India’s consumption story was not a happy one in the first half of 2016, especially for the packaged consumer goods segment. Both the first and second quarters were hit by sluggish demand. None of the firms operating in the sector reported great numbers. Consumer goods firms registered poor second-quarter results. Hindustan Unilever Ltd reported a 1% decline in sales volume growth; ITC Ltd’s revenue growth was muted and Dabur India Ltd’s revenue grew just 1%.
Clearly, packaged consumer goods firms’ performance in the first half was not up to the mark. Most of them posted low single-digit growth. The rural sector, crucial to most consumer packaged goods firms, did not show any pick-up in demand.
Although the September quarter was dismal in terms of volume growth, most firms expected demand to improve at the beginning of October on the back of a good monsoon after two drought years and the money from the seventh pay commission award of pay hikes to central government employees and pensioners coming in.
And improve it did. October was a good month. According to Hemant Mehta, senior vice-president at market research and business consultancy IMRB International, “Consumption was picking up. Urban and rural markets showed promise. Preliminary numbers from Diwali looked robust. Rural pent-up demand was coming in. There was hope."
But that was before demonetisation. After 8 November, when Prime Minister Narendra Modi outlawed high-value currency notes and imposed restrictions on withdrawal of money, India’s consumption story saw another twist. Sales at mom-and-pop stores, retail chains and e-commerce websites declined. While retail stores suffered logistics issues as their supplies stopped, the cash-on-delivery model of e-commerce firms crashed owing to shortage of currency notes.
“People thought things would change after the monsoons, but demonetisation shot that down. November onwards there has been a 20-30% drop in sales. In many ways it is a sad way to end the year. From all accounts, the harvest has been good, but there is no money to buy that harvest…it’s a bit of a mess right now," said Kannan Sitaram, operating partner at private equity firm India Equity Partners. Sitaram is also chief executive of Innovative Foods Ltd, which markets the Sumeru brand of frozen foods.
Yet, others like Prashant Singh, managing director at research and information firm Nielsen, and Arvind Singhal, chairman and managing director at retail consultancy Technopak Advisors, feel reports of a sales slump post demonetisation are exaggerated. “The decline has not been more than 5-7%. 2016 has been better than 2015 in terms of sales value and volume in FMCG (fast-moving consumer goods), automobiles, clothing, footwear, telecom and durables," said Singhal.
According to recent data from a Nielsen report, the packaged consumer goods segment saw a 1.8% decline in sales in November over October. However, it added: “While a 1- 1.5% net impact of demonetisation does not look huge, with the size of the FMCG industry at Rs256,000 crore, this is a large drop in absolute value terms."
The report added that despite Diwali-related spending, there was an indication of lost velocity in the packaged consumer goods segment. “More importantly, we see retailer purchases declining faster than consumer sales, leading to a belief that some amount of softness may creep into December as well," it said. Impulse foods and personal care products were the most affected in terms of consumer off-take loss. Personal care items such as toilet soaps, toothpaste and shampoo witnessed the steepest decline in retailer purchases. “The decline in off-take is driven by urban (-3.1% Nov vs Oct) while rural has managed to stay flat at 0.4%. Rural trends may be attributed to the overall recovery witnessed in the market post good monsoons. Additionally, rural has mostly operated differently with a higher incidence of low unit packs, smaller currency transactions and barter system," the report added.
However, the sector was witness to some interesting trends. According to Singhal, product premiumization turned out to be a false start. “Value over volume wasn’t a good strategy for companies across product categories like apparel, foods, mobile phones," he said. IMRB’s Mehta agreed: “Consumers shifted from premium to value. They pushed growth in large stock keeping units to get better per-unit price."
Consequently, firms selling at value pricing took away market share. One example is Patanjali Ayurved Ltd that wrested market share from some Indian and multinational firms in different product categories as it expanded its retail reach and invested heavily in brand promotion.
Patanjali was, perhaps, also responsible for starting the trend of “going back to the roots" with Indian herbal and ayurvedic products. Both Indian and multinational firms (MNCs) latched on to the trend and introduced herbal and ayurveda-based products in the market.
Mehta also pointed out that in 2016, local firms were growing much faster than MNCs. His argument is based on an IMRB analysis of the listed MNCs versus listed Indian companies. “Companies like Godrej, Marico, Emami saw better value and volume growth than the multinational companies," he said.
Going forward, in 2017, Sitaram expects some innovations from MNCs. There hasn’t been any for a while, he said. “On the other hand, young Indian companies like Bengaluru-based Hector Beverages (Paperboat) and iD Fresh Foods have launched truly innovative products," he added.
Another big trend in 2017 will be that the packaged consumer goods category will find bigger play in e-commerce. Currently, the segment is a very small part of e-tailing. “But increasingly, e-commerce is also learning to deliver shampoo in two hours like the neighbourhood kirana stores. It will be interesting and a trend to watch out for," said Sitaram.
Prashant Singh of Nielsen is betting big on 2017 because he thinks there will be more openness in trade, and inflation will be down. Singhal, meanwhile, expects a boost to consumption on account of a probable stimulus from the government in terms of lowering of income and corporate taxes in the federal budget, which will put more money in the hands of the people.
Most retail experts expect the demonetisation overhang to end by February and expect to see a revival in demand. “This slump is not structural. Once agri money comes in, things will change. At least the FMCG economy will revive," said Sitaram. Singh agreed: “Demonetisation has not crippled trade. It will not play a bad role in 2017."