FMCG Distributors' Inventory Piles Up As Sales Falter After January Uptick
The only bright spot, however, has been an early pickup in summer demand.
Distributors of fast-moving consumer goods have been piling up inventory as companies aggressively push products into channels to show volume growth. After a lacklustre festival season, there was slight uptick in demand in January, but February and March so far have lagged, causing a build-up in stocks.
The average closing stock at distributor level has gone up by 25 to 40 days versus a lag of 7-10 days in the last few quarters, Dhairyashil Patil, national president, All India Consumer Products Distributors Federation, told NDTV Profit. Despite extending higher credit periods to retailers, he said that "it's becoming impossible" to push stock as consumer offtake in urban markets continues to face pressure, leaving distributors under financial burden.
The only bright spot, however, has been an early pickup in summer demand, where summer-centric categories such as beverages, glucose, cooling hair oil, soaps, talc and body wash are seeing an uptick, said Patil.
Citing channel checks, Abhijeet Kundu, a research analyst with Antique Stock Broking Ltd. also said that distributors of Colgate Palmolive (India) Ltd., Dabur India Ltd., Jyothy Labs Ltd. and Britannia Industries Ltd. missed their sales targets in February. Distributor inventory levels increased by up to 12-24 days for most companies.
"Biscuits were key growth drivers for Britannia while cakes declined. Cream biscuit performance was below expectations and the dairy portfolio was under pressure," Kundu said in a March 17 note. "Nestle's milk and nutrition offtake remain weak across major distributors, while price hikes continued to put pressure on Colgate's offtake growth."
A milder winter has thrown a wrench in Dabur's seasonal sales plans. Juices and healthcare sales remains muted, while key products like Chyawanprash and honey also faced challenges in offtake.
Even as general trade slows, the FMCG companies have been focusing more on quick commerce, standalone modern stores, and rural markets for growth, said analysts. "There has been a surge in discounts in modern channels, particularly in partnerships with companies," according to Nitin Gupta, senior analyst, Emkay Global Financial Services. "Given the current lower demand, bundling of smaller packs has surged. FMCG companies are offering 'buy-one-get-one' in modern chains despite pressure on margins. The quest for market share has made companies participate."
Another Stressful Quarter
Urban consumption is set to weigh on the growth of FMCG companies in the March quarter even as rural demand —which contributes about a third to sales — is likely to outperform for the fifth quarter in a row.
Analysts project single-digit volume growth for packaged goods companies during the quarter, with staple makers seeing low single-digit increases.
Sustained demand pressure coupled with relentless inflation in raw materials like palm oil and coffee, is likely to put pressure on the profitability of companies in the March quarter. A meaningful recovery is expected only from second quarter of fiscal 2026, say analysts.
"The demand scenario should remain strained in Q4," Gupta said. "If overall inflation is controlled, we may see demand recovery from Q2 FY26."
February’s retail inflation came in at a seven-month low at 3.61%, led by benign trends in food prices. However, prices of key commodities for FMCG companies, including palm oil, which is used in pretty much all processed food like noodles, chips and ice cream; and palm fatty acid distillate, used in soap making; along with prices of coffee, milk and sugar remain high.
The raw material inflation is seen impacting food companies’ margins the most, particularly Nestle India Ltd., Britannia Industries, Tata Consumer Products Ltd. and Bikaji Foods International Ltd. Also, the impact will be felt by companies with higher palm oil exposure such as Hindustan Unilever Ltd. and Godrej Consumer Products Ltd. Soap sales remain sluggish for both the companies, indicated distributors. For HUL, they said that the demand in beauty and personal care segment is under pressure.
Companies including HUL, Nestle India, Dabur, Emami, Tata Consumer Products and Britannia Industries have taken price hikes of up to 6% to combat input cost inflation. They are expected to take another round of price hikes in order to fully offset cost pressures on margins.
These price hikes will aid margins on a sequential basis in the March quarter, but year-on-year margin expansion will remain constrained, say analysts.
"While companies have started taking price hikes to pass on the inflation, we believe these hikes will be lower than raw material inflation in the interim and can pressure year-on-year gross margins for the fourth quarter," according to Mihir Shah, a research analyst with Nomura. "But we anticipate limited expansion quarter-on-quarter due to the price hikes."
Meanwhile, a few companies have taken price cut to revive demand as well. HUL relaunched Glow & Lovely Glass Bright Ultralight Gel in a 23gm pack for Rs 70 and a 7gm sachet for Rs 10. The price of Nescafe ready-to-drink can was reduced by Rs 25 to Rs 50. The price of Godrej Consumer's 625-ml HIT mosquito and fly killer spray was reduced to Rs 250 from Rs 325, while the 400-ml variant saw a price cut of Rs 40 to Rs 180.
Abneesh Roy, executive vice-president, Nuvama Institutional Equities, expects larger players to continue to gain market shares from regional players and start-ups in an inflationary setting.
The FMCG companies have increased retail schemes to revive the general trade channel. Colgate, for instance, is offering additional trade schemes ranging from 2–8%, said distributors. However, the quick commerce shall continue to be the fastest-growing trade channel for all companies.
"With quick commerce aggressively reaching new cities, its share in overall sales shall continue to rise rapidly as consumers’ dependence on it is rising in top cities," Roy added.
