The downgrade comes soon after the sector posted its strongest quarterly volume growth in two years, with FMCG sales volumes rising 5.4% in the March quarter from 3.5% a year earlier, according to the Worldpanel data shared exclusively with ET.
“We expect 5% growth if current macro-economic numbers and monsoon expectations hold good, but 3% if the macro-economic conditions deteriorate well into the second half, coinciding with a weaker-than-expected rainfall,” said K Ramakrishnan, managing director – South Asia, at Worldpanel.
The Gulf conflict is pushing up crude oil-linked packaging, transportation, and fuel costs, forcing companies to raise prices on everything from biscuits and soaps to shampoos and packaged foods. Companies said if the war drags on, consumers, especially in the villages, may once again cut back on discretionary purchases and shift toward cheaper packs.
Due to high costs, most companies either shrink pack sizes or raise prices, both of which hurt volume growth. “Inflation is FMCG consumption’s biggest enemy, especially in the bottom of the pyramid or in rural areas,” said Saugata Gupta, managing director at Marico.
Data indicated demand in cities remained stronger at 6.4% versus 4.3% a year ago, while rural growth rose to 4.4% from 2.7%. This was largely led by food and beverages growth which increased to 5.5% from 3.3% a year earlier, while household care rose 5.4% from 4.3%. Personal care, however, lagged at 3.4%, below last year’s 3.9%, hurt by weaker hair care demand.
At its earnings call, Tata Consumer Products chief executive Sunil D’Souza said companies across the industry would likely respond with price increases if crude continues to climb.
However, the concern is not just inflation. The sector had only recently begun recovering from a prolonged slowdown caused by high food prices and stagnant rural wages.
Hindustan Unilever already raised prices by 2-5% last quarter after seeing cost inflation of around 8-10% on its material base.