FMCG firms look to India as Bharat takes a pause

Household consumption growing in urban areas but slowing in rural, show data for 2014; In rural India, personal care and beverages segments do well, foods volume contracts 5%

A concerned Hindustan Unilever recently cited a cut-back in spending by urban consumers as a reason for its sales volume growing only three per cent in the October-December period. But consumption data sourced from market research firm IMRB seem to suggest it was urban India, and not rural, that supported the sales of fast-moving consumer goods (FMCG) companies - both in volume and value terms - in calendar year 2014.

Rural consumption, which had propelled FMCG firms' growth the previous year, slowed in 2014, according to IMRB, which collects data from 79,400 households across urban and rural India.

Compared with an annual decline of two per cent in 2013, household FMCG consumption volume (all categories) grew four per cent in urban areas in 2014. By comparison, rural volume growth declined three per cent, versus zero growth the previous year. Household consumption trends were similar in value terms, too. For urban India, growth in 2014 stood at six per cent, compared with rural India's three per cent. In 2013, value growth for urban India was two per cent and rural India's was four per cent.

"Urban growth has certainly been better than rural in 2014, in volumes as well as value. But the picture seems to change a little if you do a category-wise analysis. Personal care, for instance, has done better in rural India, while food has done better in urban parts," says Varun Sinha, group business director, IMRB Kantar Worldwide.

It is because of differences by categories that some consumer goods companies have varying perceptions of the FMCG market. For instance, HUL, India's largest FMCG company, depends on home and personal care for 80 per cent of its revenue. For these two categories, rural consumption was better than urban, both in terms of value and volume, in the January-December 2014 period.

While personal care products' consumption volume grew five per cent in rural India (against one per cent in 2013), it was unchanged at three per cent in the urban market. The story for Britannia Industries, which is into foods and more concentrated on the urban market, is different. The company's sales volumes grew an annual nine per cent in the December quarter, led primarily by premium biscuits. The company derives 90 per cent of its revenue from bakery products, which includes biscuits. The rest comes from dairy and exports. In terms of an urban-rural skew, 60-70 per cent of its sales come from urban areas and the rest from rural parts.

"We have ploughed back some of the margin gains and are giving more value to consumers, especially in the Good Day and Marie brands," Britannia Managing Director Varun Berry had said last week while announcing the company's results. "Our back-to-basics approach has helped us deliver consistent results."

IMRB data suggests Britannia cashed in on phenomenal volume growth for foods in urban India - four per cent in 2014, compared to a decline of three per cent the previous year. The foods market in rural India has shrunk for two years in a row - it fell five per cent in 2014, after a one per cent contraction the previous year.

ITC, does not give a quarterly break-up of numbers for its non-cigarette FMCG business. This segment grew 11.4 per cent in the December quarter, and crossed Rs 8,000 crore in full-year sales, led mainly growth in foods.

Foods account for 70 per cent of ITC's non-cigarette FMCG business. Analysts tracking the market say the company would have benefitted from urban consumption growth in this segment, as a large part of packaged foods continues to find traction in urban markets. ITC does not give a break-up of its urban-rural skew in foods.

The good news, however, is that most companies are expecting the tide to also turn for the segments where urban consumption had slowed down - personal care and household products. Godrej Consumer Products Managing Director Vivek Gambhir says: "We are seeing signs that urban recovery has moved up very sharply. In the case of rural, we will have to wait and watch. Real income growth in the rural market for the past year has been negative. Rural subsidies have also been rationalised, indicating less disposable income in the hands of rural consumers. So, rural sales will grow less sharply, while urban will pick up."

Even categories like beverages, where the rural and urban markets appear to be on an even keel in terms of volume growth - both saw an annual increase of two percentage points in consumption volumes in 2014 - companies expect the urban market to pick up going forward.

Zubair Ahmed, managing director of GlaxoSmithKline Consumer Health, the maker of health drinks like Horlicks and Boost, says: "Consumer confidence numbers released by Nielsen in recent quarters suggest the confidence level among consumers is back to the previous level. This gives us a reason to believe propensity to spend (in urban areas) will improve as we go forward."