Tough times ahead for consumer firms

The New Year may not bring good tidings for consumer goods companies battling inflation and a slowdown. Most consumer product firms expect the year ahead to be tough, as sentiment remains weak.

Already the expectation among analysts tracking consumer goods firms is that third-quarter results of most will not be exceptional. Most firms are likely to see lower volume growth as consumers remain wary about spending too much. The volume growth for the second quarter was down to about eight-nine per cent from 10-11 per cent earlier.

So, how long will this trend last? Six months of next year, according to Amit Burman, vice-chairman of Dabur. "Hopefully, the situation will ease in the second half," he says. Harsh Mariwala, chairman and managing director of Marico, says he has yet to draw a conclusion on the volume growth.

"October-November saw a marginal slowdown. But I'd wait and watch to see how the situation pans out," he adds.

A recent survey by brokerage Emkay to gauge inventory levels of fast moving consumer goods at modern trade outlets in Mumbai showed two-and-a-half months was the average for 37 stock-keeping units in the household and personal care (HPC) categories. Milk and food products such as noodles bucked the trends.

The brokerage (likely to extend the survey to other cities) says it has surmised a slowdown in the sales momentum in cities such as Mumbai in categories other than food.

The brokerage also says companies such as Nestle and Marico are relatively better placed than those such as Hindustan Unilever and Procter & Gamble, which have a higher exposure to HPC.

Despite this, some marketers remain optimistic about the new year. For instance, Adi Godrej, chairman of Godrej Group, says he has "no problem" on the consumption front. "Growth should be there," he adds.

A key reason for the optimism among some marketers is the expectation of a good monsoon next year. India has received sufficent rain in the last two years, and the expectation is that 2012 will be no different.

Typically, a good monsoon improves output of the kharif crop. That increases the probability of rural households earning a good income. This, in turn, impacts consumption and demand in rural areas -- a key contributor to the sales of consumer product companies.

While the monsoons were good this year, a sustained inflation, mainly in food, ensured that consumers were wary of spending too much. This took a toll on discretionary products such as consumer durables, which saw a marked slowdown this year.

By some estimates, the growth in consumer durables as a whole was just nine per cent in 2011, as opposed to 14-15 per cent in 2010. Categories such as air conditioners fell, thanks to adverse weather conditions. This impacted sales.

LG, India's largest consumer durables company, says it is not hopeful of a significant revival next year. A key reason being added pressure on the rupee front, which is compelling companies to take up prices at a time when pricing power is limited.

Already from September to now, most consumer durable companies have taken up prices at least twice. LG, Samsung and Videocon, the top three, say another round of increases is likely in January.

"This is not likely to go down well with consumers," says Pradeep Dhoot, president, Videocon Industries.

From September to now, home appliance prices, which were taken up due to the rupee depreciation, have risen by about seven to eight per cent. Another two to three per cent hike will take up the total quantum of hikes from September to 10-11 per cent.