Deepak Parekh terms the coexistence of falling business confidence and rising consumer confidence ironic. In his annual letter to shareholders, the HDFC chairman stated the buying power of Indians was the country’s true strength. ICICI Bank Managing Director Chanda Kochhar agrees. In a recent interaction with Morgan Stanley, the head of India’s largest private bank said the consumer story was still intact.
If 2011-12 is any indicator, voices from the market justify such optimism. Though the growth story has slowed and inflation remains at elevated levels, most fast-moving consumer goods (FMCG) companies, a few automobile majors and retail giants have sustained the momentum in sales.
FMCG companies saw their top and bottom lines grow 15-20 per cent in 2011-12. It is estimated they would sustain this growth in the first quarter of the current financial year, driven by demand in essentials. In the automobile sector, companies such as Mahindra & Mahindra (M&M) and Honda Motorcyle & Scooter India (HMSI) are likely to sustain growth in the quarter ending June. However, Tata Motors, India’s largest automobile company, could be hit.
In 2011-12, M&M’s passenger vehicle sales rose 36 per cent, while commercial vehicles sales increased 21 per cent. HMSI sales rose 29 per cent, while Tata Motors reported a six per cent growth in passenger vehicle sales and a rise of about 20 per cent in commercial vehicle sales.
In the retail segment, food and grocery companies benefited from escalating food prices in value terms, says Harminder Sahni, managing director, Wazir Advisors. “Though shopping baskets have not grown, due to inflation, retailers have benefited 20-25 per cent in value terms,” he says.
With consumers unwilling to cut on food, experts say organised food retailers have gained. On an average, food accounts for 40-50 per cent of the organised retail segment in India, followed by apparels at 15-20 per cent, and consumer durables at 5-10 per cent.
Devendra Chawla, president (food & FMCG business), Future Group, says, “For us, all categories are doing considerably well, especially food and FMCG. As part of our summer plan, we worked jointly with our vendor partners, which, coupled with our public holiday sale (April 28 to May 1), did extremely well.”
However, all is not hunky dory. Marico Chairman Harsh Mariwala says, “While the consumption story has held on so far, persistent inflation could lead to a slowdown. Typically there’s a lag effect in FMCG. So, while the slowdown in consumption would not show now, it would begin to surface a few months down the line, owing to persistent inflation.”
With the rains playing truant, analysts and FMCG companies are already beginning to factor in the impact on rural consumers, who have contributed to the growth of the sector. In the last three years, FMCG sales in rural areas have been growing at a heady 15 per cent a year, while urban sales grew about 10 per cent.
The trend seen in the automobile sector is no different. Rural areas contribute about 60 per cent to overall two-wheeler sales, while their share in the overall sales of four-wheelers is about 40 per cent, say experts. However, with rural consumers cutting on purchases like their urban counterparts, growth in these areas could also be hit. Barring M&M and HMSI, no company expects significant growth from rural areas. Arvind Saxena, director (marketing and sales), Hyundai Motor, had recently said, “In the beginning of the current financial year, we had spoken of a six to seven per cent growth in sales. That may be difficult to achieve now.”
In the FMCG sector, signs of this trend are already beginning to appear. Growth in sales in rural areas fell to 10-11 per cent from 15 per cent earlier.
In the retail segment, companies selling discretionary items such as electronics and apparels have been hit, as consumers cut expenditure. Faced with a 15-20 per cent drop in sales so far this financial year, apparel retailers have offered hefty discounts, launched mid-season sales and advanced end-of-the-season sales.
“It is challenging for all apparel retailers. Customers are left with less disposable incomes, and are spending less on discretionary items,” says Nikhil Chaturvedi, managing director, Provogue India. “Besides, raw material costs have gone up and excise duty has been increased. If you can increase the selling price, you can manage the situation. But no one is in a position to increase prices in the current situation,” he adds.
With low pricing power, companies across automobile, FMCG and retail sectors have to count on volumes. In retail, for instance, hypermarkets such as Hyper City, known for its slightly upscale products, are now counting on mass-market goods to drive sales, much like Big Bazaar outlets. “In an inflationary environment, food accounts for about 50 per cent of monthly household expenditure. The option to buy other products is limited, which is why consumers opt for cheaper or inexpensive products,” says Anand Shah, FMCG analyst at Mumbai-based Elara Capital.
This holds true in the two-wheeler category as well. To prune costs, consumers in this segment are now opting for 125cc and 135cc bikes, instead of 150cc ones. In durables, consumers have simply deferred purchases, as prices continue to rise due to a weak rupee. Between August 2011 and April 2012, prices of appliances rose about 10 per cent, as the rupee slid by about 20 per cent. Following the rupee’s recent slide, companies are now bracing up for another round of price rises.