Poor rains, global headwinds hinder FMCG growth

The growth rate in India’s fast-moving consumer goods sector has slowed down in the past three years, hit by poor monsoons, global headwinds and buyers cutting down on discretionary spending.

The combined revenue of listed FMCG companies such as Hindustan Unilever, ITC, Nestle India, Dabur, Asian Paints, Tata Global Beverages, Britannia Industries, United Spirits, Radico Khaitan, United Breweries and Colgate-Palmolive, among others, has grown at a CAGR (compound annual growth rate) of 4.4 per cent in the last three years, sharply down from 13.6 per cent CAGR between FY12 and FY14.

“For the past few years, the economy has been going through a rough patch,” Dabur India Chief Financial Officer Lalit Malik told BusinessLine . “There have been global and macro-economcic headwinds that have impacted the overall economic growth. The sharp devaluation in currencies in several countries, coupled with geopolitical disturbances in major economies, has impacted the performance of companies across the board.”

India has witnessed three back-to-back years of poor monsoon and drought-like situation in some key pockets. “This stretch of poor monsoons has resulted in sentiments remaining subdued, particularly in rural India. The sentiments were further hit by growing unemployment during that period, high interest rates and slower off-take of loans due to rising NPAs,” he added.

Rural India, which has more than 700 million consumers and accounts for 50 per cent of the FMCG market, has been the focus area for companies for many years. But the dwindling growth rate there is worrisome for FMCG players.

Sanjiv Mehta, Chief Executive Officer and Managing Director of HUL, India’s largest FMCG company, said in an investor presentation last month that from double-digit growth across urban and rural markets in 2012, the overall segment has fallen to single-digit growth.

And for the first time in the past five years, rural is lagging urban market, he pointed out. Dharmakirti Joshi, chief economist at CRISIL, says growth in rural consumption prices for most foodgrains has fallen, reducing farmer profits. For pulses and oilseeds, prices fell even below their minimum support prices (MSPs) and cost of cultivation, resulting in a loss on the margins. For several crops, prices and profit margins have continued to decline in recent months.

This impacts the spending ability of farmers.

FMCG, the fourth-largest sector in the Indian economy, is seeing stiff competition from consumer durables, especially mobile phones, which are now doubling up as means for banking as well as entertainment for consumers. “FMCG is hit partly also because people are diverting incremental funds towards phones, etc,” Joshi said.

Malik said the sentiments had started improving following good monsoons last year, but the demonetisation exercise hit the revival. “The large-scale de-stocking following the introduction of GST further hit businesses in the first quarter of 2017-18,” he added.

“Overall, there is a stress in the system, affecting discretionary spending,” points out G Chokkalingam, founder and Managing Director, Equinomics Research and Advisory. “Alongside, with increasing urbanisation and lifestyle changes, some of the durables such as air conditioners have become a necessity, unlike many FMCG products, which can be done away with.”.

Malik, however, is hopeful of improvement in demand, going forward. “With the market sentiments showing signs of improvement and stability returning post-GST implementation, we expect the demand scenario to move up, both in rural and urban markets. The coming festival season is expected to further boost consumer spending in the branded consumer products categories.”

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