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WRAP: Tapering off rural growth - What lies ahead for FMCG companies

Decline in rural consumption growth steeper than urban

July 27, 2019 / 06:29 PM IST
  • bselive
  • nselive
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Rural growth slowdown is a reality for now in consumption. Both urban and rural consumption growth have been tapering off for a last few quarters.

A year earlier rural growth was faster than urban consumption which added edge to volumes and product diversification for FMCG  companies.

Fall in rural consumption growth has been steeper than urban consumption, confirms Nielsen report.

Nielsen considers the calendar year for calculating quarterly growth.

According to FMCG research firm Nielsen, for Q2 (Apr-Jun) of calendar year 2019 rural growth has been at 10.3 compared to Q2 (Apr-Jun) of calendar year 2018 growth of 20.3, thus a deceleration of 9.7 percent.

Overall, in Q2 (Apr-Jun) of 2019, FMCG value growth has dropped to 10 percent inching towards a slowdown; this follows the softening from the highs of Q3 2018 (16.2 percent).

“The most important takeaway from the management commentary of HUL was the continued moderation in rural demand. Note that rural demand growth, which was around 1.3 times that of urban in the early parts of FY19, is now on par with urban demand growth,“ said FMCG analyst from a brokerage firm.

According to Nielsen, the rural slowdown across all markets is due to key macro economic indicators such as slowdown in rural output, reduced government spending, untimely rain impacting crops in most North​ ​Indian markets.

Generally, crops require 300-500 mm of rainfall/water for their growth.

As per an Indian Meteorological Department (IMD) report, overall, India has received 17 percent less rain than average since the monsoon season began on June 1.

Uncertain Rural Income

The urban consumption deceleration has been at minimal 4.3 percent in the last two quarters of calendar year 2019, says the Nielsen report.

It is to be noted that the urban consumption is largely salary-driven which is more certain than the volatile weather-driven rural incomes, thus in stressful times, FMCG outfits would count more on urban companies.

The rural income structure is one dimensional, coupled with weather-dependent agriculture, makes it improbable for the farmers to supplement their uncertain farming with additional income sources.

The government policy approach to doubling farm incomes in the next five years should be two pronged, one irrigation facility to all villages to reduce weather dependence, two easy financing and creating eco system for supplementary rural engagements like horticulture, floriculture and the like.

The Nielsen report elaborates, price has grown more slowly in rural consumption than its volume growth. This reflects that minimal increase in farm incomes has only helped in more growth in volume of low value consumption items. That puts the branded sector at a challenge to grow fast in rural areas.

Hindustan Unilever Ltd (HUL), India’s largest listed consumer packaged goods firm by sales, saw a further slowdown in its volume growth in the June quarter for FY20, because of weak consumption, particularly in rural areas.

HUL saw its net profit, driven by higher revenue and a fall in raw material cost, jump by 15 percent to Rs 1,755 crore.

However, volume growth hit a seven-quarter low at 5 percent in the April-June quarter of FY20.In the previous quarter, HUL had registered volume growth of 7 percent in (Jan-Mar) of FY19.

Dabur reported its results on Oct 19, Dabur’s consolidated sales grew 9.3 percent YoY, mainly led by domestic demand which constitutes about 68 percent of sales.

Dabur’s India business grew by 10.5 percent on the back of an exceptional 9.6 percent volume growth, which interestingly came on a high base of 21 percent.

While the domestic volume growth of Dabur was unexpected, the management commentary suggests that there is a gradual deterioration in hinterland demand trend. Note that rural demand is about 47 percent of total sales for the company.

For Dabur, the demand in June was weaker than that of in the start of quarter. This is primarily due to rural distress, shrinkage in rural per capita wallet leading to significant credit stress, particularly in the rural-oriented supply chain.

The ray of hope lies in FMCG corporate having put the GST disruption behind them, thus supply chain logistics of FMCG goods to remote rural areas should be well operationalised and smoothly functioning.

IIFL FMCG report identifies cost savings and operating leverages as positives of new GST supply chain for FMCGs.

The Path Ahead

The future roadmap in enhancing rural consumption lies in identifying its fault lines and consumption indicators. In consumption indicator, Nielsen report shows a 5.5 percent rural growth in price led growth and 4.4 percent volume led growth in overall 10.3 percent rural growth in Q2 of calendar year 2019.

It implies that the rural growth will be more from value-driven products, compared to brand driven products.

The government policy towards farm income has to reduce dependence on weather-related rural incomes, that would make rural economy incomes more steady at basic level, in turn making FMCG consumption lines steadier.

Himadri Buch
first published: Jul 27, 2019 03:37 pm

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