Q2 results preview: Destocking prior to GST 2.0 may impact FMCG sales

FMCG companies face muted sales in July-September as distributors slow purchases ahead of GST-driven MRP cuts, with Hindustan Unilever citing a short-term impact

Fast-moving consumer goods (FMCG) companies are expected to see pressures on their performance, especially on the top line, in the July–September quarter, as buying from distributors took a hit while the trade slowed down their purchases in anticipation of new stock with updated maximum retail prices (MRP). The government had announced changes to the goods and services tax (GST) on many categories, which led to a cut in MRP from September 22.

 

The government had reduced GST rates on items ranging from food products to shampoos and soaps.

 

Distributors from the Central, Western, and Eastern regions have seen muted growth. While distributors typically pick up stock ahead of the festival season, as secondary sales (sales from distributors to retailers) also see an uptick, this time they are witnessing some weakness.

 

A distributor from the Western region said that while primary sales (sales from companies to distributors) have picked up since

September 22, the same recovery has not been seen from retailers.

 

The distributor in the West explained: “The quarter (July–August–September) has not looked great, and sales have seen muted growth as buying had slowed down and also halted for around four to five days ahead of the implementation of the new GST rates. But even with the new rates kicking in, there is some weakness in buying from retailers.”

 

Another distributor from the East reported the same trend in the region and added that smaller retailers and wholesalers are stuck with old stocks, which is causing them to focus on liquidating those stocks before making new purchases at updated prices.

 

In Central India, a distributor said that while there is demand, companies have been pressuring them since September 22 to increase their stock quantities. He added that competitive intensity has increased in the region as companies aim to gain market share across categories.

 

“While consumption is growing, buying was not really impacted ahead of the implementation of GST, but we have to pick up much higher quantities of stock now after the implementation,” the distributor said. In the South, while the story remains the same, the emergence of quick commerce (qcom) has also crimped sales, as the transition to the new rates has been quicker.

 

A distributor explained: “Business has been severely impacted due to a huge shift in sales happening in qcom, and stocks are lying at retail outlets.”

 

Hindustan Unilever said in an exchange filing last week: “The latest GST reforms are a positive step by the government to drive consumption. While this measure supports long-term consumption, we have observed a transitory impact in the form of disruptions at distributors and retailers across channels, as they attempt to clear existing inventories at old prices. The disruption has resulted in the postponement of ordering in anticipation of receiving new stocks with updated prices and lower orders across the overall portfolio as consumers delayed their pantry buying.”

 

It added: “This has led to a short-term impact on sales in September. Given our existing pipeline inventory in the channels, we expect this impact to continue into October as well.”

 

The maker of Lux soaps said that it expects consolidated business growth to be near flat to low single-digit for the quarter ending September 30, based on its current view, and also said that this is a one-off, transitory impact. The company foresees recovery starting in November as prices stabilise, underpinned by rising disposable incomes and ongoing portfolio transformation actions.