FMCGs find themselves fighting post-pandemic rural demand woes

The third quarter (Q3) results rolling in from most FMCG companies show they are facing declining demand in their rural markets, in sharp contrast to urban demand. According to retail intelligence firm Bizom the FMCG sales in the rural markets showed a decline of 0.2%, as compared to the positive growth in urban sales at 4.4%, in December 2022, as against the preceding month.

Rural demand has lagged urban demand for the past two quarters. While the rural business declined by 0.8% in Q3 of 2022-23, the urban business reported a growth of 7.1%, Mohit Malhotra, Chief Executive Officer, Dabur India Ltd told DH in an email.

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Industry players report several reasons for this.

Low liquidity and disposable income

The pandemic evoked a reverse migration putting a lot of pressure on the rural economy.

According to the data from the Centre for Monitoring Indian Economy, the rural unemployment rate which was 9% during the September-December 2019 rose to 11.1% during the Covid-19 pandemic in the September-December 2020 period. It was reported to be 10.3% in the September-December 2021 period falling to 10.1% during the September-December 2022 period.

Low income and more mouths to feed pushed the rural consumers into the “cautious zone”, more inclined to conserving resources, pointed out Kannan Sitaram, Partner at Fireside Ventures.

Inflationary fears

To add to their financial woes, rural consumers had to contend with the price hikes implement across the FMCG industry on the back of inflationary pressures.

“The infrastructure ramp up that we have done in rural markets over the last few years has reaped encouraging outcomes and we have been able to outpace the rural FMCG industry growth because of our multidimensional interventions,” informed Sandeep Sule, Chief Executive, Trade Marketing and Distribution, ITC Ltd.

The unseasonal rains last year in several states destroyed crops such as rice, soyabean, cotton, pulses and vegetables, pushing up food prices and putting them out of the reach of rural consumers.

“We continued to adjust prices responsibly to reflect inflation. However, the pricing action to mitigate input cost inflation, as expected, had an impact on volume with consumers, particularly in rural India, downtrading to affordable packs,” said Malhotra.

The outlook

“It will take another quarter or two for rural demand to pick up. Easing of inflationary pressures, higher rabi production, coupled with government support through various schemes, will help rural economy and rural demand to improve in the quarters ahead (likely from Q1FY2024),” said Kaustubh Pawaskar, DVP Fundamental Research at Sharekhan by BNP Paribas.

“I certainly do not see price hikes in the short to medium term unless the commodity situation goes up. I see price drops in categories like in soaps and all,” assured Sudhir Sitapati, Managing Director and CEO, Godrej Consumer Products Ltd (GCPL).

Establishing direct market channels

Market observers feel that rural market penetration can be best achieved through establishing direct market links matching the scale FMCG companies have in urban markets.

A case in point is Britannia Industries Ltd, which announced a revenue growth of 17.4% YoY and credits this to a revival in demand from rural areas, market share gains and increasing distribution reach. Its distribution reach stands at 28,000 rural areas having directly reached 26.4 lakh outlets, the company revealed in the earnings call.

“GCPL is more an urban-focused company than a rural-focused company. As a company, we are fortunate to have a large soap business, which gives us a lot of rural distribution reach. We see pretty dramatic improvements in the distribution of home insecticides on a pipeline that’s already been built,” said Sitapati.

“We are investing ahead of the curve to ride the demand recovery by expanding our rural footprint, taking our total coverage to over 100,000 villages,” said Dabur’s Malhotra.

“The infrastructure ramp-up that we have done in rural markets over the last few years has reaped encouraging outcomes and we have been able to outpace the rural FMCG industry growth because of our multidimensional interventions,” Sule informed.

Beyond market penetration, there are strategies at play. “We are working on innovations and introducing new low-unit price packs to drive volume growth adding new consumers. Such affordable innovations would help to revive the rural demand,” said Sitapati.

The roadmap to recovery is clearly in place.