In India, slow-moving consumer goods

Last Updated: Sun, Aug 04, 2013 05:13 hrs

Nitin Paranjpe, managing director and chief executive of the largest consumer goods company in India, Hindustan Unilever Ltd (HUL), was unequivocal when he indicated that growth of the Rs 1.8-lakh-crore fast-moving consumer goods (FMCG) market in the country was slowing. The fifty-year-old, who has been elevated to president, homecare, Unilever, effective October, made this statement while declaring the firm's June quarter results last week.

HUL reported its slowest sales growth in three years at seven per cent for the three months ended June 30. The underlying volume growth, a metric analysts keenly track, was down to four per cent in the quarter.

But the maker of Dove shampoo and Lux soap wasn't the only company to feel the slowdown pinch. Kolkata-based ITC reported lower-than-estimated net sales growth of 10 per cent during the quarter as cigarette volumes continued to disappoint, growing at 7.1 per cent. The normally buoyant non-cigarette FMCG portfolio, which has helped the paper-to-hotels company register good numbers in the last few quarters, was a bit of a drag, too, growing 18.4 per cent between April and June. Analysts had expected higher growth rate numbers for the business.

Abneesh Roy, associate director, research, Edelweiss, says: "Our expectations were that FMCG sales growth for ITC would be in the region of 22 to 23 per cent. It was a little lower than that. This weakness was driven by biscuits, soaps and shampoos." (Click for table)

Mumbai-based oral care giant Colgate-Palmolive (India) Ltd and Ghaziabad-headquartered Dabur Ltd, while reporting a decent nine per cent volume growth each during the June quarter, just about met analysts' estimates on that parameter. So did GSK Consumer that saw volumes rise seven per cent in the June quarter.

Nestle India, on the other hand, posted a decent 9.8 per cent growth in domestic net sales, led more by price than volumes.

On the net profit front, too, the picture remained mixed with companies such as HUL and Asian Paints seeing their bottom lines fall (HUL's 23 per cent net profit decline was because of a one-time sale of Rs 605 crore; but adjusted profit after tax was just four per cent). While Godrej Consumer Products Ltd saw a sluggish growth in net profit at 1.7 per cent, Nestle and GSK saw a 10.3 per cent and 12.5 per cent growth, respectively, in bottom lines. Dabur, Colgate and Tata Global Beverages (TGB) were the exceptions, logging growth in excess of 20 to 30 per cent (see chart).

The mixed bag of results in the June quarter then provides an important clue regarding the road ahead for consumer-driven companies: The ride is likely to be bumpy as consumers defer purchases in an uncertain environment. Paranjpe said: "All categories are slowing, most notably those at the premium end and those dependent on discretionary spends. And this should continue for some time."

While most other FMCG CEOs have not been as vocal as Paranjpe has about the slowdown blues, Sunil Duggal, CEO, Dabur India, says the environment remains challenging and that companies will have to walk the tightrope managing costs and ensuring there is growth. This point is reiterated by Harish Bhat, MD, TGB, whose top line grew five per cent during the quarter and bottom line by 44 per cent. "We saw growth in most geographies barring Europe," he said. "The challenge would be to ensure there is sustainable growth and that costs are under control," he added.

TGB, which derives 65-70 per cent of its revenues from international markets and 30-35 per cent from India, saw its total expenditure increase by just four per cent during the June quarter. TGB achieved this by keeping a tight leash on expenses such as advertising and sales promotion (ASP), which grew three per cent only during the quarter under review.

Most other companies, however, were not as lucky having to take up ASP during the June quarter as the pressure to be visible in a slowing market increased. On an average, ASP, as a percentage of sales, has jumped from about 10-11 per cent a year ago to about 13 to 15 per cent now for most FMCG companies. In the case of companies such as Colgate, it is even higher as the pressure to fend off competition grows.

What does this mean for companies? That there will be pressure on operating margins as ASP will continue to be high. Most companies are beginning to respond to this challenge by keeping allied expenditure under check. Duggal of Dabur said his company had a rigorous cost management programme in place to address this issue. HUL's chief financial officer R Sridhar, TGB's Bhat and and Godrej Consumer's managing director Vivek Gambhir added they were keeping a close watch on their operating expenditure.

"We have set up a project called Daksh to improve efficiency (read cut costs) in our go-to-market model," Gambhir said.

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