FMCG volumes fall in Q4FY22, but pricing power compensates

The fast moving consumer goods (FMCG) space has seen a diverse trend in the March 2022 quarter. During the quarter, the FMCG companies overall saw a spike in the overall sales, which was driven by higher price realizations even as volumes came under pressure. That is the big story. That story has just been ratified by the latest data put out by the leading market research firm, AC Nielsen. 

According to Nielsen Research, the volumes of goods sold by FMCG companies actually fell by -4.1% on a YoY basis in the March 2022 quarter. Ironically, during the same quarter, the FMCG industry overall reported a 6% increase in sales in value terms.

That is because, the sales spike was predominantly driven by aggressive price increases undertaken, especially by the large FMCG companies that still command a lot of pricing power in the market.

The pricing power saw prices go up by double digits, although the actual extent of the price increase has not been disclosed by Nielsen. The volume slump as well as the price hike was the most pronounced in the rural markets.

For instance, the rural and semi-urban markets reported a -5.3% dip in volumes. This is the worst fall in the last 3 quarters. However, the fall in volumes was just about -3.2% in the case of urban customers. 

If you have seen the CPI inflation numbers over the last few months, the one trend that really stands out is the pace at which the rural inflation has gone up. More so, it is the rural core inflation that has gone up rapidly. Now we have the answer.

The price hikes in rural India by the FMCG companies were more acute than the urban areas. As a result, rural markets reported value growth of 6.6%, while urban markets grew 5.6% in value terms.
 

Even within the volume drop, there were regional disparities. In terms of regions, the North and south regions saw a sharper decline in volumes compared to the West and the Easter regions. For the FMCG companies it was a double whammy.

On the one hand, it was the spike in input costs and on the other hand it was the drop in volumes. Despite the pricing power boost to sales, operating margins of FMCG companies came under intense pressure.

To cut a long story short, Nielsen has pointed that the price hikes were largely necessitated by the spike in input costs. However, in reality, this almost managed to gloss over a very important fact that volumes at FMCG players had actually fallen quite sharply.

The impact on household budgets is quite prominently visible and FMCG companies are bearing the brunt of this. FMCG companies took bigger price hikes on rural sales.

There were other underlying trends too. For example, packaged foods, which contribute more than 60% to FMCG sales, fell by -1.8% in volume terms. Now comes the real shocker. The volumes in non-food categories were down -9.6% in volumes in the March 2022 quarter.

Clearly, wherever there is an element of discretionary consumption, buyers are looking to postpone their buy decisions rather than make outlay sat this point of time.

In fact, the price hikes were most prominent in the food items like refined oil, packaged atta etc where the price hikes were to the tune of nearly 15%. This segment also happens to be less elastic as a rise in price does not dent demand beyond a point.

What is also interesting is that while traditional channels of FMCG companies are stabilizing, the incremental growth in sales is actually coming from the more modern channels like ecommerce.

The first and foremost trend is that most consumers have been scaling back on discretionary spends in the non-food categories. There is also a shift to smaller sizes in terms of consumption preferences.

This is true of food items and non-food items. Rural volume contraction has been more serious than urban centres while even the price hikes in the rural aeras have been more intense. 

What could change going ahead. Nielsen is of the view that a good monsoon could make all the difference. It would tame food inflation and also boost farm incomes leading to more rural demand. But for now, FMCG companies have to contend with this price / volume dichotomy in the coming quarters.