Mumbai: A poor monsoon may bite off a huge chunk of demand for consumables, especially in rural areas which thrive on agricultural income, but friendly government schemes and lower price points may lessen the impact, say officials.
The rain-dependent farm sector has seen a poor run this year, with rainfall since 1 June falling 25% below normal, threatening crops, including staples like rice and sugar, sending food prices flaring though overall inflation is muted.
Fast moving consumer goods (FMCG) makers have not yet taken a hit, but the weak monsoon could lower rural offtake in the coming months and put some pressure on margins, officials said.
“There may be a lag effect of the monsoon. There will be some effect seen from the October-December quarter. Going ahead there may be some kind of sluggishness for consumers,” said Dalip Sehgal, managing director at Godrej Consumer Products.
“I think the concern is not so much in terms of any demand destruction, but in terms of margin impact on account of high material costs,” said Sunil Duggal, Dabur India’s chief executive.
“Maybe we will see some margin pressure happening in the third quarter or fourth quarter.”
But officials see recent government moves to douse anxiety of farmers and the rural poor cushioning a dip in consumer sentiment.
“With the kind of government initiatives we have in rural areas, we can still expect the sector to grow,” said Mohan Goenka, director at Kolkata-based Emami Ltd, makers of a range personal care products like hair oil and skin cream.
Union finance minister Pranab Mukherjee unveiled a raft of schemes for farmers and the poor in the budget in July, including Rs39,100 crore for a rural jobs programme and raising allocation for rural roads scheme by 59%.
A number of FMCG companies are betting on affordable products and strong distribution channels to ride out the monsoon blues in the countryside. And firms are resisting price hikes despite rising raw material costs.
“Affordable price points, increase in distribution and penetration and some increase in ad spends will help. All these things will have to be put together as a strategy to get numbers going even in difficult scenarios,” said Aashish Upganlawar, an analyst with brokerage Sharekhan.
“Forty per cent of our sales come from products prices between Rs1 to Rs10, so we are fairly rural-centric in our products,” says Emami’s Goenka.
“Most FMCG companies are adopting this strategy of lower price points”. Godrej, which gets about 38% of its sales from the rural markets, has been increasing penetration to push up the segment’s share to half of its sales.
“We have a basket of products offering value for money which will catch consumers as they are trading downwards, if indeed they do,” said Sehgal. Godrej is also marketing products through state-owned television channel Doordarshan and other local media.
Dabur, which sells popular brands like Dabur Amla hair oil and Vatika shampoo, is not keen on raising prices despite rising prices of edible oils, fearing it will deepen a dent in consumer sentiment.
“If we see inflationary trends as being temporary, for a quarter or two, we will absorb the input costs...I don’t think the customer will be very happy if there are price incrases”.