"FMCG products likely to move slower off the shelves": Prabhakar Mundkur on the effects of demonetisation on marketing

That title may seem a little incongruous at first, but once we see the effects of demonetisation - like demand contracting, much like in a recession - it is an easier concept to grasp. Though the symptoms of the two - recession and demonetisation - may be similar, the reasons differ.

Some of symptoms of recession are that businesses cease to expand, GDP falls for two consecutive quarters, the unemployment rate climbs up and house prices decline. We will begin to see all those signs manifest themselves as the lack of cash in a primarily cash-based economy begins to take effect. The entire informal sector of the Indian economy, which accounts for about 45 per cent of the GDP, and nearly 80 per cent of employment, is likely to suffer. This disruption of liquidity can affect the economy both in terms of growth and equity.

Which sectors of the economy are likely to be most affected? Here is a quick analysis.

AUTO

Demand is likely to dip for at least two months although the sale of cars, passenger vehicles and tractors will be less affected. This is because only 35-45 per cent of all two wheeler sales are done through financing while the rest are through banked cash or simply unaccounted. But in the passenger vehicles segment, 75-80 per cent are through financing or down payments. For tractors, 65 per cent of sales are through financing.

FMCG

With liquidity choking up, FMCG products are likely to move slower off the shelves Also the organised retail sector would be affected. In the days after demonetisation was announced we had Mr. Kishore Biyani tell us that almost 65 per cent of Big Bazaar sales were through cash transactions. The local grocer, then, would be close to 100 per cent.

CEMENT AND BUILDING MATERIALS

The real estate sector has been operating on a 'part cash (upto 40 per cent) part cheque' basis. As the real estate sector resists the decline in demand and remains unwilling to bring down prices, construction activity may be affected.

JEWELLERY INDUSTRY

There will be a shift from the unorganised to the organised sector in the jewellery industry.

PAINT INDUSTRY

For paint companies, the cash component of sales deals is 30-40 per cent, while for shops, which have higher retail sales, the cash component could be 70-80 per cent. So the current phase will definitely affect sales.

In the short term, we can see marketers coming under pressure with slowing down sales. Typically, advertising budgets are the first to see a cut when there is a decline in sales or an increase in costs.

But what should marketers ideally do? The first natural reaction is to cut, cut and cut. But there are other options that they could look at for the following reasons:

. Brands that increase advertising during a downturn can improve market share and return on investment.

. Early-buy allowances, extended financing and generous return policies motivate distributors to stock your full product line.

. In tough times, price cuts attract more consumer support than promotions.

A tough environment usually provides an unusual opportunity to differentiate oneself and stand out in the crowd, but it is difficult to get senior management on board with that kind of strategy. For companies that do stay the course and continue to advertise into a tough time of slowing demand, the key is, perhaps, to craft messages that reflect the times and describe how their product or service benefits the consumer.

Many consumers may be scared of the negativity generated by tough economic conditions and might be receptive to more upbeat messages. For example, you could use positive messages to genuinely help consumers to feel upbeat and tell them that the current phase is a passing one. Gold's Gym, for example, had one spot that said, 'You can't control the economy but you can control how many push-ups you do... take control where you can, and we can help you.'

A shrinking market will shrink advertising. But maybe the clever marketers will take advantage to make themselves heard when there is not too much noise and win over consumers that they don't currently have.

(The author is chief mentor, HGS Interactive)