FMCG no longer fast moving as rural demand fizzles out

Mumbai: India’s consumption engine is losing steam as rising prices and lower purchasing power in the countryside hit the brakes on demand growth.

The fast-moving consumer goods (FMCG) industry this year will grow at least two percentage points slower than in the last quarter of 2018, consumer insights firm Nielsen said on Wednesday. The projected growth of 11-12% for 2019 is a downward revision from its previous forecast of 13-14%. It also expects volume growth that peaked at 11% in 2018 to come down to 8.5-9.5%.

Meanwhile, inflation is expected to approach the 4% mark in 2019 from a low of 2.1% in the December quarter. Despite various government schemes focused on rural areas, rural job guarantee payments, higher minimum support prices and surging non-farm income, below-average rainfall could play spoilsport.

“While a slight drop is witnessed in urban growth, there is a significant softening of growth trends in rural, which is dampening the overall FMCG industry growth from Q3’18 to Q1’19. Historically, rural has grown 3-5% points faster than urban and the recent slowdown in rural growth also brings the growth closer to the urban growth,” Nielsen said in its report.

Nielsen said Indian FMCG grew at a combined 13.6% in the March quarter, at least 2.3 percentage points lower than the December quarter. Rural consumption that grew 20% in the December quarter slowed to 15.2% in the March quarter.

The gloomy projection for consumption ties in with that for automobile sales, together painting a bleak picture of the Indian economy. According to the Society of Indian Automobile Manufacturers (Siam), sales of passenger vehicles and two-wheelers are expected to grow just 3-5% and 5-7% respectively in 2019-20. The demand scenario also poses a challenge for the ruling National Democratic Alliance, which is vying for a second consecutive term at the centre, rejecting reports of a slowdown in economic activity and job creation.

“The last six months have seen increase in fuel prices, big impact of increased insurance costs and poor liquidity. Interest rates were quite hard on consumers too and market has seen weak sentiments. Sentiments are a mixture of several factors such as job losses in telecom and aviation industries, among others. Since incomes are hit, consumers don’t want to spend money on discretionary purchases at the moment,” Vishnu Mathur, director general, Siam said. “We will wait and watch how Q1 fares; we expect Q2 to be better.”

Madan Sabnavis, chief economist at CARE Ratings, said the agency does not have “confidence that consumption will see a pick up in India and would not even see a revival this year”.

“Last year, farmers received lower prices on crops, which led to low spending and is now getting reflected in consumer durables and piling up of inventories in different segments like auto in last few months. Therefore, we will get real picture of consumption only by September-October post monsoon in India,” Sabnavis said.

“It has been a challenging last few months for the auto industry at large, marked by weak consumer sentiment across all major segments. In the domestic market, challenges related to adverse macroeconomic conditions, tight liquidity, drop in rural demand and low consumer buying sentiment resulted in subdued demand for passenger vehicles,” said Veejay Ram Nakra, chief of sales and marketing, Automotive Division at Mahindra and Mahindra Ltd.

Nielsen said the drop in rural growth is mainly due to a slowdown in packaged foods such as atta, refined oil, spices, biscuits, chocolates, breakfast cereals, cheese and sugar substitutes. While there is a slowdown across various food categories in rural areas, the extent of drop is larger in essential (atta and refined oil) and impulse (biscuits and chocolates) food categories. Value growth in these segments has fallen 6.1% and 5.6%, respectively in the March quarter sequentially.

“Forecasts of a below-normal monsoon this year at 93% as against a normal range of 96-104% is another key area to watch out for. Discretionary spending gets immediately impacted, especially in rural markets, on the backdrop of a weak monsoon. The impact of El Niño needs to be assessed and closely looked at,” Nielsen said.

Skymet, a private weather forecasting agency, has forecast below-normal monsoon rains, at 93% of the long-term average. Skymet attributed developing El Niño phenomenon for its prediction.

However, the India Meteorological Department (IMD) has predicted near normal monsoons this year, at 96% of the 50-year average of 89cm rainfall. It expects rainfall to be well-distributed. Anything between 90-95% falls under the “below normal” category.

Nielsen said the slowdown will be worse for small companies compared to large manufacturers. The magnitude of the slowdown for small players is even greater in rural areas, it said.

Companies, meanwhile, have raised prices to protect margins. Kotak Institutional Equities said in a 13 March report that Nestle has raised the price of Maggi Oats Noodles and Maggi Atta Noodles by 3-4% and Lactogen Baby Cereal No.1 by 4%.

Others who have raised prices are GSK Consumer (Boost-3%) Kraft (Complan-4%) and Danone (Protinex-3%). In February, GSK raised Horlicks prices by 1-5%.

Hindustan Unilever has increased the price of Axe Dark Temptation deodorant by 5% and Fair & Lovely Advanced Multi-Vitamin cream by 3%. Dabur has increased the price of Odonil air fresheners by 4-6%.