No Consensus On Why Consumer Goods Demand Rose After GST

No Consensus On Why Consumer Goods Demand Rose After GST

Consumer goods makers’ volumes jumped as the supply-chain emerged from the initial disruption of goods and services tax. There’s no consensus on why. Makers of soaps to biscuits say lower GST tax rates drove higher demand. But distributors and retailers aren’t sure if that was the trigger and attribute it largely to recovery after the twin disruptions of demonetization and GST.

Wholesale demand had slowed as distributors pared inventory ahead of the July 2017 rollout of GST, fearing losses on leftover stock. Starting three months ended September 2017, sales volumes of consumer goods makers have grown for six straight quarters. The GST Council, the apex decision-making body under the new law, in November 2017 reduced the number of fast-moving consumer goods attracting the highest 28 percent tax rate from 224 to 50.

That brought a host of products including shampoos, soaps and detergents, and deodorants and perfumes in the 18 percent tax bracket. The companies were supposed to pass on the benefit to consumers by lowering prices, not by offering more weight in the same pack.

“If prices come down, people tend to consume more and we have seen a consumption trend in the last one or two years after GST implementation,” Sunil Duggal, chief executive officer at Dabur India Ltd., told BloombergQuint. The consumption has been fairly robust after the instability caused by demonetisation and in the run-up to GST, he said. “We’ve seen around one year of good growth.”

“I don’t think there has been an underlying consumption boom, but the fact that people have to spend less to buy the same product has accelerated consumption.”
Sunil Duggal, CEO, Dabur India

Mayank Shah, category head at Parle Products Pvt Ltd., said lower taxes increased demand for its products by an additional 4-5 percent. Customers have largely been loyal to existing products such as namkeen and rusks, he said.

Distributors See No Such Trend

But distributors and retailers said lower prices didn’t create additional demand. The volumes jumped more on a lower base as the demand had slowed first because of demonetisation and then GST, four distributors and three retailers told BloombergQuint—none wanted to be identified out of business concerns.

A retailer in Maharashtra said consumption has grown organically and not because of rate cuts. A distributor from Mumbai said 2018 was a year of growth, which can’t be attributed to rate cuts. His counterpart from southern India said demand was growing at its historic pace. According to a distributor in Gujarat, prices of goods were down only in the first six months, and now they are higher by 5 percent on average following multiple hikes by companies.

Moreover, distributors said, some consumer goods makers increased grammage instead of lowering prices. Market leader Hindustan Unilever Ltd. and Nestle India Ltd. face anti-profiteering penalty for not lowering prices. While HUL got a stay from the Delhi High Court and voluntarily deposited Rs 90 crore, Nestle said it provisionally deposited the amount that it had set aside.

Premiumisation Vs Formalisation?

A distributor in Punjab told BloombergQuint some consumers upgraded to premium products. If a person typically bought four bars of soap, his consumption will not go up, he said, adding that the rate cut made him to buy a more premium brand. But he agreed with his counterparts in other regions that there hasn’t been an overall uptick in consumption because of GST.

A retailer from Nagpur said there are instances of customers buying higher-priced items after GST rate cut. But, he added, fast-moving consumer goods makers have also been pushing premium products in smaller packs.

Dabur’s Duggal agreed that there was a higher demand for smaller packs, citing the example of shampoo sachets selling at Re 1 each. “It is deeper penetration and a higher level of consumption (driving demand),” he said. “I don’t see any premiumisation.”

Instead, there’s a shift from products like tea and biscuits sold loose to packed, branded items, he said. Smaller packs account for 20-30 percent of consumption, and in some categories, lower GST rates has made that formalisation possible. Even in the larger packs, deep discounting after GST rate cuts has improved offtake. “In oral, skin and hair care, it has been quite positive.”

Saugata Gupta, chief executive officer at Marico Ltd., pointed to a similar trend in an investor call. Formalisation of the economy after GST would help increase demand for branded soaps, detergents, household cleaning products, and coconut oil, he said. “Companies will need to ensure direct distribution to compete with smaller regional players.”

Suresh Narayanan, chairman and managing director of Nestle India Ltd., also doesn’t see premiumisation because it’s more a brand strategy. But he has a more nuanced view on volume growth—it can be attributed to a mix of everything.

“The overall sectoral growth of FMCG has been fairly encouraging,” he said. “The momentum in the market was good in 2018. Not that GST alone pushed it, he said, but it aided that.

Ease Your GST Retrun Filing & Invoice with XaTTaX- GST Software

Source: Bloomberg Quint

One thought on “No Consensus On Why Consumer Goods Demand Rose After GST

Leave a Reply

Your email address will not be published. Required fields are marked *