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Overcoming The Consumption Blues
While the government is expected to and is taking measures to tide over this slowdown, leading consumption oriented companies are looking at the following themes to beat the consumption blues!
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The popular business press is filled with stories of a slowing economy, expected to hover around mid single digits (5%in the previous quarter). The reason for this slowdown has been attributed to slowing consumption, which accounts for over 50% of our GDP. Across sectors like auto, FMCG and consumer durables, this slowdown is visible with differing levels of intensity. The stinging part of this slowdown has been rural India which has been growing at 1.5 times urban India over the last 3 to 5 years. This is primarily due to lack of available credit, limited disposable income due to minimum support prices which are not increasing at the same proportional rate and inadequate jobs. While the government is expected to and is taking measures to tide over this slowdown, leading consumption oriented companies are looking at the following themes to beat the consumption blues!
Easy financing of your trade partners!
As consumers are delaying purchases, especially non-disposable, distributors are facing a liquidity crunch as they have huge piles of inventory as companies have billed their goods but consumers are not buying from retailers and hence they are not getting cash back from the retailers to fund their inventory. As a result, leading auto and FMCG companies, are looking at different ways to support their distributors. While a company like Maruti Suzuki is embarking on centralised negotiations with third party financiers so that their distributors get 1-1.5% better rates on borrowing money, Jockey has extended its credit period to its distributors to support them during this slowdown. It is also to be noted that while some distributors have adequate capital to keep investing in their business, after GST implementation, they are hesitating and rightfully so, to keep their unaccounted money in their distribution business!
Single consumption packs to lure the rural consumer in!
Given rural comprises about 40% of FMCG sales and is primarily hit with the consumption slowdown, leading FMCG companies are using their age old maxim to churn out smaller packs to attract consumers to shift from unorganised to branded players. There are 1 rupee chocolate slabs, single use masala packs, Nestle pushing its mini-Maggi (35 grams) pack and single use perfume packs that are being deployed extensively. It is one of the reasons why most of the leading FMCGs have still been reporting mid to high single digit growth rates in the first two quarters of this year.
Spend and scream your lungs away!
To keep the rural consumer invested in, leading FMCGs are continuing to invest in rural oriented activations viz village haats, wall paintings, local hoardings and communication over local media. The underlying principle is most leading companies are not willing to compromise on top-line growth but are more acceptable to a 0.5%-1% reduction in EBITDA margins due to the higher investment on a smaller base.
Lower the play on premiumization unless it is super premium!
Over the last few years, leading consumption companies have embarked on the premiumization journey to cater to the aspiring middle classes and increasing their profit margins as a result.
While there have been news of Hector MG selling out its premium launch models or iPhone 11 Pro series selling out in 5 days from its launch, companies are slowing down on the premiumization route unless it is a super premium model route. For instance, Maruti Suzuki is going back to what it does best, making a value for money vehicle in the form of its mini SUV S-Presso. This behaviour is based on the principle that revenue from premium models constitute 12-15% of business while rural constitutes about 40% of business and is the future of growth as the next 200 million consumers will come from there!
Return of the offline consumer!
While e-commerce and omni-channel experience have been the words of the year for the last few years, the likely trend in the next few years is going to be the re-emergence of the offline channel. E-commerce growths are reducing (to 20%) as there is a decline in deep discounting, offline channels matching online prices and an increasing perception on the poorer quality of goods (especially apparel) being sold online. As a result, there is an increasing trend of leading consumption companies setting up offline channels like One Plus, Xiaomi, RealMe, Amazon selling its private labels in 2100 stores in Future Group, More and Shoppers Stop. As consumers slowly prefer the offline channel again (e-commerce has very little channel penetration at 3-6% anyway), the real battle will move to winning each physical outlet over!
Supply side efficiency and passing the benefit on to consumers!
As raw material input commodity prices soften the world over (e.g. prices of input material copra are down by 20% assisting Parachute), the resultant benefit in cost inputs are being passed onto consumers of economy products. For instance, Unilever reduced its prices in Lifebuoy by 5% (upto 20% in certain SKUs) to lure the price discerning consumer to make them shift from unorganised players to branded players. This trend is likely to continue in industries which have a significant channel exposure to rural India. In addition, efficiency in supply chain mechanics is also likely to be passed onto the price discerning consumer going forward.
Drive alternate channels of revenue!
Given the domestic slowdown, the exports market is likely to emerge as an important channel of focus. With a consistently depreciating rupee and South East and Middle East Asian countries doing relatively well, leading consumption players are likely to drive exports to these shores to build an additional buffer. Simultaneously, Modern Trade, from an existing channel contribution of ~10%, is likely to be focussed on (e.g. GCPL, Marico), as the consumer likely to purchase a larger assortment or premium packs is likely to visit there. Needless to say, ambitious market entries in newer categories are expected to be put on the back burner till consumer confidence numbers move in the right direction.
In conclusion, the consumption slowdown is expected to continue for the next few quarters. As leading consumption companies implement the above principles, it is only a matter of time to see who laugh their way to the financial markets and who pant away to plummeting finances!
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.