Business Recorder (BR) Research
The growth in the consumption of processed food and beverages has tapered off lately in Pakistan which is probably due to a slowdown in the rural economy. Sadly in the depressed period, the masses have less resource to smoke and drink. Alas, nothing to toast for losses in crop income!
In the past five years or so, the real GDP growth in Pakistan has remained dismally low. However, the consumer sector thrived with high double-digit growth in income of various companies in food and other consumer goods businesses. But that trend is seemingly changing of late. The last quarter (Jul-Sep) has raised a red flag.
Low commodity prices and surpluses from previous year’s crop have pressed farmer communities and subsequently overall rural inhabitants to spend less on basics. A universe of eleven listed companies in consumer business including Nestle, Engro foods, National foods, Unilever Pakistan foods, Colgate Palmolive, Rafhan Maize, Murree Brewery, Pakistan Tobacco, and Hum Network shows a bad last quarter (Jul-Sep). Commutative sales are up by a mere 3.7 percent on yearly basis; barely surpassing CPI inflation of 3.1 percent in the same period.
Seemingly the boom in the FMCG is cooling off as the dip in growth is not just in the last quarter; the growth trajectory for many companies, has changed direction in the last year or so – Nestle’s net sales were up at CAGR of 19 percent during 2009-14 and in 9MCY15 revenues increased by mere four percent (YoY) and its sales were flat in the last quarter (Jul-Sep) as compared to similar period of last year, while on quarterly basis the top line dipped by 14 percent.
A similar trend is observed in many other companies – combined sales of these companies grew at a CAGR of 18 percent in the last five years (2009-14) and the growth nosedived to 3.7 percent in the last quarter on yearly basis. The dent is more visible by examining the trend on a quarterly basis as commutative revenues of 11 companies during Jul-Sep fell by a massive 14 percent as compared to the previous quarter (Apr-June).
Although, there is a seasonal adjustment in the third quarter as sales usually dip owing to sowing season, Eid and Hajj-related expenses. Yet the fall is too high this time which clearly exhibits that the purchasing power of the consumer is under stress. The worrisome fact is that problems for farmers are going to increase in coming quarters as this year the cotton crop has issues while for wheat the accumulated surpluses from previous season make it hard for a small farmer to sell new crops. Depressed margins in rice have already marginalized farmers in this business.
Thus, the falling trend may continue in coming quarters and its trickle-down effect may adversely affect many other ancillary businesses. For instance, the low growth in the top line of companies in consumer businesses must have compelled them to reduce their budgets in an advertisement which is evident by eight percent dip in revenues of Hum Network in the Jul-Sep and on a quarterly basis the fall in revenues is at a whopping 22 percent. The trend is changing sharply as Hum Networks five years revenues CAGR was 24 percent in FY10-15.
The businesses of media buying houses, advertising agencies, and PR agencies are also going to be dipped. One reason for the dip in TV media revenues could be strong growth in digital marketing; nonetheless, companies spend on the advertisement is trimming.
This all will have an impact on overall GDP growth and especially on employment generation. In the past five years, after the slowdown in the financial sector, FMCGs were the darling on new graduates as they were creating more employment than any other sector.
There is a need to examine the uptick in GDP growth over four percent in the last two years as against 1-3 percent growth in the previous five years. During the low GDP growth era consumer segment (FMCGs) thrived but now with industrial sectors picking up, the consumer segment is slowing down. The top line of eleven companies grew at an average of 23 percent in 2011-13 while the growth was trimmed to 12 percent in 2014 and fell even lower in the last nine months.
One plausible reason to explain this is that inflation was high in yesteryears while it is much lower now which restricts the nominal growth in sales. Then the growth in the previous years has increased the base, so it is harder to continue high double-digit growth and the sector is in consolidation. Thirdly, the poor performance of the rural economy is having its toll on sales of FMCGs.
It is important to note that industrial sectors including cement, steel, fertilizer, banking, power, and auto sectors are growing more today than FMCG and agriculture sectors. But who generates more employment – the growth in the banking sector is jobless as few men at treasury desk are driving growth by trading in government treasuries while the loan to the private sector, especially consumer sector is not picking up despite the fall in interest rates.
In fertilizer sector, the availability of gas is fuelling growth with not much creation of employment. And in the auto sector, government’s scheme is contributing to Suzuki’s growth and this might not trickle down. The irony is that in days of low-interest rates; the consumption of basic goods (food and beverages) is down which is contradictory to economic theories. Let’s hope the easing monetary policy cycle spurs growth in coming quarters to generate some employment and increase spending spree of consumers to take FMCG growth back on track.
This article was originally published on November 05, 2015 in the Business Recorder (BR) research.
