Companies in the FMCG industry in December quarter earnings have shown an uncommon trend in rural markets: peripheral or better-than-urban sales growth is evident in value terms, but among falling demand that is evident in diminishing volumes.
Sanjiv Mehta, Hindustan Unilever chairman, explained in the October-December earnings call for the country’s largest FMCG company that despite negative volume growth, value growth was actually positive.
HUL was not the only consumer goods company viewing this trend. The growth recorded by FMCG companies in rural segments over the past two quarters has mainly been on account of price increases and not increased demand, as several companies have admitted.
Rural markets have been growth drivers for FMCG companies for years given the low penetration of several consumption items, ranging from food and staples to healthcare and hygiene products. This has particularly been the case after COVID, when sturdy agricultural growth and the relative insulation of the hinterland from pandemic restrictions, etc., have been the drivers of FMCG demand.
In a January report titled “Metros and pricing buoy India’s FMCG industry in Q3 2021”, consumer research firm NielsenIQ recorded a significant price-led growth in the Indian FMCG industry, attributing it to price hikes on commodities, raw materials, and fuel and transportation costs. While price increases have resulted in doubled nominal growth, there was a drop in volume growth for the industry.
It was clearly seen that in the rural segment, there was a 9.4 per cent value growth but a 2.9 per cent decline in consumption amidst rising prices of goods. “Consumers (in rural areas) reduced their consumption of cooking medium, packaged grocery, and hot beverages, while non-food consumption was reduced by fabric care and personal care products,” according to the report.
Producers are of the view that the fall in rural demand is partly on account of migrant labourers returning to cities over the last two quarters following the second COVID wave, resulting in subdued rural volumes.
Yet, despite the fall in rural demand, there is no relief in sight for FMCG companies in terms of inflationary pressure.
For Dabur India, which reported its quarterly earnings last week, said rural growth in value terms was around 7.5 per cent, while urban growth was around 2.6 per cent, the company’s CEO, Mohit Malhotra, said.
Recently, Dabur started “calibrated price increases” of around 5 per cent in key products across categories, such as health supplements, ayurvedic over-the-counter items, hair oils, and toothpaste.
“The inflation in this quarter was truly unprecedented at over 13 per cent and this impacted the gross margin of the consolidated business.” There is continued inflation in hydrocarbon derivatives, paper-based packing materials, raw honey, edible oils, and some key spices that we use.
According to an investor presentation by biscuit and dairy products manufacturer Britannia Ltd., prices of commodities used by the company — flour, milk, sugar, rubber processing oil — saw sequential inflation of around 4 per cent in the December-quarter, while year-on-year inflation was around 20 per cent.
In addition, inflation in other commodities, such as industrial fuel, freight-diesel, laminates, and corrugated boxes, added to the company’s margin pressure.
Another impact of the rising input costs, NielsenIQ said, was on comparatively smaller manufacturers, as a result of their being forced to increase prices of food products and cooking mediums (edible oil, etc.).
“This has severely impacted small manufacturers, as 14 per cent have exited the business in Q3 2021 compared to Q3 2020. Out of the total value growth that the industry had in September 2021 (compared to a year ago), 76 per cent of this growth came from large manufacturers, while small players had just 2 per cent with the rest coming from mid-size players, “it noted.
Kolkata-based Emami Ltd, which declared its earnings last Thursday, also noted a similar trend.
Mohan Goenka, director, Emami Ltd., said that for Emami, rural was slightly better than urban. Urban was flat, rural saw marginal growth.