Will the rural markets see revival in demand?
After the shock of demonetization and GST introduction, there’s clear recovery, but most of all, urban markets have picked up
A clutch of fast-moving consumer goods (FMCG) companies have posted encouraging results for the June quarter. FMCG companies have reported an uptick in volume growth. Dabur India Ltd, for instance, grew 21% by volume. Hindustan Unilever Ltd saw an 11% growth in volume while Godrej Consumer Products Ltd reported 14% growth. There have been others too. Marico Ltd’s India volume grew 12.4% year-on-year aided by a broad-based recovery. Britannia reported double-digit growth for the quarter and said it was backed by a double-digit volume growth primarily due to investment in brands and widening distribution network.
At Nestle India, domestic sales jumped 12% year-on-year led by broad-based volume growth across categories. In its research note, Edelweiss Securities said, Nestle has been posting sustained volume-led growth across product categories fuelled by new product launches especially in breakfast cereals and canned beverages categories. The company’s chairman and managing director Suresh Narayanan mentioned that innovation, renovation and volume-based growth were its core business strategies.
For now, all eyes are trained on the domestic business of these companies and how they will perform both in the urban and, especially, the rural markets which had slowed down.
According to V.S. Kannan Sitaram, venture partner at Fireside Ventures which invests in home-grown food start-ups, firms such as HUL, Dabur and Godrej showed strong number in the June quarter as last year’s June quarter was depressed because GST (goods and services tax) implementation started from first July. So, the wholesale trade wasn’t lifting stocks.
Clearly, the comparison is from a low base. “The trade was very unclear about what GST was. There was widespread downstocking of FMCG products in June to minimize potential losses. So all FMCG companies had poor sales in June (2017),” says Sitaram.
After the shock of demonetization and GST introduction, there’s clear recovery, but most of all, urban markets have picked up. “Sales of many categories which are urban-driven such as cars and smartphones are doing well. Start-up activity in FMCG targeting urban consumers has been very strong,” Sitaram adds.
However, the rural markets are yet to emerge. They’ve faced several issues in the past including farm distress. While last year saw a lot of farm distress, the rural economy was affected significantly by demonetization that resulted in cash shortage. But Sitaram feels that rural markets could recover well with good monsoons. Pinakiranjan Mishra, partner and national leader (consumer products and retail) at EY India, says that “with GST settled down, and monsoon forecast being reasonably good, the government increasing the minimum support price for Kharif crops, money is going into the rural segment.”
To be sure, the cabinet committee on economic affairs in July announced an increase in minimum support prices for 14 crops grown in the Kharif (summer) season. The initiative is said to be a step towards helping farmers double their incomes by 2022—a promise made by Prime Minister Narendra Modi earlier.
Clearly, the triggers for a rural revival are all there: rural sops owing to general and state elections, farm loan waivers, good rainfall, MSP hike, direct benefit transfer (DBT), stability in distribution (last two years were impacted by GST, demonetization) and infrastructure improvement—such as road construction and electrification, points out Abneesh Roy, an analyst at Edelweiss Securities. “Investment in infrastructure generates employment and economic activity,” adds Mishra. All this should start lifting rural economies.
Roy says that penetration of FMCG in rural India across categories is low, so growth in rural markets is likely to be higher than in urban India.
To be sure, for Dabur, rural is going 3.5% ahead of urban in the FMCG category. Demand in rural is trending up and sharper than expected, it says. HUL, too, says it envisages the company to be the beneficiary of anticipated rural recovery.
Demand is improving gradually and markets across urban and rural are seeing positive trend. For Godrej, urban markets grew at 13% year-on-year and rural grew 17% year-on-year and the management continues to believe that rural will outgrow urban.
For Marico, too, rural growth (28%) outpaced urban growth (16%). Pinakiranjan Mishra says : “A few years back, the growth of rural markets used to be double that of urban markets. It has bounced back but not to the same level. But the outlook is positive. There is no real challenge, no big-ticket red flag really. In an election year, the prediction is relatively safe.”
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