FMCG earnings don’t paint a pretty picture of the economy
- Sales of FMCG companies have contracted over a two-year period while the operating margins have improved
Fast-moving consumer goods (FMCG) companies have a close connection with the common man. Any change in the spending habits of households is bound to be reflected in the financial results of FMCG companies. In that sense, the earnings of these companies give a good indication of the financial situation of ordinary people, given that FMCG companies sell goods that people consume regularly.
In this piece, we look at the aggregate financial results of companies that make up for the BSE’s FMCG index. The index includes companies selling everything from processed food to tea and coffee to toothpaste to soap to detergents to sugar to shaving cream to biscuits to alcohol to chicken and so on. Essentially, stuff you and I buy on a fairly regular basis is largely from kirana or mom-and-pop shops right down the road. Hence, even in a tough economic environment, this consumption is expected to get impacted the least. And if this gets negatively impacted, it tells us a thing or two about the financial state of the common individuals.
So, let’s look at the financial results of the FMCG companies for the period April to June 2021 and compare it to the earlier years. In short, the situation isn’t looking good, though it’s better than the same time last year.
Over the past two years, that is comparing the periods between April to June 2019 and April to June 2021, net sales of these companies have fallen by 1.3%. Once inflation and population growth are considered, the real sales of these companies have contracted much more during this period.
The profit before tax of these companies has remained largely flat between the two periods when we look at the profit before tax. Nonetheless, the profit after tax has gone up by 11.9%. This is thanks to a 27.8% fall in corporate income tax paid by these companies. This is primarily due to the cut in corporate income tax base rate from 30% to 22% in September 2019. It has led to lower payouts of income tax by these companies to the government, something the government has recovered by raising the excise duty on petrol and diesel.
The interesting thing is that while sales have contracted over a two-year period, the operating margins (the profit before tax divided by net sales) of these companies have improved from 18.3% to 18.5%. This is primarily on account of the expenses coming down by 5.9%.
So, what does this mean for the overall economy? Net sales of these companies have marginally contracted by 1.3% over a two-year period. But once we take inflation and the population increase into account, the contraction is much more in real terms, even though it is difficult to quantify this.
What this means is that the financial situation of the ordinary people remains slightly stretched, and this can be seen in the fact that they aren’t willing to spend as much on buying everyday use items as they were in the past. If they were, the sales of FMCG companies wouldn’t have contracted in comparison to April to June 2019. Having said that, the situation is much better than it was from April to June last year.
The FMCG companies have been able to cut their expenses majorly. This has happened primarily because of their ability to cut raw material costs by 8.2% and advertising costs (on a low base) by 11.8%. What does this mean? It means that companies have renegotiated their contracts with their suppliers, contractors, and other partners. While this made sense for these companies individually, it hurts the overall economy as it leads to the incomes of these suppliers, contractors, and partners coming down.
To stay viable, these suppliers, contractors, and partners need to renegotiate contracts with their employees, suppliers, contractors, and partners. This also shows why small businesses have been hurt more by the covid pandemic than the larger ones. This is a trend that is also true for non-FMCG companies.
Interestingly, employee salaries during this two-year period went up 2.6%. The salaries in the two-year period prior to that had gone up by 17%. This again tells us that the purchasing power of the FMCG employees has come down compared to the past.
All in all, what the FMCG results tell us is that the financial state of the common individuals, on the whole, is still weak, though it seems to be much better than it was this time last year.
Vivek Kaul is the author of Bad Money.
