Fast-moving consumer goods (FMCG) are not moving fast enough, and the stress is causing companies to cut spending on salaries.
While Indian IT companies have been in the news lately for slowing down hiring and slashing salaries and bonuses, a dive into the balance sheets of FMCG giants suggests that these companies have considerably slowed down investment on employees, while simultaneously topping up spending on advertisements.
An Outlook Business analysis of the top 12 companies in the Nifty FMCG index showed that spending on salaries and wages has slowed significantly. Quarterly expenses on salaries and wages have seen a sharp deceleration with year-on-year growth down from 12.6 per cent in December 2022 to 5.7 per cent in December 2023.
“Growth has been moderating for most FMCG companies over the last few years, especially volume growth. This has led to lower variable pay and lower salary growth for FMCG majors,” says Ajay Thakur, research analyst at Anand Rathi Institutional Equities.
The Struggle for Growth
The broad FMCG sector has struggled for growth in the last financial year. Growth slowed for FMCG majors in India in the financial year that ended March 31, 2024, as the country saw the slowest growth in private final consumption expenditure (PFCE) at 4.4 per cent in two decades, barring the pandemic year.
FMCG companies have decided to reduce spending on salaries even though their operational costs have come down, allowing them to increase profits. This is because the sharp slowdown in sales has started to have an impact on the profits that were rising until recently.
Average year-on-year growth in total expenditure of the top 12 companies on the Nifty FMCG index came down from 15.4 per cent in FY2023 to 3.3 per cent in the first three quarters of FY2024. In the same span of time, growth in profits came down from 19.95 per cent to 8.47 per cent.
The slowdown in spending on salaries has also meant a reduction in the growth of jobs in the FMCG industry. Data sourced from job portal foundit showed a slowdown in month-on-month growth of jobs in the FMCG sector in seven out of the last 12 months.
This in turn has affected the availability of jobs in the sector as companies have consistently cut spending on employees to tide through the stress.
FMCG companies saw their rural sales fall by 4.6 per cent in the first quarter, 3.13 per cent in the second and 6.1 per cent in the third, according to market intelligence firm Bizom. The companies struggled in urban areas too with sales falling 4.7 per cent, 0.6 per cent and 2.1 per cent in the first three quarters.
Volume growth has slowed significantly. An analysis of data compiled by financial services company BNP Paribas showed that most FMCG companies saw an average volume growth in the range of 1–4 per cent.
This has been the result of a combination of high retail inflation, which shot up to 7.44 per cent in one month of the last financial year, and tepid demand in the Indian economy. The expectation of growth in the sector is so low that investor confidence in marquee names has gone down. This year, FMCG giants like ITC and HUL have seen erosion of close to 10 per cent and 15 per cent in share prices respectively.
Focus on Grabbing Eyeballs
Having reduced spending on salaries, FMCG companies have topped up their spending on ads. Even as overall jobs in the FMCG sector have seen a decline in growth, companies are making fresh investments in visibility by emphasising on sales and marketing professionals, according to Sekhar Garisa, CEO of foundit, the job portal whose data showed a slowdown in jobs growth.
Average growth in advertising budgets in FMCG companies have shot up from 7.6 per cent in FY2023 to 31.32 per cent in FY2024. BNP Paribas said in a note recently that FMCG companies will spend more on advertisements in the coming quarters. The note says FMCG companies will need to focus on improving product visibility, especially for new launches as competition remains high from both organised and unorganised players.
Competitive intensity and slowing growth have both impacted companies’ spending on employees. Without a pickup in volume and revenue growth, which in turn will lead to robust profits, it is unlikely that spending on salaries will find its lost pace. To turn their fortunes around, FMCG majors are betting big on ad spends. Will that bear fruit? The coming quarters will show.
