India’s Urban Demand For FMCG Goods Slowly Picks Up But Is That Enough? 

India’s fast-moving consumer goods (FMCG) companies have been reeling under the pressure of declining demand, both rural and urban, for a while. The decline, which started with the slowdown and pandemic-induced financial crunch, has continued with unrelenting inflation numbers. Adding to the woes is the Russia-Ukraine war and the resultant supply chain collapse which sent commodity prices—from wheat to edible oils—soaring. 

While some companies have managed profit margins in the first quarter of this financial year, they were primarily driven by a price rise which was enforced to address higher input costs due to high inflation. FMCG major Godrej Consumer Products, for instance, posted a reasonable revenue growth but attributed it more to pricing than volume growth.

Having said that, urban demand for FMCG products seems to have witnessed a revival in the April-June quarter, as per the numbers released by data analytics company NielsenIQ. This, even as rural India is grappling to catch up. The question is: Can an uptick in urban demand revive the battered FMCG sector alone? 

Demand Up in Urban India

According to NielsenIQ, demand for beverages, toiletries and packaged food saw an uptick in urban areas in the first quarter of the April-June quarter.

The overall volume was still in contraction, it fell to -0.7 per cent from -4.1 per cent in the March quarter. In terms of value growth, the FMCG industry grew by 10.9 per cent in the April-June quarter compared to 6 per cent growth in the January-March quarter, it revealed.

“The industry also observes positive momentum in volume along with price-led growth,” a press release from NielsenIQ stated. The data highlights an overall revival in consumption FMCG categories, which has been driven mainly by an increase in unit growth, and points towards urban markets clocking positive consumption growth.

“This beats the last two quarters of consumption decline and highlights the onset of cautious optimism among consumers. Also, the consumption recovery and promising macro factors support NielsenIQ’s forecast of double-digit growth for 2022,” Satish Pillai, managing director--India, NielsenIQ, told Business Standard.

The NielsenIQ data showed that modern trade, which includes hypermarkets and supermarkets, clocked a 7.8 per cent volume growth in April-June as compared to 5.5 per cent seen in January-March. Traditional trade, which comes from kirana stores, too, recovered and contracted by -1.5 per cent in April-June from a contraction of 4.9 per cent in January-March. 

Unit growth came in at 8.9 per cent in the April-June quarter as against a 1.5 per cent growth seen in the quarter ended March. That makes it evident that consumers are consuming smaller packs and more units, pushing up unit growth across the sector. 

A separate report by Bizom, a retail intelligence platform, found that while, in value terms, FMCG market has fallen by 8 per cent, demand for consumer electronic goods, like refrigerators and air-conditioners, also remained flat in July as compared to June, highlighting that steep prices have negatively impacted demand.

The electronics market grew by 25 per cent over the pre-Covid levels but the increase was more price led. Most companies opted for a 20 per cent price rise on an average. In an indication of an eroding purchasing power hindering consumption, the report found that entry-level products were still witnessing weak demand.

“Only premium products have grown in sales and stress remains in mass segment and rural towns. Whether recovery is a sustainable one will be seen from August-September sales," The Economic Times quoted Kamal Nandi, business head, Godrej Appliances, as saying. 

Rural India Still Struggling

The health of the rural economy is generally evidenced through FMCG and two-wheeler demand. Covid-19 shooting up unplanned medical expenses and the loss of work due to lockdowns and restrictions deepened income inequality which has impacted demand. Inflation has further affected purchasing power, especially in rural India. 

Big names like Hindustan Unilever and Parle have been continuously talking about volumes being down. Sanjiv Mehta, CEO, Hindustan Unilever has earlier said that volumes had declined for the company and it was more heightened in the rural markets.

While urban demand recovery seems to have brought back some hope for the sector, rural demand is yet to pick up. In the April-June quarter, consumption of FMCG products remained negative in rural areas since people bought smaller packs of products, said the NielsenIQ data. Rural demand saw a contraction of 2.4 per cent in the April-June quarter.

For most FMCG companies, the rural economy means better business as far as volumes are concerned. Hence, a muted rural demand has been a point of concern that has been voiced by several FMCG companies.

In an analyst call, Vinod Rao, president (sales), Emami, said that the company saw no uptick in rural demand either in June or July. He pointed out that most companies were trying to grow through internal initiatives to deliver better rural performance compared to the prevailing market scenario.

Saugata Gupta, Marico CEO and MD, said in an investor call that because of rural India’s relative susceptibility to inflation, its consumption slowdown has been visibly higher there than seen in urban areas. He also highlighted that the slowdown was impacting rural areas, especially in general trade.

The apprehensions of the FMCG companies make it clear that revival, in the truest sense of the term, would be possible only when demand in both India and Bharat picks up together.