WE NEED MORE MONEY in hands of people,” Hindustan Unilever (HUL) MD & CEO Sanjiv Mehta said while announcing the company’s Q3FY23 results. He was replying to a question about dealing with low consumption and volume growth, especially in rural markets, which contribute over 40% to revenues of most consumer product companies. “Value growth is still 6-8%, which means people are spending. But because inflation has been so high, they have had to cut down on volumes, which is completely understandable,” Mehta added.

In Union Budget 2023, finance minister Nirmala Sitharaman paid heed to Mehta’s suggestion by announcing personal income tax relief (income tax exemption limit increased from ₹2.5 lakh to ₹3 lakh, limit for rebate from ₹5 lakh to ₹7 lakh in the new income tax regime). The relief is expected to increase disposable incomes of taxpayers by ₹35,000 crore. She also announced an increase in capital investment outlay by 33.4% to ₹10 lakh crore. This would create employment in the infrastructure sector which, in turn, could increase disposable incomes and increase consumption. “This would be 3.3% of GDP, almost three times the outlay made in FY20. With the substantial increase, it is central to government’s efforts to enhance growth and job creation, crowd in private investment and provide a cushion against global headwinds,” she said in her Budget speech. Sitharaman also announced a capital outlay of ₹2.4 lakh crore for railways. The railways were allocated ₹1.4 lakh crore in Union Budget FY23, of which ₹1.37 lakh crore was for capital expenditure. She also announced 100 transport infrastructure projects for providing end-to-end connectivity to port, coal, steel and fertiliser projects.

Image : Photograph by Sanjay Rawat

Though the industry has lauded these moves and is optimistic about consumption pick-up in the medium to longer term when job creation happens, it isn’t hopeful about volume growth in the short term. “Income tax cuts will not put too much money into hands of people. In a large economy of $3 trillion, ₹35,000 crore is too small a number to really generate demand,” says former Dabur India COO Kannan Sitaram, who is currently venture partner at Fireside Ventures.

Inflation Plays Spoilsport

The average Indian consumer, hit by high inflation, is down-trading. Not only is she buying lower-unit packs, she is also opting for cheaper brands. “In rural areas, instead of three litres edible oil, consumers are buying 2-2.5 litres. Around 29% have downgraded to lower-priced oil brands,” says Angshu Malick, MD, Adani Wilmar. He says their mid-level edible oil brands such as Kings and Aadhar have grown 18-20% more than the premium offering, Fortune Expert.

This trend is not going to change in a hurry as inflation continues to be significantly high. “Net material inflation may have come down from 22% to 18% but is still quite high. Whether it is crude oil or soda ash, if you compare their prices from December 2020, they are higher by around three digits. Crude oil is higher by 100% and soda ash by 95%,” says HUL’s Mehta.

“FMCG sector gets impacted by high inflation because incomes are limited as you go down the strata. When inflation is high, consumers don’t compromise on food but other FMCG products. In highly penetrated categories, they downgrade, but in low penetrated categories, they tight-grade because there aren’t enough brands,” says Saugata Gupta, MD, Marico.

The FMCG market grew 8% in December quarter, higher than in September quarter. But the growth was price-led as volumes declined, although the decline in December quarter was lower than in September quarter. “If you look at the overall dip, in September quarter, it was 6% value growth and -6% volume growth. In December quarter, 6% value growth moved to 8% and volume growth, which was -6%, moved to -4%. So, it has moved in the right direction. Within this period, September and October were best months, when we had double-digit growth,” says Mehta.

Rural India saw negative value as well as volume growth. “If you look at December quarter, rural growth has been 2.5% and volume growth -5%. Month on month, the negative number has been declining, but there is still a long way to go for volume growth to come back to its original high,” says Mehta. So, even if consumers have more money, volume growth and consumption will be high only if inflation comes down.

Rural Matters

Prior to 2019, rural demand was 1.5 times higher than urban demand. Rural market is more promising for consumer goods companies as they are under-penetrated. It is a highly value-conscious customer segment with mass brands and smaller packs. And that’s what generates volume growth for companies.

If one were to travel to country’s hinterlands, consumer sentiment isn’t really low. The average consumer does have money in hand thanks to good monsoons and harvest but inflation and price hikes have forced him/her to be cautious. That’s hurting consumer goods companies.

Sridhar Gundaiah, co-founder and CEO of rural distribution company Storeking, says rural consumers are not hesitating to invest in machinery to improve farm productivity or even beautifying their homes but are cutting down on FMCG spends. He points out the trend of rural consumers embracing regional brands which are more competitively priced than national brands. “There is a Chennai-based detergent brand, Waso, which is giving Surf Excel, Wheel and Rin a run for their money. Similarly, Modern Chips in Mangalore is giving Lays and Haldiram a tough time. The brand is growing 50-60% year-on-year.”

With sales under pressure, most legacy FMCG companies are piggybacking on premiumisation. But that may not help much as India is a mass market economy. For example, almost 80% shampoo sales come from `5 sachets. Therefore, pushing volume growth in rural India is a priority. “Rural is a big agenda for us,” admits Gupta of Marico.

“Rural growth will be a huge focus. FMCG companies are investing heavily in increasing rural penetration and last-mile connectivity,” says Rajat Wahi, partner, Deloitte India. ITC, for instance, has increased its market coverage in small town India by reaching out to 1.6 lakh additional stores. “We have added 14,000-plus stockists in last couple of years. Even if sales per outlet are low, if you go to more outlets, you will get more sales,” says B. Sumant, executive director, ITC.

With inflation gradually dipping, consumption is showing signs of picking up, but it will be a while before volume growth comes back to its erstwhile level. According to Arvind Singhal, chairman, Technopak Advisors, volume growth can happen in a significant way only when real GDP growth touches 7-8% and remains steady there. “That’s when your discretionary spending will increase. Having said that, volume growth won’t be stagnant or negative. We should be happy even if it’s a modest 4-5%.” Real GDP is expected to grow 6% in the next fiscal. He expects consumption and volume growth to be in line with GDP growth.

Recovery surely seems in sight, but with inflation still significantly high, growth will continue to be price-led.

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