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The government’s data on household consumption expenditure shows that the average urban household spent 1.83 times what a rural household spent in 2011-12 and this number has fallen to 1.69 times in 2022-23. That is, the gap between urban and rural household consumption expenditure has fallen and rural consumption has grown faster. This is for the data that takes into account the value of free foodgrains supplied to households.
How does this square with the narrative peddled by listed FMCG companies that rural consumption demand has been weak and even as recent as the December quarter, it has not become robust? Urban demand continues to be the main driver for sales and profitability for most listed FMCG companies.
The data that we have is two points between 2011-12 and 2022-23. But the stock market’s lens is a much shorter one, focused on the quarter, year or at most a few years.
It’s important to know that rural FMCG demand was growing much higher than urban demand was, as recently — from a macro viewpoint — as a few years ago. A combination of good harvests, low consumer inflation, the government’s COVID cash handouts and support through other programmes meant that sales growth for FMCG companies in rural India was in good spirits. For instance, in the June 2021 quarter, if the FMCG market was growing at X, then rural was at 1.04X while urban was at 0.96X. But from there, we are now at a situation where rural is punching below its weight.
One view can, of course, be that rural has simply gone back to its normal spending levels, which from a listed company or stock market investor’s point of view may be interpreted as a decline in demand. Manas Chakravarty, in today’s edition, also points out how a smaller slice of the population — in urban and rural — accounts for a big chunk of the consumption expenditure. Therefore, a wider base of consumers may not have had adequate surpluses to spend on FMCG goods. While income generation is one side to the issue, the bigger and more immediate problem may be the flare-up in inflation that ate into their disposable income.
This theory is also supported by the fact that companies have reported significant competitive activity from smaller local or regional players in mass category products such as tea, detergents and soaps. Input price deflation has made these products cheaper, drawing inflation-pinched consumers to them. Bigger companies are loath to slash prices as it upsets their calculations on several fronts, apart from the risk that consumers perceive a product becoming cheaper as affecting its quality too.
Still, companies have been cutting prices and will probably continue to do so, till they manage to narrow the gap over cut-throat price competitors.
The December quarter’s retail sales data, in fact, showed that overall FMCG rural demand growth had narrowed the gap over urban demand. But this was not corroborated by the quarterly results data. Now, there could be a timing issue and it may reflect in subsequent quarters. Or, it could be a case of rural consumers buying more, but not from the listed companies.
A broader trend that emerges is that the expenditure of rural consumers, like their urban counterparts, is going less towards food and more towards non-food items. Even within food, in rural India, there is a higher share going towards processed foods and beverages. This ties in with what micro-level data has been pointing to, for some years now, a higher consumption in impulse foods like snacking items (chips, for example), chocolates and even cold beverages.
This can also explain why companies such as Nestle India, with an urban-centric premium product portfolio, has been expanding its ‘rurban’ strategy to cater to the more affluent rural areas. Thus, companies have to slice and dice markets not just between urban and rural and different states, but also within rural, they will need a differentiated strategy that takes into account the disparities in consumption.
Of course, most companies already do it, but they can seek to do better. And, companies with a high share of mass category products in their portfolio may decide to lie low till the disinflation wagon comes to a halt and then seek to regain market share when the playing field between them and the smaller players has levelled somewhat.
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