Consumer goods makers face headwinds in rural sales6 min read . Updated: 30 Nov 2011, 11:43 PM IST
Consumer goods makers face headwinds in rural sales
Mumbai: Dabur India Ltd, the maker of Vatika hair oil and anti-dandruff shampoo, Promise, Babool and Meswak toothpastes and Natural Neem Soap, has noticed a drop in rural demand over the past six months—a decline chief executive officer (CEO) Sunil Duggal links to inflation that’s biting consumers in the countryside.
Rural sales make up half of the domestic revenue earned by Dabur India, the country’s fourth largest maker of packaged consumer goods, which posted a 29.5% growth in consolidated revenue to ₹ 1,269.72 crore for the three months ended September. Domestic sales rose 10% in the quarter, evenly split between price increases and volume growth.
A year earlier, consolidated quarterly revenue rose 14.7% year-on-year to ₹ 973 crore. Domestic sales jumped 18.25%, led by growth in sales by volume.
Duggal said sales of key products such as shampoos and toothpastes have been slowing in the past six months—bad news for consumer product makers in a country where demand in villages had helped them sustain sales and profit growth during the economic downturn that followed the 2008 financial crisis.
Wholesale price inflation was 9.73% in October, exceeding 9% for the 11th consecutive month. This year’s sharp fall in the value of the rupee risks fanning inflation further by making imports more expensive, hurting consumption in a price-sensitive economy, which the Reserve Bank of India (RBI) has forecast will expand 7.6% in the year ending next March, down from 8.5% growth in the previous fiscal.
“Rural consumers are very price-sensitive. Even if the demand is there, inflation and higher prices will impact the rural consumer," said Sumita Kale, chief economist with Indicus Analytics.
Rural sales make up close to one-third of overall revenue for India’s ₹ 1.5 trillion consumer goods industry. Until March, demand in rural India was growing at a faster clip than urban demand. In July, it slowed to 16.5%, behind urban growth at 18.8% and lower than year-ago growth of 21%, according to the latest data by Nielsen, a market research company that tracks consumer trends.
Anecdotal evidence, backed by market research and analysts’ reports, seems to bear out talk of slowing demand in the villages that are home to two-thirds of the population.
The tide turns
While the latest numbers for the sector are awaited, category-wise the slowdown in rural growth continued in the September quarter. Rural demand growth outpaced urban demand for four consecutive quarters before the tide turned in the three months ended 30 June, according to a Nielsen report that covered the trend for sales by volume of shampoos and toothpastes.
In the three months ended 30 September, for toothpastes, volume growth in urban areas was 11% against 9% in villages; in the shampoo category, the demand in cities at 21% was 10 percentage points more than in the countryside, according to the Nielsen data.
The slowdown in rural demand may deepen in the coming months, according to industry observers. The effect of inflation has been exacerbated by factors including the flat growth in the fiscal 2012 budget for the government’s flagship jobs programme under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).
“Over the next three-six months, the slowdown for packaged consumer goods will get more pronounced and it will be led by a steeper decline in the spends of rural consumers as government spending on social schemes like MGNREGS is expected to reduce on account of the high fiscal deficit," said Harsh Mariwala, chairman and managing director of Marico Ltd, maker of Parachute coconut oil and Saffola cooking oil.
Additionally, the positive effect of the farm loan waiver in fiscal 2009 in driving consumption is tapering off, analysts say. Even a good monsoon that means higher farm production and more money in the hands of the rural consumer hasn’t provided a consumption boost.
“We expect the rise in inflation and fall in government spends in rural areas to curb volume growth in consumer products," said an 8 November report by Anand Rathi Share and Stock Brokers Ltd.
A report by brokerage house Kotak Securities Ltd also highlights “plateaued" government spending as a negative for rural consumption and the consumer products industry.
“In the backdrop of sustaining high food inflation, incremental rural spends, including MGNREGS, have likely plateaued for the time being—an incremental negative for rural spends and for the sector," Manoj Menon, an analyst at Kotak Securities, wrote in a 31 October report.
Durables not spared
Even the sales of scooters, mopeds and other consumer durables such as single-door refrigerators that are more popular in the smaller towns have declined.
“The overall refrigerator category this year has a negative growth of 5-7%, compared with 12% growth a year ago," said Kamal Nandi, vice-president, sales and marketing, Godrej Appliances, a unit of Godrej and Boyce Manufacturing Co. Ltd.
Having to spend more on daily essentials such as food staples, oil, milk, fruits and vegetables means the consumer in the hinterland has to forego even small luxuries such as biscuits, hot beverages, toothpastes and shampoos, or switch to cheaper substitutes.
Inflation hurts the poor the most in a country where food has a large share of the consumption basket, RBI governor D. Subbarao said recently.
The share of food as a part of consumer expenditure is 57% in rural India and 44.4% in urban India, according to the 66th household consumption expenditure survey by the National Sample Survey Office (NSSO) released in July.
Compared with a year ago, pulses, fruits, milk, eggs and poultry have become more expensive.
Prices of fruits such as bananas and apples are on average up 16% and cereals on average 5%, with some such as jowar up nearly 40%, according to Bloomberg.
Price increases effected by consumer product makers to offset rising raw material and other costs, too, are pinching consumers.
In the past year and a half, packaged goods such as cigarettes have become more expensive by 13% and soaps by 6%.
Hindustan Unilever Ltd (HUL), the nation’s biggest consumer products maker, has raised the prices of detergents by 8%.
Dabur, Colgate-Palmolive (India) Ltd and Emami Ltd have increased prices across products by an average 8%.
Marico has raised the price of Parachute hair oil by 30%, brokerage house Anand Rathi said in an 8 November report.
Last year, growth in the consumer goods sector was driven largely by volumes on the back of promotions and higher advertising spending.
In the September quarter, for instance, HUL posted an 18% increase in sales, with revenue driven equally by value and price. In the year-ago quarter, HUL recorded a volume growth of 14% as it increased spending on promotions and advertising; price growth was a negative 3-3.5%.
There is an inverse relationship between price and demand. Price hikes depress sales by volume.
“Typically, volume contributes as much as 60% to the overall revenue growth of Indian consumer stocks. However, in inflationary periods, the share of volume can fall to as low as 40%. We believe volume growth for the sector will fall in fiscal 2012," HDFC Securities Ltd said in a report.
To be sure, high inflation also hurts companies as they are unable to pass on the entire price increase to the consumer, putting their margins under pressure.
“Due to six quarters of persistently high inflation, gross margins of Indian FMCG companies have fallen to a five-year low of 49% in Q1 FY12. From the peak in Q3 FY10, gross margins have fallen by as much as 550 basis points," said HDFC Securities.
FMCG is short for fast-moving consumer goods, jargon for products such as soaps and shampoos that sell quickly. A basis point is one-hundredth of percentage point.
Companies are developing newer markets and launching smaller pack sizes to aid growth. HUL, the maker of Lux soaps and Wheel detergents, attributes 70-80% of its volume growth to the development of new markets.
Some companies are still groping for an explanation for the slowdown in rural demand.
“We can’t point to a specific reason for the slowdown in the interiors and are studying it," says C.K. Ranganathan, chairman and managing director of CavinKare Pvt. Ltd.
The maker of Chik and Meera shampoos has been credited with pioneering the sale of shampoos in sachets at ₹ 1 and ₹ 2—a trend that boosted rural sales.