Rural trend for FMCG companies: sales value up, but volume down

The December quarter results of FMCG companies indicate an unusual trend in rural markets: marginal or higher sales growth than in urban areas, visible in value, but against a backdrop of falling demand manifested by a decrease in volumes.

Hindustan Unilever Chairman Sanjiv Mehta pointed out during the October-December earnings call of the country’s largest FMCG company that despite negative volume growth, value growth was actually positive.

HUL wasn’t the only consumer goods company to see this trend. The growth recorded by FMCG companies in the rural segments over the last two quarters has been mainly due to price increases and not to increased demand, as admitted by several companies.

Rural markets have been growth engines for FMCG businesses for years given the low penetration of several consumer items, ranging from food and staples to health and hygiene products. This was particularly the case post-Covid, when strong agricultural growth and the relative isolation of the hinterland from pandemic restrictions, etc., were drivers of FMCG demand.

In a January report titled “Metros and pricing bouoy India’s FMCG industry in Q3 2021”, consumer research firm NielsenIQ noted “significant price-led growth”.

“Overall, NielsenIQ has seen significant price-led growth in the Indian FMCG industry, attributing it to increases in commodity prices, raw materials, and fuel and transportation costs. . While price increases have resulted in double nominal growth, there has been a decline in volume growth for the industry,” he observed.

Specifically, in the rural segment, there was a 9.4% growth in value but a 2.9% drop in consumption amid rising commodity prices. “Consumers (in rural areas) have reduced their consumption of cooking medium, packaged groceries and hot beverages; while for non-food, they have reduced their use of fabric care and personal care products,” the report states.

Industrialists believe that the decline in rural demand is partly due to the return of migrant workers to cities in the last two quarters, following the second wave of Covid, driving rural volumes to half mast.

However, despite the decline in rural demand, there is no relief in sight for FMCG companies in terms of inflationary pressure. “The kind of inflation we see, we don’t know when it will improve…let’s wait and watch, we have to wait another month or so to get a better picture,” Goenka said.

For Dabur India, which released its quarterly results last week, rural growth in value was around 7.5%, while urban growth was around 2.6%, the company’s CEO said last Thursday. company, Mohit Malhotra, on a post-earnings analyst call.

“Even in a difficult environment, Dabur’s rural demand exceeded urban demand. For us, rural growth was around 7.5% (in terms of Q3 FY2021-22 value growth), while our urban growth was around 2.6%…” Malhotra said.

Explain

Lower expenses, higher prices

Consumption of FMCG items in rural areas picked up after the first wave of Covid but is now registering a drop. This indicates that consumers are spending less on these goods due to several factors, including rising prices.

Notably, Dabur has undertaken “calibrated price increases” of around 5% for key products across all categories, such as dietary supplements, over-the-counter Ayurvedic products, hair oils and toothpaste.

“Inflation this quarter was truly unprecedented, at more than 13%, which had an impact on the gross margin of the consolidated activities. There is continued inflation in hydrocarbon derivatives, paper-based packaging materials, raw honey, edible oils and some key spices we use. Going forward, we will take calibrated price increases in addition to cost optimization to mitigate this impact,” Malhotra said.

According to an investor presentation by biscuit and dairy maker Britannia Ltd, prices of commodities used by the company – flour, milk, sugar, rubber processing oil – saw sequential inflation of around 4% in the December quarter, while year- on-year inflation was about 20 percent.

In addition, inflation in other commodities, such as industrial fuel, freight-diesel, laminates and corrugated boxes, added pressure on the company’s margins.

Another impact of rising input costs, NielsenIQ said, has been on relatively smaller manufacturers, as they have been forced to raise prices for food products and cooking media (edible oil, etc.).

“This has severely affected smaller manufacturers as 14% left the company in Q3 2021 compared to Q3 2020. On the total value growth the industry experienced in September 2021 (compared to there one year), 76% of this growth came from large manufacturers, while smaller players had only 2%, with the rest coming from medium-sized players,” he noted.

Kolkata-based Emami Ltd, which reported its results last Thursday, also noted a similar trend.

“For Emami, rural was slightly better than urban. The urban was flat, the rural grew marginally. I cannot give a timetable for the recovery of the markets. Even January was subdued when it comes to rural demand,” Mohan Goenka, director of Emami Ltd, said on the analysts’ call.

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