Stay away from FMCG they said. It seemed pretty obvious. Inflation is high, consumers will buy lesser, companies will reduce prices, but raw materials are costlier, so profits will fall, and so will stocks.
And that did come true. From October 2021 to June 2022, FMCG underperformed the Nifty 50 dramatically. But that’s not the point!
There were pockets even during this time that could have made money! Over the last year the top 5 performing stocks from the sector have been:
Varun Beverages: +70%
United Spirits: +25%
United Breweries: +17%
Radico Khaitan: +16%
See a common thread in the winners? They all make products that don't see much of a downfall in inflationary times. Varun Beverages is a franchisee of Pepsi. ITC is the king of cigarettes. United Spirits, United Beverages and Radico Khaitan make alcoholic beverages. All these products are inflation-proof!
But that’s in the past - what now?
Recent trends are pretty simple
The Russia-Ukraine conflict has put several commodities in short supply. Wheat, corn and sunflower oil primarily. These three account for a lot of the raw materials used in packaged food products.
High crude prices increase the cost of manufacturing, packaging and transportation.
Overall, input cost prices for FMCG have increased by 40-60%. Two things companies can do here:
Increase prices; but with inflation increasing for everything, after a point, consumers either buy lesser, move to cheaper brands, or even substitute products.
Reduce sizes; slyly give lesser for the same price, consumers don’t really realise they’re getting lesser and continue buying.
Although companies financials (volume, sales and margins) do get negatively impacted, the key is in knowing that the adversity is not uniform.
Same same but different
Essential products are usually shielded from price increases compared to products that can be easily substituted.
What factors should one look at to know if a stock is more inflation-proof compared to others?
How essential is the product? - Can you do with lesser milk? Probably not. Lesser cheese? Perhaps.
How strong is the brand? - Would you buy anything other than Parle-G? Would you eat anything other than Maggi when you’re craving it?
Are there substitutes available for the product or brand? - Can you think of an alternate for Dabur Chyawanprash?
Would a large price increase make a difference in you buying that brand? - You would perhaps shift from a Wheel detergent to some other bar available at a lower price. But you would still buy a Good Knight perhaps.
Market share of products do reflect answers for a lot of the questions above.
Horlicks at 50% in milk additives
ITC at 75% in cigarettes
Maggi at 60% in instant noodles
Nescafe at 55% in instant coffee
Good Knight at 60% in mosquito repellents
Chyawanprash at 60% in whatever the category is called!
And then there are conglomerates like HUL, which have products and brands in the same category for different segments. So even when consumers buy cheaper, these companies don’t end up losing market share at a company level.
Surf Excel is too expensive? Buy Wheel instead. Taj Mahal tea too posh now? Brooke Bond Taaza makes the cut (or cup)! In any case HUL makes a sale.
How does it all stack up?
Differently! Inflationary pressures aren’t the same for all companies. Products, brands and strategies make a big difference in how they are able to pass costs on even maintain sales and profits.
To a large extent, the performance of stocks over the last year has been in tandem with the product and strategy strength. While the sector may have been avoidable for obvious reasons, there are always pockets where money can be made!
Biscuits, breads, dairy
Good Day, Marie, Tiger, Bourbon, Pure Magic
Monopoly in biscuits, multiple products at different price points
Oral care, personal care
Hair care, health supplements, personal care, oral care, home care
Amla, Vatika, Chyawanprash, Honey, Hajmola, Real, Meswak, Babool, Odomos
Products with lesser substitutes, strong brand and positioning
BoroPlus, Fair and Handsome, Navratna, Zandu
Home care, personal care
Good Knight, Cinthol, HIT
Wheel, Axe, Boost, Red Label, Taj Mahal, Bru, Close Up, Dove, Horlicks, Kissan, Knorr, Kwality Wall’s, Lakme, Lifebuoy, Lipton, Lux, Pears, Pepsodent, Pond’s, Rexona, Rin, Surf Excel, Vaseline, Vim
Umbrella of brands, have a substitute for most products under the same group, excellent segmentation
Food, personal care, education, cigarettes
Aashirvaad, Sunfeast, Classmate, Classic, Wills Navy Cut
Monopoly in cigarettes, which are inflation-proof
Hair care, Food
Parachute, Saffola, Nihar
Food, Dairy, Beverages
Nescafe, KitKat, Munch, Maggi
Products and brands that can’t be easily replaced or substituted
Pampers, Ariel, Tide, Whisper, Gillette, Head & Shoulders, Pantene, Oral-B, Vicks
Essential products, strong brands
Rampur, 8 PM, Magic Moments, Contessa
Alcohol is inflation-proof
Tata Consumer Products
Food and Beverage
Tata Tea, Tetley, Tata Coffee, Himalayan, Tata Salt, Starbucks
Premium products have lesser price sensitivity
Kingfisher, Heineken, London Pilsner
Alcohol is inflation-proof
Director’s Special, VAT 69, Black Dog, Black Label, McDowell’s, Royal Challenge, Antiquity, Smirnoff, Tanqueray
Alcohol is inflation-proof
Pepsi, Mountain Dew, Mirinda, 7up, Lipton, Tropicana, Aquafina
Strong brands, inflation-proof products, low cost pressures