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FMCG weekly wrap: Cos report strong volume growth in Q1, but high input costs weigh on profits

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The survey between June 2020-May 2021 indicated that rural India was not only buying more than urban, but they are also buying more branded products.

FMCG weekly wrap: Cos report strong volume growth in Q1, but high input costs weigh on profits
With restrictions easing across the country post the second wave, every industry is talking about a recovery yet again after the months of April and May hit industries. But from the perspective of the fast-moving consumer goods (FMCG) sector, it's not a recovery, but the reverse, says K Ramakrishnan, MD – South Asia of global consumer intelligence firm Kantar Worldpanel.
The reason is that post the pandemic, Ramakrishnan says, the household demand for FMCG products has been higher than the pre-pandemic period, especially on account of households now adding new product categories like health and hygiene into their FMCG basket. This would include sanitizers, immunity-boosting products, and other hygiene and home cleaning products that one may not have bought at all, or given much attention to earlier. In addition, in-home consumption has also led to an increase in packaged foods and snacks, thus helping FMCG majors improve volume and value growth in the past 12-15 months.
This has reflected in their earnings, too, with FMCG majors all reporting healthy volume growth even in a quarter (April-June) that saw the second wave at its peak, and despite a high base from last year when there was stocking up the frenzy. There was an impact last year also due to disruption in the supply chain during the nationwide lockdown. But FMCG majors have learnt lessons from the past year and have augmented their supply chains, improved their distribution, leading to little or no disruption in Q1 of FY22.
This was articulated by FMCG major Marico while reporting its Q1 numbers. The company said that even though the pandemic affected deeper pockets of the country unlike the first wave, business was not as disrupted as in the last year given that supply chains were able to weather localized and staggered lockdowns and retail stores operated for a certain number of hours during the day.
Marico added that traditional trade continued to perform well with rural and urban growth in tandem, while e-commerce also continued its accelerated growth trajectory.
Despite a high base, Marico reported volume growth of 21 percent. But high input costs continue to burden FMCG majors. Marico’s consolidated net profit fell 5.9 percent to Rs 365 crore from Rs 388 crore profit recorded in the same quarter last year, on the back of high input costs, especially that of palm oil.
Britannia also had a strong show with its domestic volume growth coming in at one percent as against estimates of an 8-10 percent decline. While consolidated sales and Net Profit declined 1 percent and 29 percent respectively as against the same quarter last year on a higher base.
Britannia's MD Varun Berry added that the impact on the supply chain was not as severe as the first wave of the pandemic, which means that the company’s brands were back on air and the full range of products available in the market.
Britannia, too, saw an impact of the rising palm oil and crude prices but was cautious on pricing in light of the second wave impact on consumers. Britannia is now expected to take calibrated price increases as things normalize.
A similar performance was seen with Nestle as well, which saw total sales and domestic sales for the quarter increased by 13.8 percent and 13.7 percent respectively, on a base impacted by lockdowns with production disruptions across factories but saw profit decline by 10.5 percent.
Nestle's key products such as Maggi noodles, Kitkat, Nestle Munch, Maggi sauces posted double-digit growth, thanks to increased in-home consumption. And like other FMCG majors that are increasing their digital focus, Nestle saw a 105 percent sequential growth from its e-commerce business with the revenue contribution increasing to 6.4 percent.
And rural growth continues to drive demand for the sector as evidenced not just by companies themselves, but also Kantar’s annual survey of over 82,000 households.
The survey between June 2020-May 2021 indicated that rural India was not only buying more than urban, but they are also buying more branded products and has been driving growth in many categories like grooming, noodles, beverages, among others.
The data shows that rural India saw volume growth of 4.4 percent as against 3.3 percent growth in urban and value growth of 11.6 percent as against 10.2 percent in urban markets.
And it's not just companies that continue to sound upbeat about FMCG growth going ahead. Earlier in the week, a Crisil Rating report said that revenue growth of the FMCG sector will double to 10-12 percent in FY22 over the growth of 5-6 percent in FY21, which would be the highest in the last three financial years. Crisil attributed this to a host of factors - price hikes to offset the impact of high raw material prices, volume growth of about 5-6 percent, and recovery in discretionary products as the demand sentiment revives on the back of reduced COVID cases and increasing vaccination.
And while rural has been leading the show, Crisil says this trend would reverse this year and outpace rural revenue growth. Urban markets have been impacted over the past year due to stricter curbs in terms of opening hours of stores. In the absence of a third wave and continuation of unlock across India, as indicated by Crisil, urban could see a strong recovery in FY22.