By Suvarna Joshi
COVID 2.0 turned out to be stronger than the first wave of the pandemic and inflicted more severe damage to the whole nation than the first one. While the waves forced the government to impose stringent restrictions to curb further spread of the virus, both lockdowns, ‘Lockdown 1.0’ and ‘Lockdown 2.0’ differed starkly from each other. As against a nationwide lockdown observed in the first wave, the key difference of Lockdown 2.0 was that it was State-imposed with more localized lockdowns that had varying degrees of severity including night curfews, weekend or complete lockdowns and restrictions on contact-based services. Besides, the duration of 1-1.5 months too was lesser than the lockdown (2-2.5 months) experienced last summer.
Having learnt a few lessons in COVID 1.0, companies are focused on optimizing supply chain, stock-keeping units (SKUs) and product assortments this time around. According to NielsenIQ, assortment optimization strategies have become even more crucial as consumers streamlined their budgets, favored smaller format neighborhood stores and e-commerce channels. With a rise in e-commerce, shoppers are visiting physical stores less often, and when they do, they visit stores with prepared buying lists, thereby spending less time browsing the shelves and thus reduced pantry loading during Lockdown 2.0.
As per NielsenIQs, on an average 1,059 SKUs are launched every month in India. Of these, only 10% of them get sufficient distribution to survive. So, COVID-19 outbreak in 2020 made companies realize the beauty of simplicity as against the hidden cost of complexity. This has resulted in companies proactively aligning their go-to-market strategies with those of consumer preferences.
Another trend that has sustained high growth is consumers’ preference for immunity-building natural and ayurvedic products. Demand for products like Chywanprash, Tulsi, Amla Juice, Turmeric, Ashwagandha and Honey to name a few have seen astronomical rise in demand. Consequently, the leading names in Ayurveda space such as Dabur, Zandu, Baidyanath, Patanjali and Himalaya have seen a strong surge in the demand for their products.
While companies have adopted strategies to optimize their portfolios and ensure product availability on the shelves, Covid 2.0 has damaged household finances across families owing to higher medical treatment expenses and loss of employment. Lower income coupled with higher medical expenses have eaten up savings and increased their overall debt levels (most of it informally funded). Consequently, consumer confidence for discretionary spending has been materially lower than observed in the previous wave.
Discretionary categories like clothing, jewellery, home renovation, luxury products, weddings and others have seen material cuts in spending. Staple and value oriented personal, household care categories too have seen pressure on budgets as is evident from down-trading within the staples categories. Despite down-trading, companies with wider product offerings straddling across the price-value matrix stand to benefit given their brand image, quality of product and affordability.
Will BHARAT continue to drive growth for FMCG?
COVID 2.0 has inflicted severe damage to the hinterlands of the country and with the subsequent lockdown of economic activities; concerns over rural demand cannot be ignored. With a wider and deeper spread of the second wave, the emerging popular view holds that unlike last summer, when rural demand remained resilient despite a wider and stringent lockdown, this year demand may not show a similar resilience. Additionally, rising stress in the household and unorganized sector is also expected to keep discretionary spending under check.
Despite the headwinds, we believe ‘Bharat’ – the backbone of our economy, will bounce back post experiencing a slowdown in the April-May period. This will primarily be on account of 1) a record food production in the fifth consecutive year led by good rainfall last year; 2) forecast of a normal monsoon season this year at 98% of the long period average (LPA) and a weak El-Nino over the next six months, 3) income/ration support announced by Governments and 4) easing of lockdown restrictions to aid mobility ahead of the Kharif sowing season. In conclusion, higher crop volume coupled with remunerative pricing and improved economic activity augurs well for driving overall rural income and thereby a positive impact on consumption demands.
While demand could bounce back in the upcountry markets which is critical for companies, rising raw material prices are a key concern. This has caused management across the staples, durables and other sectors to be in a Catch 22 situation, whether to raise prices of final products or to take a hit on profitability in the near term. This is because prices of raw materials be it agricultural (edible oils, palm oil, tea etc), chemical or crude (PFAD and packaging material), have seen an unprecedented rise between 25-150% during H2FY21 and is expected to continue in Q1FY22 too. Although, over the longer term such high input prices are unlikely to sustain.
While a few companies such as Hindustan Unilever Ltd, Britannia Industries, and Colgate Palmolive, among others opted to raise prices to strike a balance between growth and profitability, a few others like Jyothy Labs, Emami etc have strategized to protect their shares and volumes in these challenging times.
Backed by the experience of two Covid-19 waves by far, we believe the 3rd wave which is likely to emerge in September/October is likely to be less fatal. This is because the most vulnerable segment (people aged above 45 years) which accounted for ~88% of Covid-19 related deaths would get vaccinated by then. Further, inoculation of population between 18-44 years too will pick up speed as supply constraints ease. This will shelter consumption from taking a severe hit and will help companies as well as the customers to sail smoothly through the stormy Covid-19 weather, moving forward.
FMCG stocks to watch
Against this backdrop, we pick fundamentally strong companies with healthy balance sheets and growing industry opportunities that can be added to the portfolio. Amongst large caps- Britannia Industries, Hindustan Unilever Ltd (HUL), Dabur India, and Nestle India while in the mid & small-cap space Relaxo Footwear, Varun Beverages, Mold-Tek Packaging and CCL Products are the interesting ones.
(Suvarna Joshi is Senior Research Analyst, Axis Securities, Views expressed are the author’s own.)