Year in Review: Rural India hurt FMCG; smartphones rode on e-commerce

After nearly two years of disruption due to demonetisation and implementation of the goods and services tax (GST), the country’s vast consumer goods sector had much hope from the year 2019. However, a lookback into the consumer market during the past 12 months presents a gloomier picture. While certain segments such as smartphones and air conditioners had some respite, fast moving consumer goods (FMCG), the largest of the chunk, suffered a body blow as new pain points emerged in 2019.

The country’s Rs four trillion FMCG market--the world's fourth largest --faced stiff challenges in the hinterlands with sales growth falling to a seven-year low in the September quarter. Data from market analyst firm Nielsen shows volume growth in the rural market fell to a meagre two per cent during the quarter from 16 per cent a year ago. It was the first time in seven years that growth in the rural market that comprises nearly 40 per cent of sales for manufacturers, had fallen below that of urban.

In the April-June quarter, traditionally a strong period after the slump of the winter months, growth in rural markets was the lowest since early 2018. Nielsen observed that food and personal care were the categories worst affected by the slowdown. While food and personal care grew by 15 per cent and 12 per cent by value in calendar year 2018, the numbers are likely to fall to 13 per cent and 11 per cent in 2019, said the agency.

To put things into perspective, till mid-2018 rural sales growth was ahead of urban sales growth by at least 400 to 700 basis points for most FMCG firms.

As India’s overall economic growth slowed in 2019, the urban market followed the trend too – adding to FMCG woes. Volume growth in urban areas fell to five per cent in September from 11 per cent in the corresponding period in 2018.

Meanwhile, growth in India’s gross domestic product (GDP) fell to 4.5 per cent in July-September 2019, from seven per cent a year ago and 8.9 per cent in July-September, 2016, before slowdown hit the sector.

Large FMCG players, from Nestle to Hindustan Unilever HUL), felt the pinch as consumers were reluctant to open up their purses. Sanjiv Mehta, chief executive of the country’s largest non-cigarettes FMCG firm HUL, asserted that the sharp deceleration was led by a slowdown in rural areas.

The FMCG market in the rural North – the largest among all four regions - shrank two per cent by volume in September. Though large firms like Nestle, Dabur or HUL were impacted by this slowdown in demand, the small, local players were hit harder. Small players, which account for a third of the sales for the region, grew only three per cent by value, from 35 per cent in the corresponding period last year. Medium players, accounting for 24 per cent of sales, saw their business shrink by four per cent in the quarter.

According to Edelweiss Securities’ research, two key factors affected the fortunes of FMCG players in 2019. First, macroeconomic headwinds battered consumer sentiment, particularly in rural areas. And second, the continuing liquidity crisis arising out of faltering non-banking financial companies further dented liquidity at the wholesale and retailer levels. This further exerted pressure on the trade channel.

Further, during the latter half of the year, inflation in agri-linked commodities such as milk, wheat, and sugar impacted margins of FMCG companies. For example, it “dragged Nestle’s gross margin by 216 bps y-o-y and kept Britannia’s gross margin flat. Continued inflation in glass and ENA prices heavily ate into United Spirts’ margin – down 411 bps y-o-y”, Edelweiss noted.

According to a Nestle India spokesperson, despite challenges the company managed to grow its rural presence that translated into higher contribution from the market – up to 25 per cent. Five years ago, Nestle used to get 15 per cent of its sales from rural areas.

Other consumer good segments such as smartphones and certain durables, however, fared better. Sales of air conditioners, for example, revived in 2019. While, in 2017 and 2018 they had shrunk, due to higher taxes, weakening rupee against dollar and rising commodity prices. According to Kamal Nandi, vice-president of Godrej & Boyce and president, Consumer Electronics and Appliances Manufacturers Association, this year AC sales rose by double digit.

Despite having a huge base, smartphones sales too are expected to grow by 10 per cent in 2019. During the March and June quarters, shipments surged to record highs. And in September, they touched 49 million units – highest-ever for any quarter. Market experts attributed much of this to the surge in e-commerce sales.

Data from analyst firms like IDC India and Counterpoint Research show that shipments through the online channel grew by a whopping 28.3 per cent YoY in the quarter ended September.

This took share of the online channel in the overall sales to an all-time high of 45.4 per cent. In the previous quarter, shipments through the channel had surged 26 per cent YoY. Meanwhile, sales through brick and mortar stores shrank. While, in the June quarter, shipments through offline channel dipped by four per cent, in September, the fall was at 2.6 per cent YoY. Consequently, the share of offline stores, which used to hold over 75 per cent of the market three years ago, fell to less than 55 per cent.

While the FMCG marketers are hoping for a revival in 2020, analysts expect that to arrive only after the first quarter, that is, from April, 2020 onwards. “We anticipate green shoots to emerge from FY21, anticipating pay-outs under direct benefit transfer and bountiful rainfall”, Edelweiss said.

Smartphones sales may suffer in 2020, however. Analyst firm TechArc predicts smartphone sales growth to come down to single digits after a decade, as macroeconomic factors may impact consumer buying behaviour.



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