Demonetisation may hit Q3 net of FMCG firms

Consumers tightening their purses post demonetisation is not good news for FMCG and packaged food companies.

While there has been a slowdown in sales mostly across kirana and mom-and-pop stores; analysts hint at the possibility of a hit in third quarter earnings.

“There may be some short term pain, especially when Q2 of the fiscal saw good growth. Even Q3 results may take a dip, but it is a bit early to say,” said Anil Talreja, Partner, Deloitte Haskins & Sells.

Another analyst firm, Edelweiss toed a similar line. “Clearly… some green shoots of recovery is likely to be delayed,” its recent report stated.

According to Harsh V Agarwal, Director, Emami Ltd, the result of realisations from retailers going down is that the cash-backed wholesale trade has taken a beating.

The Edelweiss report also points out that post demonetisation, cash and wholesale trade (those dealing in cash) in the FMCG and packaged food sector has been the worst hit.

“Wholesalers dealing with cash are the worst affected. Until liquidity improves, nothing much may happen,” he told BusinessLine .

According to B Krishna Rao, Category Head of biscuit-major Parle Products, the company has seen a 10-12 per cent decline in November sales this year, over the same month last year. (Incidentally, FY16 was considered to be a bad year because of poor monsoons.)

“There has been a slowdown in orders that we are receiving from distributors,” he said. For example, if a distributor used to place orders for 100 Skus with Parle, he is now going for 70-odd Skus or even less.

“The majority of our distributors dealing with cash payments are badly hit,” Rao maintained.

Companies or products that have a higher direct reach will have less of an impact, sources maintain.

The other worry is premium offerings. Typically, these are said to be the revenue churners. As discretionary spending goes down, purchase of premium offerings are deferred. Staples are unlikely to be heavily impacted.

Market sources indicate that while ITC’s atta sales may not decline, its snacking category offerings can see an adverse impact. Similarly, for Britannia – 55 per cent of whose earnings are from premium offerings – there could be a decline in premium biscuits volumes depending on outlets / region. Both Britannia and ITC refused to comment on the matter.

Retailers – even in the organised retail trade – also speak of consumers moving towards small value packs.

As Abneesh Roy, Senior Vice-President (Institutional Equities), Edelweiss, points out – there will be a tendency to go for smaller packs by consumers to curtail excess spending.“Why just rural, it will not be unusual to see the phenomenon amongst urban consumers also,” he pointed out.

And interestingly, Mohit Kampani, CEO of Aditya Birla Retail Ltd, which owns the supermarket and hypermarket brand More, speaks of a movement towards “mid-size and top-up packs”.

“As more consumers adopt the supermarket channel at this time we see sales increasing of mid-size and top up packs of everyday grocery items purchased at home,” he said in an emailed response.

Interestingly, for FMCG majors, the way out seems to be extending the credit cycles. Wholesalers – who are already low on cash – have done the same to retailers and distributors are doing the same at the moment.

“To address this liquidity situation some of the consumer companies have extended some credit to the distributor (payments from distributor to the company are generally made in advance via RTGS),” Edelweiss said in its report.

ITC in an emailed response said: “Given our long standing relationship with trade partners we continue to engage with them to discuss and resolve issues.”

COMMENT NOW