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Once growing at a fast clip, the rural market and the mass-market consumer goods categories have been under stress for three years. While green shoots are visible, with rural growth returning for FMCG and two-wheelers, manufacturers’ hopes are riding on a good monsoon and government spending
Ever since the Covid-19 pandemic introduced the work-from-home routine, Ramesh Sharma (name changed on request), a corporate professional living in Delhi, started spending more on his food and groceries. Sharma, 45, has always been particular about the quality of his diet. But now, he buys more organic groceries and cold-pressed cooking oils and juices even though they are costlier and add to the general inflation in his food and grocery bill. Meanwhile, domestic worker Kusum is scouting for a second-hand refrigerator for her family of five. After multiple repairs, her fridge stopped working this summer. Kusum’s husband is a driver, but they don’t have Rs 10,000 for a new fridge. Her budget: Rs 3,000-4,000 for a second-hand one. With rising expenses, buying new appliances remains a dream.
" The company’s strategy has been penetration-led volume growth. So, I wantto get back to volume growth as quickly as possible and not linger on with just value growth "
Suresh Narayanan
CMD
Nestlé India
Consumers like Sharma and Kusum are familiar to Kamal Nandi, Business Head & EVP of Godrej Appliances. A veteran of the consumer durables industry who tracks purchasing patterns, Nandi says the inflationary cycle that began in 2021 has throttled demand for mass-market home appliances. “For the past two to three years, the mass-market categories of essential appliances like refrigerators and air coolers have been subdued,” he says.
In refrigerators, sales of single-door direct cool models have been contracting 5-10% a year since the pandemic. These models account for 70% of volumes. “Whatever growth was recorded was in the premium segment. Last year (2023), the refrigerator market remained flat as the mass segment de-grew by 6-7% [by volume]. In 2022, the mass segment was flat, but premium grew by 20-22%,” Nandi says. Overall growth was 7%, against 10% in 2021.
The picture is not much different for TVs: Sales of 32-inch or smaller sets, the preferred choice of over 80% of Indian consumers, are under severe stress. Avneet Singh Marwah, CEO of Super Plastronics Pvt. Ltd, which makes smart TVs under licence for popular brands such as Kodak, Thomson and Blaupunkt, says sales of smart TVs larger than 40 inches have overtaken 32-inch TVs post-Covid. “Demand for 55-inch and larger smart TVs is the highest, followed by 40- and 42-inch TVs, while the 32-inch models are de-growing,” he says. In 2023, TV sales had declined by up to 15% year-on-year due to subdued demand in smaller (cheaper) categories. Marwah says the current demand is primarily from households that are upgrading.
The trend: practically no demand from poorer households, whose incomes do not give them leeway for discretionary spends. But affluent consumers continue to buy. Ditto in rural areas, where most buyers are not making purchases while a handful opts for premium products.
The home refrigerator market remained flat in 2023 at Rs 25,000 crore or 13 million units after growing 8-10% between 2010 and 2019. It sank in 2020 and perked up in 2022 on the back of premium models. The TV market shrank to 12 million units in 2023 from 15 million in 2019.
The story is different for home air-conditioners. Although ACs are considered expensive consumer goods that add to electricity bills, the market is surging, helped by the low household penetration of only 7%. (While some 80% of the households have TVs, household penetration of refrigerators is about 33%.)
Industry veterans such as Nandi and B. Thiagarajan, MD of AC major Blue Star, say sales are growing at 20-30% this summer.
Daily essentials such as branded packaged foods and personal care items are also feeling the chill. Take India’s branded FMCG market, valued at Rs 5 lakh crore and ranked the world’s fourth largest. With consumers spending less, the volume offtake has continuously fallen since early 2022. While offtake in urban markets had slowed significantly in recent quarters, the steep decline in the rural market was a drag on overall growth. Between the March and December quarters of 2022, FMCG volumes in the rural market had shrunk by 6-10% every quarter. Rural India, which has nearly 70% of India’s population, accounts for 36% of FMCG sales. While rural consumption has shown signs of recovery since 2023, most leading FMCG players remain “cautiously optimistic”.
" Monsoon impacts the agri economy and rural consumption. And I think in that sense, most likely, the worst is past us, and from here onwards, we do see a gradual recovery in rural consumption "
Rohit Jawa
CEO & MD
HUL
Hindustan Unilever Ltd (HUL), the country’s largest FMCG firm, reported a 5.7% drop in its net profit in the March quarter to Rs 2,406 crore, while revenue stood almost flat at Rs 14,693 crore. HUL has been marking up prices during the past two years to offset the faltering volume offtake. Now, it is passing on the benefits of lower commodity prices, either by reducing MRP or increasing pack size. This impacted its top-line growth not only for the quarter but for FY24. While its revenue for the year was Rs 59,579 crore, or 2% higher than the Rs 58,154 crore it had posted in FY23, its net profit margin of 16.73% was the lowest since FY19, the year before the pandemic.
