FMCGs brace for a weak monsoon

13 Jul,2012

By Ratna Bhushan & Sagar Malviya

 

Consumer goods companies are busy firming up contingency plans to stem any decline in volume sales in case a deficit in monsoon rainfall hit crop yields, escalate food prices and impact consumer spend.

 

Companies such as Dabur and Parle Products said they will delay price increases, emphasise on low-priced packs of Rs2, 5 and 10, explore new value price points and step up promotions to prevent possible downtrading, or consumers switching to cheaper products, in case of a crisis.

 

“If there’s a monsoon deficit, we would obviously look at protecting volumes,” said Sunil Duggal, CEO of Dabur, which makes Vatika shampoo and Babool toothpaste.

 

“Contingency plans could include a combination of things like putting off price increases, accelerating focus on smaller packs and allocating more spends on consumer promotions, depending on where the deficit is,” he added.

 

BK Rao, general manager at top biscuits maker Parle Products said the maker of Parle-G, Monaco and Hide & Seek biscuits will focus on smaller price points if the situation is bad.

 

The monsoon has revived significantly in the past week to reduce total deficit in the country so far to 22 per cent from 31 per cent and accelerated crop planting. But crop yields may still be lower as rainfall has been uneven, with some regions, including parts of Karnataka and Maharashtra, remaining practically dry for three weeks. Economists warn that food prices may rise sharply if rainfall weakens again.

 

FMCG companies have been bucking the overall slowdown in the economy and posting an average 15 per cent growth, but a weak monsoon could change it.

 

“A weak monsoon will naturally reflect on costs and we will have to work around that. The industry will feel the impact around September-October,” said Chitranjan Dar, divisional chief executive of tobacco-to-chips maker ITC Foods.

 

While impact of inflation on the premium urban rich is not very significant, mid-rung and rural demand is strongly linked to the monsoons. Thus, top FMCG firm Hindustan Unilever, Dabur and biscuit maker Britannia, which have large rural presence, could be hurt more than Nestle and GlaxoSmithKline Consumer, which have an urban focus for their products, say experts.

 

Analysts say consumer goods companies tend to push ‘magic price points’ of Rs2, 3, 5 and 10 in an inflationary scenario to minimise any negative impact on discretionary spends. Such low-unit packs account for over 25-30 per cent sales of makers of shampoos, hair dyes, biscuits and snack foods.

 

Also, with local competition always posing a threat, established players would have to step up volume discounts and consumer promotions in a weak monsoon scenario. A significant 70 per cent of low unit packs are sold through kirana shops (mom and pop stores).

 

“Small SKUs and distribution expansion may save the day. Downtrading too would be arrested at the small-pack level,” Shirish Pardeshi, executive director and co-head, research, at financial services firm Anand Rathi Securities, wrote in an investor note two weeks back. “Rural expansion of distribution (for example, HUL’s Project Shakti and Emami’s Swadesh initiatives – both aimed at accelerating expansion in rural markets) would help arrest drop in consumption,” the note said.

 

Some analysts, however, believe the impact of a weak monsoon will be limited on rural consumption because dependence on agricultural income has been declining. “Our discussions with rural trade and consumers have always highlighted that one bad monsoon does not result in consumption declining. Instead, it leads to trade credit terms becoming more onerous in rural India,” Ambit Capital’s Anand Mour wrote in a report.

 

Some companies such as Marico, maker of Saffola edible oil, say they would wait for some more time before start worrying about monsoon. “The June-July period is too early to take any decision. We will have to wait for August to check the monsoon trend and get a clearer picture,” said Marico CEO Saugata Gupta.

 

Source: The Economic Times

Copyright © 2012, Bennett, Coleman & Co. Ltd. All Rights Reserved

 

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