FMCG industry caught in a cleft

Traders, retailers and manufacturers struggle to shake off the double whammy of demonetisation and GST

As the growth numbers for April-July rolled in, consumers appeared to have shrugged off the impact of demonetisation after a brief pull-back. Fast-moving consumer goods posted an impressive 13.9 per cent growth in volumes over the same period last year, according to data from Nielsen, and demand continued to expand through July. 

As the festive season wore on, however, the mood changed. 
 

Comparable numbers for August-September are not yet available, but traders, retailers and manufacturers are worried. According to Praveen Khandelwal, secretary general of the Confederation of All India Traders (CAIT), the umbrella body for over 4,000 trade associations, sales during the festive season, which started around third week of September, dipped nearly 30 per cent over the same period last year. 

What exactly is restraining consumers is a matter of debate, but this drop is significant because, typically, demand for fast-moving consumer goods is inelastic as they are considered essential items that people tend to buy regardless of market sentiment. Some argue that back-to-back large-scale policy decisions — first demonetisation, then the hurried implementation of the Goods and Services Tax (GST) — nipped the nascent April-July recovery in the bud. 

Others point to an aberration in the growth numbers, attributing the spike to the low base effect. FMCG sales grew 2.2 per cent in April-June 2016 in volume terms and 3.7 per cent in terms of value. 

Most traders unequivocally blame GST. FMCG firms are heavily reliant on wholesalers to reach rural areas. Before GST came into effect, wholesalers typically generated 30 to 45 per cent of the sales for FMCG firms and dealt mainly in cash. Since July 1, when GST came into effect, that relationship has been disrupted because wholesalers are yet to fully comply with the new tax filing norms. Thus, a large chunk of rural consumers, who were earlier reached by wholesalers, are currently unserved. Major FMCG firms, including ITC, Dabur, Godrej and Nestle, are rapidly increasing their direct distribution reach, but the damage has been done.

Sunil Duggal, chief executive officer, Dabur India, says while part of the trade channel is yet to become fully compliant with GST norms, the biggest concern remains demand recovery. “While demand was appearing on the horizon last year before demonetisation and this year again during the first quarter of 2017-18, growth in August went down sharply,” Duggal told Business Standard in an interview last month.

Many feel the days of high growth for the sector are over. “The market for daily-use items like soap, detergent, shampoos and hair oil has been under pressure for quite some time now. Rural growth rates are higher than the urban market’s but the next phase of growth can only come if firms look ahead of the 50,000-odd villages to which they can cater directly,” says a senior executive of an FMCG company who did not want to be named.

“The first phase of massive growth that began in mid-2000 is now over. To enjoy such high growth period again, marketers now need to expand their distribution reach further,” he adds.

Indeed, manufacturers have not done enough to find new markets. Between 2012 and 2016, the rural FMCG market grew at a compound annual growth rate (CAGR) of just 2.35 percent. Of this, food and beverages grew at a CAGR of 1.87 per cent. 

Others believe, however, there is no cause for concern. Dhanraj Bhagat, partner, Grant Thornton, expects the situation to return to normal soon. “There is underlying demand in the market. Some glitches in implementing the GST at mass scale may have impacted growth in recent months. However, it is a one-time phenomenon and normalcy is expected to arrive soon,” he says.

To beat the downward trend, some manufacturers are rethinking their products. Hindustan Unilever and others have sharpened focus on segments that are growing faster than average. The firm in recent months revived its personal care brand Lever Ayush that falls into the herbal-natural products category. Ayurveda major Dabur, too, has lined up more products in the herbal segment. Dabur expects to generate 75 per cent of its local sales from herbal-natural products business by 2020 — from 60 per cent in 2016.

The herbal natural segment is growing 1.7 times faster than other categories in personal care, and is currently pegged at Rs 18,500 crore with 41 per cent market share, according to Nielson. 

Sameer Satpathy, CEO (personal care), ITC.

Innovation is the theme at ITC too. “We continue to maintain a higher than industry average growth rate, in high double digits, for the past few quarters. But slowdown in consumer market has been observed in some categories. Thus, our current strategy is to keep innovating constantly on the product to jumpstart demand, ahead of the market,” says Sameer Satpathy, chief executive (personal care products business), ITC Ltd.

Companies will need to strain their marketing strategies to the limit because, in the short run at least, the slowdown is threatening to turn into a vicious cycle. Khandelwal says that traders who had bought large stocks in anticipation of demand picking up ahead of Diwali have been left not just with large unsold inventories, but also with little cash in hand to pay for them.

SLOW MOVING

PRICE REVISION: Price-led growth revived to 6.1 per cent  in June 2017, from 1.6 per cent in June 2016 

RECOVERY IN SLOW LANE: Sector experts say double blow of demonetisation and GST pushed back recovery

TRADE HURDLES: Wholesale trade continues to remain disrupted; firms banking on direct distribution to reach rural markets

TRADERS WORRIED: Poor sales during festive season have left them with large unsold inventories