Nestle India bets big on rural consumers amid a consumption slowdown

Company has set a target of 35 per cent contribution in sales from rural areas by 2022

Deviating from its long-tested growth formula, Nestlé India, predominantly an urban-focused company for more than a century, has set its eyes on the country’s vast rural market for growth in coming decades. 

The food and beverages major, which till recently used to market the bulk of its products targeting urban and slightly premium consumers, is aggressively expanding the rural business amid a consumption slowdown.

According to Suresh Narayanan, chairman and managing director, Nestlé India, it has set a target of generating 35 per cent of its sales from the hinterlands of the country in the next three years. This is in contrast to Nestlé’s business style in India since it entered the country in 1912. It depended on high-margin products developed for urban consumers. Traditionally, the share of rural business in Nestle’s portfolio had remained lower than all its peers in the market. For most larger fast-moving consumer goods companies like Hindustan Unilever and ITC, the share is well over 30 per cent. Companies like Dabur get over 40 per cent of its revenue from rural markets.

The change in strategy is relatively new. Nestlé’s urban bet was intact till recently. In an interview to this newspaper in mid-2016, terming Nestlé India an “urban centric company”, he had said “adding urban consumers” would remain its “primary focus”.

However, with changing consumer sentiment and growing reach of marketers, Nestlé India has changed its stance. According to Narayanan, now consumers in rural market are more exposed to latest innovations in consumer goods sector – thanks to better broadband connectivity and penetration of smartphones. Unlike a few years ago, now rural consumers are demanding the similar types of products that used to mainly consumed by their urban counterparts. 

Moreover, the company’s business cluster approach — launched two years ago — through which it had divided the India market into 15-odd clusters with localised teams for marketing and promotion, product feedback and consumer connect, has played a key role in this transformation. 

The company’s aggressive bid on expanding direct distribution reach in rural areas, backed by strategically priced products for the market over the past two years have lifted rural business. Nestle that currently gets slightly above a fifth of its sales from rural, used to get a little over 10 per cent of its revenue from the market till 2016. 

The company now plans to cater to over 100,000 villages directly by 2022 from some 50,000 now. 

Festive buying may not be enough

While an uptick in consumer sentiment during the ongoing festive season may result in consumption boost, for a long-term recovery in consumer sentiment, the consumer goods industry may have to wait longer.

“People are looking forward to the festive season, there is a bump that companies will get. Most consumer products companies have got expectation out of festive season. For me, what needs to be watched is the short to medium term which is really the next six months, how that evolves. The festive season, I have no reason to believe it will not be a good one but this alone will not be an answer to the longer-term secular issues of consumption that seems to be foremost in the minds of most industry people,” he said.

Narayanan, who has managed to steer Nestlé into the growth trajectory after its prolonged struggle for volume growth during 2015 to 2017, said three key factors might determine a recovery in coming two quarters. While, higher capital expenditure from excess fund in the books of corporates may boost economic activity. Lower payables by corporates on account of tax will yield better dividends for shareholders that may translate into higher spending. Moreover, a better monsoon — resulting in lower commodity prices — will play crucial roles in lifting consumer demand.