FMCG flavours: Rural demand revival uptick and double-digit volume growth in 2024

NEW DELHI: From an uptick in rural demand to higher volumes and favourable commodity prices, the country's FMCG industry is pinning hopes on diverse catalysts for a double-digit volume-led growth in the new year after a challenging 2023.

Weaker-than-expected festive demand, rainfall deficit that hampered rural growth, unseasonal rains that dampened sale of beverages and higher commodity prices all together cooked a difficult-to-digest market recipe this year even though "green shoots" of recovery are becoming more visible.

The sector, which has a high growth potential especially in an emerging market like India, is anticipating 2024 to be a "better year" with favourable input prices benefitting the Home and Personal Care (HPC) as well as certain food business segments.

"We expect the demand situation to improve as we enter the next financial year. We expect FMCG players to increase the pace of innovation and premiumisation and also focus on significant investment behind expanding the quality of rural distribution," Marico MD and CEO Saugata Gupta said.

The FMCG players are also expecting expansion of their profit margins with softening of commodity inflation that would result in increased spending on branding, return of promotional schemes for consumers and increased dividend payout to their shareholders, according to analysts.

Most FMCG companies extend the benefits of moderation in key commodity prices to consumers by undertaking price cuts or by increasing grammages. They are expecting a faster growth in the premium and large pack sizes, thanks to a stronger urban market and modern trade channels.

Besides, analysts expect a double-digit growth for the sector with higher volumes with market share gains and increase in rural penetration with the come back of popular price packs, which gained prominence when inflation was ruling at high levels.

"A combination of weak demand sentiment especially in rural areas due to inflation and increased aggression of smaller players and alternative avenues of spending have led to softer growth of the FMCG sector this year. Having said that, the economy is on a sound footing, inflation is largely under control and the overall outlook is on an improvement trajectory," Gupta said.

He also said that price cuts by large, organised players in the sector will make them more competitive. Small regional FMCG players have reemerged in the market after the cooling of inflation, giving tough competition to big players, impacting their market share in their pocket of influence in segments such as soaps, tea, detergent and biscuits.

Dabur India CEO Mohit Malhotra said there has been a marked improvement in consumer sentiments in 2023 with the softening of inflation.

"While green shoots of recovery are visible, rural demand is still trailing urban markets. That said, we are hopeful that rural markets will post a strong recovery in the new year. We are already seeing the gap between rural and urban growth continuously shrinking," he said, adding that going forward, Dabur is looking at both urban and rural markets to drive growth. Leading consultancy EY India National Leader - Consumer Products & Retail - Angshuman Bhattacharya said that for the FMCG sector, urban growth will continue.

"The FMCG industry is expected to grow at over 10 per cent, and in urban-centric segments above 12 per cent," he said. All said, the rural market contributes around 37 to 38 per cent to the overall FMCG sales and a bulk of that comes from the food segment.

According to the latest report from data analytics firm NielsenIQ, the rural market, which has been facing a consumption slowdown for the last several quarters, is showing signs of recovery while the urban market is maintaining a "stable rate of growth". For Tata Consumer Products Ltd (TCPL), 2023 was an "action-packed year", in which the Tata group FMCG arm had a number of new product launches across categories, expanding its total addressable market.

"This financial year has seen relative stability in commodities and currencies as a result of which pricing movements have been relatively low in our businesses. And with this, we have seen a gradual uptick in volumes and we keep our fingers crossed that this trend continues," TCPL MD & CEO Sunil D'Souza said.

"While I would not want to give a forecast, the industry consensus is that if macros fall in place ' i.e. inflation coming off, higher rural incomes, government interventions to spur up the rural economy, then things should start looking up," he said.

In India, the FMCG segment is also receiving structural tailwinds due to rising disposable incomes, rapid pace of urbanisation, growing aspirations and lower penetration of branded products, and all of this points to a multi-year growth opportunity for food & beverage products. Food & beverages major PepsiCo said the Indian consumer is ever more discerning, and the exciting shifts in consumer behaviour have propelled them to keep innovating.

"We are very bullish on the Indian growth story, and will continue to keep in step with it through our investment plans," PepsiCo India President Ahmed ElSheikh said. Godrej Consumer Products Ltd (GCPL) said it witnessed robust growth in categories such as air care, hair colour and liquid detergents, which have low market penetration.

"As we reflect on the positive strides taken this year, we remain optimistic about sustaining our performance. In 2024, we expect an improved economic environment and lower volatility in commodity prices. We remain optimistic that our focus on market development will enable us to deliver market-beating volume growth," GCPL CFO Aasif Malbari said.

Recently, a joint report by consultancy BCG and industry body CII said the total FMCG spending in India in 2023 is estimated to be Rs 5.39 lakh crore, with a growth of 20.2 per cent. "Strengthening the RURBAN strategy continued to be a key focus supported by distribution expansion and portfolio tweaking," a Nestl India spokesperson said.

Regarding the pricing, financial services provider Nuvama Institutional Equities Executive Director Abneesh Roy said there would be negative pricing in the December and March quarters but after that, it would gradually come back. Companies like HUL generally take a price hike of 2-3 per cent every year, he added.

"2024 is looking like a better year because pricing will come back, commodity deflation will help HPC companies while in food, it will not help all food companies," leading snacks maker Bikano said, adding that personalisation emerged as a key trend in 2023 in FMCG, reflecting the desire for tailored products.

"Across the industry, companies are leveraging AI (Artificial Intelligence), VR (Virtual Reality) and AR (Augmented Reality) to create personalised experiences for consumers. This commitment extends to the growing e-commerce presence, where convenience meets quality," Manish Aggarwal, Director of Bikano, Bikanervala Foods, said.