Why urban India is turning frugal

They all appear appetizing. But there is one problem. Fewer people may be ordering in now compared to a few months ago. At least, that was the case in the December quarter of 2022.

“We have seen an industry-wide slowdown in the food delivery business since late October (post the festival of Diwali)," Zomato Ltd stated while announcing its December quarter results. “This trend has been seen across the country but more so in the top eight cities."

Zomato’s gross order value of the food delivery business in the December quarter was up by a measly 0.7%, sequentially. In comparison, in the June and the September quarters, the company’s gross order value rose by 9.9% and 3.1%, respectively.

Zomato is among many other companies facing the heat from a ‘normalization’ in discretionary demand, which is largely urban-led. In other words, the pent-up demand that businesses rode on post the pandemic is tapering off.

Remember, when mobility restrictions began to ease in the post pandemic world, India saw a K-shaped recovery. Certain sectors benefitted more from the unusual surge in demand. People had pandemic savings after being cooped up at their homes during the lockdown months. And they splurged when the restrictions eased.

“Our analysis suggest that forced savings (given an inability to spend on goods and services during lockdowns) and precautionary savings (fear of job loss and economic uncertainty) led Indian households to save an extra $180 billion over 2020 and 2021," said Tanvee Gupta Jain, chief India economist, UBS Securities India. “We believe household spending was pulled forward over the past year (until September 2022) by affluent Indians using their excess savings accumulated during the pandemic. As per the National Sample Survey Office data, the top 20% of the population nearly accounts for 66% share of India’s discretionary consumption," added Jain.

This phenomenon is now showing signs of fatigue, December quarter’s financial results suggest. Companies in sectors such as consumer durables, paints, jewellery, quick service restaurants (QSRs), apparel and footwear have seen a slowdown post the festive season last quarter.

“Post-covid, consumption recovery was led by durables, retail and QSR. However, these segments are slowing sharply, even as autos, hotels and airlines hold up (owing to pent up demand)," said Prateek Parekh, vice president, institutional equities, Nuvama Wealth Management.

The current trend is concerning, as it could be a precursor to a broader slowdown, said Parekh, in Nuvama’s December 2022 quarter results review report.

Mint scanned through the transcripts of many earnings calls companies held post their December quarter results, press statements, and research reports, to understand the consumption sentiment, and what lies ahead.

Pizzas get soggy

QSRs threw up a bad set of numbers with the demand momentum slowing in November and December even as October was appetizing. Sales of pizzas took a sharper knock.

Accordingly, in the December quarter, Sapphire Foods India Ltd’s same store sales growth (SSSG) for KFC and Pizza Hut stood at 3% and negative 4%, respectively. In the September quarter, these measures were at 15% and 23%. SSSG is a comparable measure of sales performance for companies.

Similarly, in the December quarter, Devyani International Ltd saw SSSG for KFC and Pizza Hut at 3% and negative 6%, respectively. In the September quarter, these measures were at 13% and 3%, respectively. However, Westlife Foodworld Ltd, which owns and operates the master franchisee of fast-food chain McDonald’s in West and South India, was able to buck the trend and clocked a 20% healthy SSSG in the December quarter.

“It’s a softening of demand condition that we are seeing right now, which continues into January and February also," said Sanjay Purohit, group chief executive officer and whole-time director, Sapphire Foods India Ltd, during the post earnings conference call.

Less lipsticks

Even as people ate less pizzas and fried chicken, they bought less clothes and lipsticks, too. Those who shopped possibly ordered the cheaper stuff.

Apparels saw a subdued quarter, though Aditya Birla Fashion and Retail Ltd and Trent Ltd were able to sustain the momentum. But V-Mart Retail Ltd, Shoppers Stop Ltd and Page Industries Ltd saw a deceleration in sales on a three-year compound annual growth rate (CAGR) basis versus the September quarter.

Avenue Supermarts Ltd, which runs the D-Mart supermarket retail chain, said that fast-moving consumer goods (FMCG) and the staples segment continued to outperform the general merchandise and apparel businesses. Further, discretionary non-FMCG sales did not do as well as expected in this quarter.

Falguni Nayar, the executive chairperson, managing director and chief executive officer (CEO) of FSN E-Commerce Ventures Ltd, the parent company of beauty retailer Nykaa, said that over the last one year, customers are down trending in certain categories—from luxury brands to premium and mass brands. Nayar, however, felt that this trend could be short-lived.

