FMCG looks beyond 'temporary blip', keeps faith in GST

Business Standard By Press Trust of India December 20, 2016. 12:22 IST

Organised players believe demonetisation, GST will stand them in good stead vis-a-vis unorganised players.

The hopes of fast-moving consumer goods (FMCG) companies on the back of a good monsoon and the Seventh Pay Panel award came partially unstuck after the government's sudden move to pull back currency notes upset the applecart towards the end of 2016.

Two years of slow growth meant the companies had been gearing up to turn the corner on a likely demand surge because of a hike in salary and more rural income.

The FMCG players chose to describe the phase post November 8, when the notes ban was announced, as "a temporary blip" that is unlikely to prolong the slowdown and "demand should pick up next quarter on the back of strong demand and consumption".

Like the rest of the economy, the industry is getting ready for life after a likely Goods and Service Tax rollout in 2017, which analysts said "is expected to bring relief... From high taxation and consequent increase in cost".

Acknowledging that there will be pain in the short term, the organised players believe that demonetisation and GST will stand them in good stead vis-a-vis unorganised players because of compliance and structural changes which will ensue.

Looking forward to the next year, Marico MD and CEO Saugata Gupta said, "We expect the fourth quarter to be better and settled in comparison to third. We are already seeing some signs of recovery, especially in stand-alone modern trade, urban, retail and chemists, but it will take time to stabilise completely."

From a long-term perspective, he said: "The demonetisation coupled with GST will lead to more compliance and bring about structural changes in the way the wholesale functions in the sector. There is absolutely no change in the medium- and long-term growth aspirations. In fact, organised players like us will further benefit."

EY India Partner and Leader (Retail and Consumer Products) Pinakiranjan Mishra agreed: "This will bring businesses into the tax bracket while lowering the tax impact and bringing more transparency... This will also create a level-playing field among players by bringing all into the tax system."

But for the moment, the industry is reconciled to dealing with the after-effect of demonetisation.

"Overall, 2016 was a lacklustre year for the FMCG sector. We did see some recovery, with growth inching up to low single digits... (but) the hopes of a significant revival post a strong monsoon have been temporarily derailed by the impact of demonetisation," said Godrej Consumer Products (GCPL) MD Vivek Gambhir.

ITC Chief Operating Officer Sanjiv Puri pointed to the difficulty faced by consumers, wholesalers, retailers, brand owners and manufacturers.

"Certainly, in this period, growth rates would be muted. Some categories which are high on consumer discretionary would even have degrowth," he noted.

Puri was quick to add: "In the short run, we have challenges, but are still optimistic because India has long positives going for itself."

According to Rajat Wahi, Head, Consumer Markets and Agriculture, KPMG in India, the FMCG firms will first have to address the issue of destocking in 2017 at wholesale and stockist levels as it failed to take off because of the cash crunch due to demonetisation.

"Demand for the last quarter was expected to be strong due to the good monsoon and the 7th Pay Commission payout, but due to the liquidity crunch following the demonetisation exercise, there will be slowdown in offtake as retail and wholesale trade adjusts to this," he said.

Dabur India Chief Financial Officer Lalit Malik chipped in: "There has been massive amount of destocking across the entire trade channels and 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."

There are some that are happy with the way things have panned out. Yoga guru Ramdev-led Patanjali, which has been a 'disruptive' player in 2016, sees the crisis as a perfect opportunity to cash in on.

"When people face such situations, they buy only necessary products that are of good price and quality. We have no impact (of demonetisation) on our sales and in fact, it has gone up slightly," Patanjali CEO Acharya Balkrishna claimed.

Riding high on its ayurveda-based products, Patanjali is on track to achieve a sales target of Rs 10,000 crore in 2016-17, he said. The strategy has, in fact, prompted other traditional players to jump onto the bandwagon.

"The year saw demand for ayurvedic and natural products grow with more and more consumers embracing these products. Dabur has always believed in the benefit of ayurveda and has been spreading the goodness among our consumers in India with a range of ayurvedic products," said Malik of Dabur.

As for Swiss FMCG firm Nestle, 2016 was a continuation of its comeback trail of its popular noodles Maggi, which within a year of relaunch almost gained over 60 per cent market share in the segment.

"For the first three quarters of 2016, there had been broad-based growth across categories aided by a spate of innovations and renovation of over 25 new products. We are now clearly in the leadership position in instant noodles category, which vindicates consumer confidence and trust in brand Maggi," a Nestle India spokesperson said.

2016 did not exactly turn out to be a good year for rural sales, which contribute around 35 per cent to the total industry pie. But the companies are optimistic of a bounceback once the effect of the cash deficit blows over.

"Since the rural economy is largely cash based and wholesale dependent, the large cash crunch has led to a slowdown in rural sales. We believe that the slowdown is temporary. We expect that as the liquidity situation improves, rural (numbers) will start showing better growth," said Gambhir of GCPL.

Looking forward, FMCG companies, including GCPL, Patanjali and Dabur, are lining up big investment plans for their expansion in 2017.

"We are investing in Jammu and Kashmir to build large-scale manufacturing facilities for many of the categories we operate in. This new facility will help ramp up our presence in the rural market, which is a real growth driver for us," said Gambhir.

Likewise, Balkrishna of Patanjali said: "We will invest Rs 5,000 crore in 2017-18. We will foray into new product category such as textiles and also improve our offerings in cosmetics and child nutrition. We would also venture into dairy segment and rice."

Similarly, Dabur is going to start commercial production at its greenfield facility in Assam in 2017 after earmarking a capex of Rs 500 crore for 2016-17.

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