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“Urban and premium categories maintained their steady pace of growth. However, recovery in rural demand was not as discernible as retail inflation stayed at elevated levels,” reads a line from Marico’s December quarter update. “During the quarter, the Indian FMCG sector witnessed slow growth driven by poor rural consumption and a slowdown post the festive season,” adds Godrej Consumer Products.
If the December quarter was supposed to yield some respite in the rural economy, due to better agricultural output, a slight recovery in rural wage growth and a pick-up in the real estate sector, then that remained absent. Worse, this showing is even as the government’s free foodgrain programme was in place. That is, even with some basic food provided for, rural consumption is not reviving.
For investors, this means that FMCG companies’ sales growth will not get a much required push to volume growth. Marico has guided for a mid-single-digit volume growth while Godrej expects a low-single-digit growth. And, this is despite inflation easing during the quarter, giving some leeway in growing volumes by adding grams to low unit packs that sell at fixed prices. They will remain focused on urban-focused consumer companies such as Nestle India or the quick service restaurant market.
However, deflation in input costs also mean that companies will get some relief on the gross margin front (sales less raw material cost), that can support marketing activities or margin growth or a combination of both. It depends on how the management wants to play the sales growth versus profitability combination.
However, rural India’s weak appetite for basic consumption goods means companies will continue to rely on urban India and premium products to drive sales and margins. In fact, the resilience in these pockets means FMCG companies may simply be content to wait for rural demand to recover instead of taking measures such as price cuts or promotions to drive up sales.
Alternatively, they perceive that even such measures won’t move the sales needle much. That then poses a big question about the health of the rural consumer. If basic items such as hair oil and soaps are seeing a slowdown in demand, then it’s certainly a sign of rural distress. Hopes of a revival have been talked for long and have been carried over from Kharif to the Rabi season but the consumption numbers don’t lie.
One of the problem areas may be that bigger companies in the organised sector are faring much better than the smaller ones or even the unorganised sector. The latter two form one of the sources of rural employment, apart from agricultural and construction work. Even the surge in real estate demand does not seem to be creating work in enough numbers to spread cheer in the countryside. Inflation too is eating into the disposable income available to rural consumers. Once it comes down by a few more percentage points, then maybe rural demand could see some improvement.
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