inflation: FMCG CEOs see inflation eating into volumes

Demand for fast-moving consumer goods is expected to take a hit for the next two quarters at least, chief executives of listed FMCG companies have told analysts, as rising inflation leads to stress on margins and downtrading by consumers.

Strategic funding for new initiatives and launches could also face delays in the April-September period, they have said.

“This is a unique situation where you have food inflation, general inflation (petrol and diesel) and input-cost inflation,” Saugata Gupta, the managing director of Marico, which owns the Saffola edible oils brand, told ICICI Securities analysts during a recent interaction.

“The first quarter of FY23 (April-June) is expected to be painful for everyone… the pain in terms of volume growth and margins may be for a while,” Gupta told the ICICI Securities research team. “There are possibilities of pushback on strategic funding for new initiatives.”

Besides raw material inflation, the ongoing Russia-Ukraine conflict has also disrupted supply chains and oil shipments.

Industry executives said passing on inflation will lead to further downtrading — consumers buying either cheaper products, smaller packs, or delaying consumption.

“There will be a softening of volume growth due to inflation,” said Sunil D’ Souza, managing director of Tata Consumer Products.

“Inflation is a reality, and everyone should budget for the next 6-12 months accordingly.”

Over the last quarter, prices of commodities such as crude oil, crude-linked derivatives, packaging material, spices, palm oil and skimmed milk powder have surged by between 23% and 42%, while freight costs have shot up by three to four times.

The overall volume growth across large core categories such as toothpastes and hair oil have declined, while that of shampoo has been flattish, said Mohit Malhotra, chief executive of Dabur India.

“This situation is likely to remain the same for some time due to inflation. In terms of rural, we had better performance last quarter (December) but rural is declining for us as well this quarter,” Malhotra said during an interaction with analysts.

The rural markets, which were already under pressure in the December 2021 quarter, have been impacted further, data showed.

According to retail intelligence platform Bizom, four out of six categories that were tracked witnessed downtrading in rural markets in March.

“Rural India saw a spurt of growth last year with reverse migration. But in the short term, rural consumers are facing income and liquidity challenges which would impact consumption,” said Ram Raghavan, the managing director of Colgate-Palmolive, on an analysts’ call led by ICICI Securities research head Manoj Menon. Raghavan will be relocating to a global role at the oral care company later this month.

For the quarter ended December 2021, rural market consumption declined 4.8%, according to market measurement firm Nielsen. Market volatility and inflationary trends will continue to impact consumption in the March quarter, the US-based company said.

“Yes, there is a slowdown in rural markets. If the Ukraine crisis would not have happened, rural would have recovered but with food inflation it will continue to be stressed,” Gupta of Marico said.

Listed FMCG firms are scheduled to announce their March-quarter earnings over the next three weeks. Leading FMCG companies including HUL, Nestle, ITC, Dabur, Marico and Britannia have resorted to price increases of between 5% and 20% since October last year.

“We cannot transfer the full inflation to the consumer; the difference between CPI and WPI has to be absorbed by companies,” Dabur’s Malhotra said.

Consumer Price Index and Wholesale Price Index are measures to calculate the price changes of goods.

He said growth is currently coming from pricing, even as volumes are flattish. While some inflation is good, such high inflation has a negative impact, he added. “Going forward, inflation will depend on the Ukraine crisis; we are taking cover, but they are not enough,” he said.

Brokerages have forecast that the March and June quarters could see flat revenues and a high-single-digit volume decline.

“Rise in key input costs is a concern, especially for staples, paint and quick service restaurant firms; we expect product price hikes, despite which margins are at risk,” Jefferies wrote in a report.

Indigo Paints managing director Hemant Jalan said that volume growth would be muted for the entire industry. “Much of it is due to over-stocking by the dealers due to price increases in December, so they have a higher inventory base,” Jalan said.

Raghavan of Colgate-Palmolive said with the third Covid-19 wave receding, consumers intend to spend more, but how much of this leads to consumption will depend upon the impact of inflation on income levels.

Delays in the replacement cycles of toothbrushes, for example, could play out, he added.

“Consumption in certain categories can be postponed or delayed. We are competing with a lot of things like data plans, as consumers have limited budgets,” he said.

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