In a bid to protect their margins at a time when demand is subdued, makers of FMCG products have reined in expenditure on advertising and promotions.
A study by analysts at BNP Paribas point out that while ad spends as a share of revenues increased sequentially in Q3FY22, these remain at much lower levels than in the past. The aggregate spends, for a clutch of nine companies, was a shade under 7% in the December quarter, better than the 6.5% seen in the September 2022 quarter. In Q2FY20, spends as a share of sales were at levels of 10%.
Over the past year, FMCG players have been taking price increases to fight inflation — essentially the higher prices of raw materials. However, this has impacted their volumes and margins.
Volume growth for most companies in the sector ranged between negative- to mid-single digits due to the price hikes and sluggish rural markets.
Analysts believe that with prices of key commodities softening and demand in rural India showing signs of a revival, companies could report better margins. They also expect advertising spends to go up. “While we expect margin improvement in FY24, our earnings estimates are below consensus as we anticipate an increase in advertisement spends and selective price cuts to drive volumes that are under pressure,” Kunal Vora, BNP Paribas, wrote in a report.
An index of India’s consumer goods firms has lost some 3% from its peak earlier in February and is now virtually flat after climbing 17% in 2022. While demand was robust in October on account of the festive season November saw a sharp decline. Thereafter, December witnessed a pick-up though it was weaker than expectations. “Demand is yet to revive till mid-Feb, which is concerning,” analysts at Jefferies wrote.