Consumer goods firms’ sales growth slowest in five years

Low inflation, declining input costs affecting revenue; drought, local competition other challenges


Hindustan Unilever’s value sales growth declined from 4.7% in the September quarter to 3.2% in the December quarter. Photo: Priyanka Parashar/Mint
Hindustan Unilever’s value sales growth declined from 4.7% in the September quarter to 3.2% in the December quarter. Photo: Priyanka Parashar/Mint

Sales at major consumer packaged goods companies like Hindustan Unilever Ltd (HUL), Colgate-Palmolive (India) Ltd, Gillette India Ltd and Dabur India Ltd grew at their slowest in five years in the December quarter, even as consumer confidence boomed and more Indians joined the job market.

Indian consumers have topped Nielsen’s global consumer confidence index for seven quarters in a row. And the job growth index has raced mostly at double digits over the past two years, according to a 10 January Deutsche Bank AG report.

Historically, there has never been a divergence between the confidence index and consumer sector revenue growth for such a long period, said the Deutsche Bank report, inferring that while consumers are optimistic about a recovery over the medium term, they are not spending in keeping with that optimism. Instead, they are saving for the future.

Experts agree with the view.

“Most consumers have gone through the boom period and then there was the high inflation and the slowdown. So, now they have a longer term view. They know that things can be good as well as bad, and they continue to calibrate spends,” said Sumita Kale, chief economist, Indicus Foundation, a think tank that conducts and supports analytical research. Kale noted that continuing economic uncertainties could also be impacting spending.

Either that or spending habits are changing.

In the past couple of years e-commerce companies have made more premium products available to a larger number of people at affordable prices, thanks to heavy discounting.

“Consequently, consumers are now spending more on premium products, thereby postponing other discretionary expenditures,” said the Deutsche Bank report in an alternative explanation of the divergent trends.

Value growth has also taken a hit from low inflation. Declining input costs will continue to put pressure on revenue as companies take price cuts to ensure that cheaper products don’t gain an upper hand.

Among consumer companies, HUL’s value sales growth declined from 5.4% in the June quarter to 4.7% in the September quarter and then to 3.2% in the three months to December-end.

At the same time, companies like Patanjali Ayurved Ltd have gained scale amid a growing consumer move towards natural and ethnic products.

By financial year 2020, Patanjali is estimated to have a high market share in categories like honey (35%), ayurvedic medicine (35%) and ghee (33%).

The company will have eight categories with a turnover of more than Rs.1,000 crore each. The high growth will impact on companies like Colgate, Dabur and HUL, said a 5 January India Infoline Ltd (IIFL) report by analyst Percy Panthanki.

In the December quarter, Colgate registered a meagre 1% volume growth, an indication that it is already feeling the heat in its core category.

In addition, there’s the weather to factor in: two straight years of drought have hit rural consumer spends.

“Rural has grown worse for some companies. It is now growing at similar rate as urban,” said Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities Ltd.

Consumer spending in rural areas used to grow at 1.5-1.6 times than in towns and cities, Sanjiv Mehta, chief executive officer, HUL told an earnings press conference in July.

Now, consumers are keeping a tight grip even on their discretionary spends.

While the December quarter, on account of the festive season and an early onset of end-of-season sales, was better for most companies, the September quarter was one of the worst in recent memory.

Sales growth in the September quarter for Pidilite Industries Ltd, Asian Paints Ltd and Shoppers Stop Ltd was at its lowest when compared to the year-ago quarter in over two years. Watch and jewellery maker Titan Company Ltd reported an over 25% decline in income in the September quarter over the year-ago period, its steepest in five years.

“We are a deals-driven culture and consumers wait for deals—we are noticing this across sectors,” said Roosevelt D’Souza, senior vice-president, Nielsen India. Given the gap between optimism and ground reality, it will be difficult to say when consumer sentiment will pick up, he added.

Meanwhile, margins will continue to expand for most companies in the consumer sector as key raw materials remain cheap.

Operating profit margin, a measure of a company’s operating efficiencies, saw the largest expansion in five years this December quarter over the year-ago quarter at 48% for 14 companies across discretionary and staples.

Expenses have been declining for five quarters now and raw material prices have been trending negative for a year now.

However, net profit growth is at its lowest in five years at 1.68% for the 14 companies, largely on account of increased taxes as tax subsidies have come off in Himachal Pradesh and Uttarakhand, which impacts companies like HUL and Colgate.