Fast-moving consumer goods segments, before the onset of the lockdown, was the fourth largest contributor to the Indian economy. It encompasses essentials for our everyday life – from household items like detergents to personal care products, packed food, beverages, clothes and just about every regular consumable item in our homes. As late at January 2020, reports for the segments in the upcoming year presented a host of growth possibilities, pegging growth at 11-12%. However, with the lockdown in place, factories shut down and supply chain disputed – an early recovery looks rather impossible. But regardless, there exist niches in the FMCG sector in the Indian economy that have been growing and are expected to continue to do so. This also makes it one of the rare industrial segments that may grow, despite the economic changes heralded by the lockdown. In this post, we attempt to highlight the impact of the lockdown, with a specific focus to draw out possible outcomes due to policy and business environment changes. In the end, we also present the way forward for FMCG businesses to tread on to the path of recovery amid disruptions.
Pre-lockdown FMCG – A slowdown in consumer demand:
In the year 2018-19, FMCG growth recorded a rather surprising trend. From years of high growth previously, there was a slump in certain sub-divisions. Soaps, shampoos, biscuits, tea, hair oil, skin cream and toothpaste, among other categories, saw growth fall too low single digits in 2019 compared with double digits in the previous year. Psychologically, it can be attributed to the increasing trend for savings in a year of low incomes. Economically, what explains this is the year 2018-19 recording lower agricultural growth, an overall increase in unemployment coupled with a slowing income growth rate in urban areas.
Disruption in the FMCG sector due to Coronavirus Lockdown:
Some of the biggest problems being faced across all FMCG segments – from personal hygiene, household consumables and food businesses are as follows –
Availability of movement services – disruption of trade routes, lack of availability of automobiles for transportation etc
Plants operating at less than optimum capacity – Most FMCG businesses are either shut down due to lack of raw material supply, labour disruption or governmental regulations in red zones. Many other FMCGs that have been granted special permissions to operate are operating at less than 50% capacity, which is also adding to production costs and mounting losses.
This has led to many packaged food – such as cornflakes, baby food, ready to eat snacks going out of stock on most platforms.
The government restrictions on sales and delivery of non-essential items have been leading to a mounting stock of products across segments such as cosmetics, apparel, footwear.
With limited savings, people are also shifting towards only essential buying, leaving a huge segment of luxury goods such as branded cosmetics, watches, appliances out of their consumption basket.
Contributors to FMCG Income – What will help pull up FMCG sales?
Rural sector – The rural sector perhaps represents the highest growth prospects for the FMCG sector. An independent reports pegs 35% of FMCG proceeds to be originating from rural consumption. Higher farm incomes mean increased liquidity in the hands of the rural population to spend on better household and personal care products.
The FMCG growth is intrinsically linked to a boost in agricultural production. For example, a bumper crop of corn makes it easier for producers to procure corn for making a variety of products such as corn flakes, cornflour, cornmeal additions etc. Availability of the essential base material for food FMCGs such as tomatoes (for ketchup, chips and masalas), dry fruits, variety of grains etc, at cheaper prices also adds to the overall profitability of the sector.
Special exemptions for necessity and essentials FMCG:
The government announced a slew of measures to ensure that the supply chain of essentials is not disrupted. Most products in the essential categories are largely made by medium and large-sized FMCG industries. Some examples of essentials are – medicines, sanitary and hygiene products, beverages, packaged food etc. Allowing easy transportation of goods carrying essentials has been one crucial step in ensuring supply chain sustainability.
Government Policies aiding the FMCG sector:
Boosting rural incomes – With the governments increasing efforts towards boosting rural income – by way of increased MNREGA (Mahatma Gandhi Rural Employment Generation Act) wages, subsidies for essentials such as food and gas through the public distribution system, and an impetus to the rural economy through better infrastructure linking it to urban markets – the chances of recovery in the FMCG sector, especially food-related, appear bright.
Improved agricultural production and supply – Amidst the pandemic, if there is one sector that has been recording a bumper growth – it is agriculture. The first half of 2020 has yielded a record high production of paddy in the southern states. In the last few years, India has recorded consistently high agricultural production, making us a top producer of milk, wheat, rice, sugarcane and cotton. The government at both central and state levels has taken proactive measures to ensure no disruption of supply chains, especially with milk, food grains and vegetables. This means that most FMCGs in the food segment would not face unusually delayed raw materials.
Export-Import and Supply disruption – Most non-food FMCGs that depended on import of raw materials to be used in making their final goods have been facing a crisis due to port closures. With extended travel bans, railways disruption and bans on interstate movement, the supply of raw materials have impacted nearly every business in the FMCG ambit. However, with graded lockdown easing under the fourth phase of lockdown, it is expected that all micro, small and medium enterprises will be able to avail exemptions on goods.
Beneficial loans for FMCG MSMEs- The Finance Minister in early May 2020 has also announced a no-collateral loan for MSME companies to help them kick start production after the recent losses and slump in demand.
Equity infusion in MSMEs – Rs 50,000 crore equity infusion for MSMEs (https://vakilsearch.com/online-udyog-aadhaar-registration) through Fund of Funds, to be operated through a Mother Fund and few subsidiary funds; which would help in expanding size as well as capacity.
Labour law relaxations – Most businesses in India believe that the multiplicity of labour laws (with over 29 central laws and multiple state laws, ordinances and regulatory filings for employees) impede the process of accessing economical labour. Most state governments have been announcing a slew of measures to empower industries in boosting production. One such measure has been allowing suspension of all major labour laws (excluding women and child employment) for three years. The government in Uttar Pradesh has also allowed suspension of the Minimum Wages Act, and various other state governments have announced relaxed policies on hiring and firing. While this threatens labour security, it is very likely to reduce costs incurred by employers on wages and social security benefits. The central government has also announced relaxations in Employee State Insurance contributions and a 25% deduction in TDS.
The silver lining for FMCGs – Boosting sales via online platforms
If there is one panacea for the slowing demand – it is online sales. While malls and large grocery stores are completely shut, neighbourhood Kirana shops have long queues and social distancing messages in place, online sales platforms are recording on an average a whopping 60 per cent increase in sales. A large number of new consumers are also being added daily. This presents a unique opportunity to FMCG businesses to achieve consistent sales, albeit with reduced costs. While maintaining a huge wholesale, retailer chain involving multiple transportations and labelling costs was expensive, selling through centralised distribution centres to large online conglomerates such as Amazon, BigBasket, Grofers etc could be a fruitful exercise inefficiency. However, despite an online shift, non-food, non-essential FMCGs such as footwear, apparel, luxury goods would still take a while to return to normal profitability.