On October 22, Chacha Food announced that due to rising raw material costs, it decided to adjust ex-factory prices for some of its sunflower seed products, with the new prices effective from October 22, 2021.

According to the announcement, based on the product power enhancement brought by the upgrade of the sunflower seed series, along with the rising costs of raw materials, auxiliary packaging materials, and energy, and in order to better provide consumers with high-quality products and services and promote sustainable market development,

After research, it was decided to adjust ex-factory prices for the sunflower seed series, pumpkin seeds, and small fragrant watermelon seeds, with price increases ranging from 8% to 18% depending on the category. In fact, this is the second price increase since Chacha Food's listing 11 years ago; the previous one was in July 2018, with increases ranging from 6% to 14.5%.

Multiple brands raise prices: Is the FMCG industry experiencing a wave of price hikes?

In fact, since the beginning of this year, the FMCG industry, including Chacha seeds, has seen a succession of price increases.

It is understood that PepsiCo recently stated it might raise prices early next year. PepsiCo's CFO, Johnston, said in an interview with the media, "After the lifting of restrictions caused by the COVID-19 pandemic, demand for PepsiCo beverages in restaurants and cinemas has surged, highlighting the shortage of raw materials."

Prior to that, Coca-Cola had already issued a price increase notice. On April 19, Coca-Cola CEO James Quincey said that due to rising raw material prices, the company would raise beverage prices to cope with the impact of cost increases.

On August 16, Dali Foods Group issued a price adjustment notice for some products in its three major food series, stating that the group would adjust prices for some products in the three major food series based on the rise and fall of operating costs.

In May this year, Budweiser APAC mentioned that many of its brands had already raised prices, including Budweiser and core and value brands nationwide, with different brands having different price increase ranges. China Resources Beer also previously stated that it expected raw material prices to rise further in the second half of the year and did not rule out raising prices nationwide in the second half or at the end of the year.

International food giant Nestlé plans to raise prices across the board in the second half of this year. Nestlé said it expects input costs to rise by about 4% this year, so the company needs to raise prices as soon as possible, with an expected price increase of about 2% to offset the 4% cost inflation.

On the evening of October 12, leading seasoning company Haitian Flavoring released an announcement to adjust ex-factory prices for some products such as soy sauce, oyster sauce, and sauces, with main product adjustments ranging from 3% to 7%, and new prices effective from October 25, 2021.

Behind the price increases: soaring costs

From these price increase announcements, it is not difficult to see that rising costs of raw materials are the direct cause of product price increases. Currently, a fierce wave of raw material price increases is sweeping through the upstream, midstream, and downstream of manufacturing, and ultimately transmitting to consumers, such as the price increases of bulk commodities like PET, cartons, logistics, and sugar.

Now, with crude oil prices surging, PET pellet prices have risen to around 12,000 yuan per ton, and the raw material for the largest proportion of bottled water and bottled beverages is PET pellets. Therefore, in order to maintain product freshness and increase the cost of counterfeiting, beverage companies have to frequently update packaging, which also increases cost pressure.

In addition, the rise in carton prices has also brought great pressure to various enterprises. Cartons are essential packaging for products, but due to stricter environmental requirements in recent years, some paper mills have closed, leading to a crazy rise in carton prices, which has also caused chain reactions for many companies.

However, raw material price fluctuations alone are not enough to trigger the sensitive nerve of consumers regarding "price increases." PepsiCo stated that in addition to raw material shortages, labor shortages, reduced availability of air or other commercial transportation, port closures, or border restrictions have also adversely affected the supply chain, which may further affect PepsiCo's ability to produce and sell products.

Currently, the cost pressure faced by the FMCG industry is not only from rising raw material prices, but the deeper reason lies in the supply chain crisis.

Port delays, container shortages, transportation delays and supply shortages caused by the global supply chain crisis, and the resulting shortage and price increases of packaging, logistics, energy, etc., combined with rising bulk commodity prices and raw material supply shortages, have pushed up production and operating costs for FMCG companies at all levels, eroding their profit margins, forcing them to offset cost increases through price hikes.

"Price increases" are an inevitable trend for Chinese FMCG companies

Regarding this round of price increases in the FMCG industry, Mr. Zhao Bo, founder of New Distribution, said:

In fact, FMCG companies should have raised prices long ago. On the one hand, price increases can improve corporate competitiveness and maintain sustained profit growth; on the other hand, they can also improve the profits of channel partners and maintain the possibility of sustained win-win. Let's first analyze the data:

First, the core reason for this wave of price increases by consumer goods companies is cost increases. In 2021, the price increase of global bulk commodities exceeded 7%, and this cost transmission has brought considerable cost pressure to downstream production enterprises.

Second, the Consumer Price Index (CPI) has been increasing at a rate of 2% for many consecutive years, far exceeding the current price increase rate of the FMCG industry.

Third, national income continues to increase, and consumption upgrading is very obvious. According to statistics from the National Bureau of Statistics, personal consumption expenditure has increased by 10% in recent years. However, the demand for improving people's lives has not been used in the consumer goods field. The proportion of consumer goods retail sales to per capita disposable income has decreased by 59% over the past 10 years.

From this point of view, in a sense, we see that consumer goods brands have not kept up with this wave of consumption upgrading.

Fourth, the costs of channel partners are growing rapidly, with warehousing, logistics, and labor costs growing at a compound annual growth rate of about 5%, continuously squeezing channel profits.

In summary, I personally believe that whether from the perspective of cost or consumption capacity, consumer goods companies should make a wave of price adjustments this time.

But at the same time, we must also see the pressure of price increases: why is the price increase in the consumer goods industry slower than the overall CPI? I personally think it is due to severe involution in the industry, especially in categories with fierce competition. In order to ensure market share does not decline, companies have to withstand cost pressure, causing the entire industry to fall into a prisoner's dilemma.

New Distribution has also interviewed small shop owners before, and the most obvious feedback is that consumers have become accustomed to this price, and once the price rises, it becomes difficult to sell. Moreover, if they raise prices and the convenience store next door does not, it will affect their reputation.

Distributors will also worry that if we raise prices and competitors do not, sales will be damaged. This leads to insufficient desire for price increases among brand owners, channel providers, or retailers.

But we must also see that consumers are not sensitive to price fluctuations within 1 yuan for consumer goods, especially with the popularity of mobile payments. Consumer goods are also impulse purchases, so small-scale price increases are not a big pressure for companies, and price increases can significantly improve the profits of partners such as retailers and distributors.

With profits, companies can invest more in the market and motivate channel partners to better distribute our products!

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