Demonetisation woes: Stock accumulation, production cuts worry FMCG sector
New Delhi, Dec 7: With limited liquidity in the economy following the government's demonetisation move, the fast-moving consumer goods (FMCG) sector is resorting to production cuts due to accumulation of stock.
After the 1,000 and 500-rupee notes were banned by the government on November 8, distribution channels and consumption levels have been disturbed, leading to an overall impact on the sector.
"We had to review our production and reduced it by 10 to 15 per cent. There has to be some pulling down, else we will have a lot of inventory," Manish Aggarwal, Director of Bikano, told IANS. Bikano, a part of the Bikanerwala group, makes packaged snacks and other items.
"With unsold inventory piling up with wholesalers, who mostly deal in cash to supply to traditional trade, and consumers spending less due to the liquidity crunch, FMCG makers are bracing themselves for a short-term blip in sales," he said.
The wholesale stores too are under stress as sales at these "cash and carry" outlets have slowed down. "The government's move of eliminating high-denomination notes has impacted both the retail transactions between consumers and retailers and the ones between distributors and retailers," said Sanjana Desai, Head Business Development, Desai Brother's Food Division and ELMAC brand.
"The wholesales traders, who mainly dealt in cash, have stopped trading due to the cash crunch," she added.
Desai predicted that there would be impact of at least 25-30 per cent on the volumes during this sales cycle in traditional trade, which accounts for 72 per cent of overall sales for the FMCG sector.
Research showed that the food and consumer products took a leap in sales post-demonetisation. The sudden spurt was seen as most of the retailers accepted old currencies.
"When the news broke on the evening of November 8, retailers were quick to leverage SMS notifications to spread the word that they were accepting old notes, besides extending working hours all the way to midnight, leading to a jump in sales," said Prasun Basu, President, South Asia, of Nielsen.
"With uncertainty over availability of cash during the November-December period, or whether the local grocer would be willing/able to transact in cash, shoppers took the opportunity to stock-up. What aided sales were promotions and discounts offered by retailers," he said.
The food products segment, which accounts for almost 43 per cent of the overall market, received a mixed response with certain categories having witnessed a surge in buying activity, whereas other categories saw a dip in demand from retailers.
According to a report "Demonetisation - The Nielsen View", foods witnessed the highest increase in growth during the demonetisation week at 19 per cent as compared to a year ago, with packaged grocery and cooking medium displaying the highest growth.
However, the study revealed a much slower growth in the impulse categories such as biscuits, chocolates, salty snacks and confectionery.
"Currently, our production is 25-30 per cent less as consumers are spending less on bakery item purchases," Gobind Ram Chaudhary, Managing Director, Anmol Bakers, told IANS. "We have to resort to production cut till the situation normalises."
Experts are of the view that with spending cuts visible in the economy, trade channels involving higher value transactions might take longer to recover.
"Though consumer items are also falling into the cash crunch problem, these will recover relatively quicker as the new currency notes become available, but trade channels may take a few weeks as their transactions will be of higher value," Aggarwal added.
"And if their purchases decline, definitely that will affect the sales growth of any company," he said.