Hindustan Unilever’s stock hit a record high last week after the company, India’s largest in the fast-moving consumer goods (FMCG) category, announced its results for the quarter ended June 30. Its sales were up 20 per cent, driven by higher volumes as well as better prices. Dabur, the biggest home-grown player in the sector, reported an increase of 21.37 per cent in sales, and Nestle, the country’s largest food company, said its sales were up 12.8 per cent. The latter two companies, too, said it was because of better volumes and higher prices. Indeed, the last two quarters have been a dream run for the FMCG sector. Demand was buoyant, and all price increases were absorbed by customers. As a result, pricing power had returned to the FMCG companies. There was no evidence of down-trading, a situation in which consumers opt for lower-priced brands.
Given deficient rainfall in large parts of the country, this scenario could change dramatically, and from this very quarter. Rural markets now account for almost 40 per cent of FMCG sales. For companies like Hindustan Unilever and Dabur, which have focused their energies on villages and small towns, the contribution is as high as 50 per cent. For several quarters now, growth in the FMCG sector has been contributed largely by rural India. Good harvests, higher support prices for crops, and, though to a lesser extent, money given out under the rural jobs scheme made people buy more soap, toothpaste, hair oil and packaged food. Now, FMCG companies know that rural disposable income is almost certain to fall, slamming brakes on the FMCG growth story. At the same time, farm commodity prices have begun to rise. This will erode the profitability of FMCG companies’ foods businesses.
In the past, FMCG companies have shown remarkable flexibility while dealing with crises. For example, in 2008, not only were agri-commodity prices very high, but international crude oil prices had surged to almost $150 a barrel, making packaging material prohibitively expensive; and so the companies quietly reduced pack sizes. The reduction was so small that consumers didn’t even notice it. They will have to show similar ingenuity now, playing around again with prices and pack sizes. They will have to pull out their regional and low-end brands and push them aggressively in the market because down-trading is bound to happen. This may fetch lower profits but will at least ensure volumes. They will also have to incur higher expenditure on promotions and freebies. In the end, they might be able to hold on to their sales volumes, but profits could be dented.
