Consumer discretionary grapples with slowdown

Rohit Joshi and Siddharth Tak/ZRG

While consumer staples have managed to shrug off the slowdown during the fourth quarter of fiscal 12-13, a slowdown is clearly evident in discretionary categories such as pizzas, paints, and packaged food. The sales of passenger car have already hit a decade-low mark in FY13, and moreover latest quarterly results of discretionary consumer companies reiterate a similar deceleration.

Interestingly, India`s popular fast food restaurant chain like Jubilant FoodWorks (which run Domino’s Pizza) has reported a pessimistic growth in same-store sales during January- March than preceding quarters. The trend is also apparent in the other consumer discretionary space ranging from paints to packaged food during the period under review.

A Zee Research Group (ZRG) study of company data in this space points to the rather alarming trend. Jubilant FoodWorks posted dismal same store sales (SSS) growth of 7.7 per cent as against 26.3 per cent in the corresponding period last year. The 7.7 per cent SSS growth reported was its weakest growth in the last 16 quarters. It was even below the market estimate of nearly 15 per cent growth.

Citing the reason behind the lower SSS growth, Jubilant FoodWorks in its earnings presentation stated, “Sales during the quarter reflect the impact of economic factors, constraining consumer spend and lower than anticipated rate of customer additions, which in turn impacts SSS growth.”

Furthermore, in FY14 management expects SSS growth to come down to 10 per cent which is much lower than the 16.2 per cent growth in FY13. Similarly, McDonald’s India recently said that it has also witnessed pressure in SSS growth and this time it would be less than 22 per cent achieved in the fiscal year ended March 2012. Moreover, it expects to temper demand growth for at least the next seven months.

Asian Paints too reported results which were below market expectations. The volume growth slowed down to two per cent on yearly basis which exerted pressure on its operational performance. Adding to the woes, the premium product in FMCG space like Saffola witnessed a modest five per cent volume growth in Q4FY13 owing to the expansion in premium vis-à-vis competing brands.

Commenting on this trend, Marico in its FY13 results press release said, “The growth was impacted by a softer demand environment in premium packaged foods that are discretionary in nature. Though the Company doesn’t believe that Saffola’s existing consumers are down trading there is a deceleration in the rate at which new consumers are upgrading into the Saffola brand, leading to a lower growth rate.”

According to consumer confidence findings from Nielsen, consumer confidence in India dropped one point to 120 in Q1 2013 after topping the list at 121 in Q4 2012. Agreeing to this view, Pranab Barua, CEO of Madura Garments, part of Aditya Birla Nuvo, opined, “Confidence level is very low among the consumers. Macro-economic indicators are not sound, uncertainty in the political situation and people are unsure about the way forward. These are contributing to a general sense of lack of confidence.”

Barua’s thought got an endorsement from Kaustubh Pawaskar, Research Analyst at Sharekhan, who averred, “During the inflationary and uncertain macro–environment, normally consumer sentiment gets impacted and discretionary segment (like Pizzas, Paints, Saffola) is the first one to get a hit because of all this.”

Commenting on the outlook going forward, Barua at Madura Garments said, “Post general elections the consumer sentiment is expected to improve. However, if the government can push major reforms like GST then it will certainly boost the confidence.”

However, Pawaskar at Sharekhan has a different perspective and argued, “Until and unless, inflation softens to substantial low levels there are little chances of improvement in discretionary spends. However, gradual recovery is expected and it will take another two quarters to see any revival. Therefore, we need to monitor the growth rates in the first and second quarter. By the second half of FY14 we might see a decent revival in the performance of these companies. Companies have started offering discounts in order to spur demand.”

AK Prabhakar, Senior vice-president, equity research at Anand Rathi Financial Services said, “Going forward, we do think that the trend reversal in discretionary space will not be very immediate. However, positive structural changes like inflation downtrend and rate cuts could add to some sentiment change in this space. Moreover, the base effect can bring in some positive numbers as FY13 was a weak year. Therefore, in FY14 this segment may post good show due to the base effect.”