Why non-cyclical FMCG stocks have become vulnerable in the current scenario?

20 Jun 2022 , 02:58 PM

FMCG (Fast Moving Consumer Goods) stocks such as HUL and Britannia are doing well today. But if one looks at their performance year-to-date, almost every FMCG stock is below the level at which it started the year. FMCG stocks are considered to be non-cyclical stocks. Non-cyclical stocks are considered to be not vulnerable to economic cycle of expansion and contraction. This is because people continue to purchase every day consumer items such as soap even if there is an economic slowdown. They cut on discretionary items like luxury goods but not on everyday items of use.

But the current economic slowdown is not the normal slowdown phase of a normal economic cycle. There is both demand slowdown and high inflation in the current scenario. High inflation has raised input costs for these FMCG companies.  Input costs mean the costs of raw materials that these companies use for making their goods.  Higher input costs mean lower profit margins for these companies, if they do not raise prices in the same proportion. But demand slowdown means that if they raise prices, demand for their goods may go down further.

Rural parts of India emerged as a very important source of demand for FMCG companies in the past few years. The current economic scenario is one where the rural parts are severely hit. Companies like HUL have already said that they are seeing significant decline in demand from rural India. High inflation coupled with high unemployment is making people cut down even the consumption of many of the so-called essential consumer goods. Discretionary consumer goods such as a more expensive soaps are already seeing their demand going down. Conditions for FMCG companies will not improve until inflation slows down and unemployment goes down.

The lesson is clear. When the times are really bad, even the safe are not so safe.