Fast-moving consumer goods (FMCG) companies are experiencing an interesting trend. Although the growth in product sales, particularly in rural areas, has been slow, the profitability measure known as EBITDA margins remains strong. This is due to a decrease in commodity prices and cost-control measures implemented by companies.
Despite claims by companies that they are investing in their brands to boost sales, the data tells a different story. In the past year, rural sales growth in the domestic FMCG market has improved from a decline of 3.6% in the September 2022 quarter to 7% in the September quarter of this year, according to Nielsen data.
FMCG companies, including Hindustan Unilever, Godrej Consumer, Dabur, Marico, and Britannia, say they are passing on the benefits of lower commodity prices to consumers. However, this doesn’t reflect in the rural sales growth numbers, which continue to be lower than urban sales growth.
Urban sales growth is reported at 10% in the September 2023 quarter, up from 1.7% a year ago. Companies argue that the positive impact of price cuts will take time to show.
Experts suggest that for the FMCG market to achieve strong double-digit sales growth, rural markets need to outperform urban markets. Traditionally, rural markets have led in growth, but there is now a trend where urban markets are ahead in terms of sales growth for several quarters.
Factors like inflation and weather uncertainty have affected rural demand, and companies need to focus on rural markets to boost sales growth. Over a third of FMCG sales come from rural areas, where the purchasing power of consumers is lower. To drive sales, companies need to focus on affordable products, a role currently played by small and regional FMCG manufacturers.
HUL, the largest FMCG company, acknowledges losing value market share to small players in certain categories. The company is addressing this through its ‘Winning in Many Indias’ strategy and will continue passing on commodity price gains to consumers.
Other companies like Dabur, ITC, Marico, and Godrej Consumer plan to focus on distribution and manufacturing expansion, along with digitisation initiatives, to counter competitive pressures.
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