Indonesian packaged-food leaders’ pricing power buffers commodity shocks

PT Indofood CBP Sukses Makmur Tbk’s and PT Mayora Indah Tbk’s leadership in the Indonesian packaged-food market will cushion the effect of a jump in commodity prices, Fitch Ratings says.

“We expect their pricing power and leverage headroom to help absorb the short-term rapid cost increase through gradual price adjustments. However, a prolonged escalation in commodity prices is likely to erode their EBITDA margins and hurt their leverage headroom,” they said in a report.

Prices of commodities such as wheat, crude palm oil (CPO) and milk powder have risen rapidly since early March 2022 due to rising geo-political uncertainty and a global demand-supply imbalance. Wheat prices have surged by around 45% since end-December 2021, CPO prices by 35% and skimmed milk powder by around 19%. This is likely to dampen ICBP’s and Mayora’s short-term profit margins because raw materials make up around 75%-80% of their manufacturing costs.

ICBP’s and Mayora’s ability to pass on raw-material cost increases to customers is underpinned by their entrenched market positions and solid brands. ICBP is the largest instant-noodle producer in Indonesia with over 70% domestic market share. Mayora is a top-three producer in several categories, including biscuits, wafers and candy. Strong brand loyalty from customers will allow these companies to incrementally revise their pricing without significantly sacrificing demand.

Packaged food companies can typically adjust their pricing a few times a year, mostly during the Eid-al Fitr and year-end festive seasons, although additional periodical adjustments are possible. The magnitude of the price adjustment will depend on product type, drivers for the change, market conditions and the company’s competitive position for the product category.

Companies that carry staple food among their products, such as ICBP’s instant noodles, benefit from these products’ affordability relative to general food, reducing demand elasticity on price changes. We believe Indonesia’s improving macroeconomic conditions will provide support for price adjustments, Fitch said.

Leave a Reply

Your email address will not be published.