Demonetisation: Dabur cuts ad spends by half in Nov, sees normalcy next year

Although the company has cut down ad spends by around 50 percent in November, promotion intensity would continue as normal.

With regards to volumes, he said there would be no growth in the third quarter but the fourth quarter would see some improvement.Below is the verbatim transcript of Sunil Duggal’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: The feedback that we are getting is that a lot of products like soaps, shampoos etc have not seen too much of an impact purely because of how need based they are. What is the evidence suggesting to you?A: There definitely has been an impact. There has been massive amount of destocking across the entire trade channels, distributors, particularly the wholesalers and retailers, which has lead to a sharp drop in primary sales. So, while the actual consumer off take may not have suffered very much but the destocking impact is very severe.Anuj: Can you give some numbers to that how much has been the problem because of that?A: We still have a week to go before the month ends but I would expect around a 30 percent drop in the month of November. Of course, the concentration has been very high in November and there will be some spillage into December but things will start normalising by the end of the quarter but November is at the epicentre of the whole storm.Anuj: 30 percent is a reasonable drop and will it have impact on receivables, working capital etc as well, just want to understand from an fast-moving consumer goods (FMCG) point of view because a lot of this depends on the kind of sales that you do?A: We will be obviously extending some credit but in a calibrated manner. We are not going to expose ourselves to credit risk. So, there will be some impact on working capital but that is not a serious consequence in terms of the financials. It is the drop in the primary sales, which will hurt the numbers.Sonia: How much of your revenues comes via the cash channels and just to understand what kind of products sell the most in cash?A: We sell to our distributors against cheque and after that there is a significant amount of cash component which goes on. The distributor also sells to the wholesalers in cheque but then downstream transactions are significantly in cash. How much there is we can't put numbers to it. It depends upon the part of the country we are in. But it is something like two thirds of the whole transactions would be in cash and that obviously would feel the brunt of the whole thing.Sonia: So do you get a sense that this 30 percent fall that you have seen in the month of November or you are expecting to see in the month of November, do you get a sense that this could extend into next couple of months because we hear from a lot of channel checks that we are doing is that the first week was bad but now in the last couple of days things have improved a bit?A: Things are looking up marginally. I do expect December to be better partly on account of salary disbursements, which will happen by the end of month, which will fuel consumption. So, even the homes have destocked. So, there will be some consumption uptick, which will happen early in December. But there will be some collateral damage, which will continue well into December and we do expect the situation to normalise or come into near normalcy only in January.After that things would look much better than what they are today because we could also see some stimulus coming from the government to fuel consumption. There is a lot of expectation that that would happen perhaps as early as in Q4 and Q4 we should see much better performance happening but the November damage is deep and there would be some spillage into December.Anuj: I remember the conversation that we had just about a month back where you said that you are willing to compromise a bit on margins if that means increase in volume. But at that point of course we had no idea about this demonetisation turning things upside down. What is the incremental strategy now then?A: We continue with the strategy in terms of offering better value to the consumer so that the consumer discounts and the consumer offers would continue unabated. So there is no relaxation of that. We would in the short-term cut back a little bit on media because there is no point in having a lot of advertisement in an environment like this. So, we would resume media perhaps in the early part of December. So, otherwise our advertising and promotions (A&P) spends other than the media cuts would continue the way they were pre-monetisation.Anuj: For this month you are cutting down on ad spends completely?A: Not completely, but significant cut backs. Some commitments are there, we have to honour them but others which we could perhaps postpone into December we have been doing that.Anuj: Significant meaning how much?A: I would say that we would be halving our above the line spends, media spends this month. Very rough number but that is indicative of what we are doing.Sonia: What about promotions? The customer is still not back into the markets in a full way. So, it may not make too much sense but just to get a sense over the next 2-3 months will you be upping promotions in any way?A: I don't think we will be upping promotions. We will be probably continuing the trajectory, which we were doing. We were thinking of taking promotions off the table in December. We probably would run the side of caution and not do that, continue into January. So, wait and watch but the promotional intensity would continue unabated, that would not stop. I am also hoping that we would get media back on track in December if the consumption cycle becomes a little bit more buoyant. Then we will be back on media big time. So, whatever we have lost out in the month of November, we will be recouping in the month of December in terms of media spends.Sonia: On volume growth, the sector as a whole has been struggling with low single digit volume growth for a long time now. Is that something that we have to reckon with in the second half of the year as well?A: This quarter obviously there could be little or no volume growth. There may be a significant decline in growth on a year-on-year (Y-o-Y) basis. But then this quarter is not representative. I do expect volume growth to come back in Q4 and a lot like I said depends upon the stimulus, which we expect that the government would do, which could mean that volumes could come back quite strongly. So, the outlook for Q3 is poor, Q4 is far more benign than what it is today.