Moneycontrol Pro Panorama | Is rural FMCG demand on the cusp of a revival?

The improvement in rural FMCG consumption can be attributed more to a much needed price-value correction.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

India’s rural demand resembles an oil and gas super tanker that takes a long time to turn around. But sometimes the shift can happen under your nose and you may not see it late. Conditioned by quarters of disappointment, as company CEOs sighted green shoots that never matured, one can be forgiven for being sceptical that rural FMCG demand is reviving. The December quarter’s results did show little change in the commentary of most company managements, about rural demand. However, just as their optimism proved to be false, could their caution too be a false alarm?
FMCG market research NielsenIQ told Reuters last week that for the first time in 2023, rural India narrowed the gap between urban areas, with rural FMCG volume sales growing by 5.8 percent while urban sales grew by 6.8 percent. It’s another matter that overall volume sales grew by 6.4 percent in the December quarter, slower than the September quarter’s 8.6 percent growth. That implies urban demand slipped during the quarter, but let’s keep the spotlight on rural demand for now.

We have been highlighting that listed FMCG companies are finding the going tough in rural India, but smaller, regional and even local brands are gaining ground. And, that this points to different reasons for the variance. Bigger brands may have lost touch with the market reality and in refusing to cut prices, left a wide space open for the smaller ones to creep in with their lower-priced products. That means it’s not just a demand issue.

This can be traced back to a few industry characteristics. High and sustained inflation typically sees the bigger companies manage better, through advance purchases, bulk buying and their ability to manage other overheads better. The smaller ones’ market shares shrivel in this period as cost inflation hits them hard. Since rising inflation also sees interest rates rise, it becomes even more difficult. The larger brands typically gain.

But when the situation reverses, if it’s gradual the larger brands manage well but when it’s sharp and volatile, the smaller ones get an upper hand. They find their operating costs have fallen sharply. But the larger brands may have raw material locked in at higher prices, limiting their flexibility. What’s more, when the falls are continuous, the larger brands may find inventory management get more complex. The smaller brands that typically buy in the spot market have no such problem.

There’s another problem, however. The bigger brands take their time to cut prices as they don’t want to make frequent price changes and also prefer to do a mix of cutting prices and adding free volumes. In India, this process is also made complex by the presence of sachets and other low-price packs.

In fact, it does appear that companies that have cut prices have seen consumer demand increase, during the quarter. More are likely to follow. They have little choice. Once the major companies are able to bridge the price-value gap over the smaller brands, then trade channels will find it easier to sell their products and consumers will also buy more, as they are getting the same for a lower price or more for the same price. And brand loyalty gets a fighting chance to revive.

Thus, the improvement in rural FMCG consumption that we are seeing can be attributed more to a price-value correction that was much needed. If commodity prices remain benign, then this process is likely to continue and spread to more categories. Therefore, rural demand should head up in 2024.

Of course, supply-side reasons for this demand pick-up can only do so much. Low inflation can help. But the real push can come from a revival in income levels. One of the drivers of rural income is agriculture. If the El Nino fades away by April, as is being forecast, then we could look forward to a more normal crop pattern in the subsequent seasons. That could be the first sign investors should look for, to see what could spur rural income to higher levels.
Investing insights from our research team

What’s Paytm value after price correction?

EaseMy Trip Q3 FY24 – Not easy to defend the premium valuation

Hero MotoCorp Q3 FY24: Premium launches improve performance

Tata Power: More room for growth

Emami: Delayed winter and subdued rural markets impacted performance

Voltas or Blue Star – Which is a better play in the AC segment?

Divi’s Lab: Progress in product launch pipeline adds to conviction

Medanta: Still more to offer

In case you missed it

MC Pro Election 2024 Portfolio: You can bet on these 14 select stocks to play the election theme

What else are we reading?

MC Pro Inside Edge: Man Friday holds on to Airtel call, PSU bank bulls await White Knight, Suven Pharma’s volume surge, SME tales, earnings call capers

Moneycontrol Pro Market Outlook | Structural weakness persists

Chart of the Day | Sugar mills find themselves in a sticky spot

Why laws on independent directors need to be tailored to suit Indian conditions

Max Healthcare sets the bar high for Apollo Hospitals, Fortis Healthcare

Rise in climate financing underscores need for green taxonomy

In a rare defiance, Pakistani voters have rejected the military’s power game

America now has a high-pressure economy (republished from the FT)

Bharat Ratna MS Swaminathan had backed 'Swadeshi' stand on GM crops

Asset attachment under PMLA – What is the right approach?

Democrats can no longer ignore Biden's age

Mark Zuckerberg’s 20-year formula for success has expired

Demystifying Concepts: Should you invest in the brands you use?

Technical Picks: Apollo Hospitals, Crude oil, Zomato and Jindal Saw (These are published every trading day before markets open and can be read on the app)

We have a crack team of reporters writing on everything startups and tech. We are fans of their newsletter Tech3 that lands in our inboxes every weekday evening. You can catch up on the day's happening tech and startup stories, including news, scoops, and analyses. If you have not already subscribed to it, click on this link to sign up.
A new offer for you and your friends--The MC Pro Elite Club referral programme. Invite friends to subscribe to Pro, and you could earn up to Rs 1000/- on eligible subscriptions. Plus, your friends get Rs 200 when they subscribe for the first time. Click here to know more. 

Thank you for subscribing to Moneycontrol Pro. Check out our offers page here for exclusive discounts on select brands and giveaways.

We would love to hear from you. For any feedback on the product and suggestions please click here. We promise to read your responses although we might not be able to reply to each one individually.

Ravi Ananthanarayanan
Moneycontrol Pro