Consumption change. Why fast-moving goods are slowing 

Late last month, Nestle India Chairman and Managing Director Suresh Narayanan set the cat among pigeons at a media roundtable, saying FMCG companies are facing muted demand due to an urban slowdown led by metros and mega cities. From double digits a few quarters ago, growth in the F&B sector is down to 1.5-2 per cent, he stated. “Food inflation has been a cause of concern due to sharp uptick in prices of fruits and vegetables and oil prices. This could lead to an increase in prices if raw material costs become unmanageable for companies. We are ourselves facing a difficult situation as far as coffee and cocoa prices are concerned,” he said.

Narayanan is not alone. Other leading FMCG companies, too, have flagged concerns about an urban slowdown even as rural demand seems on the recovery path. This also comes amid rapidly evolving shopping behaviour in urban regions, with a marked shift to online shopping for groceries and essentials, led by quick commerce platforms. At the same time, there are concerns that demand on emerging channels such as quick commerce is not being captured in urban regions. However, the top management of these companies remain bullish on the industry’s long-term growth fundamentals. 

According to NielsenIQ (NIQ), compared with urban regions, rural regions reported 2x faster volume growth year-on-year, at 6 per cent, in the September quarter. In fact, FMCG volume growth was higher in rural regions for the third quarter in a row this year. 

Overall, India’s FMCG industry posted volume growth of 4.1 per cent in the September quarter over a year-ago period, with price growth being flat at 1.5 per cent and value growth at 5.7 per cent.

Urban region volume growth was pegged at 2.8 per cent y-o-y in the September quarter, 2.1 per cent in the June quarter and 6.4 per cent in the March quarter. In comparison, rural volume growth was pegged at 5.2 per cent in the June quarter year-on-year and 7.8 per cent in the March quarter. 

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Falling income

In a recent earnings call, Varun Berry, Vice-Chairman and Managing Director, Britannia Industries, noted that FMCG market growth, according to NIQ data, was the lowest in metros in the September quarter, amidst heightened food inflation. “Metro region’s contribution to the total FMCG business is... let’s say... about 30 per cent but contributes to the slowdown almost 2.4x that. So, metros are the ones where the slowdown is the maximum,” he added. Besides inflationary pressures, Berry pointed out that almost 51 per cent of the urban workforce is under stress from lower income growth.

Nestle’s Narayanan also flagged the fact that middle-income households are under stress. “At the same time, a bit of channel shift is also happening in top cities with the growth of quick commerce while the general trade channel is under pressure,” he added. 

Saugata Gupta, Managing Director and CEO, Marico, pointed to a combination of factors shaping the FMCG industry. “Last year, there was a slight slowdown in rural areas while urban regions were doing well. I think in the last two quarters, we have seen some rural green shoots of recovery. In urban regions, there has been a slowdown due to food inflationary pressures... people tend to titrate or downgrade as far as FMCG is concerned,” Gupta told businessline. At the same time, the premium segment is growing, he said. “So, while the economy is growing, it’s not that all sections are growing. It’s a bit of a yo-yo in terms of the three segments of growth,” he added. 

Missing data

Zydus Wellness CEO Tarun Arora says urban consumption is under pressure as consumers are making alternative spending choices amid inflationary pressures. “Rural consumption has improved but not enough to cover up for urban consumption gap,” he added.

With new channels outpacing general trade, there is a growing debate over whether this shift is captured by industry syndicated data.

“In the last three years there has been significant growth at the top-end through digital brands across personal care, hair care, skin care, male grooming, nutraceuticals, food. Other than a few companies like ours, traditional FMCG companies haven’t participated in that growth. Now that growth obviously doesn’t get captured technically,” he reasoned. There is also a significant disruption in sales channels, especially in the top 5-10 cities, where quick commerce has overtaken modern trade and e-commerce. “It’s a lot of churn... So, you can’t broad-brush it to say there is structural slowing down,” Gupta says. 

Earlier this month, Dabur India CEO Mohit Malhotra echoed these sentiments in an earnings call: “Overall, FMCG urban demand is under pressure because of food inflation... But some of this urban demand is getting catered through e-commerce and quick commerce,” he said. Nielsen’s syndicated data tracks only modern trade, general trade and mom-and-pop stores, he argued, and is perhaps missing the huge demand on e-commerce and quick commerce channels.

Co-existing channels

Meanwhile, players like Dabur India believe the urban consumption slowdown has likely “bottomed out”. Nestle’s Narayanan too did not deem it an “endemic” issue, as non-urban centres were doing well.

FMCG companies are taking measures to manage the slow growth in their biggest distribution channel, namely general trade, while also boosting partnerships with quick commerce platforms.

“Quick commerce is impacting not only modern trade but also kiranas... we believe that for mass distribution companies, general trade and kiranas and the distribution system will co-exist. It is important we support them in the form of lower inventory, better servicing, and a portfolio which has general trade advantage to avoid channel conflict,” Gupta explained.

Dabur India’s Malhotra foresees growing clout for e-commerce and quick commerce. “We are strengthening our relationship... creating new products for them, connecting with them on a monthly, quarterly basis and continuously growing share on quick commerce and e-commerce portals,” he added. 

Consumer goods companies are hoping that the perceived slowdown is just a blip.