Aditi Kapoor, a media professional residing in South Delhi has cut down on her impulsive shopping of food items. “This cash crunch has really affected the daily buying of milk, biscuits, chocolates and other foods,” says Kapoor. Just like her, Shekharan, a software engineer from Andhra, working in Gurgaon, has unwillingly stopped his daily consumption of Coca Cola. “This demonetisation bit will help the country in the long run, but in the short, it’s keeping me away from Coke,” he smiles.
The government’s move to scrap notes of Rs 500 and Rs 1,000 has had an adverse impact in several fast moving consumer goods (FMCG) categories such as biscuits and salty snacks, where sales have declined by up to 40 per cent, according to data from market research agency Nielsen. There has been a 20-40 per cent fall in the sales of biscuits, salty snacks, toilet soaps, shampoos and washing powders, the data from Nielsen shows. Sales of refined oil, agarbattis, beverages and packaged tea fell about 3-4 per cent.“There has been a 30 per cent drop in sales. Demonetisation will have a positive impact on the economy in the long term but there will be some short-term impact on sentiments,” says Sunil Duggal, chief executive officer, Dabur India.
The Big ImpactThe impact of the government’s move to eliminate current high-value currency notes on FMCG companies can be seen in two parts. One, is on the distribution channel as small retailers —who make up the bulk of sales—mostly deal in cash. While consumers will recover relatively quickly once the new currency notes become available, the trade channels may take a few weeks as their transactions will be of higher value. If their purchases decline, it will affect the sales growth repor-ted by companies.
The second impact is at the consumer level as the move has caused a liquidi ty crunch. Consumer staples may not see a sizeable impact, the demand is intact but there is no cash. “There has been an impact on sales, particularly in impulse categories, although we believe things should ease out soon,” says Saugata Gupta, managing director & CEO, Marico. “We mainly deal in staples which are items of daily consumption —they are not discretionary or impulse purchases.
Hence, I believe the impact is more on the pipeline correction as opposed to absolute consumption,” she adds.
Nightmare For DistributorsThere has been massive amount of destocking across the entire trade channel — distributors, particularly wholesalers and retailers — which has led to a sharp drop in primary sales. So, while the actual consumer offtake may not have suffered very much, the destocking impact is severe. “We are providing thrust to direct distribution in urban retail and are selectively extending credit to our associates to combat the situation,” says Gupta.
Duggal says that sales were down 20 per cent over last week, which has resulted in the supply chain automatically calibrating production. “The entire supply chain from wholesale to retail is down-stocking,” he says.
According to Nielsen’s survey of over 750 stores, “70 per cent stores reported that due to cash-crunch on both purchase as well as sales, their business has come down in the last few days. Many wholesalers/distributors have stopped visits to small towns and rural areas compounding the problem.”
The situation is getting difficult as only 1 per cent stores accept non-cash payments like debit cards or mobile wallets. With unsold inventory piling up with wholesalers, who mostly deal in cash and consumers spending less due to liquidity crunch, FMCG companies are bracing themselves for a short-term blip in sales. “The small kirana stores are caught between the drop in sales on one side and wholesalers stopping visits to these outlets, particularly in small towns in the wake of the liquidity crunch. There has been a disruption which will make comeback to normalcy by January,” says Rajat Wahi, Partner and Head, Consumer Markets, KPMG India.
“There has been almost a 40-50 per cent drop in FMCG sales. Challenge is particularly in the wholesale segment, which is very cash driven and where things have come to a standstill,” says Rajat Wahi.
Despite the worries, company chiefs are happy with the move of the government. They all say that demonetisation is a bold, game-changing move, which will have tremendous long-term benefits for the country. “We anticipate a possibility of short-term liquidity issues in the distribution system, particularly wholesale,” says Gupta.
The fourth quarter results of the company will show impact on sales due to demonetisation. Companies expect their fourth quarter to be far better and settled as they are already seeing some signs of recovery, especially in the standalone modern trade, urban, retail and chemists, but it will take time to stabilise completely. “There is a temporary impact on demand in select segments which is likely to be short-lived once the new currency is rolled out across the country. We are continuously engaging with our trade partners to work out solutions that best address the requirements of consumers and also ensure availability of our products,” says an ITC spokesperson.
Impact On Growth
The BSE stock prices of the listed companies such as Nestle India, HUL, P&G, Dabur, among others have seen a market correction in the third quarter of this financial year. The numbers look weak from November 1 closing to November 10 closing. For instance, Nestle India was down by 500 points by the end of November. “There will be a pent up demand in the fourth quarter if liquidity happens, in the next 2-3 months, the impact on sales will be lower by 10 per cent, from the current 20-30 per cent,” says Abneesh Roy, associate director, Edelweiss Capital.
During the past two years, FMCG sales growth has been muted. Inadequate monsoon rainfall, low growth in the minimum support prices of various commodities and cuts in government spending on the rural employment scheme have hurt the income of rural households. Urban markets suffered due to lack of adequate job creation and uncertainty over macroeconomic conditions. Analysts said FMCG companies delayed price hikes during the September quarter to offset the subdued growth in sales. Value growth for rural and urban markets was 8 per cent while the volume grew by 5 and 3 per cent, respectively. In individual categories growth in value terms remained 3-4 percentage points higher than volume growth. It seems demonetisation has further derailed the growth process of the industry that is struggling to see a double digit growth for the last few years. “If the GST bill is passed, and companies hike the prices of the products then we can see a double digit growth next fiscal FY17-18, however, demonetisation will not derail growth,” says Roy.
However, companies such as Britannia, Parle, Dabur and Emami have started cutting down on production as sales have slowed down significantly in the aftermath of the demonetisation drive. Companies are also reducing their ad spends. “We will undertake cuts on media spends for December but are closely monitoring it. Having said that, for seasonal products (winter) which were already sold in to trade, we will continue to advertise,” says Gupta.
The current quarter may, therefore, show some impact of this development on sales growth of companies.
This comes even as some pockets of revival in growth are becoming visible.
If the rural economy revives as expected, then the headwinds from the government’s move will be easier to manage. Even otherwise, it does not appear as if FMCG companies will face any lasting impact because of this decision.
