FMCG demand; long on urban but short on rural

Most of the FMCG stocks have had a good run. In fact, the latest quarter results of most FMCG companies were quite impressive. They managed to grow their top line and also used price hikes skilfully to offset the impact of higher input costs. However, the latest report by AC Nielsen, brings out some interesting insights. Consumption of FMCG products like packaged foods, beverages and toiletries did show a revival in the June 2022 quarter. However, the recovery was positive in urban markets but negative in rural markets.

The broad trend still is that the key driver is not volumes but price. For instance, in the June 2022 quarter, the volume growth was still negative at -0.7%. However, the volume contraction was much lower compared to -4.1% in the March 2022 quarter. However, the FMCG market in value term saw a 10.9% rise in the June quarter compared to just 6% in the March 2022 quarter. The volumes have improved in the sense that the contraction is lower in the June quarter. But the broad story is still that pricing power is ruling the roost.

There are two trends that are emerging. First, the volume pressure is more in rural areas than in urban areas, but we will come back to that later. What is of immediate interest is that demand for FMCG products via hypermarkets and supermarkets clocked volume growth of 7.8% in the June 2022 quarter compared to 5.5% in the March 2022 quarter. However, during this same period, the traditional Kirana stores saw volumes contract by -4.9% in the June 2022 quarter and by -1.5% in the March 2022 quarter.

An interesting trend that is visible in the FMCG demand patterns is that the unit growth for the entire FMCG sector bounced back to 8.9% in the June 2022 quarter as compared to a more modest 1.5% in the March 2022 quarter. How do we interpret this data point? It only means that consumers are buying smaller packs and more units. In short, buyers are more comfortable buying half-KG packs where they were formerly buying 1-KG packs. This trend towards miniaturization of demand is more prominent in the rural areas than urban areas.

This fall in unt size is the big trend across the FMCG space in the June quarter. For instance, within foods and non-foods, there was a drop in average pack size growth. Clearly, consumers prefer smaller packs which is evident from the high unit growth. This is an important indicator for the manufacturers and retailers as it gives them useful insights into consumer behaviour and gives them an opportunity to tweak their packing size, explore the possibility of miniaturization of products and even position the product differently.

For the June 2022 quarter, the foods segment has seen a positive volume growth of 1.8% while the non-foods segment continued to be negative at -6.4%. Clearly, there is a demand towards essentials in the FMCG space and a move away from non-essentials. However, there is a degree of irony in this analysis. That is because, some of the non-essential personal care categories like perfumed deodorants and colognes did record a sharp 40% volume growth, largely on the back of an extended summer season this year.

At a macro level, the FMCG segment still has a value problem too. For example, in the first half of the year, the value growth in FMCG products was 8%. However, this is sharply lower than the FMCG market value growth of 17.5% recorded in the financial year 2021. For now, the good news for the FMCG segment is that the second half of the year is normally driven by the festive season and a greater normalization of the monsoons. That should give the necessary push to consumption patterns for the FMCG sector. That is the fervent hope!