As rural demand weakens, FMCG distributors offer more credit to retailers

Rural demand has been a pain point for fast-moving consumer goods (FMCG) companies for the last six quarters, but the situation has now worsened with distributors being forced to extend more credit to retailers. Also, the frequency with which distributors procure stocks from companies has reduced.

Distributors that Business Standard spoke to said on the condition of anonymity that credit days had gone up in rural areas, and attributed this to high inflation. They added that they had started procuring stocks from FMCG companies once every 10 days compared with once a week earlier.

Alan Jope, chief executive officer (CEO) of global FMCG giant Unilever, recently called out the stress in rural areas in the country during a conference call with investors. “Indian markets are growing in value, but volumes are declining. This consumption weakness is due to the impact of inflation on Indian consumers, particularly those in rural areas,” he had said.

A distributor based in western India said he had been extending credit to retailers to the extent of 40 days from 15-20 days earlier. “Retailers are not buying stocks from us if we don’t offer credit. Companies necessarily don’t offer credit, but we have to offer extended credit to retailers. We need stocks to move, but its overall movement has been impacted due to weakness in rural demand,” said the distributor.

Another distributor said that even the festival season did not see a strong demand offtake in rural areas, and that credit days had increased by 15-20 days.

The impact of the above situation has started reflecting on FMCG companies.

“One or two days of inventory has gone up because things are not happening at the pace that we expect it to happen, especially in rural areas,” Mohit Malhotra, CEO of Dabur India, said. “We’ve extended selective credit to our rural customers,” he added.

CavinKare, a south India-based FMCG major, has also witnessed stress in rural areas for the last two quarters. “We have noticed that the frequency of distributors ordering stock from us has decreased. Distributors typically order goods at least once every seven days but that has increased to 10 days,” said Venkatesh Vijayaraghavan, group CEO and director, CavinKare.

After the September-quarter results, Hindustan Unilever MD and CEO Sanjiv Mehta told investors: “CPI inflation continues to be above the RBI threshold….Within this, rural inflation was higher than urban.”

Mehta also said, “Volume continued to decline in both urban and rural markets with a more pronounced drop in rural.” He further explained, “It is quite natural for consumers, especially at lower income levels, to feel the pinch of increased pressure on the wallets due to high inflation. They do adjust volumes and prioritise essentials over discretionary to manage the household budgets.”

HUL did not offer any comment on Business Standard’s query for this story.

Rural stress began towards the end of August last year and it still continues to be a pain point for FMCG companies.

However, some companies said they remained unaffected by the issue. For instance, Mayank Shah, senior category head, Parle Products, said the company had not seen an impact on demand and had, instead, seen a pick-up since the festival season. The company has not extended credit to its distributors, he said.