FMCG sector has become the casualty of the Central bank’s decision to ignore inflation in its latest Monetary Policy Review. The inflation rates of retail in India breached the upper tolerance levels set during the tenure of Raghuram Rajan, the former RBI Governor. The stats reflect a seven-month high rate of 6.01% in January 2022. Most FMCG companies saw a decline in the volume growth as reported in the Q3 of FY 22.
The Reserve Bank of India ignored the inflation in its latest Monetary Policy Review to keep the stock market intact. This decision has given rise to casualties, with the FMCG sector most likely facing this consequence.
Read along to find out more on this matter!
How Has It Affected the Indian Households?
The COVID-19 pandemic has largely disrupted the change in income trends. Apart from that, steep retail inflation rates of 6% result in a decline of expenditures by people on non-essential grocery items in the upcoming quarters.
According to a report of ICE360 Survey, the income of 20% of the Indian households (considered the poorest fifth) has dropped by 53% in the financial year 2020-2021 during the pandemic in comparison with their income in the financial year 2015-2016.
In contrast, the top richest 20 per cent of households have recorded a surge in the income of 39 per cent in the same period. But this wealth concentration does not bode well with the consumption sector as it depends on the spending capacity of the masses.
How Has It Affected the Companies?
Most FMCG companies have experienced a decline in their volume growth in quarter three of FY 22. Further backed by the recently released NelsonIQ report, a decline of 2.9% in volume growth was recorded, with demands from rural segments taking a hit.
With a seven-month high rise of 6.01%, retail inflation has breached the upper tolerance limit set during the previous RBI Governor’s tenure. The cause of its rise has been steep food inflation that jumped to a fourteen-month high of 5.43%, together with a high base.
Though the inflation of wholesale prices decreased to 12.96% in January 2022 from 13.56% in December 2021, it still remains a double-digit figure for nearly ten consecutive months. This has pressurised the expenditure capacity of the consumers.
According to Abneesh Roy, Executive VP (Research) of Edelweiss Securities, FMCGs indulged in lower price units of Re. 1, Rs. 2, Rs. 10 opt for price hike as it will hugely impact the demand in this range. He further states that companies cut grammage based on their calculation which has had a straightaway impact on demand recently.
The War of Margins and Volumes
The basic dilemma faced by FMCG sectors is choosing between volumes and margins. According to analysts, protecting margins will impact the volume of companies and vice versa as the consumers will restrict consumption to a limit.
Furthermore, the rising cost hugely impacts FMCG consumption as a commodity’s inflation will indirectly or directly impact every service or product. For example, the inflation in the prices of fertilisers and diesel impacts FMCG consumption as the disposable income for farmers is spent on these commodities, and they will cut down its usage.
According to the FY 22 Q3 results of FMCG, companies like Britannia, HUL, Dabur, etc., witnessed a 2% to 3% rise in the prices of commodities, impacting their margins. A further rise in price is expected to 10% from January to March.
Further, HUL has witnessed a decline in volumes, and Dabur expects a 4% to 5% inflation above the high base from last year. To work in these challenging circumstances, the only way the companies have come up with is to increase the prices to maintain a sustainable profit margin.
This is evident that FMCG commodities are highly price-sensitive. To maintain a consistent market price, these companies usually reduce the grammage of products, which helps curb raw material prices. Thus, the cost of high-end products increases in a range of 5% to 7%.
Keeping in mind that 36% of sales of FMCG companies come from rural India, this continued slowdown has become a risk for these companies. Furthermore, even urban India has started utilising products priced at the lower end of the spectrum. A positive outlook should be maintained in the long term, and resilience should be built, creating value for both consumers and the economy.
Frequently Asked Questions
What is volume growth in FMCG?
The volume growth is the physical growth in sales volume. The volume growth of FMCG is pegged at 4% in the last financial year.
What is the projected growth of the FMCG industry?
It is expected to increase at a compound annual growth rate of 14.9% by 2025.
Why are FMCG stocks falling?
The rise of inflation is the main cause behind the falling stocks of FMCG. Further, the weakness of rural India to meet the high paced demands of consumer goods has slashed the sales by 8 to 10%.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.