Deals Likely To Return, Rural Rebound Seen For Consumer Goods Sector In 2023

Coming off lackluster sales volume for most part of 2022, the fast-moving consumer goods industry is looking forward to the new year with hopes of consumption recovery and easing inflationary pressure on margins.

The makers of staples to soaps are amping up efforts to turn the year into a shopping bonanza with increase in offers and promotions across general trade, modern outlets and e-commerce platforms as input prices soften.

They also expect rural demand, which accounts for more than a third of the overall sales, to turn around in 2023, riding on a good harvest season and improvement in farm income.

Besides, they are pinning hopes on the upcoming Union Budget. Expectations of short-term demand drivers such as fuel price cut or income tax reduction top the list, the executives said.

"We're now seeing an uptick in volumes typically led by modern trade and e-commerce on the back of discounts and year-end offers," Krishna Rao, senior category head, Parle Products, told BQ Prime. "We hope this trend to percolate down to general trade as brands begin to offer higher weight for the same price and discounts on retail shelves with most input prices cooling off from peak levels. This is expected to spur overall consumption."

Between thinning shopper wallets and rising raw material costs, the year 2022 has been difficult for the fast-moving consumer goods sector. Successive price hikes initiated by companies to offset inflationary pressure on margins has come at a cost: demand slump. It has failed to recover with the country's rural population cutting back on spending.

While oil prices have cooled off, the industry is still impacted by high prices of wheat and sugar, said Parle's Rao. "Yet, we are able to give freebies or price-offs to bring back demand and fend off competition as profitability is sort of taken care with most [commodity] prices now seeing a correction."

According to Sunil D’Souza, managing director and chief executive officer, Tata Consumer Products Ltd., the battle to contain inflation, global growth slowdown and geopolitical risks are some of the key monitorables in 2023.

He, however, remains "cautiously optimistic" about rural recovery in India and overall FMCG growth in the absence of a conducive macro environment.

"As far as the inflationary scenario is concerned, we think the worst is over," said Saugata Gupta, managing director and chief executive officer at Marico. He expects consumption to improve but only "gradually" as we get into the second half of 2023.

Manish Aggarwal, director- Bikano, Bikanervala Foods Pvt Ltd., expects to see better margins and profitability in the coming year as concerns around input inflation ward off. The snacks segment, however, was the least impacted in 2022, he said, as homebound people resorted to impulse buying.

"Even as people cut down on their household budget, the craving for snacks has grown with digital and remote work becoming mainstream."

Ahmed ElSheikh, president, PepsiCo India, said that the company is seeing "strong" demand from rural India for both food and beverage products.

"This is largely due to labour migration, increased digital penetration and enhanced distribution of our portfolio and rural India switching from unbranded loose products to branded ones," he said, adding that the strategy in 2023 will be to "focus on innovation, prioritizing profitable sales channels and diligently managing stock-keeping units" to drive growth.

Digital Adoption, Premium Play Among Key Trends

Tata Consumer Products' D'Souza pointed out health and wellness, convenience, digital adoption and premiumisation are among the key trends that have emerged in FMCG and are expected to drive future growth. "And we will continue to position ourselves to cater to them."

B Sumant, executive director, ITC Ltd., concurred. "Digital acceleration and innovation will be key drivers for the FMCG segment," he said. The owner of Fiama and Savlon brands is also seeing an uptake of premium products.

In fact, most FMCG companies have seen their premium portfolio buck the demand slowdown as affluents remain immune to the effects of inflation.

India's largest consumer goods maker Hindustan Unilever Ltd., has seen its premium portfolio grow at "twice the pace" than the rest of the portfolio in the September quarter of FY23. "This is a very clear trend, and it is in many ways intuitive because people who have more money are a bit more resistant to inflation than people at the bottom of pyramid," said its CEO Sanjiv Mehta.

Another key trend is that the direct-to-consumer sales channel has become more relevant post the Covid-19 pandemic and is here to stay.

All FMCG companies from HUL to Bikanervala Foods Ltd., have launched their own D2C (direct-to-consumer) portals and are seeing their digital sales inching up steadily.

"Hopes are building up for a recovery in rural demand as wage growth overtakes inflation after long, unemployment rate drops and sowing and tractor sales reveal strong trends," according to Himanshu Nayyar, senior vice president–consumer staples & discretionary at Systematix Institutional Research. He believes pressure on margins have bottomed out, yet improvement will be gradual. "This is because companies have begun to effect price cuts to protect market shares against unorganised players, and would also need to increase marketing spends, which have been low for last couple of years."

Porus Doctor, partner and consumer industry leader at Deloitte India, said low rural consumption remains a matter of concern for the FMCG industry.

"Stimulus packages for rural support programmes such as the Mahatma Gandhi National Rural Employment Guarantee Act 2005 among other packages can provide some recovery." He expects the upcoming Union Budget to focus on the agriculture sector to increase rural demand, ease cost pressures by capping exports to enhance FMCG firms' profitability.