Multinationals feel destocking pinch in June quarter

Multinational companies in the fast moving consumer goods sector (FMCG) have reported a significant destocking impact on their June-quarter sales growth numbers, ahead of the implementation of the goods and services tax (GST) in India.

On Thursday, the world’s second-largest consumer goods company, Unilever, reported a 0.6 per cent decline in sales volume growth in the Asia, Africa, Middle East, Turkey, Russian and Brazil regions, clubbed as the Asia/AMET/RUB zone, in the quarter (Q2). 

It was the only Unilever region to report a decline in Q2 (Americas and Europe, the other two regions, reported a 0.9 per cent and 0.1 per cent volume growth), though value-wise, the sales growth for  Asia/AMET/RUB was the highest, at 4.3 per cent.

Colgate-Palmolive said on Friday that organic sales for the Asia-Pacific decreased 3.5 per cent, reflecting mainly inventory reduction by wholesalers in India, in anticipation of GST.

Johnson & Johnson (J&J), the pharmaceutical and consumer goods major, was more specific about the destocking impact on its consumer business. It said GST implementation, resulted in market disruption, negatively impacting growth by one-half point in Q2.

J&J’s global finance head, Dominic Caruso, maintained during an investor call last week that economic trends in China and India were impacting the expectations. “In the consumer business, we are seeing much weaker markets and some macroeconomic conditions, particularly in China and India,” he said.

Analysts say the impact of trade destocking is likely to be higher in the September quarter, since the wholesale channel, a key one for FMCG companies, has yet to transition fully to the new regime. Caruso underlined those views last week, saying J&J had adjusted its expectations in the face of the overall consumer market likely to be seeing market deceleration this year, from last year. Wholesalers constitute 35-40 per cent of an FMCG company’s sales in India. Analysts have said the transition period for wholesalers in the September quarter will extend beyond a month, since they remain largely unorganised, depending mostly on cash transactions.

“Our estimate is that sales growth and profit after tax (PAT) growth in the June quarter for FMCGs will be in mid-single digits and lower still in the September quarter. While Hindustan Unilever’s (HUL’s) net sales growth in the quarter did live up to our mid-single digit estimate, PAT growth was lifted by the prudent cost management exercise the company put in place,” said Sachin Bobade, senior analyst at Mumbai-based brokerage Dolat Capital.

G Chokkalingam, founder, Equinomics Research & Advisory, agreed. He said improvement in sales and profit growth for FMCGs was likely in the third quarter, as trade was likely to fall in line with the GST requirements by then.

In an investor call last week, HUL's management said organised wholesale (cash and carry stores of Metro and Walmart, for instance) would gain at the cost of unorganised wholesale in the GST regime. “They will get bigger,” said Chief Financial Officer P B Balaji. “GST will also push companies to drive their direct distribution efforts even more as they look to bring down their dependence on wholesale (unorganised wholesale). We will look at sustainable direct reach because we see clear benefits coming out of this.”