With expectations of a normal monsoon and a softening in prices of commodities like palm oil, FMCG companies and analysts are hopeful of witnessing a revival in demand, especially in rural consumption, in the second half of the fiscal year. With expectations of improvement in margins, companies may also put off any further price hikes believe experts.
This comes at a time when rural consumption slowdown, amidst inflationary pressures, has been flagged as a key concern by the FMCG players. The unprecedented inflation seen in palm oil and crude-based derivatives led many FMCG companies to take price hikes in the range of 10–15 per cent over the past few months, which adversely impacted consumer spending.
Rural consumption
Mayank Shah, Senior Category Head, Parle Products, said that the company has already begun seeing some signs of demand revival in rural markets. “Besides substantial correction in palm oil prices, we have also seen some drop in wheat and sugar prices in recent times. Most FMCG companies do not take price hikes in one go but it is done in a staggered manner and therefore further price hikes were being planned. However, with this cooling off prices, players are unlikely to take further price hikes and this will augur well for revival in demand and there are expectations of robust volume growth in the second half,” he added. Shah said recovery in rural consumption is also being anticipated with expectations of a normal monsoon.
Palm oil is one of the key commodities used in a wide range of FMCG products such as biscuits and soaps. Its price has come down to about $1,200/MT from the peak levels of $1,800-1,900/MT as per analyst reports.
Vineet Agrawal, CEO, Wipro Consumer Care and Lighting, said, “We do see margin pressure easing in the latter half of the quarter as the industry will still be carrying high price palm oil stocks at the beginning of the quarter.” In response to unprecedented inflation, the company had to increase the price of its flagship brand, Santoor, by nearly 19 per cent over the past nine months.
“While it’s early days, the drop in palm oil prices augurs well not just for companies but also for consumers in this challenging environment. Our approach will be to avoid any further price hikes as our key focus will be on stronger volume growth ,” said Tarun Arora, CEO, Zydus Wellness.
Volume growth
A recent report by ICICI Direct Research stated that volume growth is expected to come back to positive territory in the second half of FY23 for the FMCG sector. “With the rise in interest rates globally, commodities are likely to further cool off in the next three to six months. A reflection of that in gross margins would give FMCG companies the manoeuvring power to spend more on advertising, support new launches and foray into newer categories. This would bring back volume growth in H2 FY23, “ it added.