Mumbai: Higher food prices and growing input costs are edging out packaged consumer goods from family budgets, leading to slower volume growth for the segment, a decline that industry experts say could continue.
A Mint analysis of 42 listed consumer goods companies for the December quarter showed that revenue growth slowed to 12.25% over the same period in the previous fiscal, when it grew 18.25%.
Of the firms analysed, at least 22 saw a decline in revenue growth for the December quarter and one-third saw a decline in net profits, compared with the year-ago period. The firms included Britannia Industries Ltd, Dabur India Ltd, Marico Ltd and Tata Tea Ltd.
Photo: Indranil Bhoumik / Mint
Amita Shetye, director, client solutions, at market research firm Nielsen Co., said volumes for products such as biscuits, soaps, washing powders, detergent bars, hair oils and shampoos in the December quarter also fell on a sequential basis.
Being largely volume-driven, the consumer goods industry is facing pressure from a growing share of food in family budgets. Food typically accounts for 40% of a household’s budget, and with food inflation at 17.4%, consumer goods firms are worried.
“We are wary about FMCG (fast moving consumer goods) volume growth in general, given the fairly high base effect of the last two years, and the fact that food price inflation is crowding out spends on FMCG at the lower end of the consumer strata,” Jamshed Dadabhoy and Aditya Mathur, analysts at Citigroup Global Markets India Pvt. Ltd, wrote in a recent report on Hindustan Unilever Ltd (HUL).
Graphic: Yogesh Kumar / Mint
“The focus will remain on volume-led growth as long as companies can maintain their margins,” said Vanmala Nagwekar, a research analyst at India Infoline Ltd, a brokerage.
At an earnings press conference in Mumbai earlier this month, HUL chief financial offer R. Sridhar said the firm continues to grow, but added that the “pace of growth is clearly slower than (that in) the September quarter”.
The volumes slowdown is despite the fact that most consumer goods firms have significantly increased their advertising and promotion budgets. For instance, such spending for the three months to December as a percentage of sales for HUL was 14%, a 66% increase over the quarter ending December 2008.
Dabur’s spending on advertising and promotions as a percentage of sales was 14% for the quarter ending December, a 44% increase over its spending in the year-ago quarter. The Delhi-based firm’s year-on-year revenue for the December quarter grew 19%, of which 14% came from growth in volumes.
Marico, which makes brands such as Saffola cooking oil and Parachute hair care coconut oil, registered a 12% volume growth in the December quarter over the same year-ago period, one-third of which came from consumer promotions.
However, consumer goods firm may find that promotions alone may no longer be enough to drive sales.
“We are seeing signs of media inflation coming back. Companies will now have to pay more to maintain their advertisement volumes or increase their A&P spends or reduce advertising as they look at a trade-off between margins and growing consumer franchise,” said Pritee Panchal, analyst, SBICAP Securities Ltd, who expects margins to get squeezed two-three quarters down the line.
“If compared to a year ago, commodity prices are still lower, giving companies some room for gross margins expansion. But if we look at the year to date (April to December), commodity prices have started hardening,” said Madan Sabnavis, chief economist at National Commodity and Derivatives Exchange Ltd.
“Most FMCG players have reported this quarter that there is a strong possibility of a sequential moderation in revenue growth trajectory, in categories like shampoos, soaps, detergents and hair oils,” Dadabhoy and Mathur of Citigroup wrote in their report.