the snack item
of choice for a growing number of white-collar workers.
From October last year to March this year,
URC’s cost of sales went up 17.7 percent to P15.99 year-on-year
due to the increase in sales volume and costs of major raw materials
like whey powder, palm olein, skimmed milk, wheat, corn grain,
refined sugar, soya, as well as bunker fuel and diesel. With the
double-digit rise in cost of sales, the company’s gross margin
slipped to 24.4 percent from last year’s 25.8 percent.
“Flour will be most affected because wheat is
its only raw material. Potentially we have to consider additional
increases because the price of flour has gone up very quickly, also
the shortening and fat,” Gokongwei said.
Tony Tan Caktiong, Jollibee Foods Corp. (JFC)
chairman and chief executive, said the company would have to see
what it can or cannot absorb before they undertake another round of
prices adjustments, especially since oil hit more than $120 per
barrel in the world market. The government had forecast Dubai crude,
the Philippine benchmark for the commodity, to average at $62 a
barrel, or half the current price levels in the world market.
The country’s largest fast-food chain admitted
another round of price adjustments may ensue as higher costs of raw
materials start to eat into its margins. Instead of serving smaller
portions to consumers, JFC raised prices in small increments of
about P1 to P2 in some products like burger, pasta and rice meals
this year. Despite the increase, its gross margin slid to 51.4
percent at end-March from 53.31 percent last year.
Change in demographics of diners
However, there are limits to how big an
adjustment consumers can afford. Uytengsu said there is a point
beyond which customers—especially in the lower income
bracket—can no longer afford to buy Alaska’s products. Price it
beyond this critical point, then buyers would have to look elsewhere
for alternatives or stop purchases altogether and allocate more
money for basic food items.
Uytengsu said the company is reformulating some
of its milk products, shifting from tin cans to sachets, reducing
the packaging sizes and streamlining distribution to cut costs like
trucking—all of these just so Alaska can keep its prices at bay,
and hopefully, hold onto its customers.
In the case of JFC, higher prices failed to
deter people from eating out, but Tan-Caktiong noted a change in the
demographics of diners. From being the bellwether of Filipinos’
taste for the fast-food, the company’s flagship Jollibee is
turning into the refuge of the not-so-poor in the current
high-inflation environment, he said.
“The nice thing about fast food is that you
are in this certain [market] level. Of course you will lose the
bottom but the upper [income] went down so this business is somewhat
resilient. They [used to dine] maybe [in] high-end restaurants.
[Now] they go to [Jollibee]. But you lose the bottom [market],”
Tan-Caktiong said.
Indeed, the Asian Development Bank said recent
price increases have further marginalized the poor, who spend almost
60 percent of their income on food. A 10-percent rise in food prices
will push an additional 2.3 million people deeper into poverty, the
lender said.
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