BackNestle’s urban edge
An economic rebound should see urban consumer markets recover earlier and faster, which should see demand for Nestle's products also recover at a much faster rate
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Nestle India Ltd’s recently-held analyst meet gives a closer peek into what is holding it back. Though the company’s sales growth has perked up in the latest quarters, the going remains tough. Nestle’s segment-wise results and volume growth figures show most of its categories under strain. But better times may lie ahead if India’s economic recovery picks up pace and input cost inflation stays low.
Nestle’s domestic volume growth in the nine-month period ended 30 September declined by 1.6%, and price hikes and mix contributed to sales rising by 7.7%. In this period, the fast-moving consumer goods (FMCG) market itself saw value sales growth of only 6.7%, while the categories in which Nestle is present in grew by 8.5% as a group. Thus, Nestle underperformed the market growth of its categories. In 2013, it had grown at nearly twice the market rate in this same period.
The decline in volume growth was due to slowing economic growth though some cuts in its product portfolio were also to blame. And rising product prices, mostly to compensate for rising costs, could have affected demand, too. While reported volume growth was either very low or declined in most categories, Nestle’s measure of real volume growth was better off, but still low in absolute terms. This measure excludes the effect of acquisitions and divestments in its portfolio. Noodles and sauces business was the only segment where real growth was healthy.
If one were to look at the brighter side, then one factor is that real volume growth is positive. As the high base effect recedes, reported volume growth should look better. Rising input costs was a bugbear. Nestle’s commodity basket shows that all commodities except milk have reported soft trends. And even milk has softened post-September. Global milk powder prices are softening,due to a surplus situation. Whether this downtrend is temporary remains to be seen.
Now, these trends need to hold and then it comes down to watching how quickly the economy recovers. Nestle does have a strong rural presence, but its products are more urban-centric. An economic rebound should see urban consumer markets recover earlier and faster. So that should see demand for its products also recover at a much faster rate than, say, mass market products such as soaps and detergents, where rural markets will play a much bigger role. That puts Nestle at an advantage, and may also explain why the company management says volume growth may play a bigger role in the coming times, and not price hikes, according to a Nomura Research note on the analyst meet.
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