Consumption of packaged consumer goods by rural households also grew at a slower pace than in urban areas for the first time in seven years, Nielsen said in a quarterly report on Thursday.
The rural economy has been plagued by falling crop prices and declining incomes, resulting in a severe slump in demand. Falling income has not only singed farmers but also landless wage workers, who together account for two-thirds of all rural households.
In the September quarter, rural grew at 5% in terms of value, sharply slower than 20% reported in the year earlier. Urban India grew at 8% compared with 14% in the year-ago period.
Across urban and rural markets, September quarter growth rates dropped to 7.3% from 16.2% in the year earlier.
Consumption volumes grew 3.9% in the September quarter against 13.2% a year ago. Rural India contributes 36% to overall FMCG spends and has historically been growing around three-five percentage points faster than urban.
“In the last seven years, this is the lowest we are seeing from a rural growth perspective; second is, we have always seen so much potential coming in rural from a commodity to branding perspective that rural always used to outpace urban from a growth point of view. This is the first time around where we are seeing otherwise," Sunil Khiani, head of retail measurement services at Nielsen South Asia, said in an interview.
Erratic rainfall in the last three months caused floods in as many as 13 states and worsened the plight of farmers, compounding the slowdown, Khiani said.
Nielsen has, however, retained its annual growth forecast for the FMCG market at 9-10%. In the quarter ended June, Nielsen had cut its earlier growth forecast of 11-12%. Analysts at Nielsen have warned that demand could cool further in the December quarter, before picking up in the three months to 30 April. Nielsen tracks consumption of branded fast moving consumer goods in over 80 categories across urban and rural India.
The slump in consumption has been hurting packaged goods makers over the last few quarters. Earlier this week, Hindustan Unilever Ltd (HUL), India’s largest household goods maker, said it has not seen an uptick in demand. For the September quarter, HUL’s revenue rose 6.7% to ₹9,852 crore from a year earlier. Sales volume rose just 5% during the period as demand cooled, especially in rural India. “On an overall market basis, the slowdown has happened more in rural areas than in urban. During good times, rural growth used to be 1-1.5 times that of urban in the last four-five years. Now, it has come down to half of urban growth," Sanjiv Mehta, chairman and managing director of Hindustan Unilever, the local unit of the Anglo-Dutch firm, said after announcing the September quarter earnings.
Khiani said the researcher has seen trends in the markets, where shoppers were moving to lower price packs, something reported by several companies.
Adani Wilmar Ltd, which sells edible oils, rice and pulses, has seen a pickup in sales of its lower priced variants of cooking oils that are at least 10-15% cheaper than the regular variants. “These brands are gaining momentum in such times, especially in urban markets," said Ajay Motwani, head of marketing at Adani Wilmar.
Slow offtake of goods and a liquidity squeeze have prompted neighbourhood stores to stock fewer goods. As a result, “small retailers and kirana stores have seen a drop in earnings", Khiani added.
In the September quarter, sales per store in rural areas were a fourth compared to the year-ago period, reflecting a significant drop in demand among rural consumers. Earnings of such shops in rural markets grew at 5% in the September quarter compared to the 19% growth they clocked in the same quarter last year, according to the findings of the Nielsen report.
The slowdown is far more severe in north India, Nielsen’s data showed. “North market has seen maximum impact where volume growth is almost flat at 1% in Q3 2019," the report said. Markets in the southern states continued to hold on to growth rates, especially urban households in south India, that helped lift sales of packaged foods.
Nielsen expects growth in Q4 2019 to be in the 6.5-7.5% range. The growth forecast for Q1 2020 (January-March) is in the range of 7.5-8.5%. It expects demand to bounce back early next year.
“We are now finally seeing early signs of the declining trends being arrested," the report said.