Consumption Slowdown: This Growth Strategy Is Not Helping FMCG Firms Anymore

From snacks and biscuits to shampoos and hair oils, companies offered premium products in smaller, affordable packs to convert customers to costlier alternatives in the hope of initially boosting volumes, and eventually improving margins by creating a habit. But customers are not only buying less during the consumption slowdown, they are also going back to cheaper alternatives.

“There is a deceleration of growth in the last two to three quarters, and signs that consumers are opting for popular brands or low-priced variants of their favourite brands to save on costs,” Sharang Pant, leader for retail management practice and retail vertical for Nielsen South Asia, told BloombergQuint.

“At a quarterly level, there is evidence of a marginal increase in the popular segment and a softening for the premium segment with its share dipping marginally in the last two quarters,” he said.

The premiumisation strategy of selling costlier brands in smaller helpings aided the growth of fast-moving consumer goods makers even when the sentiment flagged. But stagnant wages during a prolonged slowdown has forced Indians to buy less of everything. That has hurt everyone from carmakers to steel companies, and the Indian economy is expected to expand at its slowest pace in more than a decade in the year ending March.

For the FMCG sector, October-December was the worst quarter in five. The nation’s 10 largest consumer goods makers with a market capitalisation of at least Rs 25,000 crore saw aggregate top line grow 3.7 percent—the slowest pace since three months ended June 2018. It remained sub-5 percent for the second straight quarter and in single digits for the third three-month period in a row.

Also Read: India FMCG Sector Growth Slows For 5th Straight Quarter: Nielsen

“When the economy is a little slow, consumers tend to go back to their favourite brand. That gives them more comfort and they are not as experimentative as they would be in good times,” Varun Berry, managing director at Britannia Industries Ltd., told investors in a call. The poor sentiment in the economy forced the maker of Good Day biscuits to shelve its plans to launch salty snacks and croissants.

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Marico Ltd., the maker of Parachute coconut oil, observed the shift from premium to local brands. The conversion from loose or unbranded to branded products has drastically slowed down, Saugata Gupta, managing director at the company, told its investors. There has been a reverse migration from branded to “loose” oil sold in certain rural markets, he said.

Dabur India Ltd., too, saw downtrading. While colder months impact shampoos, Mohit Malhotra, chief executive officer of herbal products maker, said in a post-earnings call that the consumption of sachets has gone up as people look for low-cost alternatives. And the trend is visible in hair oils, a discretionary spending, as consumers are using less and have also downtraded to the Rs 10 pack.

Growth continues at the bottom-of-the-pyramid brands like Shanti, Amla and Shanti Jasmine, he said. Even in toothpastes, consumers are moving to lower price points, he said.

While revenue took a hit because of downtrading, it also means some of the larger consumer goods makers, including Hindustan Unilever Ltd., Dabur and Godrej Consumer Products Ltd., were able maintain volume growth, driven by demand for cheaper variants.

But Marico’s domestic business saw a contraction, while growth cooled for Colgate-Palmolive (India) Ltd.

Operating Margins Stable

Operating margin of most FMCG companies remained stable, aided by cost cuts. HUL managed to expand its earnings before interest, taxes, depreciation and amortisation margin by 350 basis points in the quarter ended December. Marico benefited from lower copra prices.

A rise in miscellaneous expenses hurt Procter & Gamble’s margin. Nestle India Ltd. and Britannia saw some pressure owing to rising prices of dairy inputs, wheat and sugar. The managements of HUL and Dabur, in their earnings calls, said they may have to increase prices of certain products, particularly soaps, by 5 to 6 percent.

Outlook

Srinivas Phatak, executive director and chief financial officer at HUL, said in the post-earnings press conference that “demand outlook is challenging”.

Also Read: India Can’t Spend Its Way Out of a Slowdown

According to Dabur CFO Lalit Malik, while the company managed to boost volume growth in the third quarter because of its marketing initiatives, sentiment remained subdued in January as well. “There has been no major positive trend yet. Less cash in the hands of customers continues to remain a challenge.”