By Ratna Bhushan and Sagar Malviya
Sales of consumer goods have slowed the most in about a decade, suggesting that Indians are making cuts in spending — especially on discretionary products — amid high inflation and a sluggish economy. Most company bosses expect things to get better soon, but a bad monsoon looms as a threat over rural consumption.
The overall consumer products market slowed to 7.5 per cent in the year to March from 10.6 per cent in the previous year, according to Nielsen data. The declining pace is across urban and rural markets and covers all three broad categories — food, home and personal care, and over-the-counter products.
“The last time FMCG (fast-moving consumer goods) saw singledigit sales growth was in 2004-05 when it grew 8 per cent soon after a drought situation,” said Abneesh Roy, associate director at Edelweiss Securities. “Hence, last fiscal’s growth is the slowest in over a decade after strong double-digit growth of 15-17 per cent, especially with the rural market opening up.”
The trend has hit consumer stocks — the BSE FMCG index rose 13 per cent in the year compared with a 63 per cent jump in the Sensex.
“A lot of discretionary spending slowed down because economic sentiment hasn’t been positive for the most part of last year,” said Chittranjan Dar, CEO of ITC Foods, which makes Sunfeast biscuits and Bingo snacks. Things may be turning around, he suggested. “Indicators that things are looking better, though, are reflecting in the latest quarter and we should see a brighter picture going ahead.”
Annual performance figures also reflect the direction of the market. Nestle and Godrej Consumer posted decade-low sales growth in FY15. Dabur posted its lowest revenue in nine years. Hindustan Unilever’s income growth in the past two fiscal years was its worst since 2005.
Within the overall picture, companies report two contrasting trends — a shift to the value segment and premiumisation, or higher-priced products in the same category.
“Over the past two years, the market has shifted more towards mass and popular pricing and towards sachets as opposed to large packs,” said HUL Managing Director Sanjiv Mehta. “(But) there are consumers who still have the capacity to consume brands such as TRESemme (hair care products) and Magnum (ice cream). We focus a lot on unlocking the potential not just at the bottom of the pyramid, but also at the top end of the fill.”
More pain could be in the offing if predictions of a deficient monsoon come true, derailing any positive growth sentiment. Consumer goods firms are taking steps to hedge themselves against this risk, especially since the Nielsen data suggest rural market growth has outpaced that of urban areas, albeit on a smaller base.
Leaning on urban demand
Companies are leaning on urban demand to improve the numbers as it accounts for nearly 65 per cent of the total market. “We believe revival in the FMCG sector will be led by urban markets as the sector is expected to be at the forefront of development and growth,” said Sunil Duggal, chief executive of Dabur, the maker of Vatika hair oil and Real juices.
He too is optimistic about things improving soon. “While the overall macro environment continues to remain challenging, consumer demand has started showing signs of a recovery,” he said. A gradual improvement in the consumption environment has helped the company perform well on several operating parameters.
Dabur has piloted a new sales and distribution initiative, called ‘Project 50/50’, aimed at leveraging the potential of the top 130 towns that account for 50 per cent of urban consumption. The project involves segregating the grocery channel teams for wholesale and retail as both trades have differing requirements. “At the same time, rural demand has proved to be resilient, and we plan to focus on 60,000 high-potential villages over two-three years,” Duggal said.
The economic situation has meant that the urban poor, who account for nearly 20 per cent of the market for most consumer product companies, have been facing a squeeze.
“A lot of the urban poor or people like construction workers, because of job challenges, ended up moving back to villages or cutting down spends,” said Godrej Consumer Managing Director Vivek Gambhir. “While we would all love to see much faster growth, at least it is trending in the right direction with higher growth every quarter. It is achallenging environment.”
Some analysts have been sounding a note of cautious optimism.
“Consumption demand, until recently, was seeing a continuous decline despite lower inflation and improved consumer sentiment. However, Q4 results imply that demand in at least consumer staples has clearly bottomed out. The worst is possibly over (if monsoon is normal), but it would be a long wait before the party begins,” Axis Bank analysts Sanjay Singh, Ajay Thakur and Mihir Shah wrote in a recent investor note.
Source:The Economic Times
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