What sells for FMCG

True to their ‘defensive’ tag, many stocks from the Fast Moving Consumer Goods (FMCG) space managed to hold their heads above water in the blow hot, blow cold markets of the last one year. While the Sensex and Nifty 50 lost 8-9 per cent, the BSE and CNX FMCG indices contained losses, plunging only 4-5 per cent.

But that doesn’t mean the sector had a smooth sail. Amidst great expectations that consumption will keep India Inc afloat, consumers opened up their purses only selectively, benefiting some players, such as Godrej Consumer and Britannia. For those companies that were faced with reluctant buyers for their offerings, lower raw material costs presented an opportunity to push up advertising and promotion spends to try and woo consumers back.

But a rural slowdown and stiff competition from the likes of Patanjali Ayurved did not leave the sector unscathed. Players such as Hindustan Unilever, Dabur and Colgate faced rough weather trying to navigate the tough market conditions as well as the choppy stock markets. Here’s a look at the trends that drove FMCG stocks in the last one year and what’s in store for them in the coming days.

In a scenario where investments were in first gear, manufacturing activity still sluggish and reform measures yet to make an impact, consumption was expected to be a bright spot in the Indian economy. Borrowing costs had peaked out and consumer price inflation too looked tamed in.

But a sluggish rural economy turned this theory on its head. Patchy monsoons for the second successive year in 2015 further trimmed down kharif output expectations for major crops. Falling crop prices globally did not help either. Minimum Support Prices for 2015-16 also did not see a big hike, apart from some crops such as ragi , tur and urad dals. Non-farm wages such as that from the NREGA also took a beating.

As a result, demand for consumer goods waned. Two-wheelers, tractors and entry-level utility vehicles that sell more in rural areas, saw sluggish offtakes. Consumer staples too were among the affected. Companies such as Hindustan Unilever, Dabur, Colgate, Emami, Jyothy Labs and Bajaj Corp, which derive 40-50 per cent of their revenues from rural areas, took a hit.

Take Hindustan Unilever, which derives 45 per cent of its sales from the rural areas, for instance. With soaps and detergents accounting for almost half the revenues of the company, subdued volumes and price cuts to boost demand saw revenue growth in this segment drop since mid-2014. From about 11-13 per cent in the first two quarters of 2014-15, revenue growth in the soaps and detergents segment deteriorated to mid-single digits in the second half of that year and further to 0-2 per cent in the first three quarters of fiscal 2015-16. Similarly, Jyothy Labs, which derives three-fourths of its revenues from this highly penetrated and competitive soaps and detergents category, also felt the heat.

On the other hand, companies such as Godrej Consumer and Marico, which derive only 20-30 per cent of sales from rural areas, were able to tide over the slowdown relatively better. Besides, Godrej’s international presence and its reasonably good performance in foreign markets also helped it offset the domestic slowdown.

Apart from the geography mix, what helped Godrej Consumer was also its product mix. With a product portfolio that includes slightly more discretionary spends such as hair colour and insecticides, the company was able to hold customer interest. Another factor which helped Godrej was the lower penetration of its products. Soaps have 99 per cent penetration. But Godrej derives a major portion of its domestic revenues from household insecticides (Hit, Good Knight) and hair colours (Expert, Nupur) which have only 35-45 per cent penetration, giving enough opportunities for growth. Backed by healthy volumes, household insecticides and hair care segments clocked 9-14 per cent sales growth in the first nine months of 2015-16.

Britannia also played its cards well in the last few quarters. It re-launched Tiger biscuits with its cookie and cream variants in the value segments to push up volumes. At the same time, it focused on the less penetrated, less competitive and higher-margin premium biscuits category with new products, such as Nutri Choice Heavens, Good Day Chunkies, etc. The company clocked a consistent volume growth of 11-12 per cent in each of the three quarters of 2015-16, backed by similar growth in sales.

