FMCG Growth Slows in Q3, Volumes Fall For Fourth Quarter In A Row: Nielsen IQ

India's fast-moving consumer goods industry continues to reel from a rural demand slump, as elevated inflation forces companies to go for successive price hikes, according to Nielsen IQ.

In the third quarter, volume growth in the FMCG sector fell 0.9%, compared with a 0.7% decline over the previous quarter, as per the FMCG quarterly snapshot released on Thursday by the market research firm.

The decline in volumes in the July-September period—the fourth quarter with negative volume growth—comes on the back of low-unit growth and double-digit price increases that companies took over six consecutive quarters to offset inflationary pressures, Nielsen said in the report.

Rural India, home to more than two-third of Indians, remains more stressed than urban India. Rural markets recorded a higher volume decline in the third quarter at 3.6%, compared with 2.4% in the previous quarter, while urban markets' volume grew 1.2%, the report said.

Consumption growth in the urban areas was driven by food, which grew 3.2%, while non-food continued to remain stressed, with a fall in growth of 3.6% in the third quarter of 2022, compared to a 2.7% fall in growth in the previous quarter, Nielsen said.

"This quarter shows cautious consumption from consumers, primarily due to apprehensions of slowdown and continued inflation," said Satish Pillai, managing director–India, NielsenIQ.

While inflationary pressures persist, variations in rainfall across rural areas would have worsened the demand scenario.

"This sentiment also shows up in the cautious behaviour of the retail trade," he said. "Traditional retailers have been keeping a leaner assortment and lower stock levels to be agile."

Pillai also expects a 'muted' festive season this year. "Typically, the third quarter witnesses a consumption uptick, but this year, despite the opening of the markets, the indications are that consumption has not grown," he said.

Due to multiple price hikes, sales in the FMCG industry grew at a slower pace of 8.9% in the third quarter from 10.9% growth seen in the previous quarter. However, both volume and value sales are above pre-Covid levels of January-March 2020.

The stress in consumption was also reflected in the results of the FMCG companies in the September quarter.

Hindustan Unilever Ltd, which owns brands such as Dove, Surf Excel and Lakme, saw 4% growth in volume.

"Demand environment remains challenging with inflation impacting consumption," said its Chief Executive Officer and Managing Director Sanjiv Mehta.

Operating margins of most companies, barring Britannia Industries Ltd., also continue to remain under pressure as input cost pressures persisted.

Within channels, the fall in growth deepened in the traditional general trade volume to 2% in Q3 FY22 from 1.5% fall in growth seen in Q2 FY22. Modern trade, however, showed double-digit value of 22.2% as well as volume growth of 11%.

"Consumers continue to prefer smaller pack sizes as pack-size growth remains negative in the third quarter, but a slight uptrend was observed in the third quarter of 2022 compared to Q2 2022 on the back of traditional channels," the report said.

Food Consumption Strengthens

The food segment continued the uptick seen in the previous quarter with positive volume growth of 3.2% over July-September period in urban markets, while witnessing marginal decline in rural markets (-0.3%).

The staples category, comprising non-refined oil, atta, and rice, is on the uptick after being in the negative for the past three consecutive quarters, according to Nielsen. Impulse categories sustained double-digit growth.

This quarter has seen a sharp drop in prices of edible oil due to the government lowering taxes and manufacturers decreasing prices, leading to volume growth.

Non-food consumption fall in growth rose to 6.8% in the third quarter versus a 6.4% decline seen in the previous quarter, led by rural markets.

The non-food category is below pre-Covid levels (below Q1 FY21) since last three quarters in terms of volume growth.

Small Manufacturers See Demand Revival

Small manufacturers, especially those with less than Rs 112 crore offtake this year, are driving consumption with positive volume growth of 0.5% in Q3 compared to a 9.1% decline in the previous quarter, according to Nielsen.

Lower price increase by small manufacturers compared to large and medium manufacturers or the top 400 companies in the third quarter is helping them drive positive consumption growth.

"They are also gaining both value and volume share in last 2-3 quarters when looked at sequentially," it said.

Contribution of new launches was higher across key FMCG categories in the third quarter than it was a year earlier, though most of it was in terms of changes in pack size. "This could be result of manufacturers working with smaller grammages as raw material prices are still high," said Nielsen.

While new product offerings contribute positively to consumption, assortment distribution decline are pulling down overall volumes within key FMCG categories.

“Manufacturers are taking different measures to rejig their pricing strategies to win back consumers," said Sonika Gupta, customer success lead (India) at NielsenIQ.

"Some manufacturers are focusing on innovations in pack sizes, and many manufacturers have rejigged their price strategies to develop affordable price points for consumers."

This could create a win-win situation for both manufacturers and consumers, Gupta said.