Sector Update: FMCG

Sector Update: FMCG

by Nikita Bhoota Last Updated: Apr 28, 2020 - 03:30 am 102.8k Views
Listen icon

A continued tepid consumption environment for the large part of the quarter coupled with the lockdown implementation, which resulted in system-wide, supply-chain disruptions, would impact FMCG performance in coming quarters. Supply-chain disruptions following the lockdown announcement resulted in unavailability of labour and raw materials, thereby impacting production, even of commodities classified as essential.

To understand the lockdown impact better and performance post lockdown, we will analyze the lockdown impact company wise on their sales, cost management and profit performance.

Sales Impact

Impact on sales will be judged on following parameters for each company

  • Exposure to staple/essential categories
  • Contribution of out-of-home (OOH) consumption
  • Dominance of the company/brand
  • Strength of direct distribution

Categories that are staple/essential in nature and are largely consumed in-house are likely to see a lesser impact during the lockdown. Post the lockdown, however, there would be an impact on demand due to the consequent economic damage. In such a scenario, more staple categories and companies or brands, which are dominant, would hold an edge. Trade channels are likely to be disrupted again and companies with strong direct distribution would be better equipped to walk through the tough times.

Cost Management

In order to derive the cost management ability, we consider the following parameters for each company:

  • Likely benefit to the company’s input basket
  • Ability to retain cost tailwind
  • Track record of cost efficiencies
  • Flexibility/ability/willingness to cut ad spends
  • Extent of operating leverage

Cost management assumes greater importance when top-line is under pressure. Even as the benefit of low crude oil prices and commodity prices in general would be available to all, some companies would be better placed to retain the benefit. Also, in times of low demand, some companies would be in a better position to cut advertising spends in order to protect the bottom-line.

Company Name



Loss/ Gain









Godrej Consumer Products Limited (GCPL)




















Varun Beverages (VBL)












Source: NSE

The above table represents the performance of some FMCG stocks in the past one month. Britannia gained maximum 43% from 23rd March 2020- 24th April 2020. VBL gained the least 11% in the same period.


HUL has exposure to staple categories such as soaps, detergents and beverages, a relatively large size and market leadership in most categories and access to one of the widest direct distribution networks. OOH consumption is limited to beverages (institutional sales), which is also likely to be replaced by home consumption. As a result, HUL is well placed in terms of sales performance.

 In terms of cost management, HUL has a strong track record of extracting cost efficiencies, especially in tough times. Operating leverage from inorganic sales (pertaining to the GSK merger) and resultant synergy benefits would also aid bottom-line performance.


Colgate meets all our parameters in sales check with exposure to a staple category in oral care, a completely in-home consumption, a dominant brand and a reasonable direct distribution.

Benign crude oil prices and relatively higher ability to retain the input cost tailwinds should benefit gross profit. However, ability to cut ad spends is limited, with a high competitive intensity, and track record of cost savings is also not very strong. Thus, the company can only take advantage of falling crude price.

Godrej Consumer Products Limited (GCPL)

Apart from soaps and hand sanitisers, which are expected to benefit from the current crisis, GCPL’s portfolio is tilted towards the discretionary (hair colours and household insecticides). Other geographies of operation such as Indonesia, LatAm, Africa and the US, would also be impacted by COVID-19. Consumption, however, is largely in-home for GCPL’s products and brand strength/direct distribution coverage are also relatively moderate.

Input cost basket is likely linked to crude oil prices and gross profit, as a result, is expected to benefit. While flexibility to cut advertising spends is limited owing to competitive intensity, employee costs (~10.5% of sales) have a large variable component.


Categories such as milk products, baby food, instant noodles, coffee are not likely to witness any material disruption on account of the lockdown, even as OOH consumption of coffee suffers. Post the lockdown, the size and strength of the company’s brands along with a robust direct distribution would help wade through a weak consumption climate.

