FMCG Slowdown: Who is Beating It? Who is Getting Battered?

GROWTH = CONSUMPTION INCREASE X PRICE INCREASE

Growth is the DNA of a healthy business. FMCG enterprises have chased it with a formulaic focus on consumption and pricing. India's demographics dividends should have rewarded the enterprises with impressive growth. But economic reality has been anything but linear.

Depending on the category, consumers are sensitive to price increase which can lead to an altering of consumption. Hence, more often than not, consumption growth is what dictates the real growth of brands and their strategies.

In how slow-moving consumer goods companies can go faster, we spoke about how brands were taking a series of measures to drive growth on the back of price cuts, focus on key products, launch premium product etc. Now let’s assess their current status.

Here are the Underperformers

HUL                                       

Volume Growth Q2 ‘19 = 5%

Sales Growth YoY = 6.7%

PAT Q2 ‘19 vs Q2 ‘18 = 18.5%

The poster boy of Indian FMCG is struggling. Volume growth is down to its lowest in two years. To combat the slowdown, the company has rolled out a slew of measures like price cuts and premium products. For instance, thirty years after its last laundry brand, they launched Love & Care, a premium product, to take on the likes of Future Group's Voom. Also, tax cuts and lower input costs have helped improved profitability and given HUL the ammunition to continue investing in digital disruptions for growth.

India has probably one of the most disparate distribution mechanisms, with countless distributors servicing retailers from a varied set of products. It is this edge that has served HUL well over the years. However, digital is disrupting distribution like never before and shifting that power to retailers with self-ordering mechanisms. There is an increasing need for giants like HUL to leverage such digital disruptions.

Dabur                                                

Volume Growth Q2 ‘19 = 4.8%

Sales Growth YoY = 4.09%

PAT Q2 ‘19 vs. Q2 ‘18 = 15.1%

Its growth in Q2 FY-19 has prompted Dabur to take off its gloves. It has embarked on an aggressive marketing strategy to take competitors head-on.

They have also doubled down their efforts in direct distribution in rural areas. By September '19, they had increased coverage to 51,000 villages from 48,000 in June '19. We do feel this will reap big dividends for them.

 Britannia*                              

Volume Growth Q2 ‘19 = 3%

Sales Growth YoY = 6.2%

PAT Q2 ‘19 vs. Q2 ‘18 = 32.9%

Britannia has maintained a stoic silence on its volume growth. Seems fair to assume that not much has improved from earlier and they will continue to grow volumes at 3%.

We see a price increase-led growth for the next quarter. However, there might be delays in the launch of several products, which are indicative of operational weakness. A negative factor for the enterprise given the acute need to innovate in these trying times.

ITC FMCG*

Sales Growth YoY = 4%                                                                                                      

ITC Cigarettes*                                  

Volume Growth Q2 ‘19 = 3%

Sales Growth YoY = 5.9%

Cigarettes haven’t lost favour among its consumers despite the price increase. Both price and volume growth have helped the category grow by 3%.

For ITC’s FMCG, growth has been more challenging. There are a plethora of options for consumers. It won’t be as easy for the enterprise to foster growth through a price increase as it has in the cigarettes category.

While we see a 4% sales growth, it may not be enough for ITC to execute on its 2030 vision of Rs 65,000 crores revenue growth from packaged foods. Its current 4% growth is way off the target of over 17% CAGR that they need to achieve the 2030 goal.

Marico                                                                       

Volume Growth Q2 ‘19 = 1%

Sales Growth YoY = ~0%

PAT Q2 ‘19 vs. Q2 ‘18 = 17%

There are newer lines of business

In India, Marico has started developing new health foods, including a variety of ready-to-eat oatmeal with flavours tailored for local tastes such as Mumbai pav bhaji, and lemon and mint chutney. To distribute them, Marico installed vending machines in offices, hospitals and gyms across Mumbai, Pune and New Delhi.

Marico also recently launched its line of soups, shakes, green teas and coffee products. It’s also rolled out male grooming products and a premium skincare lineup.

These new products are expected to grow at 20% for the next 3-5 years improving the overall growth trajectory of the company.

