Consumer Giants Are Cutting Down Workforce & Commodity Prices, Is Economic Slowdown the Reason?
Free Book Preview Money-Smart Solopreneur
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
Despite facing the worst economic slowdown in history, India is better off than the rest of the world, the Finance Minister, Nirmala Sitharaman had said last week. While the government acknowledges that the Indian economy has entered its worst phase since the 2008 global financial crisis, it is ready with a welter of measures to rectify the situation.
However, with auto and housing sectors in focus, consumer market, which has been hit hard by the dropping demands, is still waiting for the government to save the day. The largest of India’s consumer goods companies are taking unforeseen decisions such as price and workforce cut, blaming the weak demand has left us wondering if the economic slowdown is the reason.
Cutting the Cost – A Strategic Decision or Forced Necessity?
Known for manufacturing the highest-selling soap brands in India, FMCG bellwether Hindustan Unilever (HUL) has cut prices across some of its product portfolios to pass on the benefit of softening input costs. Struggling with stiff competition, the company has reportedly taken this strategic decision to win back customers that are switching brands due to high costs.
“HUL does selective and judicious price changes across its portfolio in the normal course of its business. Given that the commodity prices are expected to remain benign for a certain time period, we have taken price reductions in the range of 4 per cent to 6 per cent in Lux and Lifebuoy portfolio, while it may be higher on certain packs in order to pass on the benefits to the consumers,” a company spokesperson said on Tuesday.
In some cases, the price cuts are reportedly as steep as 20-30 per cent. Despite being one of the largest players in the personal care segment, HUL has been facing taut competition from rivals including Godrej Consumer Products Ltd, Wipro Consumer Care and ITC Ltd. According to media reports, the current demand environment and low costs have prompted these changes.
Notably, the price cut has come just after HUL released its second-quarter report which suggested a slowdown in its volume growth. The company has been witnessing modest demand in its beauty and personal care segment. Interestingly, HUL increased prices of face washes by 4-14 per cent across Pears, Dove, Ponds and Fair & Lovely brands in July.
The Lower Price Segment Has Been Hit Hard. Why?
In its April-June update, research firm Nielsen noted that non-food categories such as salty snacks, biscuits, spices, toilet soaps and packaged tea led the slowdown during the quarter. The testimony to the statement was received when India’s leading biscuit-maker Parle Products Private Limited announced the possibility of laying off up to 10,000 employees.
“Slowing economic growth and falling demand in the rural heartland could cause production cuts,” the company said in a statement. Surprisingly, the brand’s flagship product Parle-G is available at INR 5, making it an affordable commodity but reportedly, it is the lower-priced products that have been hit the hardest.
Talking to Business Today, Mayank Shah, Category Head, Parle Products blamed the high GST for the consumption slowdown. “They were subject to lower taxes earlier, and we fail to understand why it has been put under such a high GST slab. There is no rationale for it. The government has reduced GST for many categories such as footwear and hotels. I wonder what stops them from doing it for biscuits.”
GST (Good and Services Tax) of 18 per cent on an INR 5 staple biscuits pack is too steep for the bottom of the pyramid customers. Notably, Parle’s rival brand Britannia Industries Ltd has recently sounded alarm bells over the sharp deceleration in its domestic sales volumes. The INR 35,000 crore biscuit industry is looking for concrete steps by the government to rectify the situation.
The Problem is More Structural in Nature. How?
The private consumption of goods is declining due to people feeling insecure about their savings, which can only be resolved through reforms and policies, said Sudhanshu Rai Chief Strategist, SaintsArt Strategic Communication Firm. He said the reduction in GST as the only way forward.
The level of wages in the rural and urban vicinity has also decreased to a great extent. “In the last decade, the economy has been hit three times – 2008, 2012 and now,” Rai said, adding that the global scenario plays a huge role in the number of risk manufacturers would be willing to take. The trade war between the United States and China has greatly impacted India whether we believe it or not.
“Trade wars impact exports greatly. Hence, they (manufacturers) try to buy less, store less and produce less, which transfer the impact to the manufacturing scale,” ultimately, increasing the costs of production. In such scenarios, cutting down the workforce and even costs to promote better sales and sustain for a longer period.
Rai stressed that authorities need to step up in situations like these because companies need to take preemptive measures to survive. While the government has announced a flurry of measures for catering to various segments, the FMCG space is yet to see the sunshine.