Marico’s focus on urban India and its efforts to reduce dependability on the plain vanilla Parachute coconut oil over the last few years, also paid off during this slowdown. With products such as the Parachute Advansed and Hair & Care, the value-added hair oils segment clocked double-digit volume growth in most quarters beginning fiscal 2015.

While companies were busy combating the rural market distress and strategising to make their product mix richer, a fresh challenge from the unlisted Patanjali Ayurved also surfaced. Patanjali rode on the ‘natural/ayurvedic’ platform to capture market share. Word-of-mouth advertising, a combination of own retail outlets, tie-ups with Big Bazaar and other retailers and aggressive pricing of similar products at points below that of established FMCG players helped Patanjali increase sales.

From revenues of ₹2,000 crore in 2014-15, provisional financials for the first 10 months of fiscal 2016 (i.e., until January 2016) available in the public domain indicate a revenue of ₹3,300 crore for the company. A recent note from Religare Capital Markets indicates revenues for full fiscal 2016 at around ₹4,500-5,000 crore. And with Dant Kranti toothpaste and its variants among Patanjali’s biggest selling products with estimated revenues of about ₹300 crore in 2015-16, Colgate felt stifled. While Dant Kranti’s price range remains at ₹35-45 for different variants (100 gm pack), Colgate’s toothpaste line-up costs anywhere between ₹44 and over ₹150 for a 100 gm pack. ‘Natural’ toothpaste products from Dabur too posed stiff competition for Colgate. Owing to the headwinds, toothpaste volumes for Colgate grew a mere 1-2 per cent in the last three quarters. Colgate is now betting on premium launches, such as Visible White Plus, Sensitive Pro Relief Enamel Repair, and Sugar Acid Neutralizer to drive growth.

The fierce competition from Patanjali was felt by Dabur, too, in its healthcare segment (one-third of domestic revenues) which includes Honey and Chyawanprash. Its revenue growth in the health supplements category was confined to single digits in recent times, with de-growth in the December 2015 quarter.

Ayurvedic hair oils too witnessed some competition from Patanjali in a year that saw Emami acquire Kesh King and Hindustan Unilever buy out Indulekha, to get on the ‘natural’ bandwagon.

In Nestle’s case, competition made hay while the company was bogged down with food safety issues. Though noodles per se did not fly off the shelves following Nestle’s Maggi controversy, rival brand Yippee from ITC could increase market share at the expense of Maggi.

Cheap inputs to the rescue

The one solace amidst the testing times was the cooling off of raw material costs for most FMCG players, be it agri commodity inputs such as wheat, barley, milk, copra, and palm oil, among others, or crude oil derivatives. Cheap raw material costs gave elbow room for companies in two ways. One, without squeezing profit margins, companies could afford price cuts to pass on benefits of low input costs.

Consider Marico which derives 45-50 per cent of revenues from hair oils. Falling prices of copra, the key raw material for coconut oil and liquid paraffin, a crude-based derivative used in value-added oils played a major role in bringing down the raw materials-to-sales ratio in each of the three quarters of 2015-16. Even as the company took a 6 per cent price cut in Parachute plain coconut oil packs in the December 2015 quarter for instance, operating margins moved up to 18.8 per cent in this quarter, from 16.8 per cent a year ago.

Secondly, low raw material costs meant that to further catch consumer interest, companies could splurge on advertising. Hindustan Unilever’s ad spends stood at 14-15 per cent of sales in each of first three quarters of last fiscal, compared to 11-12 per cent in the corresponding quarters in 2014-15. Increased ad spends did pay off with the December 2015 quarter seeing good volume growth in brands such as Dove, Pears, Lifebuoy, Surf and Rin; though price cuts kept revenue growth muted.

Others such as Dabur, Emami, and Jyothy Labs, too, increased their ad spends. Thus, though volume pressures and price cuts limited the top-line growth many companies managed reasonably good growth in profits, despite ad spend increases.

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