Lights or Lightning: What did Diwali bring for urban FMCG demand?

Consumer demand, especially in urban regions, shows clear signs of waning, a trend underscored by economic indicators and recent earnings reports across the consumer goods sector. This slowdown is raising red flags for India's economic momentum.

While rural demand has seen a positive shift recently, rising food inflation and a deceleration in credit growth create formidable challenges, potentially stifling growth prospects for the second quarter of 2024-25.

Urban Demand Slows as Inflation Pressures Mount

Major FMCG players like Hindustan Unilever Limited (HUL), Godrej Consumer Products Limited (GCPL), Marico Limited, ITC Limited, and Tata Consumer Products Limited (TCPL) reported shrinking margins in Q2 FY 2025, impacted by elevated input costs and food inflation, which are dampening urban consumption. Soaring prices for essentials like palm oil, coffee, and cocoa are prompting some companies to signal potential price hikes, further straining middle-class budgets. With raw material costs persistently high, FMCG companies are feeling the pinch as profitability takes a hit amid an increasingly challenging economic landscape.

"Diwali sales are not catching up for kirana trade, and we don't expect this year's (Diwali) sales to match that of last year's," said a spokesperson for the All India Consumer Products Distributors Federation, which represents over 400,000 FMCG distributors. General trade distributors saw a 25-30% month-on-month drop in sales since July, as reported by the Economic Times.

Voicing Concerns from Leading Brands

In a recent survey by the Economic Times, many FMCG companies commented on the current market situation and highlighted as follows:

Sudhir Sitapati, Managing Director and CEO at GCPL commented on the impact of inflation, saying, "We think this is a short-term hit, and we will recover the margins through judicious price increase and stabilising costs."

Makers of Dabur India Limited said, "High food inflation and a resultant squeeze in urban demand" added to the challenging environment. They noted a tough September quarter, with its consolidated net profit falling by 17.65% to Rs 417.52 crore and revenue dipping 5.46% to Rs 3,028.59 crore.

Suresh Narayanan, Chairman and Managing Director at Nestle India Limited, also echoed these concerns, noting that "middle segment" consumers bear the brunt of high inflation, significantly impacting their budgets. "The growth in the F&B sector, which used to be in double digits a couple of quarters ago, is now down to 1.5-2 per cent," he explained, highlighting the effects of sharp price increases in fruits, vegetables, and oil.

Sunil D'Souza, MD & CEO at TCPL, remarked on how inflation has affected urban spending. "My hypothesis is probably that food inflation is higher than what we think it is, and the impact is far higher," he said in the quarterly earnings call.

Rohit Jawa, CEO & MD of HUL, also noted the impact of inflation, stating that the FMCG market's volume growth trajectory has been subdued. "The pattern is quite clear that urban growth has trended down... while rural growth continues to lead," he added.

Fighting Against All Odds

The rural market, which was earlier lagging behind, continued its growth journey ahead of the urban. CRISIL forecasts 7-9% revenue growth for the FMCG sector in the current FY25, driven by increased volume and rural demand recovery.

Conclusion

Looking at the pattern, it is quite clear that urban growth has trended down in recent quarters, while rural has continued to grow gradually and has been ahead of urban this time. FMCG companies are becoming concerned about re-evaluating how this situation needs to be addressed.