Consumer goods sales and rural demand seem to have remained weak in Q3 FY24, as festive season demand fell short of expectations. Worse, volume weakness and demand challenge may persist in the January-March quarter too, said Nuvama Institutional Equities, dashing hopes of recovery for the consumer goods sector.
Consumer goods companies and experts had expected the demand to recover in the October-December quarter but that did not materialise.
"Although moderating inflation in diesel and fertiliser costs augur well for the rural segment, we forecast that volume growth for most players shall remain challenging in Q3FY24 and possibly even in Q4FY24," said the brokerage firm. This is because of a weaker-than-expected winter and festive demand, and rainfall deficit, have impacted rural growth.
However, the brokerage firm expects Nestle India and United Breweries to pose a strong sales and volume growth in Q3FY24.
Volume growth has been a problem for FMCG companies this year. This is because easing inflation brought down raw material costs, which led to more small and regional players entering the market. Branded FMCG companies are facing competition from these small and regional players. In a period of high inflation, local players exit the market due to high input costs, while branded FMCG players gain their market share as they can take a cut on their margins by not increasing the product prices.
Also read Why Metro Brands stock jumped 50% while Bata, Relaxo, Campus languished?
Rural recovery is another concern for FMCG companies. Even though rural demand shows a rebound, the pace of growth is slower than in the urban market.
Increasing direct reach
As slowdown continues, the companies have stepped up efforts to increase direct distribution in rural areas. They hope this would help them tide over the challenges of slowing rural demand, which has been further aggravated by the stressed wholesale trade channel due to the liquidity crunch, said Nuvama.
Credit from distributors to kirana stores has dried up due to low end-consumer sales, which is delaying payback from stores to distributors, thereby limiting fresh credit. The credit squeeze is not allowing kirana stores to stock up sufficiently, creating a vicious cycle, said the brokerage firm.
Consistent decline in sales in rural markets saw a halt in the July-September quarter. However, challenges continued in Q2 due to deficient rainfall and increase in food prices.
Sales in rural areas fell 9.6 percent year-on-year (YoY) in November, far more than the decline in urban areas, which was at 3.5 percent. Kirana stores, which contribute to 85 percent of FMCG sales, saw a 7.5 percent on-year decline in orders, as per data by Bizom. This was exacerbated by the excess pre-Diwali inventory which didn't sell because of poor demand.
Sales looked better for FMCG companies in the last two months. In September, urban FMCG sales increased 3.2 percent on-year, while that in rural India increased 5.8 percent. In October, sales in cities declined 2.2 percent, as against 6.1 percent in villages, as per data by Bizom.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
