FMCG sector growth: Inflation cripples small brands, how big companies win even in slow market?

Growth of FMCG Sector: The country’s fast-moving consumer goods (FMCG) market is currently witnessing a peculiar situation. The volume growth of the entire FMCG sector has slowed during the July to September quarter. Declining demand in rural areas coupled with rising costs have compounded the problems of small and regional producers. But the other side of the coin is that the country’s major listed companies have registered very strong growth in this sluggish market.

According to World Panel data by Numerator, total volume growth of the FMCG sector was 3.6 percent in the September quarter. The figure was 4.7 percent in the same quarter a year ago. In contrast, the performance of large listed companies in the stock market has been stellar. Hindustan Unilever (HUL) reported volume growth of 7 percent. Marico’s India business grew 10 percent, Godrej Consumer Products grew 8 percent year-on-year, while Nestlé India posted double-digit growth.

Small businesses hit, big companies benefit

This growth of large companies shows that market consumption has not fully improved. In fact, smaller and regional brands are struggling due to rising costs, supply issues and weak demand. Taking advantage of this, large organized companies are increasing their share in the market. According to Mayank Shah, vice-president, Parle Products, most categories see smaller players losing ground to larger players.

This pressure is greatest in rural markets. A large part of the country’s small and local FMCG industry operates in villages, where the pace of consumption has now slowed down. Large companies have strong purchasing power with nationwide distribution networks. But regional manufacturers have less scope to deal with rising costs or disruptions. Mayank Shah also said that within weeks of the announcement of GST last year, small manufacturers had cleared nearly two months of stock fearing conversion issues. This created a high basis for comparison, while larger companies handled the change with ease.

Local brands are struggling with shortage of raw materials

The World Panel also tracks branded as well as unbranded goods (including retail goods) purchased by households. Food accounts for about two-thirds of its total tracked volume. This segment is mainly dominated by regional brands, local manufacturers and open products.

Marico managing director Saugata Gupta said in the company’s earnings call that supply-chain disruptions along with inflation are benefiting large companies. In tough times, small and regional players are often crushed, while large firms control the market. He said smaller competitors suffered more due to shortage of stock, packaging material and commercial gas. At the same time, Marico benefited directly from its stronger purchasing power and less competition.

The pace of shopping slowed down from city to village

Idleness of rural areas has doubled the challenge of small producers. Rural FMCG volumes grew by 3.6 per cent in the September quarter, marginally ahead of urban growth (3.5 per cent). But both these figures are much less than a year ago. Urban growth was 5.2 percent in the same quarter last year, while rural growth was 4.2 percent.

Manoj Menon, Director-Commercial, World Panel Division, says the current 12-month rolling FMCG volume growth is 4.7 percent. This is certainly up from last year’s 4.1 percent, but could go below last year’s level in the coming quarters. According to him, on a 12-month basis, urban markets are still ahead. This situation may reverse in the next quarter, although there is a threat of low rainfall on rural demand. Figures in various categories are also witnessing a slowdown. Personal care growth slowed to 3 percent from 4.4 percent. Household care slowed to 4 percent from 6.1 percent, while food and beverages growth slowed to 3.5 percent from 4.4 percent.

Burden of inflation, hope for relief from government action

The slowdown in purchases comes at a time when household budgets are strained due to rising inflation. Retail inflation rose to 5.5 percent in September, while food inflation rose to 7.7 percent. Uneven rainfall has damaged the kharif crop, leading to an increase in food prices. This has affected the purchasing power of people in rural areas.

However, there is some hope for the future. HUL MD Priya Nair said last week that the real question is rural wages. The government has increased the Minimum Support Price (MSP) by 5 to 6 percent, which is a very good step. Apart from this, the budget of ‘Developed India-Guarantee for Employment and Livelihood Mission-Rural’ is also seeing an increase. This will support rural labor in areas where there are still challenges.