By Suvarna Joshi
COVID 2. turned out to be stronger than the 1st wave of the pandemic and inflicted more extreme harm to the complete nation than the 1st one. While the waves forced the government to impose stringent restrictions to curb additional spread of the virus, each lockdowns, ‘Lockdown 1.0’ and ‘Lockdown 2.0’ differed starkly from every other. As against a nationwide lockdown observed in the 1st wave, the crucial distinction of Lockdown 2. was that it was State-imposed with more localized lockdowns that had varying degrees of severity such as evening curfews, weekend or full lockdowns and restrictions on make contact with-based services. Besides, the duration of 1-1.5 months as well was lesser than the lockdown (2-2.5 months) knowledgeable last summer season.
Having learnt a couple of lessons in COVID 1., corporations are focused on optimizing provide chain, stock-maintaining units (SKUs) and solution assortments this time about. According to NielsenIQ, assortment optimization tactics have grow to be even more essential as customers streamlined their budgets, favored smaller sized format neighborhood retailers and e-commerce channels. With a rise in e-commerce, shoppers are going to physical retailers significantly less normally, and when they do, they take a look at retailers with ready getting lists, thereby spending significantly less time browsing the shelves and hence lowered pantry loading for the duration of Lockdown 2..
As per NielsenIQs, on an typical 1,059 SKUs are launched just about every month in India. Of these, only 10% of them get adequate distribution to survive. So, COVID-19 outbreak in 2020 made corporations recognize the beauty of simplicity as against the hidden expense of complexity. This has resulted in corporations proactively aligning their go-to-market place tactics with these of customer preferences.
Another trend that has sustained higher development is consumers’ preference for immunity-constructing organic and ayurvedic goods. Demand for goods like Chywanprash, Tulsi, Amla Juice, Turmeric, Ashwagandha and Honey to name a couple of have seen astronomical rise in demand. Consequently, the major names in Ayurveda space such as Dabur, Zandu, Baidyanath, Patanjali and Himalaya have seen a robust surge in the demand for their goods.
While corporations have adopted tactics to optimize their portfolios and make sure solution availability on the shelves, Covid 2. has broken household finances across households owing to greater healthcare remedy costs and loss of employment. Lower earnings coupled with greater healthcare costs have eaten up savings and elevated their all round debt levels (most of it informally funded). Consequently, customer self-confidence for discretionary spending has been materially decrease than observed in the prior wave.
Discretionary categories like clothes, jewellery, home renovation, luxury goods, weddings and other individuals have seen material cuts in spending. Staple and worth oriented individual, household care categories as well have seen stress on budgets as is evident from down-trading inside the staples categories. Despite down-trading, corporations with wider solution offerings straddling across the price tag-worth matrix stand to advantage offered their brand image, excellent of solution and affordability.
Will BHARAT continue to drive development for FMCG?
COVID 2. has inflicted extreme harm to the hinterlands of the nation and with the subsequent lockdown of financial activities issues more than rural demand can’t be ignored. With a wider and deeper spread of the second wave, the emerging well known view holds that in contrast to last summer season, when rural demand remained resilient regardless of a wider and stringent lockdown, this year demand may well not show a comparable resilience. Additionally, increasing anxiety in the household and unorganized sector is also anticipated to retain discretionary spending beneath verify.
Despite the headwinds, we think ‘Bharat’ – the backbone of our economy, will bounce back post experiencing a slowdown in the April-May period. This will mainly be on account of 1) a record meals production in the fifth consecutive year led by very good rainfall last year 2) forecast of a typical monsoon season this year at 98% of the lengthy period typical (LPA) and a weak El-Nino more than the next six months, 3) earnings/ration assistance announced by Governments and 4) easing of lockdown restrictions to help mobility ahead of the Kharif sowing season. In conclusion, greater crop volume coupled with remunerative pricing and enhanced financial activity augurs effectively for driving all round rural earnings and thereby a positive influence on consumption demands.
While demand could bounce back in the upcountry markets which is crucial for corporations, increasing raw material costs are a crucial concern. This has brought on management across the staples, durables and other sectors to be in a Catch 22 circumstance, no matter if to raise costs of final goods or to take a hit on profitability in the close to term. This is since costs of raw supplies be it agricultural (edible oils, palm oil, tea and so forth), chemical or crude (PFAD and packaging material), have seen an unprecedented rise in between 25-150% for the duration of H2FY21 and is anticipated to continue in Q1FY22 as well. Although, more than the longer term such higher input costs are unlikely to sustain.
While a couple of corporations such as Hindustan Unilever Ltd, Britannia Industries, and Colgate Palmolive, amongst other individuals opted to raise costs to strike a balance in between development and profitability, a couple of other individuals like Jyothy Labs, Emami and so forth have strategized to safeguard their shares and volumes in these difficult instances.
Backed by the practical experience of two Covid-19 waves by far, we think the 3rd wave which is most likely to emerge in September/October is most likely to be significantly less fatal. This is since the most vulnerable segment (persons aged above 45 years) which accounted for ~88% of Covid-19 associated deaths would get vaccinated by then. Further, inoculation of population in between 18-44 years as well will choose up speed as provide constraints ease. This will shelter consumption from taking a extreme hit and will enable corporations as effectively as the clients to sail smoothly by means of the stormy Covid-19 climate, moving forward.
FMCG stocks to watch
Against this backdrop, we choose fundamentally robust corporations with healthful balance sheets and expanding market possibilities that can be added to the portfolio. Amongst massive caps- Britannia Industries, Hindustan Unilever Ltd (HUL), Dabur India, and Nestle India although in the mid & modest-cap space Relaxo Footwear, Varun Beverages, Mold-Tek Packaging and CCL Products are the exciting ones.
(Suvarna Joshi is Senior Research Analyst, Axis Securities, Views expressed are the author’s personal.)