The new year holds promise for the consumer economy
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In 2015, weak consumer sentiment and depressed demand was the running theme for makers of packaged consumer goods and appliances. The fiscal second quarter (July-September) results of several consumer goods companies indicated they were grappling with less-than-encouraging demand for their products in urban markets and weak demand in rural markets.
The companies’ executives admitted that the business environment remained tricky. While the urban markets weren’t buoyant, demand in rural India, where agriculture is the main source of income, declined as a result of the second consecutive year of poor monsoon rainfall that affected crop production and, therefore, earnings.
The country’s largest consumer packaged goods firm, Hindustan Unilever Ltd, for instance, reported a net profit decline owing to a slump in rural demand. Another consumer goods maker, Dabur India Ltd, saw its consolidated net profit rise for the quarter to September, but the firm said this was despite “low growth and a challenging business environment…where growth rates in most consumer products segments remained under pressure…”
Summing up 2015, Dabur’s chief financial officer Lalit Malik said: “The year 2015 has been a mixed bag for all FMCG (fast-moving consumer goods) firms, including Dabur. It has had its positives by way of lower input costs and a reduction in fuel prices that helped improve margins.” According to him, packaged consumer goods firms witnessed strong pockets of growth in urban markets, especially in retail store chains. Besides, e-commerce fast emerged as a new lucrative channel that showed immense potential.
However, rural demand remained muted owing to several reasons. Poor monsoon rains combined with no increase in the minimum support prices of key crops dented sentiment in the hinterland. “Also, in some states, the dues to farmers for sugarcane crop have still not been paid. As a result, cash flows are restricted. These factors have together hit consumer demand in rural India,” Malik said.
The makers of white goods and appliances reported slow growth as well. Their sales growth in the October-November festival season remained tepid at 10%, according to industry estimates. Usually, the increase during this period is around 20-25%. Consumption remained anaemic, especially in rural markets. Urban markets performed slightly better, paced by demand for product replacements.
However, Manish Sharma, president of lobby group Consumer Electronics and Appliances Manufacturers Association (CEAMA) and managing director of Panasonic India and South Asia, said there was a steady rise in the sales of products such as air conditioners, televisions and washing machines as well as in new electronic goods categories like air purifiers, water purifiers and smartphones.
Hemant Mehta, senior vice-president (media and panel group) at research firm IMRB International, said that even in urban markets, consumer spending did not match inflation rates. This means consumers were spending less. To consumer goods, he added the example of quick-service restaurants, which, he said, did not see their same store sales—a measure of sales at stores open for at least a year—increase.
Against the grim backdrop of 2015, the new year holds promise. Rajat Wahi, partner, management consulting at KPMG India, for instance, is hopeful of seeing a “pick-up in consumer and retail sector, backed by improving economic situation (both Indian and, to some extent, global).”
Wahi, who is also the head of the consumer, retail and agri sector practice at the consulting firm, said the biggest boost to consumption, however, will come from the recommendations of the 7th Pay Commission that will be implemented in 2016. The report, released in November, proposed a 23.55% increase in pay, allowances and pension for 4.8 million government employees and 5.5 million pensioners, providing a potential boost to the consumer economy. For consumer-facing businesses such as white goods, electronics and automobiles, among others, this could prove to be a bonanza as the commission will put more money in the pocket of the consumer.
This will boost consumer demand, especially of the big-ticket items, as the payment of arrears would make their purchases possible. “The 7th Pay Commission will give a significant boost to government employees’ income, and this will have a knock-on effect on overall consumption in both urban and rural areas,” Wahi said.
Malik of Dabur, too, sees 2016 as being better than 2015. More disposable income will boost consumer spending and benefit all sectors. “This, coupled with the plans to build 100 smart cities, will help boost consumer sentiments. It would be difficult to put a figure to the expected demand growth though,” he said, adding that urban demand will stay ahead of rural demand.
Wahi said it is difficult to predict if rural consumption will go up, especially as farm sector growth has been below 3% for most of 2015. However, he expects timely rains, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 7th Pay Commission report and increased investment in infrastructure projects to have an impact on rural incomes. “If the agri sector can grow 5-6% in 2016 on the back of improved productivity, it will further add to the growth of consumption in rural markets,” he said.
CEAMA’s Sharma said under-penetrated rural and semi-urban markets have the biggest potential for growth. “They will fuel industry growth through first-time sales and MGNREGA will augment the demand in these markets as the scheme is designed to provide job guarantee for at least 100 days in rural parts of the country,” he said.
According to a September report by the Press Trust of India, the centre has decided to provide 50 more days of work in drought-hit areas under MGNREGA to provide relief to farmers. The move will benefit the poorest households and reduce rural distress.
So, what could trigger a recovery in 2016? The expansion of e-commerce, with brick-and-mortar retailers expanding their footprint in urban and rural markets by building an online presence, either directly or by partnering with major e-commerce firms, could provide a booster dose to the consumer economy. Firms feel the introduction of a proposed goods and services tax, a stable exchange rate and higher investments under the ‘Make in India’ programme could lift sentiment, generate greater employment and drive a recovery.