Sticker-Shocked Consumers Deal FMCG Companies Double Whammy
Rising prices of oil have led households to cut down on spending, impacting sales growth for FMCG companies.
Indian households are cutting down on purchases of consumer goods, dealing companies a double whammy—rising costs due to high crude oil and other input prices and slackening demand.
Sales value of staples to soaps fell 5% in March over February, according to data from retail intelligence platform Bizom, as consumers reel from sticker shock. Sales of commodities, including pulses and oils, shrunk by a third. Personal care, confectionery and homecare categories also saw a decline. Overall, Bizom said, average monthly sales per kirana store declined 10% sequentially.
The consumption drop in March dragged down sales value growth of fourth quarter to its slowest this fiscal for the makers of fast-moving consumer goods, according to Bizom, which tracks 75 lakh stores across the country.
The slowdown in growth underscores the impact of inflation on consumption. The trend is pronounced in rural areas that were less impacted at the peak of the pandemic, but have also been slower to recover. Companies increased prices in response to the global supply crunch, made worse by soaring energy costs following Russia’s invasion of Ukraine.
Analysts at Kotak Institutional Equities estimate consumer goods makers would need to increase prices by 4-12%, in addition to the hikes in 2021, to pass on higher costs. And this would continue to hurt volume growth.
The first quarter of FY23 will be “painful” in terms of volume growth and margins, Saugata Gupta, managing director and chief executive at Marico Ltd., said in a recent analyst meet. “We are faced with a unique situation where you have food inflation, general inflation (petrol and diesel) and input cost inflation.”
If the Ukraine crisis had not happened, consumption in rural areas would have recovered, but with food inflation “it will continue to be stressed”, Gupta said.
The makers of soaps to hair oils and biscuits, including Hindustan Unilever Ltd., Dabur Ltd. and Parle Products Pvt. hiked prices in the range of 5-30%.
HUL, India's largest consumer goods maker, and peers raised prices more than once in the March quarter.
“The Russia-Ukraine crisis is putting pressure on oil prices and logistics, necessitating price hikes across categories, especially where it is used as a key ingredient,” said Akshay D’Souza, chief of growth and insights, Bizom. “This, in turn, has been affecting consumption of essential categories.”
“Oil inflation was already happening and it has now accelerated,” according to Sunil D’Souza, managing director and chief executive at Tata Consumer Products Ltd. The salt-to-tea and coffee maker has taken a 15% price hike from October 2021 due to the sustained inflation in key inputs. He expects softening of volume growth in the near term
According to Dabur's CEO Mohit Malhotra, “volumes of shampoo are flattish, while toothpaste and hair oil are declining”. He expects the situation to persist. The company is counting on “a couple of more price hikes” in the coming quarters to offset inflationary pressures, even at the cost of dwindling demand.
Consumers Are Buying Less Or Downtrading
The consumption slowdown is not restricted to the hinterland, said D’souza of Bizom. Urban shoppers, too, are buying less of everything as goods turn pricey. Or shifting to cheaper options.
Shoppers are re-evaluating their spends to cope with inflation, said Prem Kumar, founder of retail tech platform Snapbizz. "We are seeing a large number of private label or regional brands making their way to the consumption basket because they have a distinct advantage: low price.”
Consumers are opting for lower-priced variants, forcing biscuit-to-shampoo makers to offer affordable packs to boost volumes. In urban India, the contribution from lower-priced home care items to overall sales inched up by 5.8%, followed by packaged staples (5.2%), beverages (3.1%) and personal care (2.7%), according to Bizom. Higher price point packs, however, dipped except for the personal care category.
Krishnarao Buddha, senior category head at Parle Products, told BloombergQuint that the input cost-led price increases across products has led to “downtrading” or customers switching to cheaper alternatives. Pricing of raw materials including wheat and milk rose 10-15%, while packaging cost is seeing 20-25% inflation, and cooking oil prices are “rising unabated”.
Beverages was an outlier as sales rose in March due to travel and record temperatures. Inflation, however, changed consumption pattern with consumers preferring low and mid-sized packs. In the home care category, Bizom’s data shows a preference towards mid-price packs in urban areas, whereas low-price packs are selling more in rural areas.
"The expectation of lowering prices is leading to consumers purchasing smaller packs and retailers reducing stocking significantly," D’souza said.
Oil Prices Through The Roof
The double whammy of crude oil inflation and supply shock in categories like edible oil due to the war is a major concern.
The sudden disruption in supply of sunflower oil led customers to switch to palm oil, causing global palm oil prices to rise 22% between February 24 and March 11. Alternatives such as groundnut oil and soyabean oil are seeing greater demand, with a spiralling impact on their prices.
Higher crude prices have a second-level impact on packaging materials and freight costs as well.
Domestic edible oil processors maintain raw material inventory of 30-45 days to tide over supply shock in the short term. But, supply and prices will start hurting if the conflict prolongs, said Angshu Mallick, chief executive officer at Adani Wilmar Ltd., the owner of the Fortune edible oil brand. "We would have to resort to blending other oils like rice bran or soyabean oil."
Prices of palm oil and sunflower oil shot up the most in March over a month earlier, followed by Vanaspati. "This is among the sharpest monthly increase since the Covid-19 pandemic in 2020 because of the war," D’souza of Bizom said.
And price pressure is likely to persist.
India consumes an estimated 2.4 million tonnes of sunflower oil a year. According to Nitin Kansal, director at Crisil Ratings Ltd., supply disruptions caused by the Russia-Ukraine conflict could lead to a shortfall of at least 4-6 lakh tonnes of crude sunflower oil for India this fiscal.