HUL To Dabur Bet On Festive Spark To Climb Out Inflation-Induced Lull

India's demand recovery remains weak as inflation means the consumption is tepid in the hinterland. The upcoming festive season could pivot it back to pre-pandemic levels.

The optimism stems on back of a good monsoon and robust harvest supported by various government initiatives to help revive rural demand that has been hit the most by the pandemic.

The weakness so far has hurt the fast-moving consumer goods sector the most with the June quarter volume declining, albeit at a slower pace, for the third time in a row. Value growth continued to be price-led.

Some companies did post volume growth in what was the first full normal quarter after two years of Covid-led disruptions. Hindustan Unilever Ltd. saw volumes rise 6%, while for Nestle India Ltd. and Dabur India Ltd. it grew 7% and 5%, respectively. But these companies still sound caution.

"Optically, on a year-on-year basis, the June quarter looks better than March quarter, but that is on a low base of 2021 where the country was going through second wave of Covid," said Sanjiv Mehta, chief executive officer and managing director at HUL.

"When we look at the market growth on a three-year basis to compare against the normalized baseline, we see that the volumes are nearly flat," he said. "That would indicate that from a longer-term period if you remove the distortions, there is not much difference."

Others such as Godrej Consumer Products Ltd., Marico Ltd. and Britannia Industries Ltd. reported contraction in volumes during the June quarter.

In rural India, according to NielsenIQ India, the volume growth of FMCG sector fell 7% in the three months through June compared with a decline of 3% in urban areas.

"The rural market continues to be under pressure," said Angshu Mallick, managing director and chief executive officer of Adani Wilmar Ltd. "We have seen the total contribution from rural markets to volumes shrink from 35% to 31%."

Companies, however, are optimistic that the rural demand will bounce back, supported by government initiatives such as enhancing fertiliser subsidy by nearly Rs. 1.5 lakh crore and giving more free food to the rural population and forecast of a normal monsoon.

"If the realisation for crops is more than the input price inflation, then there will also be an increase in income for the farmers and that should augur well for them, resulting in faster rural demand recovery," HUL's Mehta said.

Dabur’s Chief Executive Officer Mohit Malhotra concurred. "Impact of inflation is much higher in rural as compared to urban, and therefore, volumes are also getting compressed," he said. However, in the medium term, he said, the rural area is expected to be "very resilient".

"It will be very quick to come back to where it was."

Adani's Mallick, too, expects a swift revival in demand in the third quarter on the back of a good harvest and price cuts in edible oil in line with falling global prices.

The festive season kicks off by end-August with Onam and continues through Diwali in October.

Companies are also expected to unleash advertising spends to tap anticipated recovery in demand. "We will not shy away [from increasing ad spends] even if it does at the cost of margins,” said Sameer Shah, chief financial officer at Godrej Consumer Products Ltd., “because the benefit of higher kind of media spends will result in sustainable volume growth in medium to long term".

Premium Brands More Resilient

Even as a majority of the country’s 1.3 billion people has pulled back on consumption because of high inflation, a section of it seems not as affected by soaring prices in recent months. The wealthy Indians appear willing to shell out on premium goods, providing succor to companies at a time of growing economic stress. HUL, for instance, said it has seen its premium portfolio grow at twice the pace of the rest of the portfolio in June quarter.

People's desire to get out and socialise again is also boosting products like lipsticks—that were put away during the pandemic. That helped June-quarter sales of HUL's beauty and personal care, which increased 17% led by robust sales of its premium portfolio.

Marico, in its investor presentation, also said it has seen double-digit growth in premium personal care owing to "lesser impact of inflation on the upper income consumer segment".

Companies are expected to ramp up launches in the portfolio to drive growth. "Innovations in the premium segment will be our key focus over the medium term," according to Saugata Gupta, Marico's managing director and chief executive officer.

Britannia Industries Ltd.'s Managing Director Varun Berry also said that the company's premium categories are growing faster than the bottom of the pyramid. He hinted at further price hikes of 6-7% in the current quarter to cover inflation but doesn't expect higher prices to hurt demand.

"Consumers today can absorb these kind of price shocks and that's what they are reflecting in their purchase behavior," said Berry. "There has been a drop as far as volumes are concerned in Q1. Hopefully, this will start to rise. We feel more confident than we were in the last six months."

Nestle India is also looking to increase the premium products in its portfolio. Recently, it entered into premium toddler nutrition with the launch of 'Gerber' and also announced pet the acquisition of pet food business of Purina PetCare India.

"There are many Indias within India. There is the super-rich India. There is a rich India. There is a medium India. There is the middle-class India. There is the lower-middle-class India and there is the poor India," said Suresh Narayanan, chairman and managing director, Nestle. "And pet care, the 30 billion pet ownership is largely amongst the middle and upper middle segments of the population, so you really do not have too many poor people owning a lot of pets or their pets are probably eating something else."

"It is that premiumisation we are looking at as it is growing pretty well."

As for the premiumisation in nutrition segment, he said, the company is not targeting "the mother who is struggling with her budget" but "a mother who can afford to give her child the best nutrition she can buy".

High Stocking Ahead Of Festive Season

Although consumption is on a recovery path following the Covid-induced slump, retailers are banking heavily on the festival season to boost sales.

Data from Bizom, which tracks 75 lakh kiranas, showed that stocking has been about 30-50% higher than weekly average in the last week of July.

"Two key categories—commodities and packaged foods—showed strong stocking at kiranas," according to Akshay D'souza, chief of growth and insights, Bizom, a retail intelligence platform. "We see very high stocking in commodities like edible oil as a drop in prices have been fueling demand for higher price point packs."

Households generally stock up discretionary items like snacks, sweets and beverages during festivities. "There is a stronger out-of-home consumption that is driving demand for such packaged foods," said D'souza.