Moneycontrol Pro Panorama | Rural FMCG demand takes a tumble

A question mark over rural growth is the last thing that FMCG companies or investors would like to be confronted with.

Dear Reader,

Is the rural growth engine that’s been powering FMCG demand growth for some years now slowing down? If so, will the urban engine have enough pulling power to keep overall growth healthy?

These questions arise as rural FMCG growth grew by 3.6 percent in the December quarter, down from 5 percent a year ago, according to Numerator (formerly Kantar) data quoted in the Economic Times. But urban growth improved marginally to 4.6 percent from 4.5 percent a year ago. The result was that overall FMCG growth slipped, again marginally, to 4.5 percent from 4.6 percent a year ago.

A question mark over rural growth is the last thing that FMCG companies or investors would like to be confronted with. While rural growth was expected to moderate, after punching above its weight for a few years, a decline in growth of this magnitude could pose a problem. High valuations and underwhelming sales and profit growth have been overhangs on FMCG stocks for some time now. In fact, after the December quarter results season ended, the sun’s been peeking out of the clouds.

A recent note by Jefferies Research points to volume growth averaging 6 percent across the companies it tracks which was “the best in several quarters”. Demand improved sequentially, led by rural, gross margins (sales less cost of goods sold) improved marginally and management commentary was optimistic. The tone on the outlook is still cautious, but nevertheless more optimistic than earlier.

But the ‘led by rural’ part does not quite square with what Numerator is seeing. But lest you think it’s a data problem, it’s an issue of who’s seeing what and it’s important for investors to understand this nuance. Companies report primary sales, or what they sell to their distributors/retailers based on their forecasts and market demand conditions. Market research survey data can be secondary, that is based on retail sales data from a subset of stores that is extrapolated to arrive at the overall picture. Or, it can also be based on a panel of households, tracking their actual consumption—not just of branded goods but even unbranded goods. Numerator data mentioned above falls in the last category. It can even be of brands that may not be sold by listed companies.

But, directionally, all these three data sets eventually converge, even if absolute values vary, to say the same thing, give or take a quarter or few.

Nielsen data had pointed to a slowdown in rural growth in the September quarter itself. Once its data for December is out, whether that continues will become visible. If it does, should investors be worried? Not really, as yet.

For one, there’s a high base effect at play that creates a hurdle for growth rates to sustain, especially as rural growth has been high for a few years now. Second, listed companies have not been voicing worries on this front. Therefore, it’s likely that while rural consumption may be moderating in parts, companies’ growth in these markets is in a good place. That augurs well for their performance. Third, while the GST rate cuts disrupted supply chains and consumers’ buying intentions, they may also have altered buying patterns, as consumers spent elsewhere since discretionary goods became cheaper.

Lastly, the weight of urban consumption in the overall figure is seen in overall growth dipping only slightly despite a sharp dip in rural growth. If urban growth continues to trend up, which it is expected to, on the back of GST rate cuts, stable inflation and rebounding from past low growth rates, then there may not be much to worry, even if rural growth takes time to revive. But yes, if investors were looking for the sector to fire on both growth cylinders, they would do well to temper expectations.

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