By Pranav Mukul, Anil Sasi
The impact of the deepening consumption slowdown is being felt beyond discretionary purchases such as vehicles and durables with fast-moving consumer goods (FMCG) companies manufacturing small-ticket items such as soaps, biscuits and other daily essentials reporting a steady slide in consumer sentiment. There is an emerging consensus among FMCG majors that, like their automobile counterparts, the impact of the slump is more evident in rural India and that, in geographical terms, the north is the worst hit.
The volume growth, or the increase in number of units sold, of FMCG companies has slowed down perceptibly over the last one year and this trend is evident across companies.
For Hindustan Unilever Ltd, the country’s biggest FMCG company, there was a 7 percentage point dip in volume growth between the June quarter this year versus the same period last year. Britannia Industries, India’s second largest biscuit company, also recorded a 7 percentage point drop while for Dabur India, the slide in volume growth on a year-on-year basis during the April-June quarter was 15 percentage points.
The annual wholesale price inflation in July, according to data released Wednesday, eased to a 25-month low of 1.08 per cent, indicating manufacturers are losing their power to raise prices as the slowdown in the broader economy worsens.
Srinivas Phatak, Executive Director, Finance and IT and Chief Financial Officer of Hindustan Unilever Ltd said at the company’s earnings call after the June quarter results that the FMCG major has “taken price reductions across-the-board in the range of about 4 per cent to 6 per cent” in the soaps section in a bid to counter the slowdown and also pass on the benefits of lower input costs to consumers.
Mohit Malhotra, Dabur India’s CEO & Whole Time Director said that while the month of April and May were good for the company, they are seeing “a little bit tapering off on the secondaries in the marketplace” in June and “that’s got to do with the headwind of the economic slowdown”.
The worry is that the slowdown in June is “getting exaggerated… as we are going along… They are feeling the impact of the liquidity crunch in rural because of the agrarian crisis and the rural consumer doesn’t have money and it’s impacting the consumer staple sector as well,” Malhotra told investors in an earnings call on July 19.
There’s a geographical split too — while south followed by east is doing better, the west is tailing these two regions and the north is the worst impacted.
This correlates with syndicated data indicators. Market researcher Nielsen noted that the slowdown in growth was more pronounced in rural markets, forcing it to lower its annual sales forecast for India’s packaged goods sector.
“Rural is slowing down at double the rate of urban,” Nielsen said in its latest quarterly ‘India FMCG Growth Snapshot’ report. The slowdown in sales of FMCG products in the hinterland, accounting for 37 per cent of spends for the sector, occurred at a sharper pace compared to urban markets. Compared to the third quarter of 2018, FMCG growth in rural areas fell 9.7 per cent.
FMCG, tobacco and paper major ITC Ltd, while announcing its standalone results for the June quarter, admitted that its packaging and printing business was impacted by the “slowdown in the FMCG industry and exports” while in its hotels business, a steady performance during the quarter was largely driven by the recently commissioned hotels even as the performance of existing hotels was “relatively subdued” due to slowdown in the conferences and banqueting segment.
However, unlike the automobile sector – where the consumption slump is accentuated by the inability of companies to drive demand by cutting prices on account of regulatory reasons – FMCG firms have been able to pass on price reductions on account of softened raw material costs in an attempt to push demand.
This demand-led slowdown has been attributed to a possible reduction in household savings – a result of declining urban and rural wage growth. “We find that for the Indian economy there are clearly a host of structural factors that are holding back current consumption. A substantial decline in wage growth (both rural and urban wages) in recent times resulting in lower household savings (a result of conscious policy decisions to correct macro imbalances) has possibly slowed down the growth in real per capita income that is holding back demand,” a study by SBI noted. It added that corporate wages – a proxy for urban wages – used to expand in high double digits is now down to single digits “as corporates are more conscious of cost in the midst of a massive de-leveraging cycle”. Similarly, it pointed out, rural wages also declined from double-digit growth till 2014-15 to less than 5 per cent in the last three financial years.
Going ahead, while FMCG companies expect a demand pickup in the festive season, they are also implementing cost efficiency measures to rein in profitability. “With a focus on tightening our belt in this phase of low growths, we have accelerated the cost efficiency initiatives to maintain the shape of business. As we move forward, we are quite hopeful that the Government will take requisite measures to boost the economy and get it back on a high growth trajectory,” said Varun Berry, managing director of Britannia Industries.
In addition to measures to achieve cost-efficiencies, firms are also actively tracking consumer behaviour to look at tell-tale signs of the slowdown’s extent. These include traditional indicators such as customers moving down the value-chain in daily essential items by opting for smaller size of unit purchases in the same brands or cheaper items in a same category. “We’ll continue to monitor it (down-trading by customers). To be honest, we haven’t seen it, but it’s important for us to keep a close eye on that,” Phatak pointed out in the July earnings call.
“Rural India has historically been growing around 3 to 5 percentage points faster than urban on account of increasing affordability, availability and demand. However, rural growth is slowing down at double the rate of urban in recent quarters. This has brought rural growth closer to urban growth in Q219,” Nielsen noted in its quarterly update. The rural slowdown is most pronounced in north India, followed by the west. Haryana, Madhya Pradesh, Uttar Pradesh, Maharashtra, and Assam are among the states leading the slowdown.
Nielsen has lowered its 2019 growth forecast for the FMCG sector to 9-10 per cent from its previous forecast of 11-12 per cent, citing macroeconomic factors such as slowing growth and the impact of a deficient monsoon.
