The June quarter of the 2023-24 financial year (Q1FY24) could bring cheer in parts for fast-moving consumer goods (FMCG) companies. While commodity inflation has moderated, consumer demand is yet to recover across markets, companies say.
While urban growth has been stable, rural growth has been weak in Q1, top FMCG companies such as Marico said in their quarterly updates last week. Dabur says that demand trends have shown signs of improvement in the June quarter due to a reduction in commodity inflation and Godrej Consumer says that the market has been steady.
Data by retail intelligence platform Bizom, however, points to a decline of 4.6% in overall FMCG sales growth in Q1, due to unseasonal rains, weather uncertainty and erratic purchase behaviour, notably in rural areas. Q1 is also the second weakest period in the last five quarters, according to Bizom data, coming right after double-digit sales growth seen in the March quarter. The FMCG sector had last seen a sharp sales decline of 3.7% in the December quarter due to inflationary pressures, which had hurt consumer demand, Bizom said.
“After a build-up in the March quarter, the anticipated rural revival has been slow in Q1,” says Sachin Bobade, vice-president, research at Mumbai-based brokerage Dolat Capital.
“The crop loss and damage due to unseasonal rains in April-May has hurt farm incomes. While June was better from a demand perspective according to company commentary, rural growth in Q1 will still be muted,” he says.
For perspective, FMCG companies derive over a third of their sales from rural areas. It is an important metric to gauge how consumers in the hinterlands are behaving and what are their purchase patterns.
Lower offtakes in the April-June period, says Bizom, become visible when sales data is compared across quarters. For instance, four categories have reported a decline in sales in Q1 including packaged foods, confectionery, personal care and beverages as opposed to only personal care in Q4. (See chart)
While beverage sales slumped because of a cool summer this year, the decline seen in packaged foods and confectionery and a sharper decline in personal care in Q1 are a cause for concern, say experts.
Crisil’s senior director Anuj Sethi says that there is weakness in the market from a consumption perspective. He says that rural recovery will be fragile and slow in FY24.
“Whatever growth is visible is volume-led than price-led because companies have passed on gains to consumers due to moderating inflation,” he says.
The country’s largest consumer goods company, Hindustan Unilever (HUL), has taken modest price cuts across its product portfolio in the June quarter, it said recently, and is expected to pass on more price gains in the months ahead to improve sales offtake.
Dabur says that it expects consumer spending to continue improving as commodity inflation moderates further. With the monsoon season having kicked off in time, the expectation is that the second half of the year will be better than the first half in terms of consumption.