If we get the money, will spend
Dec 31 2012 , Mumbai
Consumers wait for incomes to rise, prices to fall and interest rates to drop to splurge. But retail players have their task cut out: they need to survive in the short term to remain in business
In the year gone by, high inflation left consumers with lower disposable incomes. Analysts said in 2012, consumers were worried about their jobs, volatility in the stock market and soaring real estate prices. More importantly, the grim outlook on fresh hiring, muted forecasts on wage hikes and lack of any spectacular bonuses created a sentiment of caution. Consumers are now awaiting the finalisation of budgets in the New Year to decide whether they should live it up or save for the rainy day.
While recent reports on the economy have been mixed, several indicators suggest the turnaround in the economy is yet to come. A recent research report by Crisil said as the current industrial slowdown is both well entrenched and broadbased, it will take a while for industrial growth to recover.
Retail giant Reliance Retail hopes the spurt in reforms in the last quarter along with the renewed resolve of the government to drive growth and the possible change in the bleak European macroeconomic climate will steer the Indian economy. “While not much is expected in this first quarter of 2013, hopefully after the Union budget 2013, we should see a spurt in economic growth and an improvement in domestic consumption. Consumers will come back to the stores and footfalls will increase,” said Bijou Kurien, president and chief executive for lifestyle at Reliance Retail.
Kurien said 2012 belied the expectations that retailers and FMCG companies had. “Obviously, the global economic headwinds coupled with lack of any domestic stimulus, failed to catalyse consumption. Growth was lacklustre and profit performance of companies was muted. The impact was bigger in discretionary spend categories, while categories driven by basic needs such as food appeared unaffected,” he added.
P Ganesh, executive vice-president (finance & commercial) and company secretary of Godrej Consumer Products (GCPL), said: “We have not seen any downturn in 2012. In the New Year, nothing will radically change in terms of consumer behaviour. Having said that, we can still expect renewed optimism and confidence in the market with the government turning focus on reforms,” said Ganesh.
Over the next year, the success and failure for consumer goods and retail companies will be determined by the speed and thoroughness with which they are able to adapt to changes at all levels, said industry experts. Given the dynamic developments, global as well as local, affecting sentiments, this will separate successful firms from also-rans. Consumer companies will have to constantly innovate, optimise supply chains, and drive brand value and sales through greater engagement with the consumer, added industry experts.
Chaitanya Deshpande, executive vice-president & head of investor relations and M&A at Marico, said on an overall basis, 2012 was a good year for the FMCG sector. “Although there has been a slowdown in the GDP growth, yet there was no significant impact on items of daily consumption. We have continued our investment on brand building and expanding our distribution reach. Having said that, a deceleration in growth was seen for items of discretionary spends and packaged foods,” said Deshpande.
While lower order flow through the CSD channel affected most companies, a sustained lower macroeconomic growth could ultimately have an adverse impact on the items of daily consumption as well, he added.
Devangshu Dutta, chief executive of Third Eyesight, a consulting firm based in New Delhi, said the previous year was challenging both on cost and demand side. “While cost inflation has happened for most players, real estate prices also went up. There was loss of confidence on the part of consumers. Now the challenge is for firms to survive in the short term to remain a player for the long term,” added Dutta. However, he said retail and FMCG players are more aggressive than ever and young consumers are entering the market.
Amitabh Mall, partner and director at Boston Consulting Group, said the growth rate has definitely come down for most consumer goods companies. “While consumer sentiment is clearly down compared with the previous years, it is not really a concern for retailers. Flat sales indicate things have stopped getting worse,” added Mall.
T D Mohan, joint managing director of CavinKare, said demand has slowed down and the volatile dollar and rupee are affecting production costs. There are concerns over rural consumption. “On the macroeconomic front, interest rates and higher financial costs are matters of concern. FMCG companies will not be able to maintain the 15-18 per cent growth rate they were seeing earlier. When the raw material costs go up it has to be passed on to the consumer at some point. For manufacturers, it will further reduce demand and volume growth. Price hike will also contribute to higher inflation. The government has to work on its monetary policy to bring back demand, create investment climate and fuel employment opportunities,” added Mohan.
(With inputs from Sangeetha G)