Rural growth has remained weak for the second straight quarter of FY24 for most fast-moving consumer goods (FMCG) companies, pointing to a lag in recovery in the hinterlands. A recovery in rural areas is critical for FMCG companies, as it contributes to over a third of their total sales. A thriving rural economy is also good for FMCG companies as the possibility of improving overall FMCG penetration grows, experts tracking the market said.While the June quarter of FY24 was plagued by unseasonal rains, the September quarter has seen uneven rainfall and food inflationary pressures.
These factors have hurt consumption in rural areas, firms such as Hindustan Unilever (HUL), Marico, Dabur and Godrej Consumer Products (GCPL) said.In contrast, urban demand has remained resilient, these companies said, providing much-needed respite amid a challenging environment. For perspective, crude has been inching up in the last one month, following a production cut by OPEC and Russia. The ongoing Israel-Hamas war in Gaza has only added to the woes, with benchmark Brent crude remaining above $93 to a barrel.
According to NielsenIQ data sourced from the industry, urban volume growth was ahead of both rural volume growth and the overall FMCG volume growth by 200-300 basis points in Q2. While urban volume growth came in at 10% in the September quarter, rural volume growth was 7% and the overall FMCG volume growth was 8%, NielsenIQ data shows.“FMCG demand is likely to continue, albeit gradually, with tailwinds from the upcoming festive season. We are seeing a very resilient consumer when it comes to urban metros,” Rohit Jawa, HUL’s CEO & MD, said in a virtual briefing on Thursday.
Jawa cautioned that global commodity prices, including crude, remained volatile, with the company keeping a close watch on crop output and reservoir levels following uneven monsoon distribution this year.“During the September quarter, demand trends largely mirrored the trends observed in the preceding quarter. Instances of rising food prices and below-normal rainfall distribution in some regions seemed to impede the anticipated recovery in rural demand,” Marico said.Dabur India said FMCG consumption was showing improvement year-on-year, but weather uncertainty had impacted demand in rural areas.“The festive season is later than normal this year, due to which offtake related to festivals is delayed and will carry forward to next quarter,” Dabur said.
GCPL said that it was adversely impacted by weak macros and weather conditions in Q2. It saw a better second half of the year, the company said, supported by a gradual pick up in volume growth.While Nestle India and ITC have bucked the slowdown trend in Q2, analysts say these companies are not comparable with home and personal care majors such as HUL, GCPL, Dabur and Marico, where topline growth has been impacted by a combination of weak pricing power as well as poor volume growth.
“Nestle is an urban-focused company, where consumers have been largely bouyant. ITC, on the other hand, has a large food business, which has helped these firms buck the slowdown trend visible in home and personal care,” Sachin Bobade, vice-president, research at brokerage Dolat Capital, said.“Domestic sales grew by double digits (in the September quarter), on account of mix, volume and price. Key brands continued to perform well, led by Kitkat, Nescafe Classic and Nescafe Sunrise, supported by Munch and Milkmaid,” Suresh Narayanan, chairman and MD of Nestle India, said.
In a statement, ITC said that it saw robust growth in urban and rural markets in its FMCG business in Q2. This came despite a high base in the year-ago period and enhanced distribution expansion as well as a strong last-mile execution.“Nestle is focusing on growth in various categories by stepping up launches, promotions and penetration. To achieve double-digit growth (volume-led), the company is strengthening the positioning of existing brands and deepening penetration,” Abneesh Roy, executive director, Nuvama Institutional Equities, said.Both Nestle and ITC said that they had accelerated their focus on innovation and renovation launching many new products through the year and during the September quarter.