FMCG Industry – You Won’t Believe What’s Changing!
FMCG Industry: Amidst the gloom of urban markets, a rural resurgence is taking place.
The current quarterly earnings season is proving to be challenging, particularly for the consumer sector. In cities like Mumbai and Bangalore, high-street shops are filled with more salespeople than customers. FMCG companies are feeling the impact of the hesitant Indian consumer on their balance sheets. Dabur is anticipating only minimal revenue growth, while analysts are predicting single-digit revenue growth for HUL, Britannia, and Nestle. Tata Consumer, on the other hand, is expected to see healthy revenue growth but is facing margin pressures.
Mirae Asset Sharekhan has projected a weaker performance for the overall consumer goods sector in Q3FY25 due to sluggish urban demand exacerbated by inflation and limited job opportunities. This has prompted FMCG companies to shift their focus to rural areas, which have been outperforming cities for the past three quarters.
Rural consumers are increasing their spending habits, with many brands utilizing smaller sachet sizes to cater to the price-sensitive rural market. However, recent observations by HUL have shown that rural consumers are now upgrading their purchases, opting for higher-priced products like Dove’s Rs. 2 sachets over the traditional Re. 1 sachets of Clinic Plus shampoo. They are also purchasing larger packs of noodles, chocolates, soaps, and detergents, indicating a shift towards lifestyle upgrades.
Income support schemes introduced by various Indian states, such as the Ladki Bahin Yojana, have also played a role in reducing consumption inequality. Government data reveals that spending patterns in rural areas are evolving, with a growing interest in convenience and health products. The share of processed food, vegetables, and fruits in consumption expenditure has seen an increase in 2023-24 compared to the previous year. Conversely, spending on oils and durable goods has declined.
The attitudes of rural consumers are evolving rapidly. Lakshmi Venu, director of TAFE, a leading farm equipment company, emphasizes that the once prevalent knowledge gap between urban and rural areas has significantly diminished. Thanks to the availability of affordable data, rural customers now have access to the same wealth of information as their urban counterparts.
The increase in income levels in non-metro areas is driving a surge in luxury goods purchases. Just like their counterparts in villages, consumers in tier II and III cities are seeking upgrades. Pradeep Bakshi, Managing Director of Voltas, highlights that as per capita income rises in smaller towns, consumers are allocating more of their budget towards luxury items and durable goods.
Cities such as Ludhiana, Jaipur, Lucknow, and Coimbatore are experiencing a boost in spending power. Luxury watch retailer Ethos has expanded its presence by opening boutiques in Kochi, Dehradun, and Mangaluru. Tata Cliq Luxury has observed a growing demand for high-end brands like Louis Vuitton, Gucci, and Rolex in cities such as Nagpur, Ajmer, and Aligarh. Non-metro areas now account for over half of Tata Cliq Luxury’s sales.
How are brands adapting to the changing market landscape?
Brands are innovatively engaging with non-metro consumers to expand their reach. For instance, the decision to launch Pushpa 2’s Hindi trailer in Patna instead of Mumbai showcases a shift in marketing strategies.
FMCG companies are aggressively expanding into rural areas. Dabur has successfully penetrated 122,000 villages out of the 6 lakh villages in India, while ITC has increased its rural stockist network by 1.3 times in just two years. Mahindra Logistics’ ‘Direct to Kirana’ model has enabled a multinational corporation to increase its market reach by 30% in non-metro cities. Even Durex is targeting rural markets with premium products in smaller, affordable packs.
Smaller cities are emerging as key players in the digital space, surpassing metros in data consumption. Users in these cities are consuming 38–42 GB per capita per month, compared to Delhi and Mumbai’s 30–34 GB. Streaming platforms and the digital ecosystem are thriving as a result, with Netflix and Amazon investing in content delivery networks in cities like Pune, Hyderabad, Ahmedabad, and Jaipur.
Local influencers, such as mimicry artist Siraj Bachchan, fitness creator Ankit Baiyanpuria, truck driver Rajesh Rawani, Sangli resident Santosh Jadhav, and electrician-mason Pawan Bisnoi from Fatehabad, are gaining prominence. These influencers drive online engagement at a fraction of the cost of traditional campaigns. Brands like Swiggy, Asian Paints, True Elements, and Jindal Stainless are collaborating with them to connect with audiences in ways that big celebrities often cannot achieve.
Is There a Structural Improvement in Rural Consumption?
According to government data, monthly spending in villages has increased by 10% year over year, compared to 8.5% year over year in cities, from August 2023 to July 2024. The gap between rural and urban spending has narrowed significantly. In 2011-12, urban spending was 84% higher than rural spending. However, in 2023-24, this gap has decreased to 67%. This shift indicates a more balanced economic landscape, with rural consumption growth surpassing urban growth across most income categories.
It is time to delve deeper into this trend. Rima Bijapurkar, in her book “Liliput Land,” challenges the conventional classification of consumers as solely urban or rural. She highlights that nearly 50% of India’s wealthiest households are located in rural areas and are engaged in agricultural businesses, dispelling the myth that wealth is concentrated in metropolitan areas.
To gain a true understanding of the Indian consumer, Bijapurkar advocates for more detailed data analysis: insights into income patterns, category-specific GST data, and comprehensive rural surveys. Without this level of detail, brands risk oversimplifying a complex and evolving market.
However, one cannot overlook the slowdown in urban areas. As the government prepares the budget, there is a keen focus on how to balance the needs of urban and rural residents. Urban India requires reforms in ease of doing business and taxation to reignite growth.
CIAN Agro Industries & Infrastructure has emerged as a standout performer in the latest screener, boasting an impressive YoY revenue growth of 452.5% to Rs 126.4 crore in Q2FY25. This growth significantly outpaced the average revenue growth of the edible oils industry by 439 percentage points. As a result, the stock price has surged by 126.2% over the past three months, outperforming the industry by 127.1 percentage points. The company’s revenue surge can be attributed to the strong performance of its agro and infrastructure divisions.
On the other hand, Gillette India stands out as the sole large-cap stock in the screener, having outperformed the personal products industry in terms of price change by 20 percentage points. The company achieved a growth of 8.5% over the past quarter, with its revenue increasing by 17.1% YoY to Rs 788.9 crore in Q2FY25. This growth surpassed the industry average revenue growth by 14.8 percentage points. The company’s revenue growth was primarily driven by improvements in the grooming products segment.
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