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Saturday, October 31, 2020

Five trends that are likely to play out for the FMCG sector due to Covid

Most FMCG companies forged swift tie-ups with delivery companies such as Zomato and Swiggy.

Reverse migration, a good monsoon and increased government expenditure through MNREGA and other public projects are likely to ensure increased demand from rural India. Rural consumption has been a laggard during the quarters preceding the pandemic. According to a World Bank report, the nationwide lockdown impacted 40 million internal migrants. Now, such a large migration from urban to rural areas may well tilt the growth in consumption in favour of Bharat.

Most FMCG companies forged swift tie-ups with delivery companies such as Zomato, Swiggy, Dominos, Big Basket and Dunzo to ensure that their products reach the customers ordering online. Companies expect this demand to increase over the pre-Covid levels since the lockdown prompted people to get used to online ordering and the convenience of home-delivered groceries. Ullas Kamath, Joint Managing Director of Jyothy Labs, expects the share of sales through e-commerce for the industry to increase from 2-3% before Covid to 4-5% post-Covid.

Seizing the opportunity offered by Covid, almost every FMCG company launched its brands in the hygiene categories of hand wash and sanitizer, adding to the clutter in these categories that were otherwise small and niche. However, brand equity, size of the SKUs, the company’s distribution strength and competition from private labels are likely to decide the fate of brands, which will stick around on a longer term basis and those that won’t. Vegetables wash is another category that is emerging to see more players entering it.

With top line growth under constraint during lockdown, companies are likely to be keener on enhancing profitability. Cost control is a major tool for the companies to improve the margins. Tighter credit terms, judicious advertising and effective use of digital marketing will help companies rein in costs. For instance, HUL’s investor presentation for the March quarter listed laser focus on receivables, dynamic inventory management, unlocking cash from surplus assets, optimising capex and restructuring spends as measures towards controlling costs.

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For companies selling staples foods, the lockdown period has seen super-normal sales with increased home consumption and also stocking up. In contrast, companies with largely discretionary portfolios are likely to report subdued off-take. Biscuit companies such as Britannia and Parle products, for instance, reported a sudden jump in sales in March due to lockdown and are likely to similarly report exceptional sales in the June quarter, which bore the brunt of lockdown the most. The normalcy in sales is likely to be seen from the second quarter of this fiscal.

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