After going through a rough patch in 2009-10, the packaged consumer products industry is expected to do better in the current fiscal.
The sector’s sales growth in value terms slipped from as high as 19% in the March 2009 quarter to 6% in the March 2010 quarter. This is reflected in the Index of Industrial Production data, too, where the consumer non-durables index has risen by just 1.4% during the year.
Also See Rising Sales (Graphic)
A key worry for the sector is high food inflation, which appears to have affected consumption, especially among the urban poor. The impact is most visible in the mass segments of key categories. The threat of inflation has not receded, with the Wholesale Price Index at 10.2% and food inflation at 16.5% in May.
Despite the headwind, the consumer goods sector has a higher chance of doing better this year because of the industry’s increased focus on volume growth. Most companies have responded with price cuts and volume discounts, and stepped up advertising and promotions. The more-for-less strategy works well during an inflationary phase.
As a result, the gap between value and volume growth has narrowed sharply. In fiscal 2010, sales grew smartly in value terms but volume growth was negligible. With the shift in pricing strategy this year, sales have risen in both value and volume in April.
Companies are focusing more on sustainable sales growth and growing market share than on increasing margins. Pricing power is likely to take a back seat and prices would rise only to offset higher input costs.
Advertising and sales promotion expenditures have been raised sharply to push sales, and most companies are also increasing their reach in rural markets, which have been growing at a faster rate than urban areas. They are focusing on supply chains and working capital management to improve their presence in market and cash flow positions.
The next big trigger for the sector from an investor’s perspective will be a good monsoon, which will lead to softer food prices. However, competition in the market has increased, with global firms eyeing for a larger share of the market, which would continue to put pressure on incumbents to protect their turfs.
The domestic market for home and personal care will probably continue to be under margin pressure for some time, while that for foods could improve. But the factor to watch out for would be the sustainability of the volume growth seen in the past few months.
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