Rohit Jawa, CEO & MD of HUL, notes that rural consumption is recovering, but urban has been more resilient, especially at the premium level. “Over the last few years, because the inflation or price increases are quite sizeable, they had an impact on rural,” Jawa said in a post-earnings call in April.
He said that, in FY24, “volume recovery remained gradual due to high levels of cumulative inflation over the past few years, coupled with a weak monsoon affecting rural demand. Urban, organised trade and premium portfolio stayed resilient and led growth for FMCG overall”. HUL is now betting on spending more to lure urban consumers towards its premium portfolio.
“ Despite some recovery in this segment post-Covid-19, the lowest 20% still face challenges in returning to their pre-pandemic financial status "
Rajesh Shukla
MD & CEO
PRICE
HUL’s peers are facing similar challenges. Poor offtake by low-income households in urban and, especially, rural areas is hurting their sales growth. The crisis is severe in the hinterlands, where incomes are lower than in urban areas.
Suresh Narayanan, Chairman & MD of Nestlé India, says the food and beverages major is ramping up its rural distribution and getting into smaller packs as it is “still impacted by inflation”. “The company’s strategy has been penetration-led volume growth. So, I want to get back to volume growth as strongly and quickly as possible and not linger on with just value growth,” he says.
Nestlé India, a subsidiary of Swiss F&B giant Nestlé S.A., aims to increase its direct reach to 6 million outlets in the next four or five years, up from the current 5.1 million. Nestlé India, which has relatively low exposure to the rural market, grew its volume offtake even during the worst period of 2022 and 2023, when most of its peers registered subdued growth.
Narayanan says Nestlé’s focus on growing its rural reach helped. Urban-focussed Nestlé used to get some 10% of its sales from the rural market in 2015. Over time, its share has grown to over 20% as it has increased its distribution reach from 20,000 villages in 2018 to 200,000 by early 2024.
" In the past few years, vehicle prices at the entry-level segment went up much faster than buyers’ income
levels [of that segment]… Further, the inflation scenario resulted in less money for mass-market consumers "
R.C. Bhargava
Chairman
Maruti Suzuki India Ltd
The auto sales numbers show diverging consumption trends among poorer and affluent households. Sales of two-wheelers and passenger cars were affected similarly: entry-level passenger cars have few takers, while consumers flock to dealerships to drive away in (costlier) SUVs. In April-May, sales of SUVs jumped 19.4% year-on-year, extending its lead over all other passenger car segments as domestic sales grew to 362,212 units.
In comparison, during the first two months of FY25, overall passenger car sales, excluding SUVs, declined 17.4% YoY, while sales of mini cars were down 18.1% and compact cars 15%. In April-May 2024, domestic sales of Maruti Suzuki’s mini cars, the Alto and S-Presso, declined 18.7%, and sales of compact hatchbacks, including some popular models such as the Swift, Baleno, Dzire, and WagonR, fell 15%. Maruti’s overall passenger car sales, excluding SUVs, declined 15.2%. But its SUV sales jumped 33.5%.
R.C. Bhargava, Chairman of India’s largest carmaker Maruti Suzuki, says the company had to mark up prices of entry-level cars. “In the past few years, vehicle prices at the entry-level segment went up much faster than buyers’ income levels [of that segment]… Further, the overall inflation scenario resulted in less money for mass-market consumers,” he says. Bhargava says the entry-level car segment can have healthy growth when two-wheeler users can upgrade, but that is still some time away.
The two-wheeler market has been giving manufacturers and dealers sleepless nights as demand for entry-level models has been badly affected in rural India. Manish Raj Singhania, President of the Federation of Automobile Dealers Associations, says the premium end has been doing well. “Anything premium—be it two-wheelers or passenger cars—was doing very well [for the past few years]. That was not a cause of worry. We were worried over the demand in entry-level segments,” says Singhania. After falling for several quarters, sales of two-wheelers, especially in the entry-level segment (up to 125cc), have grown since the festive season in October.
Singhania says people suffered during the pandemic, with many losing jobs and savings. Thus, despite being a necessity in the hinterlands, sales of small cars have been hit. Poor sales in the rural market also affected overall industry growth. While demand for entry-level cars has fallen, SUVs, considered premium, have taken the lead and captured nearly 64% of the passenger vehicle market in India. “Also, there has been a significant rise in prices of entry-level cars. But we expect the demand to come back, albeit slowly,” he says.
