We recently conducted a survey of the rural supply chain,mainly FMCG distributors, to gauge the consumption trends. Our findings seem to suggest a clear softening in rural demand in the last six months, especially in West and South India.
Slowing down overall; West and South badly affected, our survey clearly points to an overall rural slowdown with a marked difference in demand across the key regions – North and East India are still quite resilient while West and South India have been badly affected in the last one year.
In the West and the South, sales of most of the rural distributors have either declined or increased in low-single-digits, while the North and the East distributors are still witnessing high-single or low-double digits growth.
Key FMCG companies exposed to the West and the South are Marico, Godrej and Britannia while the ones exposed to the North and the East are Dabur and Emami.
Competition Heating Up
The supply chain clearly highlighted the growing competition from both pan-India and regional players across most categories with the proliferation of the brands. Regional players with good product quality are getting strong traction in key states with rising consumer acceptance.
Our findings indicate that the inventory levels are largely stable across the value chain; however, trade promotions and freebies have increased marginally.
Trade profitability is under pressure due to the slowing volumes and rising costs.
As per our findings, while 20-30% of the consumers are brand loyal and have continued to consume the same products with no shift in their buying patterns, 30-35% of branded FMCG consumers have cut down on their consumption but have stuck to the bigger national brands while the rest have sustained their consumption with an increased focus on other cheaper alternatives coupled with a reduction in the consumption of the existing brands.
Competitive pressure has become intense across categories throughout India. While the pressure is relatively low in household products, it has become intense in the personal care segment. Among the pan-India players, Hind Unilever with its strong distribution network continues to be dominant in terms of rural sales. Apart from HUVR, big companies like ITC, Dabur and Emami have increased their reach and supplies to the rural areas.
Regional players are also getting more active; consumers accepting quality regional brands Though as a broad structural trend, we are witnessing greater brand awareness in rural India but rural consumers are also willing to try out the regional brands if they offer good quality at affordable prices.
The regional players also offer lower cost products to the consumers, and higher margins and better credit terms to the retailers. Retailers’ margins are typically 15-20% higher in case of the regional players vs. the pan-India players.
However, in recent times some of the local players are offering good quality products, e.g., in Uttar Pradesh Hindustan Unilivers Dove is getting strong competition from a local brand called Snow which is of the same quality at a lower cost,according to the consumers.
Natural/Ayurveda-Based Products Getting Good Traction
There is continued traction in rural India for consumer products based on natural ingredients rather than the typical chemical-based personal care products. India specific products like Ayurveda-based personal care range from Patanjali, Ayurvedic medicine and the cosmetics range from Himalaya, recently-introduced mosquito repellent in paper format as a Good Knight Fast Card from Godrej Consumer, hair colour range from Godrej Consumer and products from Emami have done well in the last few years.
Same is the case with the success of Snow soap, a regional product which has coconut oil as the main ingredient.It is generally observed that the pace of growth has slowed for the category leaders while the new entrants or recently-launched products have witnessed better growth.
Smaller SKUs hold the key, even for premium products
Over the years, the tiering down strategy has aided in penetration-led sales in the rural areas. Rural consumers are aspiring to improve their lifestyles, but being daily-wage earners, after meeting their necessary expenses, they are left with little money to buy products in bulk (they normally tend to look for single usage purchases).
It is noted that the products in SKUs of Rs1 to Rs15 are in higher demand in rural India. While these products offer lower margins, it is the only way for the companies to increase their sales in the rural areas. This is why the rural margins are lower compared to the urban margins.
On the question of revival of the business environment, most of the market participants expect better market conditions in second half after the general elections, and with the annual salary hikes, some do not see a recovery in the near future.
The business cycle is moving southward with a slowing GDP growth. Until income levels improve to absorb the inflationary pressures, any acceleration in growth will be difficult.
We continue to believe that the volume and topline growth trajectory is unlikely to see any significant improvement over next couple of quarters as a slowdown is consistent with the GDP growth levels, and rural growth also seems to be softening posing a risk ahead.
We believe that valuations for FMCG stocks are rich and the risk-reward still not attractive enough despite the last 6/12 month underperformance.
Demand revival, if any, cannot occur before FY16. Despite the low base, demand has been moderate with aggregate sales expected to grow in low double digits for the seventh consecutive quarter in 4QFY14. FMCG demand usually trails GDP growth by 9-12 months. Hence, if the economy rebounds in FY15, an improvement in FMCG demand could occur only in FY16. Apart from macro weakness, emerging weather risks (El-Nino) could lower agricultural output and hurt rural demand.
The Indian FMCG sector is trading at a 1-year forward P/E of 29.2x, a 111% premium over the Sensex’s 13.8x.
Overall, we are now getting more positively biased towards discretionary names that are positioned for urban recovery (JUBILANT FOODS) and our preferred picks in the sector are Britannia, Dabur, ITC, Titan and Jyothy Labs.
Key News Flows in the FMCG space
Soaps & detergents. Selective promotional offers in detergents continue in brands like Tide, Ariel and Surf Excel while all offers on Rin have been withdrawn. We noticed select hikes in soaps (Pears and Fiama select SKU prices hiked by 4%) and detergents (Wheel Active 1 kg SKU price hiked by 2% from Rs 45 to Rs 46).
Other personal care items
(1) Hair oils – Marico took another round of price hike in Parachute CNO across SKUs and also hiked prices of select perfumed hair oils, Dabur hiked prices of Dabur Amla by ~8%, Bajaj increased ADHO prices by ~5% and Emami hiked prices of Navratna cooling oil by ~3%
(2) Oral care – Colgate has hiked prices of Maxfresh Blue and Sensitive Pro Relief by 4-5% and
(3) Hair colors – per media reports, GCPL has hiked prices of single sachet of Expert hair crème from Rs 30 to Rs 35.
A host of offers in household insecticides continued this quarter with both GCPL and Reckitt Benckiser offering price-offs across SKUs and formats.
(1) Edible oils – promotional offers in edible oils under brands like Saffola Gold (5L + 1L free) and Sundrop (host of offers) continued this month.
(2) Biscuits – both Britannia and Parle continued to run select promotional offers and
(3) Baby foods – Nestle has taken another round of price hikes across its baby food offerings to the tune of 3-6% Tea. Hind Uniliver continues to run promotional offers in Brooke Bond Taj Mahal and Red Label.
About the Author
Avinnash Gorakssakar is the Head of Research at MIINTDIRECT.com, an advisory and broking platform covering companies in the FMCG and consumption space from the investment angle. The company also tracks industry trends.