FMCG sector will go for price reduction in 2023

Sameer Shah, Chief Financial Officer, Godrej Consumer Products finds that the FMCG sector will go for price reduction in 2023, given the softening of commodity prices. Excerpts of his talk with Sangeetha G

When you look back, how was the year 2022 for the FMCG sector in general and Godrej Consumer Products in particular?

Largely 2022 was a mixed year for the FMCG sector. The overall growth was soft and the rural growth was impacted by inflationary pressures. Inflationary impact was severe in the early part of the year for most of the companies. Hence, we saw gross margin contraction and pressure on profitability. For the industry it was a mixed year. For us, we drew strategies for growth. We did not shy away from upfront marketing investments and category development initiatives besides the commodity challenges. Some of the category development initiatives have been complemented by correction in the commodity prices in the last two to three months.

What would have been the major themes that played out in the FMCG market in 2022? Will these themes be relevant in 2023? 

There have been a few themes like slower rural consumption, high commodity inflation and the growth of new channels which had emerged in two – three years. I expect gradual recovery for the sector as inflation has more or less cooled off. This should be a boost for better rural consumption. Further, we are expecting a lot of infrastructure spending in this election year, which will also support rural consumption. There could also be budgetary sops that would favour the rural market. So rural consumption should be better in 2023 compared to 2022. As far as commodities are concerned, in the categories relevant for us, inflation seems to be behind us. We expect commodity inflation to be subdued in 2023.

How much will the global factors, including recessionary trends and multi-year high inflation in key economies as well as subdued trade affect the FMCG market?

FMCG is largely inward. In the last year or so, India has largely been an outlier, outshining others. The domestic consumption story is quite intact and I think that India would largely remain immune to what is happening globally. There could be some increase in cost of capital. But FMCG companies are largely cash-rich compared to those in other sectors. They are either capital-excess or their capital cost is low. The deflation in raw material cost will be a big boost for the margins of the FMCG industry or appetite for investment. In the commodities which are relevant for our industry like palm oil and derivatives and crude, we do not expect any further inflation.

The FMCG sector has gone for a few price hikes last year. Do you think they will go for further price rise in 2023 or hold on the rates?

I think there will be a case for price drop rather than a price rise. Commodity prices have cooled off and the companies have to pass on the benefit to the consumers.

As Godrej has a presence in several overseas markets, how will the global themes play out in those markets? How will it affect your business?

Our overseas business is largely in two geographies - Indonesia and Africa. Indonesia macros have been better than India for the past two-three quarters. The developmental activities in Indonesia have been phenomenally good. It has reflected in the GDP growth and the inflation has been stable at around five per cent. The currency also has been fairly steady. Indonesia is one of our largest businesses globally and that seems to be heading in the right direction macro-wise and for us also. In Africa, there are multiple markets, but for FMCG we have not seen any big shift. There has been a little bit of inflationary pressure mostly because of currency, than anything else. It more often gets passed on to the end consumer.

Overall what are your expectations from 2023?

In 2023, we would be accelerating some of our category development initiatives in both the Indian market and overseas markets. They may start reaping rich dividends for us. We have seen this in the solid performance of Q3 and that could be a priority in 2023. Another priority could be the acceleration of digitisation. We are in a digitization journey across functions and across businesses and we would see a lot of work happening and all of this aggregating to business transformation in a couple of years and that could be a pivot for us. Overall we expect to see a strong growth performance. Both growth and margins are going to be better than 2022.