Last week, when Sanjiv Mehta, managing director and CEO of the country’s largest fast-moving consumer goods (FMCG) company Hindustan Unilever, presented its quarterly numbers he couldn’t help highlighting the consumption trends in the hinterlands. Mehta, a seasoned consumer goods professional having witnessed some of the greatest economic crises in recent times, stressed upon the mundane situation that companies like his are currently facing in the rural market.
If the numbers are to go by, his concerns are surely not unfounded. In the country’s vast FMCG market, rural households play an important role - contributing some 36 per cent of the Rs 5 trillion annual turnover. And was growing by leaps and bounds - nearly double the rate of urban areas - between 2014 and mid-2020.
That, however, changed with the COVID pandemic disrupting supply chains across the world and initiating an inflationary cycle that has lasted for over two years now.
Consumption of daily essentials - from soaps, detergents and shampoos to wafers, tea and edible oil - have taken a major hit, resulting in a slowdown that begun in late-2020. In the July-September quarter, for instance, FMCG sales in rural market grew by a meagre 2.5 per cent, in comparison to 8 per cent growth in urban areas.
Moreover, volume offtake in rural areas too shrank by a steep 9 per cent, in comparison to 3 per cent de-growth recorded in urban market, as showed by data from Nielsen. As a result, the overall FMCG market witnessed a 5 per cent decline in volumes. Revenue, however, surged 6 per cent on account of price hikes that FMCG companies like HUL, Nestle and ITC effected to pass on some of the growing cost burden.
According to Mehta, repeated price hikes by manufacturers is a key factor in faltering rural volumes. While rural households may not be cutting down on their budgets significantly, lowering of grammage in packs is leading to decline in overall volume consumption.
As per a recent analysis by Edelweiss Securities (now Novuma), continuous rise in prices has put rural households in a challenging situation as most of them have limited means. According to its analysts, companies like HUL, Bajaj Consumer, Colgate-Palmolive, Emami, among others, are feeling the heat more than others like Nestle and Britannia due their exposure in categories, where rural consumers are more exposed.
While Nestle India’s key segments like instant noodles (Maggi) are, on the contrary, performing better in the hinterlands. Its presence in rural market has traditionally been lower than other leading players like HUL and ITC. Thus, Nestle’s recent initiatives like expanding beyond the top 50,000 villages have borne fruits.
According to Suresh Narayanan, Chairman and Managing Director of Nestle India, the company benefitted due to its smaller base in rural. “I have a lower base in rural markets, and I think we have accelerated our rural strategy that is beginning to uptake and penetration is happening in those markets. Please do not get carried away by percentage numbers because I am speaking of a low base. If you compare me to an HUL or a Dabur, they have got a much higher rural market. Their plans have already been in rural India for a while and my brands are just getting into rural India,” he said during a recent earnings call.
With crude palm oil prices coming down and monsoon over, industry experts are now hoping for a bounce back in rural consumption - crucial for an overall recovery of the consumer staples market. Some analysts, however, are keeping their fingers crossed, saying a full recovery of consumption in poorer households is still some time away.
“Rural is expected to remain under stress as inflationary pressure and weak rainfall in popular states have impacted incomes and spending ability,” Edelweiss noted.
Also read: Dabur’s got its Badshah on-board: Acquires majority stake in the prominent masala brand
Also read: ITC to HUL, how FMCG majors beat the slowdown blues in Q2, FY23