Economic Highlights

New Delhi, 30 September 2010

Middle Class Cuts Expenses

FMCG SECTOR LANGUISHS  

By Shivaji Sarkar

Rising prices and input costs are taking a toll on the retail and fast moving consumer goods sector. Many of them are gasping to survive or looking for new strategies. Many neighbourhood small retail grocery or confectionery shops have quietly closed down as consumers were unable to support the higher prices, a natural corollary of higher input or manufacturing costs. The small entrepreneurs almost country-wide downed their shutters as costs for running the business had risen to an unsustainable level.

The trend is not restricted to the small ones alone. The big FMCG groups are finding different ways to remain in the market. They either take a hit on profitability or hike prices and risk losing market share. Also inflation is not showing any sign of abating. A good monsoon has only seen vegetable prices --- raw material for many FMCG products --- skyrocketing. Food grain and pulses continue to remain expensive.

Despite the Prime Minister’s repeated expectations of tiding over the crisis, prices have not shown any down-trend. The new wholesale price index (WPI) with a wider base of over 600 items against 400 of the previous one has not helped correct the political spectrum. If at all, it showed a marginal fall of less than one per cent from the previous WPI.

Nobody is sure that prices would fall in the near future. The Reserve Bank of India (RBI) announced recently that though inflation rates have reached a plateau compared to last year, the result of high rise, they are likely to remain at “unacceptably high levels” for some months. It notes that food article prices, which rose by 15% in September, are still contributing to the pressure. In reality, the 15% rise is on an average rise of 15% through the year. That means the average rise is much more than that.

Since the basic food prices decide other cost factors for all goods, it has seen a fall in the overall consumption pattern. The surmise of the last Economic Survey was that people are buying less of garments, footwear and spending less on recreation and other necessities.

This is reflected in the performance of the allied sectors. Many footwear companies have either closed down or moved to some other areas. Similarly, many garment manufacturers have also gone out of business. Their strategies at reducing prices were not of much help as it mounted their losses.

The middle class, the supposed engine of growth, is apparently not spending much. His expenses on food hovers between 35 and 40% as per official statistics, taxes take away another 30 to 40% leaving little with him to spend on small necessities.

He has cut on recreational expenses to 3.4% at the maximum. This has shown fall in growth of the hotels, restaurant and travel sector. The growth has come down from 12.4% in 2005-06 to 6.5% now. In fact, small restaurants are finding the going tough and they have either closed down or have compromised on the quantity of servings. In rare cases, they could afford to increase prices but that proved counter-productive.

The middle class is also not using credit cards much as he was doing some time back. The banks have virtually no outstanding against credit cards hinting that the middle class is withdrawing from the consumer market.

The malaise is not restricted to the small ones. Some of the big retail chains have been looking for buyers. The FMCG companies are devising methods to survive. Some are increasing prices on the sly. Others are substituting expensive raw materials with cheaper ones. There are quite a few who are reducing the weight of each pack to tide over the inflationary times.

One of the largest FMCG company’s profit dipped as its rival reduced rates of its competitive detergent and hair care products. The company has now shot back by increasing prices of two its most popular soap brands and shampoo and reducing the weight per pack. The rival also finding it difficult to stand the price war has re-branded or so called upgraded its detergent and other products. It raised prices by over 20%. As compensation to the consumers it said that it was giving 10% free. Another cosmetic brand did both, increased prices of its products and reduced grammage.

An international confectionery brand has rounded up its price --- in reality in some cases doubled it but got it compensated by producing thinner and lighter chocolate bars though it has maintained the length and width. In September, another MNC instant food maker reduced the weight of its popular instant noodles and has been gradually increasing prices of its chocolate bars.

A pharmaceutical-cum-cosmetic goods producer is also contemplating going the same way. The Executive Director of another company says commodity inflation has been in double digits and it’s getting impossible to manage.

A leading biscuit maker which had absorbed raw material costs to maintain the sales volume has seen its operating profit margins decline by half in the first quarter ending June this year. Their profits dipped from Rs 47.37 crore a year back to Rs 32.8 crore. It is a matter of concern for the company and it is to be seen if they can take a further hit.

The Assocham has come out with a study stating that input costs are rising and this would impact the prices of manufactured goods. In many cases price hikes would be margin neutral. One silver lining is that most FMCG companies work at very high profits, some going up to 40%. If they decide to compromise on that, meaning very high consumer prices even otherwise, their survival would not be at stake. But would they learn?

A Morgan Stanley report in August said that the sharp increase in input costs amid continuing competitive intensity puts added pressure on the FMCG industry. It said that operating margins of most FMCG firms could fall by almost 9% this fiscal year.

It would be interesting to see how the country maintains its growth rate if FMCG groups start faltering. They are one of the large employers, direct and indirect. If inflationary trend persists, it might see the exit of even some of the groups. ---- INFA

(Copyright, India News and Feature Alliance)