And there are newer markets

Marico is expanding overseas, including in Bangladesh, Myanmar, Vietnam and the Middle East. International sales now make up more than a fifth of Marico’s global total.

There are many variables in this equation. Where is the tech to see it through?

What matters is Maricos's execution. Will they be able to leverage tech intensely like some of their fast-growing rivals like iDFresh? It is especially important in India, where only 5% of new products succeed due to the unavailability of data and the capability to drive sales/ distributor interest in new products.

Godrej Consumer (India)    

Volume Growth Q2 ‘19 = 7%

Sales Growth YoY = ~1%

PAT Q2 ‘19 vs. Q2 ‘18 = 9.9%

In the case of Godrej Consumer, volume growth compensated for consumer promotional spends driving marginal growth in topline for India. Bottomline benefited from lower tax outgo driving higher PAT.

GCPL has lagged sectoral growth for a while now, and with this consumption performance, it seems like a matter of time before we can expect them to deliver stronger topline performances.

The Rough Diamonds

Nestle                                                

* analyst estimates

Volume Growth Q2 ‘19 = 9%

Sales Growth YoY = 9.5%

PAT Q2 ‘19 vs. Q2 ‘18 = 33.5%

Nestle’s secret sauce has been its ability to launch new products frequently. Over the last three years, the company has launched nearly 60 new products including variations of its established brands like Maggi, Nescafe and Kit Kat.

With growth as a key driver, Nestle has shown resilience to hold prices inspite of increasing costs in Dairy and they have been rewarded for it.

Jyothy Laboratories               

Volume Growth Q2 ‘19 = 8.3%

Sales Growth YoY = 8.5%

PAT Q2 ‘19 vs. Q2 ‘18 = 17%

Jyothy Labs is the horse to bet on. They’ve been outperforming the market by 2-3 percentage points for years now. Their growth is built on good retail execution where their retail reach continues to grow. For instance, coverage increased to 1 million outlets in Sep-19 from 8 lakhs in June-19.

To tackle rural growth, they’ve increased the frequency of servicing from monthly to weekly and sometimes twice a week. These execution initiatives will help continue their growth trajectory into the next quarters as well.

Disclaimer: Jyothy leverages Bizom solutions for retail execution.

Parle Products                                             

Volume Growth Q2 ‘19 = NA

Sales Growth YoY = NA

PAT Q2 ‘19 vs. Q2 ‘18 = NA

We do feel that Parle-G is the pulse of India’s inflation much as the McBurger is for the rest of the world. It does seem imminent that they will hike prices as inputs costs for biscuits have swelled. They have already shut down less efficient plants to improve cost efficiencies.

The company has posted a 15% increase in profitability in FY19 over the previous year. However, the growth hasn’t stopped them from clamouring for a reduction in GST for low priced biscuits.

SUMMARY

Overall Industry Profitability:

Profitability has improved across the board, largely due to the tax cuts offered by the government. In many instances, it also helped by reduction in input costs. So the government has done its bit to help businesses to keep investing.

Overall Consumption Growth:

The consumer price inflation in India went to 3.99% in Sep-19. Against this backdrop, the consumption across the board has been muted barring Nestle, JLL and GCPL. Market leaders like ITC, Britannia and Marico are showing consumption growth lower than the CPI which should ring the alarm bells for their businesses.

Who’s playing the Price card?

Another important lever is the increase in price at the cost of maintaining consumption. Dabur, Marico and GCPL have tried price drops to fuel growth but it seems to have had little impact in terms of fuelling growth. However, brands like ITC in cigarettes seems to have managed to drive over half its growth from price increases and same is the case with Britannia.

Overall, it’s been a very tepid quarter for FMCG. Focus on operational efficiency and lower tax liabilities have helped them stay the course. Companies like Nestle and ITC who have been focussing on new product launches. Revenue numbers indicate it’s a step in the right direction.

However, it’s time for FMCG brands to not only rely on earlier distribution successes and direct distribution but also leverage tech innovations like gamification for new product launches. More importantly, brands need to move towards pull-based distribution from the retailer rather than just the current inefficient push-based distribution mechanism to drive significantly higher operational efficiencies.

Disclaimer: "*Based on Bizom's research".

The article has been penned down by Akshay D'Souza,  CMO, Mobisy Technologies