FMCG firms had two good years. This one may be different

Makers of soaps to shampoos and biscuits to beverages may grow at 4.5-6.5% in value terms this year, market researcher NielsenIQ (NIQ) said, sharply lower than 8.4% in 2022 and 9.3% in 2023. Nielsen, which follows a calendar year, did not share its outlook on volumes growth.

In the December quarter, the FMCG industry reported a 6% year-on-year (y-o-y) growth in value terms, driven by a 6.4% rise in volume. However, both volume and value growth fell sequentially during the quarter. The trend was seen in both urban and rural markets, where volumes grew y-o-y but dipped sequentially.

“There is a definite slowdown," said Krishnarao Buddha, senior category head, marketing at Parle Products. “Both rural and urban markets have slowed down. Errant monsoon in select geographies due to the El Niño has impacted slowdown in consumption.There is also a normalizing effect post-covid," Buddha said.

The projected moderation in FMCG growth is in line with the government’s estimate of slower household consumption growth this year. The government estimates private final consumption expenditure, which accounts for 60% of GDP, to grow at 4.4% in the current financial year, down from last fiscal’s 7.5%. Factory output figures too showed that in the April-November period, consumer non-durable sector’s output expanded 5.6% over a low base.

According to NIQ, while urban volumes rose 6.8% y-o-y in the December quarter, rural volumes rose 5.8%, the latter reflecting a sharp turnaround from the year-ago period when they slumped 2.8%. On a quarter-on-quarter basis, rural volumes dipped marginally, while urban volumes reported a sharper decline.

NIQ, though, said its outlook reflects the industry’s ability to “navigate complexities and adapt to evolving market dynamics."

“The continued strength of the FMCG sector underscores its significance in the Indian economy and its ability to flourish despite external pressures, offering promising opportunities in the future," it said.

Market analysts were less than impressed with the findings. “Overall sector growth continues to wane, with price growth turning negligible. Urban growth has seen moderation and is now growing 1.2X rural. The low base aids non-food volume recovery, while food categories are seeing volume growth moderation. Channel growth has moderated, but modern trade continues to clock healthy growth," said Nitin Gupta of Emkay Global Financial Services.

The numbers also reflect a narrowing gap between urban and rural growth.

“For the first time in 2023, consumption gaps between urban and rural markets are narrowing down. The North and West regions are contributing to this phenomenon. The favourable interim Union Budget 2024-25, supporting several economic boosters for the rural sector, should augur well for companies with a rural strategy. Despite a sequential-quarter decline, the rural recovery narrative continued to evolve throughout the year," said Roosevelt Dsouza, head of customer success, India, NIQ.

The pandemic and inflation of the past years prompted companies to raise prices, lifting revenues. This has dropped off as companies cut prices to sell more. For instance, Hindustan Unilever Ltd (HUL) has cut prices on soaps and laundry products over the past couple of quarters to boost demand.

Demand in the December quarter was led by greater demand for “habit-forming" categories—such as biscuits and noodles—in food and essential home products. These categories have thrived despite flat to negative price growth, indicating resilience and sustained demand, said NIQ’s Dsouza.

Packaged foods reported a volume growth of 5.3% y-o-y in the December quarter, lower than 8.7% in the September quarter. This was largely due to a slowdown in demand for staples such as refined and unrefined edible oil as well as impulse categories such as confectionery.

Within non-food categories, NIQ reported an improvement in demand led by detergent cakes and bars, washing powder and toilet soaps, especially in rural areas. However, in urban markets, demand for non-food products dipped sequentially.

Experts attributed the weakness in household consumption to wage growth in the bottom of the pyramid, adjusted for inflation, fluctuating between a contraction to a minor growth depending on the level of inflation. When wage growth remains below expectations, people either dip into savings, borrow or consume less, experts said.

“There is stress in the rural economy. Government interventions are needed," said Devendra Kumar Pant, chief economist at India Ratings and Research (Fitch Group).

Pant explained that one percentage point increase in rural wages translates to 112 basis points in PFCE or 64 basis points in real GDP growth. A percentage point decline inflation will have a favourable impact on consumption, Pant added.

What has added to the woes of the rural economy this year is the erratic monsoon, because of which agriculture output growth is expected to slow down to 1.8% from a 4% expansion last fiscal. In an interview with Mint on Saturday, finance minister Nirmala Sitharaman indicated preparedness to address any possible impact of the moderation in farm output on the rural economy. “If it comes up, I will address it," Sitharaman said.

Meanwhile, FMCG companies have had a mixed quarter.

Rohit Jawa, CEO and MD, HUL said FMCG demand trends remained largely stable and similar to the last quarter. “While market volumes grew at high single digits year-on-year, this came on a base period where volumes declined in mid-single digits," he said during the company’s post earnings call last month.

Consumer goods major Marico said the operating environment in the December quarter was “largely in line" with that of the preceding quarter with a more discernible uptick in consumption. The pace of recovery in consumption was not on “anticipated lines", said the company’s management during a post-earnings call late last month. The company is “optimistic" of a gradual uptick in consumption trends over the course of the next calendar year.