COVID spread in large cities causing hit to consumption

COVID’s uncontained spread, especially in big cities, is extending the hit to consumption and FMCG sector as reducing non-essential retail visits by consumers should extend well into third quarter especially in the top 10 cities, according to a research by Credit Suisse.

With COVID spreading rapidly it means that the normalisation of trends back to pre-COVID patterns will likely not happen before fourth quarter of 2021.

COVID’s continued spread to extend consumer caution beyond earlier expectations in large cities. COVID continues to spread with a rising number of new reported cases and no flattening of the curve. The worst impacted are the large cities.

“We expect consumer caution to extend into third quarter even as the lockdown is eased and people go back to work. We expect consumers to avoid non-essential out-of-home visits which would extend the impact on consumption,” it said.

In FMCG sector, the pattern of strong foods and weak personal care consumption will extend, modern retail stores decline is another headwind. The current patterns will likely extend into the third quarter including strong growth in home categories such as biscuits, noodles, branded tea/coffee, home insecticides, a pick-up in healthcare and hygiene products and a decline in personal care/out-of-home products such as shampoo, hair oils, skin creams and ice cream.

The other trend which would hurt some companies is the decline in modern trade.

On consumer discretionary, Credit Suisse said large cities to stay under pressure well into third quarter. Reducing non-essential retail visits by consumers should extend well into third quarter especially in the top 10 cities.

The increase in new COVID cases in India continues to be 3.5-4 per cent on a daily basis. The new case additions have been rising and thus there is no flattening of the curve.

The rising curve of COVID and the fear of not getting healthcare is expected to drive continuing consumer caution well into third quarter of FY21. This would mean that the normalisation of trends back to pre-COVID patterns would not happen before fourth quarter of FY21.

The report says that the return to pre-COVID consumption patterns could take much longer. Even as consumers go back to work, they are likely to remain cautious given the continued COVID spread, and avoid non-essential trips outside the home.

The consumption patterns which have been established during the lockdown will likely extend well into third quarter.

Strong consumption growth in home categories such as biscuits, noodles, branded tea/coffee and home insecticides is expected to continue. This is a function of consumers being at home for longer hours and consuming more home-cooked food.

Also, home-cooked food is likely to be preferred until the fear of disease is lowered. Fear of mosquito-borne disease in the midst of COVID is expected to keep home insecticide consumption high. These trends would hold much more in the top 10 cities.

Healthcare products which promise immunity boosting, such as Chyawanprash and Honey, are likely to continue to have high – growth until the fear of disease lingers. Hygiene segments such as handwash and sanitisers are also likely to see continued high growth in this period.

There is a decline in consumption of personal care/out-of-home products: Personal care includes categories such as shampoo, value-added hair oils, skin creams and deodorants. Out-of-home consumption is important for ice cream, alcoholic beverages and aerated drinks. These are expected to now persist well into third quarter.

Modern trade was on a strong growth curve before COVID, with steady share gains from mom and pop stores and rapid retail space expansion. This has completely reversed due to COVID. Consumers are avoiding crowded modern retail stores for fear of the disease. This is especially true for top 10 cities which is where the bulk of modern trade revenues are driven from.

Momand-pop stores have also ramped up their operations through options such as ordering through ‘WhatsApp’ and extended home deliveries. The implications for FMCG companies are also meaningful. Modern trade is a sizeable part of revenues for companies and is a strong driver for premiumisation. These trends could take a hit until if modern trade

does not make a strong comeback, the report said.

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