There is an interesting trend showing up within fast-moving consumer goods (FMCG) companies. While volume growth, especially, rural volume growth, has been sluggish, earnings before interest tax depreciation and amortisation (Ebitda) margins, which is a measure of profitability for companies, remains strong. This has been on account of a moderation in commodity prices as well as strict cost-control measures initiated by firms.
While companies claim they are investing in their brands to shore up volume growth, the numbers tell a different story.
In the last one year, rural volume growth for the domestic FMCG market has inched up from a decline of 3.6% in the September 2022 quarter to 7% in the September quarter this year, according to Nielsen data sourced from the industry. (See chart)
Ebitda margins, on the other hand, have moved up from 26% last year to nearly 28% now, pointing to a wariness of companies to sacrifice margins for growth, sector experts say. Ebitda margins have been derived from an aggregrate of 13 FMCG companies, compiled by FE Research Bureau.
While FMCG firms, from Hindustan Unilever (HUL) to Godrej Consumer (GCPL), Dabur, Marico and Britannia, say they have been passing on commodity price gains in soaps, detergents, hair oils and biscuits, it is not showing in rural volume growth numbers, which continue to be lower than urban volume growth.
According to Nielsen data sourced from the industry, urban volume growth stands at 10% in the September 2023 quarter. It was 1.7% a year ago, data from the research agency shows. Companies argue that benefits in terms of price cuts will show up with a lag.
“Pricing cuts taken by frontline FMCG companies to pass on value to consumers should aid recovery and volume growth over the next few quarters,” Saugata Gupta, MD & CEO, Marico, said during the company’s earnings call last week.
“FMCG consumption is showing improvement, but the recovery is gradual. The festive season is also later this year, due to which offtakes related to festivals will be delayed,” Mohit Malhotra, CEO, Dabur India, said. As G Chokkalingam, founder of Mumbai-based Equinomics Research and Advisory, explains, for the domestic FMCG market to log strong double-digit volume growth, the rural markets have to report stronger volume growth numbers than urban markets.
“Traditionally, rural markets have grown ahead of urban markets within FMCG. We are now seeing a trend where the urban markets have been ahead of the rural markets from a volume perspective for a few quarters now. While factors such as inflationary pressures and weather uncertainty have played their part in hurting rural demand, companies need to focus on rural markets to shore up volume growth,” he says.
“The growth in the last decade for us has been faster in rural because we have been making our presence felt in villages and smaller towns. However, there is a clear slowdown in rural. We continue to build distribution in rural areas. We know that when rural (growth) recovers, we will benefit from it,” Varun Berry, MD, Britannia, said in the company’s latest investor call. Over a third of the FMCG industry’s sales come from rural areas, but unlike their urban counterparts, purchasing power of rural consumers is lower, implying that companies have to focus on driving low-unit packs or variants that are affordably-priced, to drive sales. That role is being played by small and regional FMCG manufacturers, which have grown over the last two quarters of FY24, as commodity deflation has allowed their resurgence, sector experts say.
The country’s largest FMCG company, HUL, admitted recently that it was losing value market share in the mass-end of its portfolio, including categories such as detergents and tea to small players.
“We have seen the resurgence of small and regional players in select categories and price points, many of whom had vacated the market during the peak of inflation. This has continued into the September quarter from the June quarter,” HUL’s CEO & MD Rohit Jawa said during the company’s second-quarter earnings.
Data from Kantar Worldpanel shows that the price growth of small brands in categories such as toilet soaps, washing powder and detergent bars, was in the region of 3-6% in the 12 months ended April 2023. Between May and September 2023, industry executives said that the price growth in these categories had been flat, as commodity inflation had remained benign, notably, in crude-linked derivatives.
HUL said that it was focusing on driving its ‘Winning in Many Indias’ strategy to counter the resurgence of small brands. In addition, the company would continue to pass commodity price gains to consumers.
Companies such as Dabur, ITC, Marico and Godrej Consumer said that they would continue to focus on distribution and manufacturing expansion as well as push digitisation initiatives to counter competitive intensity.