Consumer spending in the time of covid-19

Overall the Indian Economy might be struggling on account of the pandemic. However, there are interesting changes in consumer behaviour and some sectors are doing well

There is one theory about how the pandemic will change consumption patterns - people will continue to do the same things that they were doing earlier, but they will do them in a different way.

People will continue to eat, but instead of eating in restaurants they will eat at home. They will continue to watch movies, and instead of going to the cinema they will stream it to their homes. Instead of listening to podcasts while driving, they listen while washing dishes.

And instead of eating fried snacks from the roadside cart (or office cafeteria), they will snack on biscuits.

Packaged foods maker Britannia Industries Ltd, on Friday reported a sharp 118.25% jump in its June quarter consolidated net profit to  ₹542.68 crore. Strong demand for its cookies, cakes and biscuits helped the company draw significant sales as more Indian households turned to branded packaged foods during India's turbulent lockdown.

Consolidated revenue grew 26.6% year-on-year to touch ₹3,420.67 crore for the three months ended 30 June, the company said in a filing.

We are in quarterly earnings season now, in India, with public companies releasing results for their April to June quarter. With the lockdown officially starting in India on the 25th of March, and continuing in various forms at least until the beginning of June, this quarter’s results will give a good picture of how the pandemic and the associated lockdown has affected the economy.

Analysts expect Britannia to continue to do well for the rest of the financial year (which lasts until March 31st next year), but foresee challenges to sustain the growth next year.

“We highlight the risk of a potential volume decline in FY22 assuming normalcy returning and consumers spending less time at home," said analysts from ICICI Securities Ltd in a report on 18 July.

According to JM Financial Institutional Securities Ltd, “(Britannia) stock’s performance is contingent on such hyper growth rate continuing for a few more months at least, but we expect that this will finally have to settle down at a lower level once normalcy returns in the country."

Britannia, however, is unfazed, and is considering a capital expenditure of ₹700 crore (₹7 billion, or about $100M) over the next two and half years, banking on sustained demand from rural markets. In an interview with Mint, Britannia Managing Director Varun Berry said,

It was biscuits, but all of the other products also. The biggest growth was in cheese. Bread was a very large growth for us. So bread and cheese were the highest-growing. Rusks grew more than biscuits. Cakes, which go into children’s tiffins, was slow. That’s how it panned out—impulse, and on-the-go categories were slow. Home consumption categories were higher.

And more interestingly,

E-commerce isn’t a very large business for us. It used to be 0.4% of our total business, it has gone to just over maybe 1% now but growing very fast. Because people who have never done online shopping are getting used to buying stuff online. That is a trend which is going to be staying with them.

The picture on how people’s spending patterns will change post the pandemic is only starting to unravel now.

Meanwhile, Hindustan Unilever (or HUL; Unilever’s India unit) announced its results on Tuesday, showing a 4.4% growth in topline and 7% growth in profits, though much of it can be attributed to HUL’s acquisition of Glaxo Smithkline (GSK)’s consumer unit. If the acquisition is taken out, domestic consumer growth actually fell 7%.

Given that HUL is a large conglomerate that sells a large variety of packaged goods, the top line number doesn’t give us that much information. So how much of what did they actually sell?

In a media concall post the announcement of Q1 results, Chairman and Managing Director, Sanjiv Mehta said the products that saw highest demand during the lockdown were coffee, santisers, deep cleaning and Kissan products.

HUL offers prominent coffee brand, BRU, sauces and jams fall under the brand Kissan. Within deep cleaning, the company offers products such as Domex under home care category and Lifebuoy under skin care category. Skin Cleansing led by Lifebuoy delivered strong double digit growth across formats, said Srinivas Phatak, Chief Financial Officer,HUL.

I think we can build a framework that says “people are spending more time at home. Things that people do more of at home will sell more. Things that people do less of at home will sell less”.

Most consumer electronic items targeted at individuals are likely to be used more at home. So our framework tells us that people should be spending more on them. The Economic Times reports that post-lockdown sales in consumer electronics have been unexpectedly good.

LG India, the country’s largest home appliance maker, has equalled last year’s output and is scaling it up by 10-15% for the festive season. Plants are running two shifts and also working Sundays, said Vijay Babu, vice-president, home appliances, LG.

[…]

Dixon, a contract manufacturer for Xiaomi, Samsung and Panasonic, said it will expand capacity for washing machines and televisions by up to 40% due to big orders from clients. “The industry is gung-ho about the festive season due to pick-up in rural markets, several companies reversing their pay cuts or even paying bonuses,” said Sunil Vachani, chairman, Dixon. 

Of course, a lot of this has to do with expected demand in the coming months. Companies did suffer lower sales in the April to June quarter thanks to the lockdown (revenues down by 21-22% according to ET), though they are hopeful that this can be recovered in the next few months.

One sign that sales of electronic goods (including mobiles) is likely to recover early in India is that Amazon has decided have its Prime Day in early August, having postponed it from the original July date thanks to the pandemic. In the US, it is likely to be held in October.

Amazon expects the Prime Day sale to be larger compared to last year and is not worried about the pent-up demand of customers post the nationwide lockdown being exhausted by August.

Unfortunately, not many big consumer electronics firms are listed in India, so we are unlikely go gain much intelligence about the sector from the quarterly earnings season.

Moving beyond quarterly results, a team at Mint conducted an in depth study into how consumer behaviour in India is changing in the wake of the pandemic.

A recent McKinsey survey found that an overwhelming 91% of consumers reported trying a new shopping behaviour. New product categories have emerged overnight. Several existing ones have new health and immunity claims.

For one, dishwashers “have become an actual category” according to Nilesh Gupta of Vijay Sales (as told to Mint). With sales volumes tripling, dishwasher manufacturer Voltas has launched its first online commercial for the hitherto niche product.

Zero based budgeting” is a fashionable management concept nowadays, where rather than deciding budgets for various divisions and projects based on how much was spent last year, companies start from a “zero prior” and work from first principles. In some sense, we can say that the pandemic has led to households starting to practice “zero based budgeting” as well rather than buying the same “basket” each month.

This has meant that people are willing to explore new categories (such as vegetable washes), and some product development is being hastened. Also, with social distancing norms and infection fears, categories that “compete with domestic help” (such as dishwashers and washing machines) are seeing increased spending as well.

The entire Mint piece is worth reading, as it provides different perspectives on how consumer spending is changing.

Elsewhere, Kantar Media conducted a “covid-19 barometer study” and concluded that consumer spending is “not going to return to pre-pandemic behaviour any time soon”. This report in Business Insider that covers the study has some numbers, and quotes.

Soumya Mohanty, Chief Client Officer, South Asia, Insights Division, Kantar, said “Indians are still in the phase between a lockdown and unlock. Some habits are starting to stick – eating healthy, hygiene while new ones around social distancing are emerging.”

We need to remember that some of the supposed green shoots that we saw in June have already started turning to brown. At an aggregate level, the Indian economy isn’t doing great. However, there are pockets that seem to have benefited from massive reset, and change in consumption patterns thanks to the lockdown.

As more companies release their quarterly reports, the picture of how consumer spending is changing will continue to evolve. We will be there to present it to you.