Frugal and prudent consumers held their wallets tightly and made conscious efforts to cut down grocery spend throughout last year. They used their limited money mindfully to often purchase daily use products like rice, tea, milk powder etc., while resisting any impulse-based decisions. As the year proceeded, consumers increasingly felt the pinch of soaring food prices and started to reduce quantities of products consumed on a daily basis as well. A broader pattern emerged as lavish spending styles were replaced with thriftiness. FMCG’s overall growth dropped from 11% in the March quarter of 2016 to 1% in September 2017, according to a retail study administered by Nielsen among 4,500 mom & pop stores spread across the island. The nominal growth of 1% in the FMCG sector was driven by inflation, as volumes dropped.
“Government workers received the first tranche of four-year pay hikes in early 2016, boosting sales across sectors in early 2016,” says Sharang Pant, managing director of Nielsen Sri Lanka.
However, the upsurge in consumption couldn’t be sustained for a longer period, even when state workers received their second tranche payments in 2017. Consumers were deprived from spending due to fiscal tightening measures, higher taxes and increasing food prices mainly due to drought-led supply constraints. In November 2017, the consumer price index – the measure of the change in prices of a basket of consumer goods and services purchased by households – was at 7.6%.
People started cutting down on the consumption of rice, fruits, vegetables, cooking oils and poultry, according to a Nielsen consumer confidence index survey conducted among 100 people from the Western, Central and Southern provinces. “Even in the food and beverages sector, a majority of consumers have stated that either their spending or their consumption had been affected during this period. Around a third of consumers surveyed mentioned that they reduced spending on essentials like milk powder in September 2017,” says Therica Miyanadeniya, director of the Emerging Verticals and Qualitative Research at Nielsen Sri Lanka.
“In an ideal inflationary situation, consumers shift to smaller pack sizes, but we don’t see it happening in Sri Lanka. The limited portfolio consists of only around 3-4 pack sizes, so consumers are left without much of a choice when there is pressure on prices,” adds Pant. The Central Bank also reported a drop in the average debit card transaction value at stores.
Agriculture recorded negative growth of 3.3% during the September 2017 quarter, the lowest since 2010 due to floods and drought. For food companies, failing crops led to supply constraints and rising production costs. Falling margins and a consumption tax (VAT) introduced in 2016 pushed businesses to increase retail prices, which in turn led to shrinking sales.
One in three consumers reduced spending on processed food and beverages like coconut milk, dairy products and malted drinks, according to Nielsen. Listed food company Nestlé Lanka has seen a drop in sales of its products like Nestomalt and Milo.
Around 60% of consumers surveyed by Nielsen said they had reduced spending on impulse products like fizzy drinks, ice cream and chocolate. A sugar tax of 50 cents per gram has resulted in increasing prices and falling demand. Listed Ceylon Cold Stores, which manufactures ice cream and fizzy drinks, saw profits decline 29% in the September quarter, despite revenue growth from its supermarket chain business, which saw incremental sales at new retail outlets and higher customer footfall.
Supermarkets benefitted from growth in basket value driven by rising prices and additional revenue from newly opened stores. Margins were further improved with the removal of deemed VAT, a sales tax that retailers weren’t allowed to pass down to consumers.
The economy, weighed down by the agriculture sector, is also challenged by rising public debt obligations, policy uncertainty and higher global commodity prices. The growth potential of businesses will depend on how soon consumers will fill their shopping carts again.