FMCG players feel the heat of rural inflation

CK Ranganathan | Updated on: Jun 09, 2022
Inflation worries

Inflation worries | Photo Credit: Mumemories

Low-priced products will be forced to absorb input cost hikes. Where prices are sticky, companies stand to gain over time

For years, FMCG companies have thrived in rural markets. This has especially been the case after the Covid pandemic. Coupled with strong agricultural growth, rural India’s relative insulation from Covid-induced restrictions also kept the FMCG demand on the growth path.

The situation, however, has perceptibly reversed in the December quarter of FY22 — thanks to inflation that has triggered downtrading in rural India. Inflation has travelled northwards to its highest point in the past eight years. As this might further bring down the demand for fast-moving consumer goods in bucolic India — the demand has been weak in the October-December quarter of FY22, with rural visibility lagging that of the urban — several leading FMCG brands are redrafting their business moves to absorb the impact.

According to a recent Nielsen study, for the December quarter, the rural market consumption declined 4.8 per cent and market volatility and inflationary trends will continue to impact consumption in the March quarter as well. The financial ability of consumers to procure goods of daily use has been considerably weakened, and the reasons attributed to inflation are rising crude prices and the disruption of the global supply chain in the wake of the Russia-Ukraine conflict.

One immediate fall-out of inflation is ubiquitously visible — food prices have spiked way beyond the purchasing power of the rural populace. For long, ‘food inflation’ has had an adverse effect on the FMCG sector, and FY22 is no exception. A reconfirmation of this trend has been underlined by the findings of a Nielsen study which said that the value growth for FMCG sector has seen an unprecedented low in rural economy.

While taking a call on their September earnings, top FMCG companies had issued a caution as they sensed a revenue downturn in the coming months.

Brands are facing another problem. Increasingly, consumers in rural India are taking home cheaper products or are delaying consumption by altering their habits of use in view of the liquidity-crunch they are facing. On the other side of the price matrix, the problem is almost the same for FMCG companies as they now have to face greater input costs.

Need to budget

Market observers feel that every FMCG company should start budgeting for the next six months as margins in the near term would be under pressure. Yet, it is unlikely that FMCG companies will drastically cut down investments aimed at building brands to secure short-term gains.

Going by the trend the Ukraine-Russia war is likely last till this year end or even couple of quarters more. Crude oil is not showing any respite. Now the vegetable oils are flying high on the backdrop of brief ban on exports by Indonesia.

This poses a big problem to the FMCG sector and in particular food sector. Companies are increasingly reducing the gram/ml and try to keep the unit price constant. This is also a great opportunity to spur innovation.

We are also seeing another trend which is global cartelisation. We have been witnessing the oil cartelisation led by OPEC. But of late several commodities across the globe have been witnessing sharp and unprecedented rise. The pandemic seems to have exposed weaknesses in global commerce and similarly opportunity to make huge profits when supplies are disrupted.

This is now being exploited in some sectors and therefore not all commodities will cool off immediately. This hasn’t stopped at commodities level but we see the spillover effect in some services sector too. All the players in the value chain of global shipping are minting money ever since the pandemic struck. The pandemic has receded in many parts of the globe but logistics cost isn’t coming down. All the players in the value chain have made high profits as declared in their quarterly/annual numbers.

The FMCG companies are also reconciled to the fact that all inflationary pressure can’t be passed on to the consumers and some portion has to be absorbed by them.

But the FMCG companies are aware that the unprecedented inflationary pressure will have a positive effect in the long term, once inflation recedes. The price hikes will not come down in the same way they have gone up and will definitely leave at least a permanent advantage of 200 basis points increase in their gross margin compared to December’21.

However there are some exceptions of price points such as ₹1, ₹2, ₹5, and ₹10 will go through very high pressures during inflation times, and the companies will be forced to absorb the inflation in full.

It’s a tough time for consumers and consumer facing companies but then “Nothing lasts forever including bad times”.

The writer is AIMA President and Chairman of Cavinkare

Published on June 09, 2022
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