Rural areas add to continuing FMCG sector woes

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The FMCG sector in India is like a bellwether of consumption patterns in the country. So analysts, investors, policymakers and consumers,  everyone tracks the performance of FMCG companies to assess the demand and consumption of basic discretionary items.

The situation of FMCG companies in recent times has not been great. They are going through some tough times. Brokerages believe that the fourth quarter of FY23 will also witness a subdued performance from FMCG companies.

On Thursday, HUL came out with results and they were anything but spectacular. HUL missed profit estimates by the street. Its profit came at Rs 2,552 crore which is 9.66% higher than the same quarter last year. Its revenue increased by 10.81%. HUL management stated that the situation in the FMCG sector has bottomed out and from here on it is expected to improve but demand will get better with a lag.

For the FMCG sector as a whole, there has been growth in value terms but volume growth has been tepid at best. Even there rural demand has remained a pain point. Rural area accounts for 40% of revenue for FMCG companies and demand has taken a hit there. In the rural economy, the situation was dim even before Covid. That trend has continued.

Now, there is a risk of El Nino and unseasonal rains impacting crops in March. So, they can lead to an increase in the price of commodities and also impact demand as farmers’ income may be impacted. Forty-seven per cent of the rural population is dependent on farming, which means more than 50% rural population depends on non-agriculture activities.

On that front, the unemployment rate in rural areas in March was at 7.5%. So we also need to see how the government policies like MGNREGA and food policies will impact the situation and demand in the rural areas.

In urban areas, graduation to premium products drove the growth. Companies look to sell more premium products so that there is more stickiness. Going ahead,  we can expect more spending on advertising and promotion to reduce the price elasticity of FMCG products.

Prices of commodities like palm oil and crude oil have fallen but still, some commodities like wheat, sugar and milk are available at high prices.

Now Reliance has also entered the sector, this will increase the competition in the sector as Reliance has an image of disrupting the sector. So all the will be tracked in the FMCG sector going ahead.