Battered by inflation and faltering demand, India's consumer goods industry is ailing

There was a sense of euphoria among consumer goods makers at the end of 2020. Lockdowns to check the spread of Covid-19 had just been eased, unleashing a deluge of pent-up demand that consumers predominantly channelled towards goods because most services were shut.

Recalling those days, Kamal Nandi, the Business Head and Executive Vice President of Godrej Appliances, says that though the crucial summer season had been washed away, sales of essentials from refrigerators to washing machines had shot through the roof by October. And it wasn’t just urban customers loosening the grip on their wallets. A large mass of the urban workforce that was forced to migrate back to the hinterland also flocked to shops and online portals.

But that euphoria didn’t last. Consumers clamped down on discretionary spending because of steep inflation and job and income uncertainty in the years that followed, and this was exacerbated by the Russian invasion of Ukraine, which pushed inflation up further. Unseasonal rains this summer and the uneven spread of the southwest monsoon have made matters worse. The renewed rise in inflation has added to their woes. Together, these factors slowed demand across the universe of consumer goods—from home appliances to snacks, shampoos and personal computers.

The consumer goods market’s experience best encapsulates this. After growing about 25-40 per cent year-on-year in the second half of 2020, firms are now finding it hard to remain in the black. The unseasonal rains earlier this year in North India, coupled with elevated prices, compressed demand for air conditioners and refrigerators in the June quarter by at least 5-10 per cent.

In this scenario, veterans like Nandi have faced a challenge in recapturing the momentum of those post-lockdown days. “Discretionary spending was cut as most households were under pressure because their overall purchasing power was down drastically. We were expecting [to] be out of the inflationary cycle and that consumer spending [would make a comeback] in 2023. But that has not happened. The inflationary trend continues, and the mass segment has not really come back. Therefore, we have witnessed a [contraction] in mass market categories in the last six months,” says Nandi.

The pressure is also visible in the Rs 5 lakh crore branded FMCG market. Data shows that volumes contracted in 2022 largely because of the steep decline in rural demand in recent quarters, though it has slowed significantly in the urban markets, too. Between the March and December quarters of 2022, volumes in rural areas shrank by 6–10 per cent year-on-year every quarter.

According to Sanjiv Mehta, former CEO and MD of consumer goods major Hindustan Unilever (HUL), high commodity prices played a key role. As prices of raw materials like palm oil, skimmed milk powder, and crude oil rose by 50–120 per cent between December 2020 and December 2022, manufacturers had no option but to hike the prices of packaged goods. And volumes faltered as most low-to-middle-income households baulked at the idea of increasing their expenditure.

HUL isn’t an outlier. Most leading FMCG companies are feeling the heat. Take for instance Ayurveda-centric packaged goods major Dabur India. It reported a meagre 1.8 per cent YoY growth in its net profit for FY23 thanks to a 6 per cent surge in sales. But that was mostly due to steep hikes in the prices of its products. The Ghaziabad-headquartered firm’s margins bear out the impact of higher commodity prices. While Dabur’s consolidated gross margins contracted by 258 basis points (bps), net profit margin shrank by 160 bps to 14.8 per cent because of inflation in inputs to the tune of 12.6 per cent.

Suresh Narayanan, Chairman and MD of Nestlé India, says one key reason for the slowdown in rural households’ consumption is that essential items are taking up a large chunk of their budget. Mayank Shah, Senior Category Head at biscuits and confectionary major Parle Products, says, “It’s a very difficult time for almost all players. There were multiple rounds of price hikes in 2022, but as prices of raw materials kept rising, it was getting very, very challenging for most companies to manage their price-value equation.”

Firms Reorient

For white goods makers, too, the strategy of raising prices may be reaching its limit. B. Thiagarajan, Managing Director of air-conditioning major Blue Star, tells Business Today that since the cost of production jumped by double digits, margins have remained under severe pressure. “Compared to the pre-Covid-19 levels, margins are 1.5 per cent lower. But we are not taking any further price hikes,” he says. He feels further hikes could hit demand. There might be other reasons for this rethink. According to Nandi, after surging to 31 per cent higher than pre-Covid-19 levels, the cost of production has begun to moderate. “Currently, it is about 14-15 per cent higher (than early 2020). Across categories of large appliances, 15-20 per cent price hikes have been made by the industry. But there is still an adverse equation on margin by about 4 per cent as the higher costs haven’t been recovered yet,” he tells BT.

One other factor is the change in consumer behaviour that is clearly visible in the smart TV market—the largest durables category by unit sales—where sales are now skewed towards premium TVs with larger screens. According to Avneet Singh Marwah, CEO of Superplastronics, which manufactures Kodak, Thomson and Blaupunkt brands of smart TVs, demand for 32-inch TVs has shrunk by up to 40 per cent in the last few quarters. Till recently, 32- and 40-inch TVs accounted for over 80 per cent of the market. “Meanwhile, we are witnessing a 300 per cent jump in demand for the premium 55- and 65-inch TVs. This clearly reflects a wide divide between the purchasing power of mass market consumers and the better off,” he says.

