Drought impact on consumer goods firms likely to be muted

Drought impact on consumer goods firms likely to be muted
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First Published: Tue, Sep 01 2009. 10 20 PM IST

Updated: Tue, Sep 01 2009. 10 20 PM IST
What will be the effect of drought on purchasing patterns and what will be its impact on manufacturers of home and personal care products?
The rural market has always been critical for large companies. Soaps and detergents, the largest consumer care categories, have a penetration rate of nearly 90% in rural markets. In categories such as shampoos, oral care and cosmetics, penetration ranges between 20% and 50%, leaving enough headroom for growth. In recent years, the rural market has become more crucial. Factors such as higher disposable income and altered spending patterns have contributed to this change. Better rural infrastructure has also eased distribution bottlenecks.
Colgate Palmolive (India) Ltd got nearly 35% of its sales from rural markets in 2008, compared with 32% three years ago. With Rs1,700 crore in revenues, 3% is a sizeable amount in absolute terms. Godrej Consumer Products Ltd gets nearly 38% of revenue from rural areas, and their contribution to revenue growth is significant. While Hindustan Unilever Ltd does not disclose the urban-rural ratio, in certain categories it is known to be as high as 50%. Thus, anything that affects rural demand is a concern for the sector.
Graphics: Sandeep Bhatnagar / Mint
What happened during the last big drought? In 2003, the sector slipped into negative growth after expanding at very high rates. Some of the reasons stated then were poor monsoon, higher spending on other items such as mobile telephony and monthly loan instalments that were eating into household budgets. One of the unstated reasons was also higher product prices leading to a decline in consumption.
But consumer goods firms took a long time then to change their strategy. Regional firms, too, became stronger during such periods, gaining share at the expense of those with a national presence.
This time, the response has been quicker. After seeing that high inflation is affecting consumption patterns in certain categories, firms have started lowering prices or offering free volumes. Lower input costs are ensuring that margins do not get affected as a result. But free volumes will hit revenue growth although this is preferable to a drop in volume growth, which is more harmful. Urban consumption may play a balancing role to a decline in rural growth. Large retail stores had lowered purchases from home and personal care product companies in response to the slowdown.
Also, there are a few factors related to rural areas that may actually mitigate the impact of the drought.
One, non-agricultural activities contribute more to rural income and so do remittances from family members working in urban areas. Two, any additional fiscal support from the government may soften the blow. Three, the government’s employment guarantee scheme and rural infrastructure building will protect incomes somewhat. On the flip side, the rural consumption basket, too, has new items such as mobile telephony. Given a choice, will they pay for a mobile recharge card or buy a branded soap? That will determine whether consumer product makers retain their share of the consumer’s wallet.
In sum, the drought is a concern, but not a doomsday scenario, not as yet. In mass categories such as soaps, detergents, hair oil, oral care, biscuits, shampoos and tea, the impact will be more, whereas in more premium segments such as cosmetics, the impact will be lower.
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First Published: Tue, Sep 01 2009. 10 20 PM IST