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FMCG segments come to a standstill

NetScribes/Rajiv Banerjee

Poor consumer sentiment and the weakening rural economy continue to be the bane of the fast moving consumer goods sector. April proved to be one of the worst months for the sector in the last one-year with retail sales growth being flat at 0.6 per cent year-on-year. Compare this to the 2.8 per cent growth in March and 4.7 per cent in February and the sluggishness in the sector becomes apparent.

According to a recent report by stockbroker DSP Merrill Lynch on the consumer segment, the sector under-performed the BSE Sensex by 7.8 per cent over the last month. "It now trades at a price-earnings multiple of 22 times the December 2001 (estimated) EPS and 18 times December 2002 (estimate) EPS," said Vandana Luthra, analyst at DSPML, in the report.

Amongst the large cap stocks, FMCG monolith Hindustan Lever continues to bear the brunt along with Nestle, while Colgate has seen a marginal improvement. In the mid-cap segment, Cadbury remained unaffected but Britannia and SmithKline Beecham Consumer slid slightly.

HLL witnessed the highest retail sales decline of 4.7 per cent. The growth rates have been worsening for the last six months now with diminishing business in soaps and tea contributing to the decline. In April, HLL's soap sales were down 9.5 per cent of total sales, detergents dipped 0.75 per cent and tea sales were down 16 per cent over previous corresponding period.

For HLL, the soap market has been getting tougher with competition creeping in not only from organised players but also the unorganised market. Players like Godrej Soaps and Nirma have upped the ante, with their sales rising though at the cost of HLL's market share.

The decline in the tea segment for HLL is primarily due to a brand rationalisation exercise undertaken by the company, which is presently under way. According to the rationalisation plan, brands such as Tiger tea are being withdrawn. "Here too, competition from the unorganised sector has increased owing to lower commodity prices," said an FMCG analyst from an equity research firm in Bombay.

Nestle also recorded flat sales growth in April -- the figure being merely 0.6 per cent, the lowest in the last 12 months. Analysts said that the company's strategy of price-cutting seems to be running out of steam. Nestle did an about-turn from its aggressive pricing strategies followed a couple of years ago. Nestle has now resorted to a defensive pricing strategy. On an average, it increased prices by 2.9 per cent in the first quarter of calendar year 2001, but for the whole year prices were down by 1.6 per cent.

For the first time in 12 months, there was negative growth of 2 per cent year-on-year in coffee and 3.5 per cent y-o-y in chocolates.

"Among the other categories, weaning foods and milk foods too declined. Maggi Noodles is still growing but the rate of growth is down from the high 20s seen last year to single digits now," said Luthra.

Colgate's retail sales for the month of April have seen a decline by 1 per cent. The toothpaste segment grew 3.8 per cent in value but volumes fell by 2.7 per cent. Volume-wise, Colgate's Dental Cream fell 13 per cent compared to HLL's 17 per cent fall in Close-Up and 18 per cent fall in Pepsodent.

Analysts, however, believe that Colgate's new lower-priced launches like Cibaca Top have been successful in stemming the rate of decline. Colgate's Cibaca Top, priced at Rs 8, seems to have worked as it has garnered a 5.9 per cent share of the rural market.

"The launch of Operation Jagruti for greater emphasis on the rural market has also ensured a better presence for Colgate in that segment," said a FMCG analyst at First Global.

The DSPML report added that among the other companies, Cadbury recorded the highest growth in the sector for the month with retail sales growing 5.4 per cent. Britannia witnessed a marginal decline in biscuit sales for the first time in 12 months along with SmithKline Beecham. "Cadbury appears to have reversed the declining sales trend whereas Nestle's chocolate segment's declining trend has worsened. Britannia's Tiger brand continues to be the fastest growing, though growth rates have fallen from mid-20s to 17 per cent in April," said Luthra in the report.

For all the FMCG companies, the key trigger for growth is good monsoons. The prediction of normal monsoons this year by the meteorological department augurs well for the companies, as they would be hoping to shrug off the sluggishness plaguing their sector.

Normal monsoons are the key for growth in the rural markets as more and more companies are looking at greater penetration of rural areas to fuel their growth. Operation Jagruti by Colgate, increase of retail outlets by Godrej and HLL are evidence to the fact. A senior official at Colgate said that the increased stress on rural areas was the outcome of urban markets reaching saturation point.

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