Makers of consumer goods are supposed to be in a sweet spot. Though prices of most commodities used as inputs have fallen significantly, prices of finished products are still high, thanks to a number of price hikes these firms have announced in recent times.
Since price cuts hadn’t kept pace with the drop in input costs, a sharp jump in profit was expected this year.
But less-established companies in the unorganized sector have begun to play spoilsport. Just like in 2002 and 2003, these firms are taking advantage of the enlarged gap between manufacturing cost and selling price of branded consumer goods.
Also See In A Spot (Graphic)
Not only do these firms sell at prices that are far lower than branded goods, but the sharp decline in commodity prices is enabling them to offer high trade margins as well.
Are consumers taking the bait? Brokerage Motilal Oswal Securities Ltd has come out with an interesting report, based on a visit to some rural areas in Maharashtra. The report states that consumers in these areas have shifted to discount brands of large companies as well as unorganized and regional brands.
This process of consumers shifting to cheaper products is known as down-trading, a phenomenon seen widely in 2002 and 2003. Motilal’s consumer goods analysts Amnish Aggarwal and Amit Purohit, who wrote the report, say this could well be the scenario in the rest of country, noting that the growth of large firms has lagged that of the entire consumer goods industry lately.
While a large chunk of rural income is tied to agriculture, which hasn’t been hit by the economic downturn, rural consumers have begun exercising caution because of dwindling non-farm income. In the areas visited by Motilal’s analysts, 30% of the workforce are employed in non-farm jobs, which contribute to as much as 50% of each household’s income. Income of these workers, employed in sectors such as construction and jewellery, have taken a huge hit, forcing them to shift to cheaper products.
The last time around, big consumer goods companies countered this threat by lowering prices in some cases and improving quality in others, a prime example of the latter being the change in the composition of Lifebuoy soap. Unless they repeat these steps, the slippage in market share can be expected to continue.
Already, the Bombay Stock Exchange’s consumer goods index has begun to give up some of the relative gains against the benchmark Sensex index. So far this month, the index has fallen by 6%, while the Sensex has risen by about 1%.
Graphics by Paras Jain / Mint
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