India's fast-moving consumer goods companies are showing signs of weakness.
Volume growth has faltered in the last two quarters and profit margins have shrunk, and the prospect that thrifty consumers will stop buying discretionary items is putting new pressure on the companies.
For the country's largest FMCG player, Hindustan Unilever, volumes have been on a steady downslide, dropping from nine per cent in the quarter ended June 2012 to seven per cent in September and five per cent in December.
At Marico and Dabur, volume growth has been better at nine per cent, but it pales in comparison to their own average quarter-on-quarter growth.
Ghaziabad-based Dabur, a maker of healthcare, personal care and oral care products, has an enviable track record of 10-11 per cent volume growth every quarter, while Marico’s, key brands such as Saffola and Parachute have grown 13 per cent in some exceptional months.
Adi Godrej-led Godrej Consumer saw demand for soaps shrink two per cent in the third quarter, indicating the slowdown is beginning to broad-base itself.
The changing consumer mindset is rippling across products and categories. Packaged food was among the first categories to bear the burnt of the slowdown.
It gradually spread to personal products in the second quarter and now has moved to essentials such as soaps and detergents.
The household consumption data tracked by research agency IMRB shows that urban consumers are significantly cutting their spending on home, personal care and food & beverages. (See chart) What's fuelling this trend?
A range of factors from the uncertain economic environment to inflationary pressures are wrecking havoc with consumer sentiment and threatening to sap the already weak spending power.
In January, inflation, as measured by the consumer price index, rose for the fourth straight month to 10.78 per cent from 10.56 per cent in the previous month.
“Consumers in urban areas are either opting to buy less or choosing to drop certain categories from the purchase basket,” says Manoj Menon, group business director, IMRB International.
He says when consumers are on a tight budget, among the first products to get the axe are personal care items such as soaps, shampoos, skin creams and deodorants. Companies too agree.
“There are challenges in the short term.
“Over the last few months, we have begun to see some slowdown in a few categories, where there is an opportunity for the consumer to defer the choice between today and tomorrow,” Nitin Paranjpe, managing director & chief executive officer, HUL, had told Business Standard earlier.
Marico's chairman and managing director Harsh Mariwala says, “The impact of a slowdown on FMCG shows with a lag.
“We are now seeing it for the last few quarters.”
Meanwhile, consumers hit by the price rise are downtrading to cheaper groceries, particularly in categories such as soaps, detergents and personal care, says a recent report by Religare analysts Varun Lohchab, Gaurang Kakkad and Prasad Dhake.
The report says if economic environment does not improve then staples such as rice, flour and oil, among other daily-use products would also be impacted.
Turning focus With urban demand slowing, companies are increasingly depending on rural areas to pick up the slack.
India’s villages make up for one-third of sales for FMCG companies, and with elections looming, say analysts, public spending by the government is unlikely to be reined in, thus ensuring that demand remains unhurt.
The government recently rolled out direct cash transfer benefits covering seven welfare schemes in 20 districts in 16 states.
This presents an interesting opportunity for the companies.
Most of them have already taken steps to boost their distribution network to tap into the rural market.
They are launching more products, especially low-unit packs in the countryside, and making themselves visible with greater above-the-line and below-the-line activities. Sunil Duggal, chief executive officer, Dabur, says dependence on the rural consumers is rising.
“It is not simply enough to leverage mainstream media in the countryside. Companies need to move beyond traditional media options like radio, television and cinema, and enter into a direct engagement with these consumers,” he adds.
With pricing being the key -- products available between Rs 1 and Rs 10 take off well in rural areas -- companies say the move by the government to exclude small packs from its standardisation drive has come as a big relief as they can continue to tweak the grammage without having to take a hit on margins in the event input prices shoot up. Standard packs do not allow that option.
Typically value packs constitute 25-30 per cent of overall sales for an FMCG company. In the case of categories such as biscuits or chocolates, it could be higher at about 55-60 per cent.
While both urban and rural areas contribute to sales in this price band, it is the demand from the rural areas that is growing at a faster clip, says an expert.
However, most companies have been able to retain their pricing power in the last two quarters, despite the pressure on volumes.
In the December quarter, for instance, the price of products such as shampoos, soaps, detergents, toothpastes, etc, rose 5-15 per cent as companies tried to boost value growth.
“The impact on pricing as a result of the standardisation of packs by the government, and pricing power is not likely to diminish anytime soon,” says an expert.
Gaurav Sharma, vice-president at Gurgaon-headquartered consultancy Tecnova India, says, “There will be an increase in the cost of beverages, cereals, edible oil, detergent, flour, salt and mineral water, among other categories as a result of standardisation."
Companies maintain that with the high base effect wearing off by the second quarter of the next fiscal, volume growth should also begin to come back.
Companies on an average are expecting the Reserve Bank of India to cut key policy rates fairly aggressively this year in order to give growth a leg up.
P Ganesh, chief financial officer, GCPL, says: “While consumer price inflation has been a challenge, headline inflation is coming down.
“The emphasis on growth in my view, therefore, should increase," he says. Estimates from the Central Statistical Organisation suggest that India's economic growth could fall to a decade-low of five per cent this financial year.
RBI governor R Subbarao has hinted that a rate cut is in the offing.
The process has already been set into motion with the slashing of the repo rate by a quarter percentage point last month.
That’s good news for the FMCG sector as rate cuts could give the sagging demand a boost.