 "FMCG companies put focus back on rural India")
At a recent press conference, Sanjiv Mehta, MD & CEO of Hindustan Unilever, the country’s largest consumer goods company, was vocal about the prospects of the rural market and its impact on fast moving consumer goods (FMCG). Coming after his company reported its lowest volume growth in seven years during the September quarter, most were intently listening to what Mehta had to say.
“Signs suggest that the virtuous cycle (of growth) will set in,” he said. “The monsoons this year have been good and triggers such as the Seventh Pay Commission hike and One Rank One Pension should help boost demand,” he said. The rural market is crucial for HUL’s bestseller brands like Lifebuoy, Wheel, Fair & Lovely, Hamam and Brooke Bond.
Mehta is not alone to feel this way. After two successive droughts, analysts say 2016 has come as a breath of fresh air for farmers because of the good rainfall and the prospect of a good harvest. “This means better farm incomes and the likelihood that demand for FMCG products will improve, thereby increasing sales of companies in rural areas,” says Abneesh Roy, senior vice-president (research, institutional equities), Edelweiss.
Why it acquires significance is because of this: In the September quarter, the gap between urban and rural sales growth in home and personal care, which covers nearly the entire gamut of FMCG products from soaps to detergents, toothpastes to creams, shrunk to 2-3 per cent from 5-7 per cent earlier, according to industry estimates.
“This,” says Godrej Consumer Products CFO (India & SAARC) Sameer Shah, “gives a clear indication of the slowdown that rural is seeing. Positive triggers then will only help take this market up,” he says. Some of the company’s brands that are popular in the rural markets are Godrej No 1 soap and Good Knight mosquito repellents.
For companies such as HUL and Dabur, the percentage of rural sales, according to analysts, is higher than the industry average of around 33 per cent, implying that a rural recovery has the potential to impact them significantly. Both companies, for the record, derive over 40 per cent of their sales from rural areas.
Dabur CEO Sunil Duggal says his team is putting in a lot of effort to decipher a revival in rural markets. “We already have the infrastructure in terms of a thousand rural sales representatives who are entirely focused on these markets. Once we see some demand revival, the next round of expansion in rural markets will begin,” he says. Some of the company’s brands popular in the villages are Dabur Chyawanprash, Dabur Amla hair oil and Dabur Lal Dant Manjan.
More From This Section
The new drive involves taking Dabur’s rural coverage to 60,000 villages from around 45,000 now. Dabur had first begun ramping up rural coverage in 2012-13 with Project Double. Under this programme, Dabur’s rural reach improved four times in four years.
While the last year-and-a-half, says Duggal, saw Dabur devote greater attention to urban areas as rural distress grew, this is expected to change now.
All roads lead to the village
Dabur is not alone in shifting its attention back to rural. Most other companies, say experts, will go back to the drawing board and look at expanding their distribution in the countryside. Small pack sizes, which had taken a bit of back-seat in previous quarters, could stage a comeback.
“The attempt will be to reach out to the rural consumer in every possible way. Besides distribution, media and product strategy will hold the key. Programmes to connect with the consumer through melas, thoroughfares and community initiatives will also grow,” Roy of Edelweiss says.
Companies, say industry sources, are also expected to increase direct distribution into rural areas in the coming months.
Godrej Consumer Products, for instance, has already set the ball rolling in this regard. The firm’s OneRural programme, which aims at improving rural coverage and was piloted a few quarters ago, will now be rolled out in the central and northern parts of India.
The programme, according to Shah, was intended to help the firm take up rural sales to 37-38 per cent from 28 per cent now. The company hopes to do this through enhanced distribution, marketing and promotional activities in the top 15,000-20,000 villages within its universe, Shah explains.
“While extending coverage is an important part of the exercise, and percentage-wise our rural coverage will grow 8-10 per cent every year, it is also important to look at those villages that drive consumption in the hinterland. OneRural will endeavour to do that,” Shah says.
The programme will see Godrej Consumer Products appoint a single rural head as opposed to multiple regional heads as is the trend now to drive operational efficiencies and direction. The rural head, responsible for all rural markets, will have specialists managing research, marketing, sales and media as part of his team, Shah says.
Demonetisation hurdle
But one move that could act as a spanner in the works for companies, in the short term at least, is the government’s demonetisation drive. The reason for this is that the rural market is largely a cash-based economy. With a temporary liquidity crisis and new notes yet to find their way into small towns and villages, rural consumers simply do not have the money to spend on FMCG products.
The bigger worry is that the demonetisation drive could hit farm incomes, since crops that have been harvested and are making their way to mandis, are paid for in cash by intermediaries.
Not getting cash then will mean that the virtuous cycle of growth is unlikely to get going, setting the clock back for companies. “Restoring liquidity as quickly as possible will be critical,” says Sumit Malhotra, the managing director of Bajaj Corp, the maker of Bajaj Almond Drops hair oil. “The rural market has seen pain for too long due to the drought and just when they were heaving a sigh of relief, this happened. The sooner this liquidity crisis is resolved the better,” he says.
The assessment by most sector experts is that the next three to six months could be challenging for consumers, implying the going may not be too good for companies.