The FMCG industry, more specifically the food and beverage market, may be entering a new round of raw material price increases. Looking at the market conditions over the past two months, many small and medium-sized enterprises (SMEs) are facing risks caused by significant overall increases in raw material and freight costs over the past two years. Moreover, the current trend shows no signs of stabilization or decline. Let's examine the price increases of essential raw materials in the food and beverage industry so far:

Milk powder up 50%: Essential for all dairy products, dairy beverages, and some snack foods. The rise in dairy prices stems from reduced exports from the EU and New Zealand. These two regions are the largest dairy exporters globally, accounting for over 60% of exports. EU raw milk production has been declining since June, with a planned reduction of 1.06 million tons in Q4, a larger decrease than Q3. Additionally, a 7.5-magnitude earthquake in New Zealand's South Island has negatively impacted short- and medium-term raw milk production and export trade. Industry insiders point out that this will exacerbate the supply-demand imbalance for raw milk, affecting domestic raw milk prices.

White sugar up 30%: Essential for beverages and food. Sugar prices have risen by 1,000 yuan per ton, with further increases expected.

Cardboard boxes: Uncertain increase. Due to national environmental regulations, many paper mills and box factories that do not meet production requirements have been shut down since November. This has led to significant production cuts or increased production costs due to environmental upgrades, resulting in unprecedented price increases. A box factory manager told us that prices change daily and may rise further.

Freight up 33%: On September 21, the government issued the "strictest overload control order," causing freight costs to soar. Freight rates are also affected by national policies, with stricter enforcement against overloading, especially for long-haul transport. This has also made it difficult to find logistics vehicles.

Additionally, palm oil, glass bottles, coil materials, and other upstream food raw materials have seen varying degrees of price increases.

It is reported that despite this new round of raw material price hikes, large enterprises have not yet adjusted their product prices, and distributor supply prices and terminal retail prices have not seen widespread fluctuations. These large companies may be protected by futures contracts or bulk purchasing, so the risk has not yet hit them fundamentally. However, SMEs that already struggle in the competitive market are facing even greater risks from these raw material increases.

Some industry insiders suggest that SMEs could raise prices in more subtle ways, such as launching new products with higher prices. We believe this approach is not very meaningful. "If you launch a new product, you need to invest in promotion, advertising, and discounts, which adds extra costs. Moreover, in the food industry, mainstream products are from traditional leading brands. If these brands don't drive overall price increases, the 'rising tide doesn't lift all boats' phenomenon will pose greater risks for SMEs."

Further Reading:

Why are raw material prices rising? Since October this year, the FMCG industry, especially in food and beverage, has been hit by upstream raw material supply chain and transportation cost increases, causing production enterprises, particularly small and medium-sized ones, to complain. But since November, raw material prices have not shown signs of falling; instead, the trend and magnitude of increases have grown.

Take cardboard boxes as an example. A food company founder said: "Since November, the government has strengthened pollution control policies. All small and medium-sized paper mills that don't meet environmental requirements have been shut down, causing box prices to soar. In November alone, box prices have increased six times, up 45% from pre-November supply prices, and there's potential for further increases." He calculated that just for boxes, the cost per item has increased by more than 0.5 yuan.

After inquiring with multiple box factories about supply and prices, we found that there is simply no stock. A box factory manager in Ningjin, Hebei, said: "Paper mills don't dare to produce now; even with money, there's no supply. Supply is extremely tight. Only customers who paid in full before can get supplies." Another box factory manager revealed that their factory must upgrade to meet environmental standards, increasing production costs and forcing price hikes.

That's just for boxes.

Presumably, many FMCG practitioners, distributors, and even terminal retailers have received information about raw material price increases and production cost hikes through various channels, flooding social media and online platforms. It is estimated that this round of increases in palm oil, white sugar, milk powder, flour, boxes, glass bottles, freight, and other upstream supply chain items has raised overall product costs by more than 30% compared to before. This does not include increased labor costs during the Spring Festival period.

Why haven't companies adjusted prices yet? The raw material price increases since November have left many companies at a loss, especially SMEs that are already at a disadvantage in terms of capital and sales. On the other hand, these cost increases have eroded the already thin profit margins of enterprises. Given the current situation, it is unlikely that upstream supply chain prices will fall. Many companies are eager to adjust product prices. However, since leading traditional enterprises have not yet taken the lead in price adjustments, and SMEs have not formed a united front, everyone fears that if they raise prices while others don't, they'll lose market share. They are all waiting and watching, afraid of being the first to move and becoming a casualty.

Smaller food manufacturers, due to capital disadvantages, have temporarily halted production and supply of some low-margin products this month. Some companies that are slightly larger are still struggling to hold on.

When will companies adjust prices? Because this round of price adjustments is reactive, three conditions must be met for industry-wide price adjustments: 1. Leading enterprises take the lead in raising prices. 2. SMEs raise prices collectively. 3. Raw material supply price increases reach the threshold that most companies can no longer absorb.

A friend working in procurement at a food manufacturing company with annual sales of 1 billion yuan revealed that not only small companies but also companies of their size are struggling. They have held several internal meetings to determine the timing and magnitude of overall price increases. He also revealed that the increase would be at least 20%.

If the upward trend in raw material prices continues or shows no signs of falling, it will continue to challenge the survival bottom line and risk tolerance of SMEs. It's a matter of life or death: either shut down or grit your teeth and adjust prices.

Based on the current situation, some companies have already notified distributors of price increases in November. Entering December, it is inevitable that the food industry will see widespread price increases, breaking the "rising tide doesn't lift all boats" deadlock.

What should distributors do in the current situation? Price adjustments are undoubtedly sensitive for distributors, terminal retailers, and consumers downstream in the industry chain. Especially for distributors, as the Spring Festival approaches, it's time to prepare for the peak sales season and stock up from manufacturers. At this time, distributors need to accurately estimate how much policy support they need, how much stock to take, what products to stock, when to stock, and their capacity to handle inventory. They must maximize their profits while minimizing risks. This requires distributors to make correct judgments on industry trends, companies, products, and their own sales capabilities, and to develop a keen eye.

Compiled and published by New Distribution. Please contact the original author for reprints.

Source: FMCG Family (ID: lp800315111)

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