Rising production costs, contracting home budgets cutting into local businesses

[Naveed Yaseen]

By Saad Hasan
KARACHI: With inflation at over 29 per cent for the first time in 30 years, many food processing companies are facing the twin troubles of a high input cost and a drop in retail sales.

“In terms of rupees, our sales growth is the same at 27 per cent as we have increased the price,” said Abrar Hasan, Chief Executive Officer (CEO) of National Foods Limited, which makes over 300 products, ranging from Chinese chilli sauce to spices. To put the inflation in perspective, Hasan talked about how the cost of raw materials has changed.

“The edible oil we use for making pickles used to cost Rs52 per kg. Now it has shot up to Rs150 per kg. The price of chilli, which used to cost Rs30 to Rs35 per kg just over a year ago, now costs Rs350 per kg.”

He said sales in tonnage are stagnant at six to seven per cent. “With the way things are unfolding, there can be a regression.”

The sentiment is echoed among executives of food companies, which are facing an uphill task of controlling fallout of rising costs of raw materials.

Abdul Latif, Chief Operating Officer (COO) of Shan said that the company was going through a slump in the sales of its packaged products. “Sales volume is affected in the short term whenever there is inflation at this level.”

Latif added that he hoped the situation would stabilise in the coming months after a rise in salaries and subsequent increase in customers’ spending power. “We do see signs of recovery. Within a year, the income level will improve and hopefully, the current level of inflation will fade.”

Muhammad Azam, Country Sales Manager at Mitchell’s Fruit Farms Limited, told The News that consumer response varies among different product categories of food companies. “The confectionary department has been affected worse than others,” he said.

Azam attributed this to the rise in the cost of sugar. “People buy our products with extra money, but 80 per cent of the target market comprises customers feeling the impact of inflation.”

At Mitchell’s Fruit Farms Ltd, the operational side has been affected more than ever. According to Azam, the packaging cost has shot up by 70 per cent. “Boilers run on furnace oil, which has seen a phenomenal increase in cost along with other petroleum products. These problems have been compounded by power outages.”

For Engro Foods Limited, maker of a milk brand, seasonal demand has temporarily saved it from the repercussions of inflation, but CEO Sarfaraz A Rehman fears that sales could drop in future. “The cost of logistics, already high for a company dealing in liquid products, has increased substantially,” said Rehman.

At a time when oil-fed inflation has gone out of control, executives of the food processing industry are looking at ways to save in-house costs. Abdul Latif of Shan explained that moves such as a reduction in wages and a marketing budget may have a negative outcome.

His company is curbing costs by saving energy and not buying anything extra. National Foods, on the other hand, is doing it by saving on packaging costs, said Abrar Hasan.

Restaurants and local franchise holders of foreign food chains have been especially hard hit by the inflation. Rafiq Rangoonwala, President Pakistan Food Forum and CEO of Cupola, illustrated how.

“The number of people with disposable income has gone down. People are spending less. Our profits have gone down.”

As long as customers are forced to spend less and production costs continue to rise, food processing companies and restaurants will have to continue looking towards cost-effective methods to keep going.

http://www.thenews.com.pk/daily_detail.asp?id=125619