High inflation signals good times for FMCG
Cos registered much faster growth in profits during periods of high inflation (1994-98 and again from 2006 till date) compared with periods of low inflation (1999-2005 ). Keeping customers
By TNN |
Inflation may be a political nightmare for the government, but the FMCG industry has every reason to smile at rising prices. An ETIG analysis of the growth in revenues and profits of leading FMCG companies reveals that companies registered a much faster growth in revenues and profits during periods of high inflation (between 1994 and 98 and again from 2006 till date) compared with periods of low inflation (1999-2005 ).
Inflation, as measured by consumer price index, ranged between 7% and 13% during 1994-1998 . It dropped to 3%-5 % during 1999-2004 . From 2005, inflation again started climbing , hovering around the 8% mark now.
Hindustan Unilever, ITC, Nestle, Marico, Dabur, Glaxosmithkline Consumer Healthcare, Colgate-Palmolive and Procter & Gamble were the eight companies whose aggregate net sales and net profits have revealed interesting results .
While their combined net sales grew at a compound annual growth rate (CAGR) of 24.4% from 1994 to 1998, it grew by a mere 4.3% during the low inflationary period between 1999-2004 . The aggregate net sales have also registered a faster growth of 17.4% since 2005, the period coinciding with rising inflation.
Inflation, as measured by consumer price index, ranged between 7% and 13% during 1994-1998 . It dropped to 3%-5 % during 1999-2004 . From 2005, inflation again started climbing , hovering around the 8% mark now.
Hindustan Unilever, ITC, Nestle, Marico, Dabur, Glaxosmithkline Consumer Healthcare, Colgate-Palmolive and Procter & Gamble were the eight companies whose aggregate net sales and net profits have revealed interesting results .
While their combined net sales grew at a compound annual growth rate (CAGR) of 24.4% from 1994 to 1998, it grew by a mere 4.3% during the low inflationary period between 1999-2004 . The aggregate net sales have also registered a faster growth of 17.4% since 2005, the period coinciding with rising inflation.
| | | Also Read |
| | �� | |
| | �� | |
| | �� | |
| | �� |
A similar pattern was witnessed in the case of profit growth. Net profits, which grew at a CAGR of 32.4% during 1994 to 1998, dropped to 10.8% during 1999 to 2004. But growth rate recovered to 14% from fiscal years 2005 to 2007. This rise in profits came despite rise in input costs for these companies.
So what makes an inflationary environment conducive for the growth of this consumer-oriented sector? It���s partly explained by consumer buying sparked off by higher money supply during a period of high inflation. The other reason, and a key one, is price mark-ups the companies do under the garb of passing on the rising inputs costs to buyers. This can be explained by the nature of the companies��� operating margins, earned during periods of higher inflation. High operating margins ranging between 16% and 17% have been consistently registered during the high inflationary periods, against a fall in margins during the low inflation periods.
A high inflation period is characterised by an increase in money supply and credit in relation to the volume of goods. With higher wages and increased personal disposable income, the consumer increases consumption and also at times shifts preferences. FMCG companies, being in the branded products segment, can afford to increase prices of their products without risking a drop in sales.
Introduction of high-priced premium-category products is yet another way in which FMCG companies lure the cash-rich consumers to shift consumption from a lower-end to a high-end product. The current high inflation period, which began in 2005-06 , has once again kick-started a phase of profitable growth for the FMCG sector.
Start a SIP with as low as ₹500 with ET Money App!
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
