New troubles pile on FMCG majors as they await consumption uptick

• Price cuts impacted sales of FMCG majors in Q3, even as they were able to stem market share losses.
• Slow offtake of products have also led to liquidity constraints in the general trade channel.
• General trade accounts for two-thirds of FMCG sales, and their troubles are another roadblock for volume recovery.
  

For most of the ongoing financial year, i.e. FY24, fast moving consumer goods players have been waiting for an uptick in rural sales. That never came, even in the third quarter (Q3), despite the onset of the festive season. High competitive intensity continues to persist, leading brokerages to cut their earnings estimates, as they see general trade troubles to add to the pressures, for the next few quarters.

The management commentaries have not been encouraging either. The recovery of rural markets, which contribute to 45% of total FMCG sales, is linked to many uncertainties.

“Due to lower agriculture yields and uncertainty of future crop outputs, rural consumer sentiment remains subdued. Consequently, the anticipated buoyancy from the festive season did not materialize. The dualism we've seen in the recent past continues with certain parts of the market recovering faster than the rest,” said Rohit Jawa, CEO of HUL in an earnings concall.

Lowered estimates

HUL’s volumes grew 2% in Q3, but its value growth fell marginally by 0.3%. This was due to price cuts they had to take, especially in home care and personal wash segments. Brokerages have been disappointed with its festive quarter performance, even as it was able to stem market share losses with pricing interventions.

“We believe demand slowdown, competitive pressure, distribution stress, and rising royalty rates are likely to have an overhang on HUL’s valuations. Management commentary on demand setting remains unexciting, as demand recovery remains a hope on the emergence of tailwinds,” said a report by Emkay which cut its earnings estimates by 3% for FY24 to FY26.

Marico also saw subdued growth in its core portfolio of Parachute and Saffola. They saw flat to slight decline in value growth, due to price cuts and heavy local competition. The company also said that there is ‘no visible buoyancy seen in consumer sentiment’.

“We expect overall demand trends to be subdued with no visible improvement affecting volume trajectory in Q4FY24. We expect domestic business to witness muted volumes due to stock reduction undertaken across the portfolio,” Nuvama said. It cut Marico’s FY24 earnings per share estimates by 2.1%, and revised its price to earnings multiples to 38x from 42x earlier.

In addition to price growth, most companies had to grow their advertising and marketing budgets in double digits to fight off competition. But their robust expansion in margins due to sharp reduction in input prices helped absorb the impact. Going forward, analysts see A&P costs remain elevated, while there has been a sequential upward movement in commodities like wheat, sugar etc.

General trade troubles

Slow offtake of FMCG products has had a far reaching impact on the general trade channel as well. General trade channels account for 75-78% of FMCG sales in India, as per a report by Bizom. It has been facing problems of its own, as sluggish demand has led to slow movement of goods. Retailers have been unable to pay up distributors due to liquidity constraints, increasing the credit cycle.

A weak trade channel can be another roadblock for FMCG majors who are planning to grow their volumes. Saugata Gupta, CEO of Marico too pointed out problems with general trade, and that they’re working to rejuvenate it.

“General trade channel is instrumental in restoring pace in volume growth. We are seeing how we can improve return on investment (RoI) for our partners, and facilitate higher credit. We are also looking to diversify our portfolio in general trade,” said Gupta in an earnings concall.

Marico’s efforts are expected to bear fruit only in the next financial year. In the meanwhile, brokerages consider it an overhang on the business. “We expect general trade to continue to suffer liquidity and profitability constraints leading to ROI challenges faced by channel partners due to weak structural growth,” says Nuvama.

HUL too has made changes in its approach to general trade. It has revamped its margins for distributors recently, cutting fixed margins and increasing variable margins in the top 100 cities. At its earnings call, the company said it has not seen any adverse impact of it as yet. It defended its decision saying that it’s a future-ready margin structure.

“We have incentivized distributors in big cities to essentially sell more, of course, but importantly also to service more stores, service and deliver them the next day and to sell more lines, especially more on market development of premium lead lines or more assortment, or more width. We saw, therefore, a better served kirana store,” Jawa said.

The company has also been reaching out to retailers directly via its Shikar app, and has even deployed more feet on the street. As per media reports, it serves around three million outlets directly.

Yet, analysts see general trade troubles as an added challenge for HUL. “Reinforcing the general trade moat is now an added pressure, with changes in distributor margin structure,” said Emkay.

With added challenges and muted sentiment, the road to recovery has only become slower for FMCG players.