Consumer confidence yet to translate into consumption: HUL

The uncertain global economic environment, inflation and intense competition pose challenges, says firm

  

Sapna Agarwal 

Hindustan Unilever Ltd (HUL), the country’s largest consumer packaged goods company by sales, on Friday said while consumer confidence has increased, it has not translated into an improvement in market conditions for fast moving consumer goods (FMCG).

In its annual report for fiscal 2015, the maker of Dove, Lux, Kissan and Surfbrands said in the short term, the uncertain global economic environment, inflation and intense competition pose challenges, while in the medium-to-long term, secular trends based on rising incomes, aspirations and consumption levels are positive, and an opportunity for the FMCG sector.

India remains at the top in the Nielsen global consumer confidence index for the fourth quarter in a row as of March end. However, the confidence is yet to translate into consumption, said Nielsen.

Even falling prices have not led to consumers loosening their purse strings. Inflation has dropped sharply over the past 12 months from around 9% a year ago to sub-5% levels currently on the back of government measures such as muted minimum support price hikes, open market sales of cereals and steps to limit hoarding.

“Footfalls are still down when seen month-on-month. Improved consumer sentiments have yet not translated into spends. Consumers remain cautious,” said Amit Jatia, vice-chairman of Hardcastle Restaurants Pvt. Ltd, a joint venture partner of McDonald’s in India. “We have to be patient. When the economy will take off, we can’t say. The government has taken a lot of good steps.”

As such, despite lower inflation, price cuts and aggressive spending on advertising and promotions, HUL’s increase in volume growth was not spectacular in the March quarter.

The company sold 6% more by volume during the March quarter, compared with the 3% growth seen in the October-December period. Though higher in absolute terms, a low base effect is partly responsible for it and some analysts had pencilled in this level of growth in their estimates.

Moreover, a below-average monsoon this year can dent rural demand and further compound the stress in the FMCG sector.

“This year, we have seen unseasonal rains and even the forecast for the monsoon is not very promising. This will bring rural demand under pressure,” said Vivek Karve, chief financial officer at Marico Ltd.

Besides, inflation is firming up once again. Brent crude, a key raw material for the sector, had hit a low of $46.59 per barrel on 13 January 2015. Since then it has gained 47.48%. Food inflation will also be back if the “deficient” monsoon forecast plays out.

To tackle a slow-growth market, HUL has accelerated the pace of innovation in the past fiscal year. Innovations touching about 60% of the product portfolio were executed, the company said in its annual report.

It also came out with a slew of launches, including TRESemmé Split Remedy and Hair Spa Rejuvenation shampoos and Closeup Diamond Attraction, a premium whitening toothpaste. There were also a few launches targeting the male consumer—Axe Signature deodorant andPond’s Men Energy Charge face wash with coffee beans.

Given the tough macroeconomic environment, HUL has also been working on cost-savings programmes. During the fiscal year, it saved 5% in supply chain costs, which is driven by various cross-functional teams such as research and development, procurement, manufacturing and logistics.

The company continued to drive its rural penetration programme by creating a consumer contact programme aimed at accelerating the growth and adoption of small and emerging categories in villages.

Through the programme, it reached more than 2.5 million rural consumers and contacted 800,000 schoolchildren. This programme is now active in over 8,000 villages across the country, the company said.

HUL also changed its direct selling business model under Hindustan Unilever Network to an online ordering and fulfilment model as the year continued to prove to be extremely challenging for the entire direct selling industry. There is “ambiguity on acceptable norms for direct selling in India”, the company said by way of explanation for the change to online ordering.

HUL’s shares closed at Rs.829.85, up 0.89% on BSE even as the Sensex ended at 26,768.49 points, down 0.17% on Friday.