Slow rural consumption over several quarters worries FMCGs

In its January note on the consumer sector performance in Q3FY2024, Nuvama Institutional Equities said that volume growth for FMCG firms will remain challenging

People in India’s villages are not driving demand for soaps, shampoos, detergents, tea and other fast-moving consumer goods (FMCG) for several quarters now. Among automobiles, domestic tractor sales have seen only a marginal increase in 2023. Although two-wheeler sales, which reflect the pep in rural economy, were higher in 2023 than the previous year, they are still much lower than their pre-pandemic peak.

While rural consumption, which makes up nearly 36% for the FMCG sector, is vital for demand recovery, analysts expect the situation to improve only in FY2025 .

Top executives at FMCG companies and analysts tracking the sector flag serious concerns on demand lag in rural India.

In its January note on the consumer sector performance in Q3FY2024 (Oct-Dec), Nuvama Institutional Equities said that volume growth for FMCG firms will remain challenging. They will see a low-to-mid single-digit volume growth driven by urban markets. Rural demand is tepid and volume growth is likely to remain flat or see a minor dip in several categories, it said.

“High rural unemployment and demand for NREGS (rural jobs guarantee scheme) reflect the high levels of rural stress,” Nuvama said in its note. It added that festival as well as winter demand for consumer products turned out to be weaker than expected by most companies.

Not just that, El Nino too played spoilsport and a poor monsoon has hurt agriculture and impacted rural demand. “Agriculture growth was 1% which is the lowest in the last four–five years,” Nuvama said, adding that even in Q4FY24 (Jan-March) rural volume growth will remain muted. Inflation has also hurt people in the villages with fuel and fertiliser prices going up. Consumers are spending more on education, medical expenses and telecom charges rather than on daily essentials.

While rural consumption, which makes up nearly 36% for the FMCG sector, is vital for demand recovery, analysts expect the situation to improve only in FY2025 (beginning April) as inflation tapers and heavy spending on general elections and freebies may revive demand. “The last five-six quarters have been the longest periods of rural slowdown in the last decade,” Nuvama noted. Before the Covid 19 pandemic rural markets were growing twice as fast as urban India.

Amit Adarkar, CEO at research firm Ipsos India, said there are structural and non-structural reasons for slowdown in rural markets. Patchy monsoon and inflation are among non-structural reasons as they are not long-term. Besides, the government slashed the Budget allocation to MGNREGA, the rural job guarantee scheme, for 2023-24 by 17%. “Traditionally, the outlay was either maintained or increased. This is the first year that the government has cut down MGNREGA outlay. It obviously impacts rural consumption quite a bit because that’s money in people’s pocket,” Adarkar said.

Additionally, multinational FMCG firms that gained market share during Covid and immediately after Covid owing to more resilience and better supply chains, are now facing the heat from smaller regional companies making tea, biscuits, edible oils and detergent bars who cater to the value conscious consumer. “Demand for a lot of these local and regional brands does not really get captured in formal retail giving the impression that rural consumption is slow,” Adarkar added.

Why urban markets may be outpacing rural consumption may also be linked to some of the long-term changes the country is undergoing, Adarkar said. While most estimates suggest that 70% of India lives in the villages and 30% is in the cities, that number may now be higher at about 37%, he said. “This may possibly jump to 50% by the time we celebrate 100 years of India’s Independence. The point is, this journey from rural to urban is happening very fast. The pace of urbanization has picked up. That’s a huge structural change because when you have people shifting from village to city, rural demand is not going to go faster than urban demand.”

Additionally, urban India has rebounded faster from Covid with more employment opportunities, people holding jobs and doing additional gigs. “There are more ways of earning, more money in the consumer’s pocket and more discretionary expenditure,” said Adarkar.

Also, with better road infrastructure and greater connectivity, rural consumers are no longer just relying on weekly ‘haats’ for making their purchases. “You can now actually take the transport to the nearest town, buy things and come back. This part of rural consumption may not be getting captured.”

Though demand in rural India is undeniably under pressure, how companies map it also needs to change as consumption becomes more seamless, he added.