 Inflation in food commodities such as milk, limited flexibility in cutting ad-spends, which are already on the lower side at 6% of sales, and lack of a track record of delivering cost savings on a consistent basis indicates cost structure to remain the same.


Dabur has a product portfolio that largely comprises discretionary categories such as hair oils, juices, health supplements, OTC products, digestives and skin care, among others. However, most of the products are consumed in home and other parameters – brand strength and direct distribution coverage – are also reasonable. We expect the lockdown may hit the sales as consumers will try to limit their discretionary spends.

A benign commodity cost environment should benefit Dabur. However, it does not have a history of running cost efficiency programs


With exposure to a largely staple category in biscuits, dominant brand/market position and effective direct distribution, Britannia would fare moderately better in terms of sales performance. However, there is a relatively larger out-of-home consumption for Britannia vs. peers.

Inflation in food commodities such as milk and SMP amid high competitive intensity is likely to hurt gross profit next year. Advertising cost at ~4.5% of sales is also on the lower side, with negative operating leverage likely to hurt as well. However, in the past few years, the company has shown strong ability to cut costs via various methods – decreasing distance to market, changing formulations and packaging, among others.


Edible Oils (Parachute coconut oil and Saffola) are classified into the essential category and would be relatively less affected during the lockdown. However, other segments such as VAHO and the youth portfolio are tilted more towards the discretionary side. With largely in home consumption, moderate overall brand strength and decent direct distribution sales performance will be hurt.

Input cost inflation can surprise negatively, with copra forming a large portion of the input basket. Also, ability to cut advertising spends may be limited at a time when Marico is working towards reviving brand equity of Parachute Advansed and Saffola. Sales in FY21 are expected to decline over FY20 and the consequent negative operating leverage would also impact profitability.

Varun Beverages (VBL)

Factors such as product portfolio, which is tilted towards discretionary, substantial out-of-home consumption and a moderate company size will result in sales drop. However, it will be partially offset by a largely direct distribution network,

 Input costs are mainly crude oil price-linked, but the ability to retain benefits is limited due to high competition. Also, media-related advertising is done by Pepsico. However, investments in backward integration have resulted in effective cost control.


Emami has a highly discretionary portfolio, with categories such as hair oils, skin creams and OTC products. While consumption is largely in-home, it is moderately placed in terms of company size and direct distribution coverage. The efforts to avoid discretionary spends by consumers will hit the topline of the company.

Market leadership in categories such as cooling oils, Ayurvedic hair oils, antiseptic creams, etc results in higher ability to retain input cost tailwinds. Ad-spends at ~17% of sales are on the higher side and, therefore, there is greater flexibility in supporting profits by cutting ad spends.


Sales will be adversely impacted, due to the huge out-of-home consumption and exposure to less staple categories. In fact, the hotels segment could face a significant impact on sales in FY21.

ITC’s biggest cost item is taxes and, therefore, there is no benefit from a benign commodity cost environment, which is available to other FMCG players. Also, there is very limited advertising spend owing to various regulations and bans on cigarettes. 

How do you rate this blog?

Start Investing in 5 mins*

Rs. 20 Flat Per Order | 0% Brokerage


About the Author

Enjoy 0%* Brokerage with 5paisa
Resend OTP
Please Enter OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.

Latest Blogs
Stock in Action - CAMS

CAMS Stock movement of Day

Weekly Market Outlook for 15th April to 19th April

The benchmark indices started on a weak note and continued downward during Friday's session, influenced by weak global cues. Both the Nifty50 and BankNifty experienced a sharp decline of almost 1% each after reaching their all-time highs on Wednesday. 

Why Should You Not Break Your Fixed Deposit?

Fixed deposits are the safest option to save money. The premature withdrawal of a fixed deposit means an early debit of your investment or savings before the maturity period. There are certain reasons why to not break FD before maturity as they lead to calamities like penalties, taxes, and lower rates of interest depending upon the conditions laid by the bank.