Cola cos to import sugar despite high prices

NEW DELHI: Undeterred by 30-year-high world market prices, beverage companies Coca-Cola & PepsiCo are scrambling to buy sugar overseas to make sure they are not compelled to slow down bottling lines during the peak demand months of summer.

Firm orders have been placed for delivery of sugar up to June. Cola companies are now gearing up to contract sugar for the remaining season, when soft drink demand is at its peak. Industry analysts say beverage companies are incurring heavy losses – especially in top-selling packs like 200-ml glass bottles or 600-ml and 2-litre PET packs, due to record high sugar prices. Sugar contributes up to 25% share of soft drink production costs. But after having raised prices just a few weeks ago, it may no longer be possible to make consumers share their burden.

Unlike chocolate and biscuit manufacturers, beverage companies also do not have the option of reducing the quantity in their packaging. Right now, indigenously-produced sugar is available in the wholesale markets of Maharashtra for Rs 34 per kg. But beverage companies are learnt to have bought sugar overseas for the June shipment at a significantly higher prices at Rs 40 per kg (at factory gate) because they want to be sure of supply. Moreover, there is no stock limit on imported sugar.

Traders say beverage companies are being offered sugar for delivery in July and beyond at Rs 38 per kg (at factory gate). “The market is aware that beverage companies are under tremendous pressure to buy and buy fast. They are buying on every dip,” said a trader.

Though the imported sugar is significantly more expensive than local sugar and would eat into their already wafer-thin profit margins, beverage companies are leaving nothing to chance. If they run out of sugar in the middle of the season, they will be forced to reduce production, which is a complete no-no at a time when beverages as a category is growing in healthy double digits and their parent companies have been raising sales targets of the Indian arms.

Both Coca-Cola and PepsiCo are under pressure from their parent companies to deliver escalating volume growth to compensate for the decline in beverage sales in other parts of the world.

“This will be one of the toughest years for the beverage industry if the current situation of raw material costs remains. Last year, by the time sugar prices started escalating, we had already crossed peak season. But this year we have to deal with the problem at the beginning of the season,” said a beverage industry official, requesting not to be quoted.

“Rising sugar prices over an extended period is adversely impacting our cost structures. We had no choice but to take up pricing,” the official added.

A Coca-Cola India spokesperson said in response to an ET query: “The entire food and beverage industry is looking at ways to tide over their requirement for sugar. As per the new norms set by the government, various alternatives are being looked at by the industry. The plan includes sourcing sugar both locally and also through imports.”
The government has stopped bulk consumers of sugar from stocking more than their factories need for 10 days.

Quarterly financial results of both companies declared last week show that India is a key emerging market and along with China is leading growth. Though the companies are posting record volume growth, profit margins are under severe pressure. PepsiCo India, for example, clocked its highest volume growth in a decade – with its beverage business growing over 32% in calendar year ’09. India topped beverage volume growth in the Asia, Mid-East and Africa region, at 32% in the year. In the October-December quarter too, India was the highest-growing market in terms of volumes – at 21%.

Similarly, in Coca-Cola’s case, 20% unit case volume growth in the October-December quarter helped the Atlanta-based company offset sales decline in markets like the US. Giving in to surging input costs, earlier this month, PepsiCo and Coca-Cola increased prices of some of their products by up to 20%.

While Coca-Cola has increased the prices of all its soft drink brands in 300 ml and 2 litre PET bottles between 9% and 20%, PepsiCo upped prices by Rs 2 of all its 200 ml, 300 ml and 600 ml bottles across all brands. Prices of glass bottles had remained Rs 8 and Rs 10 since 2001-02, though prices of PET bottles have gone up and down from time to time. Given the competitive business, the companies generally can’t afford to hike prices in isolation.