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Sunday, Oct 02, 2022

Post-Covid spending: Discretionary items gain steam, staples stay tepid

Companies in the discretionary pack include Asian Paints, Devyani International, Varun Beverages, Titan Company, ITC and United Breweries, while those in the staples group include Hindustan Unilever (HUL), Dabur, Marico, Tata Consumer, Colgate Palmolive and Britannia.

COVID-19, eating out, cigarettes, watches & jewellery, spirits, soap, biscuits, daily food items, Hindustan Unilever Limited, Dabur, Marico, Tata Consumer, Colgate Palmolive, Britannia, FMCG, Business news, Indian express business news, Indian express, Indian express news, Current AffairsIn comparison, nine companies selling staple FMCG products reported topline of Rs 3.56 lakh crore in the quarter-ended June this year, against Rs 2.65 lakh crore in April-June 2020 — a CAGR of 8.8 per cent.

In the aftermath of the Covid-19 pandemic, India’s consumption story points to more evidence of a K-shaped recovery pattern, with discretionary spending like eating out, cigarettes, watches & jewellery, spirits, recording faster growth compared to staples such as soap, biscuits, daily food items, etc.

What further accentuates this trend is that even within the two classes of consumption, there is an even more discerning trend: greater traction for higher ticket-size items in luxury goods like gold & jewellery, and down trading in daily consumables such as soaps and shampoos.

As per an analysis of consumer goods companies’ April-June quarter earnings by Kotak Institutional Equities, 14 companies offering products and services that account for discretionary spends reported revenues of Rs 5.43 lakh crore during this three-month period, as against Rs 3.51 lakh crore in April-June 2020 — representing a compounded annual growth rate (CAGR) of 15.5 per cent.

In comparison, nine companies selling staple FMCG products reported topline of Rs 3.56 lakh crore in the quarter-ended June this year, against Rs 2.65 lakh crore in April-June 2020 — a CAGR of 8.8 per cent.

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Explained

Big-ticket spending on the rise

The trend in the aftermath of the Covid pandemic shows that within discretionary spending, consumers are showing a preference for higher priced, big-ticket items.

Companies in the discretionary pack include Asian Paints, Devyani International, Varun Beverages, Titan Company, ITC and United Breweries, while those in the staples group include Hindustan Unilever (HUL), Dabur, Marico, Tata Consumer, Colgate Palmolive and Britannia.

In the company’s April-June earnings call, Titan Company’s CEO-Jewellery Division, Ajoy Chawla, said, “We’ve seen the buyer growths have been very good but we are seeing a greater traction on the higher ticket sizes and higher values and also greater traction on studded on the lower price points on gold specially those who are looking at below 10 grams, below 15 grams, everyday wear. There is some creeping level of, there is still growth there, there is no question but yes, it is not as high as the rest of the segments have shown, but it is very early days…”

On the contrary, FMCG manufacturers like HUL are seeing consumers prioritising essential items over discretionary goods in their product offerings, while also downgrading to cheaper alternatives in a high-inflation scenario. “At the end of the day, with so much amount of kitchen inflation happening at consumers end, there’s a clear amount of priority a consumer today gives to kitchen items and essential items and hence to some extent discretionary categories have taken a beating in where the market grows of these categories have come off I would say in the last three to four quarters,” said HUL’s CFO & executive director— finance & IT, Ritesh Tiwari.

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“What we are seeing is there are two different behaviors, down grading and down trading. Down trading is where a consumer who is buying the larger pack, buys smaller pack and hence that’s down trading where smaller amount of volume gets consumed and gets sold in the period and consumers do tighten consumption in that time and that’s down trading. We have not seen many examples of down grading where the consumer goes down the price sphere,” Tiwari added.

Interestingly, even for HUL, Tiwari pointed out that for fiscal 2021-22, the nation’s largest FMCG company saw its premium portfolio growing at “twice the pace” of the rest of the portfolio. “There are consumers who are able to afford even in such high inflationary times the product that they love to consume and we have seen those sales remaining intact and hence with say over indexed growth that we have seen in the premium portion of the portfolio,” he said.

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Cigarette-to-hotels company ITC Ltd, which sees cigarettes account for 38 per cent of its revenue, saw “strong growth in discretionary/out of home categories”. These categories include products like snacks, frozen snacks, beverages, confectionery, fragrances and agarbattis. United Breweries, maker of Kingfisher and Heineken brands of beer, also pointed out that for the June quarter this year, its premium segment “recorded growth ahead of the total portfolio”.

This K-shaped trend of recovery is in line with the pattern where top-end cars and super-luxury residential projects recorded a surge in numbers during 2021, topping not just the pre-pandemic levels but also, in some cases, levels reported 5-10 years ago.

First published on: 19-08-2022 at 02:23:42 am
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