The gap between household types is widening. Gautam Duggad, Head of research for institutional equities at Motilal Oswal Financial Services, says weak growth in rural consumption during the past two years was primarily due to lower disposable income growth and poor monsoons.
Rajesh Shukla, MD and CEO of People Research on India’s Consumer Economy (PRICE), says the pandemic has significantly impacted the bottom 60% of India’s income pyramid, eroding savings while increasing debt. “Despite some recovery in this segment post-Covid-19, the lowest 20% still face challenges in returning to their pre-pandemic financial status,” he says. This group, primarily consumers of low-end two-wheelers and FMCG products, now thinks only about essential spending, emergency savings, and repaying debt.
" Aspiration and relevance are increasing in rural areas, but affordability remains challenging. We aim to crack affordability, which we see as a key driver for growth in these markets "
Sudhir Sitapati
MD & CEO
GCPL
High inflation and limited job openings are not helping matters.
PRICE’s ICE 360° surveys show that the average annual household income among the poorest 20% has fallen by 21% from Rs 1.4 lakh in 2016 to Rs 1.1 lakh in 2023. If adjusted for inflation, the real income levels in 2023 are even lower. The average annual household income of the upper middle class has increased by 33% and that of the richest 20% by 51%.
“The Indian economy is witnessing a significant shift towards premiumisation, driven primarily by the large middle class and affluent consumers who prefer high-end products in segments such as luxury cars, upscale houses, leisure holiday trips, high-end apparel, and personal care,” Shukla says. Growth in premium consumption is not confined to metropolitan elites; the aspirational households in boom towns, niche cities, and developed rural areas contribute significantly to this trend.
The financial distress in rural households has hurt manufacturers of consumer products across sectors. Data from Motilal Oswal shows that real agricultural wages contracted by 0.4% in FY24 and 0.8% in the March quarter. Real non-farm wages contracted by 0.1% for the third successive year in FY24, following a contraction of 1.1% in FY23. During the past three years (FY22-FY24), urban consumption has outpaced rural consumption in each quarter, in contrast to FY20-FY21, when rural consumption grew faster.
Madan Sabnavis, Chief Economist at Bank of Baroda, says high inflation and rising prices have kept demand low. “Demand has been muted in rural and urban areas; demand has come from only one segment. People are spending more on services than goods and sectors such as tourism and hospitality, but here, too, it is only the middle- and high-income groups that are spending,” he says.
Sabnavis says bank credit for other personal loans has also been increasing by double digits, and people seem to be borrowing for consumption. Net household savings, which touched a high of Rs 23.29 lakh crore in FY22 as the pandemic-led lockdown and mobility restrictions dampened consumption, have, however, fallen sharply since then due to various factors, including the release of pent-up demand, more credit demand, and the use of savings to fund current expenditure.
Per NSO data, gross financial savings of households rose nearly 14% to Rs 29.73 lakh crore in FY23 from Rs 26.11 lakh crore in FY22. Of this, savings in the form of gold and silver ornaments rose to Rs 63,397 crore in FY23 from Rs 61,327 crore in FY22. But financial liabilities of households rose to Rs 15.57 lakh crore in FY23, a 73% jump from Rs 8.99 lakh crore in FY22.
" We have not seen any change, be it in consumption or sales, from rural India. Amul has penetrated rural India very deeply and gets 38% of its sales from centres with a population of fewer than 20,000 "
Jayen Mehta
MD
GCMMF (Amul)
Net household savings in financial instruments fell to Rs 14.16 lakh crore in FY23 from Rs 17.12 lakh crore in the previous fiscal, a multi-year low. Price rises, or increases in the cost of living, have also impacted spending capabilities for many households. Retail inflation has remained above the Reserve Bank of India’s target of 4% (with a leeway of two percentage points either way) for as many as 56 months up to May this year.
According to some, the problem is deeper-rooted. “Demonetisation and implementation of GST during 2016-2017 hurt the MSMEs, which support a significant portion of livelihoods… then came the pandemic,” says a former FMCG industry executive who now advises leading corporates.
While a full-fledged recovery in demand, especially from rural and low-income households, may be some time away, things are looking up. Sanjiv Puri, President of the Confederation of Indian Industry (CII), says things are looking up. “We are seeing some green shoots of a pick-up in the rural economy. The monsoon is better, which will help have better crops and this augurs well for the rural economy,” he said at a press conference in mid-June.
Sales of two-wheelers at the dealer level have grown by 33% in April, albeit on a low base, continuing a slow recovery that began last October. Maruti Suzuki’s Bhargava says it may take over two years for consumers to return to the small-car market. “Small-car sales will revive after the two-wheeler volumes reclaim their levels before BSVI came into force and prices went up. I guess we have to wait at least till late 2026 before customers are back as the impact of these high prices will be absorbed by the increase in the purchasing power of people in that category,” he says.
