Consumers cut back on little luxuries as food prices soar4 min read . Updated: 11 Jan 2010, 12:07 AM IST
Consumers cut back on little luxuries as food prices soar
Consumers cut back on little luxuries as food prices soar
Mumbai: What do middle-class consumers do when daily necessities such as rice, pulses and sugar become too expensive to afford? They start cutting down on luxuries such as chocolates, biscuits and cheese to balance their household budgets and survive.
Unable to bear the brunt of rising food inflation, Indians are cutting back their spending on these so-called discretionary items, according to a survey by market research company AC Nielsen.
Between January and November 2009, battery sales declined 10.8%, cough lozenges fell 7.4% and lollipop sales slipped 4.4%—to name just three items, according to Nielsen. The phenomenon has slackened the pace of growth in India’s Rs1.14 trillion packaged consumer goods industry.
“I now make lists and go shopping and don’t just buy my groceries randomly," said Radhika Mathur, a homemaker in Mumbai’s Andheri locality. She used to buy items such as cheese, air fresheners and new varieties of cleaners to experiment and stock, but now purchases only according to her immediate needs.
In October and November, industry revenue grew at 6.07% and 8.4%, respectively, well below the overall 13.7% growth for the first 11 months of the calendar year. It happened despite this being the festive season, when sales traditionally grow faster. The decline is sharper in the urban market, which accounts for two-thirds of the packaged consumer goods industry. Growth slowed down to 5.3% in November over a year ago for the urban market compared with 14.2% for rural India.
The kind of items affected in the two markets were also different. In the rural market, sales of cheese in the 11-month period fell by 25% and that of air fresheners and hair conditioners by at least 19% each. In contrast, urban consumers cut down their consumption of batteries, refined edible oils and some other items.
Pune-based software engineer Kingshuk Chiel, 34, who lives with his wife and their one child, said he had cut back on cheese and other “excesses" due to high food inflation. “I spend Rs2,500 on an average per month shopping for groceries and buy only what is necessary for the family," said Chiel.
Companies and analysts agree food inflation is the prime reason for the industry’s slowing rate of growth. The government’s index of food articles and fuel grew 18.22% for the week ended 26 December, near an 11-year high, as weak monsoon rains in almost half the country’s 600 districts affected supplies of foodgrain, pulses and sugar.
“Rocketing food prices means there is less money available to spend on other goods," said Ramesh Viswanathan, executive director at the CavinKare Group, which makes Chik shampoo and Fairever cream.
But not all analysts agree with the Nielsen findings. “The Nielsen data paints a sorry picture for the last two to three months and does not give the true picture," said Abneesh Roy, who tracks the industry at Edelweiss Capital Ltd. “FMCG is a necessity and cannot be impacted."
While an early winter has boosted demand for product categories such as skincare and chyawanprash (a herbal preparation used as a rejuvenative), food inflation is leading consumers to switch to cheaper products in some key categories such as toilet soap and detergents, said a third-quarter earnings preview report from brokerage Motilal Oswal Financial Services Ltd.
The Indian consumer has “become more prudent", said Anand Dikshit, executive director at PricewaterhouseCoopers India, a management consultancy. Even though India’s gross domestic product, or GDP, is projected to grow at 7.75% in the current fiscal and consumer durables, automobiles and infrastructure companies are all recording growth, consumers are cautious due to last year’s experience when people were laid off and salaries were pruned, he said.
The phenomenon has also increased brand consciousness among consumers. “Due to the rising prices of food and vegetables, we now only buy brands that we have used and trust as necessities and have stopped experimenting," said Rajendra Sawant, a software engineer with the Pune-based firm Digital Infotech.
Sawant’s shopping basket now does not include cheese or air fresheners. He spends an average Rs3,000 per month on grocery bills for his family of three, which includes his wife and one child.
Companies such as Parle Products Pvt. Ltd, Jyothy Laboratories Ltd and CavinKare Group, which have a large exposure to the rural markets, are also blaming the decline in sales on food inflation and the weak monsoons.
“The rural market growth has slowed down from 20% to 5-7%," said Pravin Kulkarni, general manager, Parle Products, a maker of biscuits and confectionaries, which has close to 60% of its business coming from rural markets.
Atul Patel, a distributor for Parle Products known for its brands such as ParleG, Monaco and Melody in Nashik, said there had been a 5% decrease in sales in the past few months. “Consumers buy biscuits and confectionaries from surplus money, after buying monthly groceries. As the price of food articles is increasing, our sales have fallen," said Patel.
The government’s schemes for boosting rural income, such as the Mahatma Gandhi National Rural Employment Guarantee Act (formerly known as the National Rural Employment Guarantee Act) hasn’t seemingly helped much in boosting demand.
“FMCGs (fast-moving consumer goods) aren’t the top priority, the increase in spending is going to food," said M.P. Ramachandran, chairman and managing director of Jyothi Laboratories, which makes India’s largest selling clothes whitener Ujala. This product category has seen a 0.6% decline in sales throughout last year.