Mumbai: Rural consumers have been cutting back on purchases of packaged goods such as shampoos and detergents as economic growth slows—a trend that may be fuelled by a deficient monsoon.
Growth in consumer goods sales by volume has almost come to a standstill in the hinterland that’s home to two-thirds of India’s 1.2 billion population, according to the latest data compiled by Nielsen Co.
Nielsen figures show that across India, volume growth declined by 6.44 percentage points to 2.16% in the 12 months ended June from the year-ago period. Volume growth in rural India was a mere 0.83% compared with 6.5% a year ago, although the decline was sharper in urban India—a fall of 7.1 percentage points to 3.1%.
Volume growth is a key measure to identify sales trends. The figure shows whether people are buying more or less of the same product. In emerging markets such as India, with most categories being under-penetrated, volume growth is also an important indicator that manufacturers look at when weighing market share.
“These are early days where we have started noticing rural growth fall behind the urban growth. It is different from what we had anticipated a couple of years ago and we will have to watch it closely,” said Roosevelt D’Souza, executive director at Nielsen India.
Rural consumption had been slowing even before the advent of the June-September monsoon, which arrived late over parts of India. The consequent deficit in rainfall that waters most of India’s crops has added to worries about the country’s economic growth prospects. Asia’s third largest economy grew 5.3% in the quarter ended March, the slowest pace in nine years, pulling down full fiscal year growth to 6.5% from 8.4% in the previous year.
The overall market for packaged consumer goods, also known as fast-moving consumer goods (FMCG), is around Rs 1.8 trillion. Rural India makes up around 33% of the market and is important to companies such as Hindustan Unilever Ltd (HUL), Godrej Consumer Products Ltd and Nestlé India Ltd, which have increased prices on account of high inflation and rising input costs.
Price increases and softening commodity prices are expected to bolster the sales and operating profitability of consumer goods makers in the three months ended June, Mint reported on 17 July, but truant rains and growth uncertainties cloud their prospects in the months ahead.
Three years ago, companies and analysts were singing paeans to rural consumers and their resilience that helped the rural market for packaged goods outpace growth in cities. Even until March 2011, demand in rural India had been growing at a faster clip than in urban areas.
Softening rural demand is also visible in slowing of sales of tractors and two-wheelers, fertilizer consumption and an increase in non-performing assets at banks. For instance, two-wheeler sales growth dropped 5.8 percentage points to 9.2% year-on-year (y-o-y) in June and tractor sales fell 5% y-o-y in the first three months of the calendar year.
“The cycle is now progressing towards FMCG as we believe that volume growth for FMCG companies will disappoint,” Dhananjay Sinha, co-head of institutional research (economist and strategist) at Emkay Global Financial Services Ltd, wrote in an 11 July report. According to Sinha, the deceleration began in the second half of fiscal 2012 (FY12) as input costs for farmers increased on an average by 15% and they earned an average 10% less on their crops, leaving them with less money to spend.
“There has been a high pressure on the rural and middle class consumer due to the high food inflation and increasing costs, due to which they are prone to buy cheaper brands and even move back to buying commodities in place of branded staples,” said Krishna Mohan, chief executive officer (sales) at Emami Ltd.
Growth in sales by value has been more than 15% across the packaged consumer goods sector for the 12-month period to June, said Nielsen. The growth has been attributed largely to the increase in prices.
Demand for both food and non-food consumer packaged products has dipped. While food categories such as chocolates, biscuits and salted snacks saw a decline in urban India, rural consumers cut back even on consumption of shampoos and detergents, said D’Souza of Nielsen.
Listed consumer packaged firms such as Godrej Consumer Products and Emami deny a decline in volume growth.
For instance, Emami increased prices by 7-8% across its products in FY12. Yet, “volume growth remained range-bound at 7-8%, which is close to its three-year average”, said Emami’s Mohan.
Likewise for Godrej Consumer Products, which makes Cinthol soaps and Hit insecticide, price increases were close to 10% in its soap portfolio in FY12. “We are not seeing any slowdown in FMCG demand, urban or rural,” said chairman Adi Godrej.
A Mint survey of six brokerage firms—Prabhudas Lilladher Pvt. Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd, Kotak Securities Ltd, KR Choksey Shares and Securities Pvt. Ltd and Emkay Global—suggests consumer goods companies registered robust growth in the June quarter, with profits having risen 17-37% and sales 16-18%.
“Most listed companies saw double-digit volume growth in the past year and our expectations are for another quarter of similar growth,” said Anand Mour, analyst at banking and brokerage group Ambit Capital Pvt. Ltd, who is bullish about the sector’s growth and sceptical about the Nielsen data.
Besides increasing cost of products and reducing their pack sizes to manage rising input costs, marketers need to localize their product portfolio and marketing approach for the rural market to get back the volume growth, experts say.
“In a buoyant economy, the value growth in rural India was at 17%, and now in a challenging environment, value growth is at over 15%. This means that there is good consumption available. But marketers don’t understand rural (market) and need to read it better,” said Nielsen’s D’Souza.
Over the past couple of years, companies such as HUL, Dabur India Ltd and Marico Ltd have expanded their distribution network and the availability of their products in rural areas.
Yet, “companies haven’t really innovated for the rural consumer”, said Harminder Sahni, managing director of Wazir Advisors Pvt. Ltd. “Now that the soaps, shampoos and detergents (market) is well-penetrated, growth is stagnating as the rural consumer has not got on to the next phase of consumption.”