Consumer goods firms on recovery path after demonetisation downturn

While inventory is back on track after demonetisation, rural demand continues to be a concern for consumer goods firms—at least for the quarter ending March 2017


For consumer goods firms, rural demand was the worst affected at the height of the liquidity crunch in November 2016. Photo: Ramesh Pathania/Mint
For consumer goods firms, rural demand was the worst affected at the height of the liquidity crunch in November 2016. Photo: Ramesh Pathania/Mint

Mumbai: Demonetisation may have hit the industry hard, but packaged consumer goods companies say they are now on the road to recovery.

India’s largest makers of food, beverages, personal and home care items say they have weathered the storm of reduced inventories and consumer spending, and are expecting to be back on their normal growth trajectories from the first quarter of 2017-18.

“In December, we saw positive growth and stability,” said Sameer Shah, head of finance and investor relations at Godrej Consumer Products Ltd’s (GCPL’s) India business. “In January, we saw very strong growth rates which continued in February. We are going to continue our strong growth from here on now as well.”

Shah said sales recovery was led by wholesalers and retailers who had managed to replenish working capital with the new notes issued by the government.

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Most of these “channel partners”, which include distributors and stockists, prefer conducting business in cash.

In January and February, Shah said the company is seeing “strong growth rates” that will continue. Shah said he did not see foresee deviation from GCPL’s normal growth rates without giving details. 

Marico Ltd’s managing director Saugata Gupta said that with cash back in circulation, wholesalers and distributors were taking on regular levels of stock, boosting sales volume.

“While the demand is showing improvement, channel inventory is now gradually coming to its pre-demonetisation levels with wholesale coming back to near normalcy from Q4 FY17”, he said in an email statement. “Marico expects business to be back on track and is likely to deliver as per the medium term guidance from FY18 onwards.”

However, the company added that the cuts it made to its advertising and promotion (A&P) budgets in the quarter ended December 2016 will remain for now. “While Marico witnessed some A&P cuts in Q3, we continue to invest in brand building initiatives”, Gupta said. “Marico’s A&P ratio is likely to remain in the 11-12% range.”

Apart from advertising budgets, some companies such as GCPL also tweaked distribution strategy to reach out to consumers willing to spend digitally.

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“We also accelerated efforts in modern trade retail and self-service channels, where cash-less facilities were available, to offset the impact of demonetisation,” Shah said.

While inventory is back on track, rural demand continues to be a concern, at least for this quarter ending March 2017. Rural demand was the worst affected at the height of the liquidity crunch in November 2016. 

“There are still some pockets of concern like few rural wholesale channels which are cash dependent,” Vivek Gambhir, managing director of GCPL said in an email statement. “But overall, we believe that growth should normalize by the end of this quarter (March 2017).” 

“Rural demand was the worst hit, so we will see an impact on rural demand-based companies like Dabur and Colgate,” Abneesh Roy at Edelweiss Capital said. Roy is senior vice-president at Edelweiss. “Not all villages have ATMs and not all ATMs have cash.” 

While manufacturers are certain that they are looking at recovery this quarter and next, experts say some may have trouble resuming regular growth.

“These companies that stopped production will now have a tough time to get their supply chain up to speed,” Sameer Shukla, executive director at Nielsen India said. “Demand is picking up faster than expected.” However, he added that buoyancy in demand will come back within the first half of the calendar year.

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GCPL said it did not significantly change its production levels during November and December 2016, while Marico did not comment on its production levels at the time. 

The impact on sales volume growth is most stark between November and December 2016, according to data from Nielsen India. In November 2015, volumes grew 0%, while in November 2016, it was -1.5%. Similarly, in December 2015, sales volume was growing at 4.4%, but fell to 0% in December 2016. This was the largest nominal decline year-on-year (y-o-y) right after demonetisation, standing at 4.4%. 

“Prior to demonetisation, industry sales for the month of October were very high at 15% (y-o-y), which was similar to what we had seen in 2011-12,” Shukla said. “The growth momentum was there.” 

Edelweiss’s Roy says things may look rocky this quarter but FMCG companies can expect normal growth from the beginning of financial year 2018.

“In the March quarter, there will be some impact, especially if you compare with the same quarter a year ago,” he said. “However, inventory levels for most companies with this quarter will also go up. Next quarter, we should better growth,” he said. 

Roy also added that if the goods and services tax, or GST, is implemented on 1 July this year, it could lead to another unstable quarter right after. “The GST will become an issue only if it is actually implemented,” he said. “If so, then for 1-2 months, there will be relative chaos as companies comply with the new tax norms.”

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