Fast-moving consumer goods (FMCG) companies in the country have been battling several headwinds in recent quarters. Demand, especially in rural markets, has been subdued slowing volume growth, and commodity prices cooling mean, companies have had to cut prices, so no pricing-led sales growth either.
Hindustan Unilever's results for the December quarter show that the operating environment has remained challenging, even during the festive season. On top of that, a late and weaker onset of the winter season hurt sales of products that companies typically push during this period.
At the same time, companies like HUL have raised their spending in areas like innovations and advertising and promotions, which has also had an impact on profit growth.
The maker of Dove soap and Bru coffee reported a standalone net profit of Rs 2,519 crore in the third quarter, up just 0.6 per cent from the Rs 2,505 crore net profit that the company had reported in the year-ago quarter.
At the same time, HUL's total income for the quarter was almost flat at Rs 15,473 crore, compared with Rs 15,456 crore in the year-ago quarter.
Its volumes (number of units sold) grew just 2 per cent in the quarter gone by. In the October-December 2022 quarter, HUL had reported a 16 per cent revenue growth, with volume growing 5 per cent.
"From the FMCG market context, the operating environment has remained challenging this quarter. The effect of uneven monsoon was felt on Kharif crop output, impacting agriculture yields and rural incomes, said Ritesh Tiwari, CFO of Hindustan Unilever.
He also pointed that lower reservoir level were a cause of concern for Rabi crops, albeit crop sowing recovering lately.
"Winter this year has been delayed and less severe and this has impacted the winter categories. Further, with rural consumer sentiment remaining subdued, the anticipated buoyancy from festival season didn't materialise," Tiwari noted.
Over the last year, companies like HUL have started seeing increasing competition from smaller players. In this backdrop, and with input costs in large part of its business cooling, HUL has dialled up its advertising spends by 32.75 per cent to Rs 1,593 crore from Rs 1,200 crore, which weighed on the net profit growth.
The company has also taken price cuts across home care, beauty and personal care categories, which account for a major chunk of its business. And things are unlikely to recover from a pricing perspective soon.
"From a near double-digit price in the December 2022 quarter, we are talking of 2 per cent negative price growth in this quarter. In the long term, we do expect some of the price growth to return back. But, we don't see that for the next couple of quarters," said Tiwari.
From sales growth perspective too, recovery is only expected to be gradual.
"Parts of the market are already growing quite fast. We are also seeing competitive growth in those areas, whether its modern trade, premium segments, big cities, new innovations, we do see high level of growth. Urban has been more resilient and leading growth, and we expect rural coming back as well in the coming quarters, sustained but gradual," said Rohit Jawa, CEO and MD of HUL.
HUL 's earnings show consumption, especially in non-premium segments and rural markets remains a challenge. Other FMCG companies too have been sending similar signals in recent times.
Hair oil maker Marico had warned earlier this month that while urban markets were steady, rural offered "little to cheer."
Dabur had also said that while there were sequential improvements in demand trends, rural growth still lagged urban growth.
"We continue to expect a gradual recovery in demand versus the expectation of a quick rebound, more so in rural markets, as high inflation has dented the net income level of bottom-of-the-pyramid consumption," noted Varun Lohchab, head of institutional research at HDFC Securities.