Fast moving consumer goods (FMCG) makers are bracing for inflation in key inputs in 2022, but expect it to be offset by strong demand for their products in the coming year.
Two major trends in 2022 will be an uptick in discretionary spending and consumer movement towards branded products, several companies in the FMCG sector told Moneycontrol.
“While we expect the overall inflationary trends to continue, the discretionary spends have picked up in the last few quarters. In the last six-eight months, we have seen a good uptick in categories like snacks, juices, premium biscuits, deodorants, and premium soaps. We see this trend continuing in the upcoming year as well,” said an ITC spokesperson.
FMCG companies have been battling price inflation in several key commodities such as palm oil, tea and packaging material since the onset of the pandemic. In 2021, the prices of most commodities rose to unprecedented levels.
“Edible oils climbed by 50-60 percent, wheat prices went up by 10-12 percent, packaging material costs, because of the rise in crude prices, rose by 20-24 percent and freight charges jumped by 17-18 percent in the last on year,” said Mayah Shah, senior category head at Parle Products Pvt. Ltd.
As a result, he said, you see inflation in one or two products, but this kind of price rise across commodities become difficult to handle.
Shah expects the situation to continue unabated in the coming months.
“We don’t see prices going down; prices of most commodities will continue to climb,” he added.
Asheesh Sharma, vice president of marketing at Agro Tech Foods Ltd, believes the prices of locally-sourced commodities will come down at the start of the financial year 2023; prices of imported commodities such as edible oils will take time to subside.
Rural India to bounce back?
Rural India, which proved to be a life-saver for FMCG companies as urban India struggled with disruptions due to the lockdowns and two waves of the pandemic, showed signs of plateauing in the second quarter of the financial year 2022.
According to data, insights and consulting company Kantar Group, rural areas reported 1.5 percent growth in the September quarter compared to 4.5 percent growth in the year-ago period.
Companies such as Hindustan Unilever Ltd were hurt by the slowdown.
“Rural demand in the past few quarters has been resilient thanks to government initiatives such as higher spending on the Mahatma Gandhi National Rural Employment Guarantee Scheme, food subsidies, direct cash transfers to farmers and a decent harvest,” said Sanjiv Mehta, chairman and managing director of HUL, India’s largest FMCG company.
“Now, as mobility improves and urban markets see a pick-up, rural centres, though they are still growing, their growth rates have moderated,” he said.
FMCG companies expect this to be a minor blip and predict that the hinterland would bounce back in the coming year.
“We expect rural to continue to show resilience given the increased government spending in rural and agri-sector in FY 2021-22 and the multiplier effect it will have on the rural economy going forward,” said the ITC spokesperson.
Discretionary categories to lead
Consumer goods companies like ITC and Agro Tech Foods project that discretionary categories will continue to lead the segment in 2022. Agro Tech, in fact, is betting on its newly launched products in the non-essential segments to revive its margins.
“We see a significant opportunity in both our cereals and chocolates categories we have entered into with our superior differentiated offerings and therefore the ability to fully harness the benefit of superior margins offered by these categories,” said Sharma of Agro Tech.
Analysts concur. A recent note by ICICI Securities said: “Companies operating in the discretionary category will maintain a better growth trajectory in 2022 driven by factors such as sharp demand recovery (mostly priced in), store expansion and (some) cost efficiencies driving operating leverage and industry tailwinds (QSR, jewellery). “ QSR is short for quick-service restaurants.
The brokerage has a neutral stance on staples. “Demand uncertainty during periods of high inflation is a tough challenge to navigate as companies look to manage growth and margins,” it wrote.“Peak margins for most with increasing salience of e-commerce and modern trade likely means years of margin headwinds for FMCG. We reckon most companies are getting distracted from their core agenda of penetration-driven growth as they worry about disruption in all facets of operations. That said, we expect the industry formalisation thesis to sustain,” ICICI Securities wrote about companies operating in the staples category.