At the end of 2020, producers of consumer products were in a happy mood. When lockdowns designed to stop the spread of COVID-19 were recently lifted, a torrent of previously unmet demand resulted, with customers turning mostly to commodities because most services were shut down. The vital summer season was lost back then, and by October, purchases of necessities like refrigerators and washing machines had surged. Additionally, it wasn’t simply the urban clients who were releasing their hold on the wallets. In addition, a sizable portion of the urban labour that was compelled to return to the countryside flocked to stores and internet portals.
That excitement, however, did not persist. The years that followed were defined by huge inflation, employment and income insecurity, and consumer restraint, which was aggravated by Russia’s invasion of Ukraine, which raised inflation even more. Unseasonal rains this summer, along with an uneven distribution of the south-west monsoon, have exacerbated the situation. Their issues have been exacerbated by the recent spike in inflation. These issues, taken together, decreased global demand for consumer items ranging from home appliances to snacks, shampoo, and personal computers.
The consumer goods market’s experience best illustrates this. Companies are struggling to stay in the black after over 25-40 percent year-on-year growth in the second half of 2020. Due to unseasonal rainfall in North India earlier this year and higher pricing, demand for air conditioners and refrigerators fell by at least 5-10% in the June quarter.
Discretionary expenditure was reduced because most households were under strain as their aggregate purchasing power plummeted. We expected to exit the inflationary cycle and see a rebound in consumer spending in 2023. However, this has not occurred. The inflationary tendency persists, and the masses have yet to fully recuperate. As a result, we have observed significant decline across market segments in the previous six months.
The branded FMCG sector, worth Rs 5 lakh crore, is also under pressure. According to the report, the volume reduction in 2022 was mostly due to a substantial decline in rural demand in recent quarters, while it has also slowed significantly in urban markets. Volumes in rural regions decreased by 6-10% year on year during the March and December quarters of 2022.
High commodity costs were a major factor in this. With raw material costs such as palm oil, skimmed milk powder, and crude oil rising by 50-120% between December 2020 and December 2022, manufacturers have no choice but to raise packaged products pricing. And volume fell as most low- to middle-income households rejected the idea of spending more.
HUL is not a stranger. The majority of large FMCG firms are feeling the heat. Dabur India, for example, is a significant maker of Ayurvedic-focused packaged goods. It recorded a small increase in net profit of 1.8% year on year for FY2013, owing to a 6% increase in sales. However, this was mostly owing to a significant increase in the pricing of its items. High material costs have an influence on the company’s margins in Ghaziabad. While Dabur’s consolidated gross margin fell by 258 basis points (bps), its net profit margin fell by 160 bps to 14.8% owing to 12.6% input inflation.
One of the main causes for the slowdown in rural family consumption is that necessary items consume a big portion of their budget. Almost all of the athletes are going through a difficult period. In 2022, there were many rounds of price hikes, but as raw material prices continued to climb, it became increasingly difficult for most enterprises to manage their price-value equation.
Even for white goods makers, price increases may be nearing their limit. Margins are still under significant pressure as production costs have risen by double digits. Margins are 1.5 percent lower than pre-COVID-19 levels, However, we will not raise the pricing any higher. Further increases may have an impact on demand. There might be additional causes for this rethinking. After reaching 31% over pre-COVID-19 levels, the cost of production has begun to fall. It is currently 14-15 percent higher (relative to the beginning of 2020). The industry has raised prices by 15-20% across all categories of big appliances. But there is still an unfavorable equation of about 4% on margins as higher costs have not yet been recovered. Another aspect is a shift in consumer behavior, which is seen in the smart TV industry – the largest durable category by unit sales – where sales have shifted to large-screen premium TVs. Demand for 32-inch televisions has dropped by 40% in recent quarters. This clearly demonstrates the enormous disparity in purchasing power between mass market and affluent customers.