THE GIST of Editorial for UPSC Exams : 16 January 2020 (Behind slow-moving consumer goods (Mint))

Behind slow-moving consumer goods (Mint)

Mains Paper 3: Economy
Prelims level: FMCG
Mains level: Slowdown in the FMCG companies

Context:

• A lot has been written about why automobile sales in the Indian economy have been skidding lately.
• While it is easy to understand why consumers may hold back on big-ticket car or SUV purchases when faced with slowing credit or income.
• Studying long-term growth trends in listed FMCG companies and their investor interactions after the June-quarter results yields some insights.

It’s a slowdown, not recession:

• The sales of the 30 listed FMCG companies, after expanding at 11-13 per cent between the June and December quarters of 2018, lost speed to a 9 per cent growth in the March quarter of 2019 and further to 7.3 per cent in the latest June quarter.
• Market researcher Nielsen has said that after growing at 12 per cent in the first half of 2019, India’s FMCG market growth will likely slow to about 8 per cent in the second half.
• FMCG firms often keep their sales growth ticking through price increases, so volume growth trends better represent consumer demand.
• On this score, sector bellwether Hindustan Unilever (HUL) has reported a 5 per cent volume growth in the June quarter of FY20, after managing 10 per cent growth in FY19.
  So what has driven this boom-bust behaviour?
• After growing at the sedate single digits until FY16, volume growth for FMCG players received a body-blow from the note ban, reporting shrinking volumes in the September and December quarters of 2016.
• By the time they staged a tentative revival to 3-4 per cent by June 2017, the GST implementation kicked in.
• With the GST sharply lowering indirect taxes on many large FMCG categories amid a benign input environment, players were able to drum up demand through price cuts and promotions.
• As a result, growth accelerated and stayed at double digits between September 2017 and 2018.
• But with the high base effect kicking in and input prices turning volatile in 2019, the old normal of single-digit volume growth seems to be reasserting itself.

What are the trends to driving it?

• The rural market, accounting for about 40 per cent of FMCG sales, seems to be facing the brunt of the slowdown. Rural demand growth for FMCGs, which was racing ahead at 1.3-1.5 times urban growth in 2018, has since levelled off.
• This can probably be pinned on the drought-like situation across many States this past year on top of declining agricultural incomes. Northern and western markets for FMCGs have reported a sharper slowdown than the South or East.
• In highly penetrated categories such as soaps, laundry or toothpastes, mid- and low-priced brands appear to be hit by consumer downtrading on slowing income. But high-priced brands appear to be in good shape, thanks to the trend of affluent consumers ‘premiumising’.
• Products with a ‘natural’ tag, despite their higher price tags, have continued to be a hit with consumers. According to Dabur, oral care products with a natural tag managed to grow volumes at 18 per cent, against 5-6 per cent in garden-variety toothpastes.
• In categories such as biscuits, packaged foods and edible oils, nippy local players have posed a stiff price competition to listed players, wooing away value-conscious consumers. In India, phases of benign input prices for FMCGs have always given birth to new local brands playing the discount game.
• Nielsen noted that small regional manufacturers of FMCGs had managed a 28 per cent sales growth in the year to September 2018, while national players grew at 12 per cent.
  Shifting towards urban markets:
• In the urban markets, disruption in trade has also played a role in slowing sales for some players. The note ban prompted a distinct shift in urban shopping habits towards hypermarket and e-commerce stores, which now make up over 15 per cent of FMCG sales.
• The traditional wholesale channel has seen shrinkage with GST woes and the liquidity crunch.
• With modern trade and e-commerce sites seeing products fly more quickly off the shelves, some players have used targeted discounts and promotions to gain share in this space, while those sticking with traditional channels have lost.

Conclusion:

• All this goes to show that FMCG players do not really have their backs to the wall.
• Should the slowdown worsen, they have leeway to stimulate demand by trimming ad-spends and taking selective price cuts.
• All this, however, must be separated from the stock price performance of FMCG players, which may still need to correct from over-optimistic valuations.

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Prelims Questions:

Q1. With reference to the indigenous Light Combat Aircraft (LCA) Navy, consider the following statements:
1. It is developed by the Defence Research and Development Organization, DRDO.
2. It is the smallest and lightest Multi-Role Supersonic Fighter Aircraft of its class.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. All the above
D. None

Answer: C
Mains Questions:
Q1. What are the reasons behind slow-moving consumer goods?