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Rural Kirana Sales Fell 14% Ahead Of Festive Season For Consumer Goods Firms

The fast-moving consumer goods industry's value fell 9.6% in September over August, according to Bizom.

<div class="paragraphs"><p>FMCG products on display at the Vashi APMC market in Mumbai. (Photo: BQ Prime)</p></div>
FMCG products on display at the Vashi APMC market in Mumbai. (Photo: BQ Prime)

Sales of soaps to consumer staples declined in the run-up to the festive season as retailers tried to clear unsold inventory before stocking up, even as inflation-led weakness in consumption persists.

The value of fast-moving consumer goods industry contracted 9.6% in September over August, according to data shared by the retail analytics platform Bizom.

It rose 8.1% year-on-year but most categories, except for packaged goods and commodities like rice, wheat and edible oil, saw a dip in sales.

This year, the festive season kicked off in the last week of September with the Navratri.

Feeble demand in the hinterland was a drag. Rural sales fell 14.3% while urban sales rose 1.1%, according to the retail platform, which tracks 75 lakh kirana stores.

Rural markets are a key growth driver for FMCG companies given the low penetration of many consumption items, according to Edelweiss Securities. "More importantly, it makes up roughly two–thirds of India’s population."

Companies have also been expanding direct reach in rural areas, which contributes about 36% to a typical consumer company’s sale, apart from adding more low-unit packs at price points of Rs 1, 2, 5 and 10, said Edelweiss.

"Rural stocking was cautious, given that consumer inflation worries haven't completely eased off," Akshay D’Souza, chief growth and insights officer at Bizom, told BQ Prime. "Also, the kirana store owners are looking to restock only after liquidation of the stock built up in the previous month (August)."

Grocery sales rose 6% in August, reversing the consecutive month-on-month decline over the past three months, as retailers stocked up in anticipation of pent-up festive demand.

But they are struggling with an inventory pile-up as consumers cut back on spending due to high prices. Rural sales were also affected owing to excessive rain in some areas and weak precipitation in others, thereby hitting agricultural yields and household incomes, D'Souza said.

Sales of wheat, rice and edible oil fell the most—14.5%—among categories, followed by home care products, which were down 8.6%. The personal care segment was an exception with flat sales compared with the previous month, according to Bizom.

The consumption trend, however, is expected to improve from October on a low base, favourable monsoons and as people celebrate the first festive season in two years without Covid-19 restrictions.

Another Subdued Quarter

The July-September quarter, which saw the impact of further price hikes as well as persisting rural weakness, reported 12.3% growth in value terms, as per Bizom data.

Volumes were impacted as inflationary pressures pushed rural consumers to ration their consumption, according to Abneesh Roy, executive director of institutional Equities at Edelweiss Securities. "However, we expect grammage cuts to likely reverse as costs ease, aiding volume growth in the coming quarters."

Quarterly updates by companies like Marico Ltd., Dabur India Ltd. and Godrej Consumer Products Ltd., too, point to weak demand, particularly in rural areas.

Marico's domestic business volumes rose in "low single-digit" over a year earlier in three months through September, it said in a regulatory filing.

"In India, demand sentiment trended on similar lines as the preceding quarter during most of the quarter," the company said. "With retail inflation holding firm, downtrading in rural (areas) was still prevalent during the quarter. Urban and premium discretionary, however, continued to fare better."

Edible oil recovered well with "high single digit volume growth" on a normalised base and benefited from the sequential correction in prices, the maker of Saffola Oil said.

According to Dabur, "Geopolitical situation continued to impact the business with unprecedented inflation during the quarter. This led to weak demand trends across categories."

"Urban markets were driven by modern trade and e-commerce, which saw double-digit growth," said the maker of Dabur Chyawanprash. "Rural markets witnessed some pressure in terms of liquidity."

It estimates "mid-single digit" revenue growth during the quarter and a 150 to 200-basis-point drop in margins compared to Q2 of the previous year.

Godrej Consumer Products expects to deliver high single-digit sales growth. "Rural markets witnessed slower growth compared to urban," it said.

Kotak Institutional Equities expects "modest" volume growth and "high single-digit/double digit (up to 20%)" value growth for most staple companies.

Margins, it said, are likely to remain under pressure due to consumption of high-cost inventory and higher ad spends ahead of the festive quarter.

However, it sees a bounceback in the second half of the fiscal as benefits of lower raw material prices flow through.

"Discretionary will continue to outperform staples in Q2," it said.

Kotak Institutional Equities' Company-wise Growth Estimates (YoY):

  • Hindustan Unilever: 17% revenue growth and 5.5% underlying volume growth (3-year CAGR of 3.5%).

  • Britannia Industries:15% revenue growth and 5% volume growth (3-year CAGR of 5.3%), despite grammage cuts in price-point packs.

  • Nestle: A 13% revenue growth (3-year value CAGR of +10.8%).

  • ITC (FMCG): A 12% growth in revenue, partly aided by recovery in the stationery business and price hikes.

  • Dabur, Godrej Consumer Products and Colgate: 4-11% domestic revenue growth with subdued volumes.

  • Marico: 1.8% domestic revenue growth on the back of low-single digit volume growth (3-year volume CAGR of 7%).

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