FMCG companies feel the pinch, finally

Britannia could be an exception, as its sterling numbers showed on Monday but, overall, consumer goods companies seem to be experiencing the pangs of a slowdown, albeit with a lag.

In the quarter ended June, the segment showed signs of the stress that has hit sectors such as capital goods, power, infrastructure and automobiles.

Hindustan Unilever Ltd, India’s largest fast-moving consumer goods company, reported sales growth of seven per cent during the June quarter, its slowest in three years.

Underlying volume growth, tracked keenly by analysts, fell to four per cent, as consumers kept away from the marketplace.

Kolkata-based ITC reported lower-than-estimated net sales growth of 10 per cent during the quarter, as cigarette volumes continued to disappoint, growing only 7.1 per cent.

The usually buoyant FMCG portfolio, which helped the company report good numbers in the last few quarters, was also a bit of a drag, growing 18.4 per cent between April and June.

For this segment, analysts had expected growth of 22-23 per cent.

What drove the weakness in FMCG for ITC?

Abneesh Roy, associate director (research), Edelweiss, said the low growth resulted from categories such as biscuits, soaps and shampoos.

As the slowdown persists, categories from staples to discretionary items are beginning to feel the pinch.

Mumbai-based Marico, for instance, reported four per cent volume growth for Parachute, one of its key brands, during the June quarter.

The company attributed this to the high base effect in the corresponding period last year, as well as the closure of retail outlets in Maharashtra, an important market, due to a strike over the levy of local body tax.

Analysts say Parachute also took a knock on account of the consumer slowdown, which has finally caught up with the Rs 1.8-lakh-crore

FMCG industry.

HUL’s outgoing managing director and chief executive Nitin Paranjpe said, “All categories are slowing, but it is mostly those at the premium end and those dependent on discretionary spends.

“And, this should continue for some time.”

While headline inflation has been below the five-per-cent mark, retail inflation continues to be high -- 9.6 per cent.

This is exerting pressure on households to cut expenses wherever possible -- items such as exotic creams, lotions, packaged foods, etc, are facing the axe.

For FMCG companies, this means the road ahead is unlikely to be easy, at least for the next few quarters.

How are consumer goods companies responding to this challenge?

The most notable approach has been raising advertising and sales promotion expenditure.

On an average, most FMCG companies raised this expenditure, as percentage of sales, to 13-15 per cent from 10-11 per cent a year earlier.

For companies such as Colgate, this expenditure was higher, amid pressure to fend off competition.

This has resulted in items from soaps to detergents, hair oils, edible oils and toothpastes being pushed heavily, as companies pass on the benefits of lower input costs to consumers in the hope of reviving sentiment.

However, this is putting pressure on operating margins.

HUL, for instance, saw its operating margins rise only 70 basis points during the June quarter, while GlaxoSmithKline Consumer saw its margins slide 126 basis points.

HUL’s Paranjpe says, “Our growth model will be volume-led because that is a reflection that consumers are buying our products. At the end of the day, that is what we want -- consumers buying our products.”