The Hindu Business Line : A shaky growth curve

THE fast moving consumer goods (FMCG) sector is on a high. Despite posting a sharp downturn in May this year, with overall growth dropping to 4.4 per cent — the lowest since July 2004 — analysts maintain that the FMCG sector has left behind the slowdown that plagued it till last year and is well on its way to recovery.

That the May story may be an aberration becomes evident when one looks at the preceding month, with the sector logging 5.2 per cent growth in April. Analysts believe that the June quarter results are expected to give a further fillip to the sector.

Pointing out that the growth has been more marked in products used by the SEC A consumers - personal hygiene products such as shampoos, skin care and luxury items - the Vice-President (Sales) of Dabur India Ltd, S. Raghunandan, says rural demand has been flat for most of this year.

He says that growth is seen largely in products that saw deep price cuts last year.

"Also, growth is fuelled by the current uptrend in the country's economy so I believe the bull phase of the FMCG sector should last for a while, at least."

For example, during May, shampoos and detergent powder - products where maximum price rationalisations were done in 2004 - witnessed the highest growth rates, followed by detergent powders and hair oils, according to analysts tracking the sector. However, among the product categories that witnessed a decline during May are detergent bars, toothpaste, soaps, chocolates and even packaged tea.

But is the growth story expected to be cut short soon? Analysts say that as the economy is on a high, the FMCG sector is expected to continue growing for some more time at least. On whether any price rationalisations were expected in the sector, they say, "Last year, price rationalisations were done pretty much across-the-board. Now, when the economy is showing robust growth, FMCG players would like to think in terms of price increases, not vice versa."

Also, industry watchers expect a lot more product innovations to take place now that the market is on the uptrend.

"The market is stable and I believe many FMCG companies will now try to offer consumers better product innovations to move them up the value chain. Besides, they will now be encouraged to invest more in research and development and perhaps even in creating better product differentiation," said a senior official of an FMCG major.

But while analysts aver that FMCG is on a growth curve, the only hitch in the dream run may turn out to be the continuous rise in input costs. With inflationary pressures fuelled by rising oil prices being felt across-the-board, many FMCG companies are worried about the impact this may have on their bottomline. While some product categories have already seen marginal price hikes over the last few months, a further upward price correction cannot be ruled out.

In categories such as carbonated soft drinks, for example, higher MRPs coupled with erratic weather between March and early May have already slowed down sales by about 10 per cent. Analysts said any further input cost increase could hurt this industry further.

If the FMCG majors can find a way around the cost conundrum, their growth curve will only become steeper.

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