High Inflation Likely To Bite Into FMCG Sector’s Volume Growth In 2022

The Reserve Bank of India in its recent Monetary Policy Review ignored inflation to keep stock market growth intact, but the first casualty of the Central bank’s decision is likely to be the FMCG sector.  

With Covid-19-induced disruption changing income trends in India, coupled with retail inflation at above 6 per cent, people are expected to cut down their expenditure on non-essential groceries in the coming quarters.  

Majority of FMCG companies have already reported a decline in volume growth in the third quarter of FY22. A NielsonIQ report released recently had said that demand in the rural segment had taken a hit, with volume growth declining by 2.9 per cent.  

Retail inflation in India rose to a seven-month high of 6.01 per cent in January, breaching the upper tolerance level set during former RBI governor Raghuram Rajan’s tenure. The rise was mainly on account of high food inflation, which jumped to a 14-month high of 5.43 per cent, along with a high base. 

Inflation in the wholesale prices in January softened to 12.96 per cent from 13.56 per cent a month ago, but it has been in double digits for ten consecutive months, putting pressure on the expenditure capacity of consumers. 

At this juncture, FMCG firms face the dilemma of choosing between margins and volumes. Analysts believe that protecting margins will further impact volumes of companies as consumers will hold back consumption. 

“It (rising cost) does impact FMCG consumption. Commodity inflation is directly or indirectly impacting every product or service. In rural India, the slowdown is an issue currently. There has been inflation in fertiliser prices and diesel prices. That means disposable income for farmers goes down as they have to spend on fertiliser and diesel. Then they would cut down consumption wherever possible. FMCG consumption then does take a hit,” Abneesh Roy, executive vice-president (research), Edelweiss Securities said. 

A recent report by ICE360 Survey stated that the income of the poorest fifth which constitutes 20 per cent of the Indian households has plunged 53 per cent in 2020-2021, during the Covid-19 pandemic as compared to their income in 2015-2016, whereas the annual income of the top richest 20 per cent of households has surged 39 per cent in the same period. The phenomenon of wealth concentration in the hands of the top 20 per cent does not bode well for the consumption sector of India which depends on the spending capacity of the masses in the country. 

According to Roy, FMCG companies operating in the lower price units of Re 1, Rs 2, Rs 10 cannot take the price hike, as a hike in this range would impact demand in a big way. “There companies cut grammage. So, when they cut grammage in a 100-gram soap or 100-gram biscuit, based on their calculation, that’s a straightaway impact on demand. Currently, a direct impact of grammage cut is being seen," Roy said. 

War On Margins 

Companies like Dabur, HUL, and Britannia have seen margins being impacted due to persisting inflation.“We continue to witness a 2 to 3 per cent rise in commodity prices,” said Varun Berry, managing director of Britannia Industries, post the company’s third-quarter results in FY22 at investor calls. The company is expected to go for a 10 per cent increase in prices during the January-March period, despite a required increase of 12 per cent to cover inflation. He also said that the company may have to go for more price rises in the first quarter of FY23 to offset the pressures seen on its margin due to inflation. 

The story is no different for HUL. Sanjiv Mehta, chairman and managing director of the company has said that inflation is expected to moderate only in the second half of 2022. “Commodity inflation continues to be a significant headwind… In fact, the operating conditions remain challenging in the near term, as we are seeing sequentially more inflation so far in the March quarter as compared to the December quarter,” he said post Q3 results in FY22 during investor calls, hinting at price hikes.

HUL also said that the company has seen a fall in volumes, which is more evident in the rural markets. 

Another FMCG major, Dabur, is expecting 4 to 5 per cent inflation over and above last year’s high base. Mohit Malhotra, CEO Dabur India, said the company would increase prices to maintain margins, post Q3 results in FY22.

“FMCG products are highly price-sensitive. In many cases, FMCG companies typically reduce the grammage of the product and maintain a consistent MRP. This helps them in offsetting the increase in the cost of raw materials. Some of the premium to high-end products would see a price increase in the range of 5 to 7 per cent,” Naveen Malpani, Partner and Consumer Sector Leader at Grant Thornton Bharat LLP said. 

About 36 per cent of an FMCG company’s sales come from rural India and a continued rural slowdown is risky for these companies. On the urban side, too, people have started using products on the lower end of the price spectrum, according to Malpani.