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Run-up to peak festive season fails to set FMCG sales, rural demand on fast track

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Run-up to peak festive season fails to set FMCG sales, rural demand on fast track

 

Hindustan Unilever, Tata Consumer Products, and ITC said rural demand suffered and prices of several key commodities were elevated.

Sluggish rural demand and inflated prices of key raw materials hurt the second-quarter earnings of key packaged consumer goods makers like Hindustan Unilever, ITC, Tata Consumer Products (TCPL)and Colgate-Palmolive.

What that means is the run-up to the peak festive season, which ended on Monday with Diwali, brought little or no cheer to packaged goods companies, known in industry slang as Fast-Moving Consumer Goods (FMCG) companies.

TCPL and Colgate-Palmolive reported a drop in sales by volume during the quarter ended September.

It was a quarter that signaled the onset of festivities in the country with Onam in Kerala, Ganesh Chaturthi in Maharashtra and the start of Navratras leading up to Dussehra, celebrated in the entire country.

TCPL’s volume growth across segments was muted or negative and its India packaged beverages suffered a market share decline of 20 basis points. One basis point is one-hundredth of a percentage point.

Colgate-Palmolive reported a sales by volume drop of 2 percent year-on-year.

HUL, India’s biggest FMCG company, reported sales by volume growth of over 4 percent, but analysts said its performance had also been impacted by a demand slowdown in rural areas and inflation. The annual inflation rate accelerated to a five-month high of 7.41 percent in September.

“The impact of sluggish demand due to high inflation and weak rural sentiment continues to weigh on HUL volume growth. Gross margin declined to a multi-year low (-5.9 percentage points year-on-year) and the company resorted to lowering marketing spend, maintaining the share of voice (SOV),” Jefferies wrote in a note.

HUL’s gross margins in Q2 dipped 588 basis points Year-on-Year (YoY) to 44.9 percent and its EBITDA (Earnings before interest, taxes, depreciation, and amortization) margins dipped 176 basis points YoY to 23.3 percent.

The company’s management indicated that sales picked up towards the end of the quarter but October would determine if the trend will continue.

“September was better than the previous two months of the quarter. But to assess demand, we will also need to look at post-Diwali and that will give us a sense whether the offtake has been better than the last year,” Sanjiv Mehta, CEO and MD, at a post-earnings media briefing.

Rural woes

Tepid demand in rural areas, which according to industry estimates contribute over 30 percent to overall FMCG sales, has impacted the industry’s performance for several quarters now.

Mehta, quoting Nielsen data, said sales by volume on a moving annual total basis (MAT), contracted by 9 percent in the rural areas and by 3 percent in urban areas in Q2.

A similar trend was observed by the retail intelligence firm Bizom, which said that the sales of FMCGs in rural areas declined last month in the run-up to the festive season as retailers kept inventory low amid concerns over inflation.

Sales in rural areas fell 14.3 percent in September compared to August, said Bizom.

“Rural stocking was cautious in September 2022 given that consumer inflation worries haven’t completely eased off and also kirana owners are looking to restock only after liquidation of the stock built up in the previous month,” said Akshay D’Souza, chief growth and insights officer at Bizom.

Outlook

Outlook for FMCG companies looks bleak in the quarter because of inflationary concerns and slow rural demand.

The HUL management said the depreciation of the rupee and price rise in commodities, except for palm oil, is expected to fuel inflation in the December quarter too.

According to the company’s management, the growth in the quarter ahead will continue to be price-led. Softening of prices of some commodities, largely palm oil, will help marginally narrow the price versus cost gap leading to a sequential improvement in gross margins.

HUL’s net material inflation (NMI) in the June quarter was 20 percent, which climbed to 22 percent in the September quarter

CEO and MD Mehta indicated that its NMI in the December quarter is expected to be slightly lower than the September quarter’s.

Monetary policy, currencies

Sunil D’Souza, CEO and MD of Tata Consumer Products, too, shared concerns about inflation and rural demand while addressing investors at the company’s investor meeting after posting quarterly results last week.

Inflation continues to weigh on demand in the international markets although India has been relatively more resilient, except for rural, he said.

“The impact of inflation and monetary tightening on the economies and currencies of our key markets remains monitorable going forward,” he added.

 

 

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