In the FMCG market, demand from rural households is gaining pace. The latest data from Nielsen IQ shows that while volume offtake in the rural market remained muted till March 2023, volumes have begun to grow. From 4% last July, rural volumes have grown 5.8% in December and at a relatively fair rate of 7.6% in the March quarter. In fact, in that quarter, volume growth in the rural market outpaced the urban growth (5.7%) after more than three years.
Mohit Malhotra, CEO of Dabur India, which has greater exposure to the rural market than its peers, is riding the wave. He says there was an uptick in rural consumption in the March quarter, with rural growth ahead of urban for the first time in three years. “Rural growth is kind of coming back. We’ve seen 120-150 basis points improvement in rural India. While urban growth is almost the same or a little bit down, rural growth is picking up, and that’s happening sequentially in the two to three months we have seen,” Malhotra says.
From contracting at a rate of 5%, rural growth is now closing towards 6% or growing at 130 basis points ahead of the urban rate, Malhotra says. “We are optimistic that with the expected normal monsoons, improving macroeconomic indicators, government spending, and lower inflation, FMCG demand will see a gradual uptick primarily driven by rural, [and] that augurs well for Dabur,” he says.
According to Sudhir Sitapati, MD & CEO of Godrej Consumer Products Ltd (GCPL), the company has launched a drive to grow rural sales. “One of the areas we are focussing on is rural distribution, particularly for new categories… Aspiration and relevance are increasing in rural areas, but affordability remains challenging. We aim to crack affordability, which we see as a key driver for growth in these markets,” he says.
Others like Nestlé’s Narayanan say the market will be watching out for a good monsoon, and with a new government in place, some re-injection of money into the market will help revive demand.
" We’ve seen 120-150 basis points improvement in rural India. While urban growth is almost the same or a little bit down, rural growth is picking up, and that’s happening sequentially in the two to three months we have seen "
Mohit Malhotra
CEO
Dabur India
HUL’s Jawa is also banking on a better monsoon. “Monsoon does have an impact, as we all know. It might not be the only impact, but it impacts the agri economy and rural consumption. And I think in that sense, most likely, the worst is past us, and from here onwards, we do see a gradual recovery in rural consumption,” he said in the April earnings call. He expects urban consumption to remain “more resilient, especially at the premium end”.
The one brand that is not worried is Amul, whether in rural or urban India. Demand for its milk and milk products is steady. On June 3, it marked up retail prices of milk. Jayen S. Mehta, MD of Gujarat Cooperative Milk Marketing Federation, which owns Amul, says, “We have not seen any change, be it in consumption or sales, from rural India.”
Mehta says Amul has penetrated rural India very deeply and gets 38% of its sales from centres with a population of fewer than 20,000.
Challenges, however, remain. Repeated increases in milk prices have added to the overall food inflation as value-added dairy products have become costlier. Between July 2021 and June 2024, the price of packaged milk has gone up by 24.5%. Overall, food inflation continues to remain a concern for consumer goods makers. In May, CPI inflation moderated to 4.75%, down from 4.8% in April. But food inflation has stayed above 8.5% for four months up to May 2024.
" We are seeing some green shoots of a pick-up in the rural economy. The monsoon is better which will help have
better crops and this augurs well for the rural economy "
Sanjiv Puri
President
CII
Dipti Deshpande, Principal Economist at CRISIL, says, “In May, the food inflation rate remained unchanged at 8.7% as inflation in cereals and pulses rose unexpectedly. We expect some softening from June due to a high base effect.”
Meanwhile, white goods makers such as Godrej are sensing a groundswell of demand in the mass-market categories, which Nandi says are now on par with premium ones. But they would like the government to lower taxes on electronics and appliances to make them more affordable. The industry wants GST on large appliances to be lowered from 28% to 18%.
“Now, with the election verdict, it is expected that the government will try to prop up rural consumption through some populist measures in the Budget,” says Duggad of Motilal Oswal. Leading players are keeping their fingers crossed: inflation, shifting consumer preferences, and weather-related disruptions could limit the revival.
“Last year, companies hoped demand would recover after the rains, but it did not happen. Tractor and two-wheeler sales continue to remain low. The expectation is that demand will recover further this year due to some pent-up demand and the expectation of a good monsoon,” says Sabnavis.
Analysts at Motilal Oswal are more cautious. While hopes may be running high and the rural economy—based on its indicators—may not decline again this year, it may be challenging to grow more than 5% in FY25.
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