FMCG Scenario Worsens with Sustained Inflation in Rural Markets

By siliconindia | Thursday, 10 March 2016, 13:13 Hrs

BENGALURU: According to the Finance Minister, Arun Jaitley, Indian economy has been delivering high performance with increased growth rates despite the global challenges. However, the picture does not seem appealing to the marketers of daily consumption products who are witnessing no improvement in the demand and predict that the situation may turn worse, reports ET. "The overall FMCG scenario has worsened considerably and most categories across consumer goods seem to be trending downwards. It doesn't seem to be 7.5pct growth economy," said Varun Berry, MD, Britannia Industries.

The growth in sales across FMCG categories has dropped to 5-6 pct in the first two months in 2016 in comparison to 11-12 pct in the first three months of 2015, as per two industry officials disclosing data from Nielsen. Weak disposable incomes and sustained inflation are the cause behind the consumers’ changing preference to cheaper products across categories, explain companies and analysts.

"It has been a very depressive market so far with no signs of improvement even in the next few months," said Sushil Kumar Bajpai, President at RSPL, maker of detergent brand Ghari. "Growth will depend on macroeconomic factors, including monsoon, instead of companies offering freebies and discounts to trigger sales," he said. Biscuits and detergents are two major components of the FMCG market contributing around 45,000 Cr to it.

The sales growth in rural areas has come down to single digits in comparison to midteens during 2010-14 as a result of tough agricultural economy, no incremental minimum support prices, poor monsoons and a sagging bottom-of pyramid segment. As estimated by Nielsen, the rural market hold a majority of retail stores yet accounts for only one third of the sales in the FMCG market.

The reforms announced for the rural markets in the last month will take upto three quarters to reflect positive results, said Sunil Duggal, Chief Executive at Dabur.

Saugata Gupta, Chief Executive at Marico, said that it might take a couple of quarters to revive from this condition. "Consumption continues to be soft; both rural and urban have bottomed out and are still not looking up. Hopefully, there will be turnaround in the third or fourth quarter," he said. Averagely, around 40-45pct of the consumer goods are purchased in the rural markets.

For the third consecutive time, the last quarter witnessed that companies had a drop in the prices by 1.2 pct yet the reverse can take place as per the analysts.

"Companies with pricing power also did not hike prices as they were sitting on huge margins gains in any case. We expect this scenario to reverse from the first quarter of FY17 and price growth to make a comeback as the last year's price cuts go into the base. There are some price hikes starting to happen, and the impact of the excise hikes is behind us," wrote Arnab Mitra and Rohit Kadam of Credit Suisse in a report. Promotional campaigns have even flopped contributing to the dropping revenue growth.

"Discounts and offers only give us share. We take share from other companies and we grow faster, but it doesn't address the issue of category growth," said Berry.