Can FMCG sector remain insulated from El Nino?

Fri, 16 May Pre-Open

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The corporate India is waiting with a bated breath for the election outcome today. After all, a stable government is the key to economic stability and business growth. However, FMCG players have an odious task of tackling El Nino than just waiting for things to get better with the formation of a stable government.

FMCG industry has been battling slowdown since past one year on account of rising inflation and high input costs resulting in decline in discretionary spending. In 2013, however, the decline in premium segments and discretionary spending in urban markets was adequately compensated by volume growth in rural areas. Increase in demand in rural areas was a result of good monsoon and increase in spending on essential items. However, the trend is unlikely to continue as the risk of El Nino resulting in scarce rainfall looms large. Poor monsoon is expected to result in low purchasing power in rural areas. This is because rural India still grapples with inconsistent income which is also largely dependent on agriculture. This coupled with boom in input prices will act as a double edged sword for FMCG companies affecting its growth and profits.

Few FMCG companies, however, are underplaying the likely impact of El Nino on their businesses. As per a feature in the Hindu business line, leading FMCG players like Godrej Consumer products and Marico Ltd have denied the likelihood of any substantial impact of delayed or poor rainfall on its demand. On the contrary, there are few other players which have introduced low-priced packs and working towards micro marketing to minimise the impact of bad monsoon on rural demand.

There is no doubt that the FMCG sector is dependent on monsoon to a large extent. GDP growth still remains the most essential factor for FMCG. Although, GDP is likely to be impacted because of bad monsoon but this shall happen with a lag. Hence, a consistent dry spell for two or more years may spell real trouble for FMCG players. Therefore, at present, a poor monsoon may result in just a couple of bad quarters and the demand could revive soon. Also, dependency of agriculture on monsoon has comparatively reduced with non monsoon crops (rabi crop) and better irrigation facilities.

Having said that, long tem growth of the FMCG sector will remain intact riding high on increase in disposable income in rural as well as urban areas, lifestyle changes and under penetration.

Do you think El Nino will impact rural demand for FMCG sector? Share your views on the Equitymaster Club.