21st November, 2014
FMCG industry is considered to be “recession proof” and a safe bet for investors in the stock market. The stock markets are currently bullish which is witnessed by a whopping 30% rise in both BSE and Nifty. This optimism unfortunately is not reflected in the FMCG stocks (Sensex FMCG Index), which have witnessed a paltry 15% rise as compared to benchmarks.
What might be the reason behind a slowdown in an industry that directly addresses the needs and wants of people across the social and economic hierarchy? Many experts believe that a combination of causes is responsible for the dismal state of the FMCG industry in India. The major causes are listed below.
Sky high price of raw materials
Some of the essential raw materials have witnessed a steady increase in the price due to similar prices in the worldwide commodity markets. The increased price of the essential raw materials has negatively impacted the earning of many players in the FMCG space. Some players had to reluctantly increase the price of their finished goods.
Uninspiring labour market
The downturn in the economy negatively impacted the labour market. Creation of new jobs plummeted by 19.9% in the quarter of July-September 2014 as compared to the previous quarter of April-June 2014. Those fortunate enough to get a salary have had to do with the existing level of compensation, as there was no hike in either the overall compensation or salary across private players and government institutions & enterprises. Fusion of both the factors has had a negative impact on the disposable income of the households.
Uninspiring Demand from the Consumer
India is battling burgeoning interest rates, less than 5% GDP growth and almost out-of-control inflation since the last couple of years. The dismal state of economy has negatively impacted the consumer spend. This has resulted in a plummeting demand for packaged consumer goods. Nielsen, the worldwide leader in measuring consumer demand and industry supply, has reported, that the FMCG industry in India witnessed a mere 4% increase in the value of goods sold (as compared to the previous year). Surprisingly, the volume of the goods sold has plummeted (with reference to the quarter ended in September 2014). The industry believes that the sentiment of the Indian consumer post the crowning of Mr. Narendra Modi as the Prime Minister of India, is increasingly getting positive, however it is yet to metamorphose into actual spending.
The Road Ahead
While the Macroeconomic factors have had a negative impact on the FMCG industry in India, experts are optimistic about the road ahead. However, due to the able leadership of Mr. Narendra Modi, the Prime Minster of India, the macro-economic condition of India can chart a positive growth story. The economy of India witnessed a 5.7% surge in the Apr-Jun 2014 quarter. This is the highest growth in the past 30 months. The Consumer Price Index (CPI) also plummeted to an unprecedented trough of 6.46% owing to easing price pressure in fuel and food goods. This is a clear indication that the years of high inflation has started to reduce. Experts predict that the quarter of October-December 2014 will witness a surge in the sentiment of the consumers in India. An increase in consumer demand and consumer spend is predicted from the end of financial year 2014-15. The fall in the price of raw materials will benefit the economy and FMCG companies are set to gain the most from it.