What shape is it?

Since the post-pandemic recovery began, economists and policymakers have grappled with one question: Which letter best encapsulates this recovery? The most contentious candidate has been the letter ‘K’, implying that the better-off have seen a recovery even as lower income households suffer.

Some economists say this divergence is already impacting the economy. While the Reserve Bank of India (RBI) expects the gross domestic product (GDP) to grow 6.5 per cent in FY24 and the International Monetary Fund revised its estimate upwards to 6.1 per cent from 5.9 per cent, others are less optimistic. The World Bank cut its growth projection for India by 30 bps to 6.3 per cent, attributing this to poor private consumption. CRISIL, a subsidiary of US-headquartered analytics and ratings giant S&P, expects India’s GDP to grow at 6 per cent in the current fiscal.

Dipti Deshpande, Principal Economist at CRISIL, says the slump in the consumer economy is not without reason. “First, unlike in previous instances of major jolts in economic activities, post-Covid-19, the government was very judicious in putting money in the hands of the common people. This has helped keep inflation in check (compared to other major economies). Second, for the unorganised sector workers there has been an impact on income levels. Third, steep inflation, especially in essential categories, meant households were made to spend more on them, which impacted their ability to spend on most other categories. And fourth, a higher rate of interest is impacting overall consumer spending,” she says.

One factor that has affected rural incomes, say experts, is the steady cut in expenditure on programmes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) that guarantees 100 days of manual work for rural households per year. From Rs 1.11 lakh crore in FY21, the Union government cut its spending on the flagship scheme to Rs 89,000 crore in FY23. In the Budget for FY24, it has been reduced further to Rs 60,000 crore—nearly 46 per cent lower than the FY21 levels.

Speed Bumps Ahead

Most companies had anticipated a revival in FY24. But their hopes are fading.

HUL is now cautiously optimistic, as volatility remains a key concern. In the June quarter of FY24, it reported a meagre 3 per cent growth in volumes on a low base—the lowest since the June 2022 quarter. It failed to meet analysts’ expectations of 5 per cent volume growth, 13-16 per cent growth in net profit, and 8-9 per cent growth in its top line. While it reported a 7 per cent rise in net profit, its sales grew by 6 per cent.

Dabur India’s performance, in contrast, was more resilient. Backed by strong volume growth, Dabur reported an 11 per cent jump in its operating revenue to Rs 3,130 crore. The company’s volumes grew by a handsome 8 per cent in the rural market and 10 per cent in the urban areas. According to Mohit Malhotra, CEO of Dabur India, while unpredictable rains due to climate change looms large, better showing of crops in the upcoming winter season will help in demand recovery.

Meanwhile, Mumbai-based Marico Ltd reported a 3 per cent decline in its operating revenue to Rs2,477 crore due to a 5 per cent fall in domestic sales as edible oil prices crashed. This, despite a 3 per cent rise in its volume offtake during the June quarter. According to Saugata Gupta, MD & CEO of Marico, in the June quarter while volume growth for the FMCG sector was in positive territory, “evident green shoots in the rural (market) were not yet visible”, he said in a post-earnings call. Factors such as retail inflation dropping to sub-5 per cent levels, late pickup in monsoons, hike in the minimum support price (MSP) of kharif crop and higher government spending continue to give hopes of a gradual recovery in rural sentiment, “although the extent of impact of spatial distribution of rainfall and erratic weather patterns on rural farm incomes may also have a bearing on sentiment in the near-term”, he added.

Another leading FMCG player, Tata Consumer Products (TCPL), sees no significant change in the consumer economy. “There is no big change in the demand scenario. I would love to see [a change] but I don’t. All industry stakeholders are cautious. At best, they are saying it’s status quo, while many are recording even worse [demand trends]. Rather, the stress (observed in rural consumption) is now spreading to urban markets. I would rather keep my fingers crossed,” says Navaneet Kar, President and Head of India Sales at TCPL.

His views were echoed by Rohit Jawa, the newly appointed MD and CEO of HUL. “FMCG markets are recovering gradually, although the operating environment remains challenging. In the near term, the FMCG industry will continue to witness a rebalancing of the price-volume growth equation and a gradual recovery in consumer demand,” he says. Shah from Parle says that with wheat production in the Rabi season touching a record, companies will soon start passing on the benefits to consumers.

But challenges remain. “While headline inflation is mostly under control, food inflation will continue to wobble for a while due to multiple factors, including climate-related issues,” says Nestlé India’s Narayanan.

The consumer economy has missed its first quarter recovery target, and people like Superplastronics’ Marwah feel the chances of a recovery even in the festive season are slim. 

@arndutt