For paint companies, growth moderated in the December quarter because of a higher base effect, an early Diwali festival, and extended monsoon. Asian Paints Ltd, the leader in decorative paints, saw down-trading in select premium products last quarter following steep price increases—18% over the past one year—to offset rising input costs. This hurt demand.

“This just tells us that the inherent strength in demand is just not there," an analyst with a multinational broking firm, who didn’t want to be identified, said, commenting on the overall slowdown in the discretionary segments.

Who takes the blame?

Is there a slump just because the pent-up demand tapered off? No, there’s more to it.

Formal sector jobs, which recovered well post the pandemic, led by exports, is showing signs of a slowdown as global growth slows, said Nitin Bhasin, co-head, institutional equities and head of research at Ambit Capital, a financial advisory firm. “According to the Employee Provident Fund Organisation, new formal sector jobs created in the December quarter were less than 1 million per month versus an average of 1 million in the half year ending September," he added.

Further, Info Edge’s Jobspeak index, which tracks hiring activities based on job listings, has seen hiring activities contract by 3% sequentially in the last six months.

Moreover, to cope with rising input costs, companies have taken price hikes and that has hurt demand—like in the case of Asian Paints mentioned above.

In a note dated 14 February, BNP Paribas Securities India, a brokerage, said that within the consumer sector, the affluent India basket is starting to see a trend reversal amid rising interest rates, a slowing job market, moderation in equity returns and pent-up demand being a thing of the past. The affluent India basket comprises of companies that derive most of their revenue from the top 10-15% income earners in the country.

The outliers

Which sectors kept the consumption story going?

Once mobility restrictions eased, it was time for revenge spending. This came as shot in the arm for the hospitality sector—one of the worst impacted during the pandemic.

Profitability of hotels improved, thanks to a sharp increase in average room rates. Key hotel companies—The Indian Hotels Co. Ltd, Lemon Tree Hotels Ltd and Chalet Hotels Ltd—have swung to profits for the nine-month period ended December, after reporting losses for the past two financial years.

Another sector that has, thus far, remained insulated from the impact of the weakness in urban consumption is real estate. In the December quarter, aggregate residential property bookings in value terms for a sample of 13 listed companies was up 7% year-on-year and 6% sequentially, showed an analysis by JM Financial Institutional Securities Ltd. This, in spite of rising interest rates on home loans and higher stamp duty in some states. Even the retail segment within real estate appears to have bounced back. Listed mall developer, The Phoenix Mills Ltd, did well on rentals of its malls.

Basket of risks

To be sure, there are hurdles ahead. Even as some pockets are faring well, the risks have risen, too.

The Reserve Bank of India (RBI) has been hiking rates to tame inflation. Since May, the RBI has raised rates by 250 basis points (bps) so far. One basis point is one-hundredth of a percentage point. This has led to higher home loan rates and could weigh on demand for realty, going ahead. For hotels, while the December quarter profit margins have been strong, occupancy rates are still lower than the December 2019 quarter (pre-pandemic). It will be interesting to watch if hotels are able to sustain the momentum, given the steep jump in average room rates.

The Indian information technology (IT) services sector was booming during the pandemic months, benefiting from the pivot to digitization. IT services exporters hired at a massive scale and rolled out increments to stem record attrition. This, in turn, positively impacted residential real estate sales. Nonetheless, the happy days appear to be a thing of the past. There’s a global recession looming, and this isn’t good news for any exporter. “IT accounted for 50% of post-covid wage bill increment (for BSE 500 companies). However, IT companies are no longer adding headcount. This could weigh on urban incomes and consumption," Nuvama Research stated in a report.

Urban consumption will also be impacted by the ‘funding winter’ in the startup world, a sector rife with stories of mass layoffs.

In summary, private consumption appears to be on a weak footing. “Private consumption, overall, will be a challenge in the coming year as both urban and rural demand remains weak. This is the reason GDP estimates for FY23 are 60-100bps lower than FY24. Our own GDP growth estimate for FY24 is in the range of 5.5-6% (compared to ~7% in FY23)," said Bhasin of Ambit Capital.

Having said that, rural demand might do relatively well compared to urban demand in the coming year due to low base and lower inflation, he added.

Nevertheless, a broad-based recovery in rural consumption could be stymied if 2023 turns out to be an El Niño year—characterized by an unusual warming of waters in the eastern equatorial Pacific—as predicted by the National Oceanic and Atmospheric Administration. El Niño will create dryer and hotter summers and a deficient monsoon.

Corporate India’s headaches are far from over.

harsha.j@htlive.com