Consumer Goods Sales Rebound In December But Inflation, Rural Slowdown Worries Persist

Sales of consumer goods makers rebounded in December, according to at least one estimate, but pricier commodities, low demand and a rural slowdown capped the rise.

The fast-moving consumer goods industry saw sales value growth of 2.3% over the preceding month in December, according to data by retail intelligence platform Bizom, which tracks more than 75 lakh kirana outlets.

That comes after a 14.4% drop in November, when the number of active kirana stores fell as owners took time out to attend festivals and weddings. Sales rose 21.3% year-on-year and 5.4% over the previous month in October.

The number of active kirana, or neighbourhood grocery stores, rose 6.1% in December. Yet, monthly sales per such outlet were down 3.6%.

“Net sales grew sequentially due to a return in the number of active kiranas, but stocking remained weak for the second month running, which indicates that consumption remains under pressure,” said Akshay D'Souza, chief of growth and insights at Bizom.

Category-wise, home care segment sales fell 6.9% over the preceding month, while personal care sales contracted 1.8%.

“Products such as sanitisers, toilet cleaners and floor cleaners are seeing lower traction. Items like surface cleaners and vegetable cleaners that were launched last year at the height of the pandemic are seeing negligible demand even as we enter the third wave,” D'Souza said.

Rural Slowdown

A bellwether of consumer confidence and the overall health of the economy, FMCG sales in rural areas lagged urban demand in December.

Marico Ltd.—the maker of Parachute oil—in its Q3 business update highlighted slowing consumption, especially in rural markets. The slowdown was due to "continuing inflation which impacted disposable incomes, and rising mobility unleashing pent-up demand for discretionary or non-essential goods, services and out-of-home consumption".

The spurt in demand in rural areas—accounting for 36% of FMCG sales—usually seen after the kharif harvest hasn't occurred either. Unseasonal rains have taken a toll on crops, impacting farmers' income.

“Rural weakness is back as a pain point, and we expect even 2022 to start slow on demand,” JM Financial said in a recent note.

Muted Demand, Lower Margin

Abneesh Roy, executive director at Edelweiss Securities, expects volume growth for FMCG companies in the October-December quarter to remain muted due to rural slowdown, grammage cuts, and high inflation.

Prices of essentials such as packaged atta, edible oil, spices, and impulse purchases such as biscuits and chocolates, went up by 4-20% as manufacturers were struggling to absorb the high raw material prices.

That will continue to drag down gross margin.

Godrej Consumer Products Ltd., in its Q3 update, said inflationary pressures such as raw material and supply-chain costs have impacted its margin. “Gross margins to expand sequentially, but remain lower over the previous year due to unprecedented cost inflation. The net result would be a dilution in operating margins during the quarter, on YoY basis,” it said.

Edelweiss' Roy expects pressure on margins for FMCG companies to start easing from Q4 FY22.