India’s Consumption Slowdown Is A Story Foretold, Says Industry Veteran Vinita Bali
India’s consumption slowdown hasn’t surprised Vinita Bali, an industry veteran, who says multiple indicators have been pointing to a drop in demand.
The writing has been on the wall for some time, said Bali, former managing director of biscuit maker Britannia Industries Ltd. “Macro and micro indicators are on the decline, industrial capacity is being underutilised, there is a liquidity crunch and we are witnessing a decrease in employment in several sectors.”
“Taking all these factors into account, it is very obvious that the consumption story should be challenged the way we are seeing it to be challenged today,” said the 40-year consumer goods industry veteran who has also worked at Voltas Ltd., Coca-Cola and Cadbury. “The number has hit us today but the trend has been there for the last two to three quarters.”
The fourth-quarter commentary from consumer goods makers resonate with Bali’s views. Hindustan Unilever Ltd., Britannia Industries Ltd., Dabur India Ltd. and Godrej Consumer Products Ltd. acknowledged a decline in consumption even as the favourable base effect stemming from the twin disruptions of the note ban and the goods and services tax has faded. That’s primarily because of slowing rural demand because of poor farm incomes.
Low food Inflation corresponds to the money the farmer earns, and that has been stressed for a really long time, Bali said. “Organisations which have a sizable portion of their sales from rural are going to continue to feel more stress.”
Betting on everything from rural push and cost cuts to a better targeting of consumers, Brittannia, HUL, Godrej Consumer and Dabur expect to beat the stress, according to the management commentary after the fourth-quarter earnings.
Bali said managements need to have open eyes and ears to the ground. The unpredictable growth outlook comes from a model that builds in hope that the initiatives put in place during challenging demand environment pays off, she said.
One strategy that makers of fast-moving consumer goods are deploying to boost volumes is that selling more and more in small, affordable packs. And demand for such Rs 5 and Rs 10 packs has been growing, BloombergQuint found in its interactions with distributors, retailers and companies.
Some good FMCG companies have perfected the lower-unit-price strategy, Bali said. But the only way to create demand, according to her, is to have a pull from consumers which in the short term can be stimulated by factors like increasing distribution, giving better margins to retailers or having lower price points.
And irrespective of the base effect, she said the focus has to be on increasing the per capita demand. “Companies have to concentrate on increasing volumes if India is going to see robust growth lead by consumption.”
That will come at the cost of margins in the short term, according to Bali. “Some companies will sacrifice margins to boost volume which is not new and unusual,” she said. “They will begin to look at overall combination of volumes and margins, and not percentage margin alone.” Margins will also depend on the measures taken to eliminate the unnecessary costs, Bali said.
Watch the full video here: