An FMCG analyst shares a picture of what's selling in rural India and what's not

• According to Kanter Worldpane, FMCG sector in India is expected to report a 4-5% volume growth in FY21, driven by rural areas that are expected to grow two percentage points ahead of the urban regions that are hit harder by COVID-19 pandemic.
• This is expected to impact Q1FY21 earnings of FMCG companies, however, it will be better than some of the consumer discretionary sectors like apparel, retail, paints etc.
• The pandemic has also led to resurgence of the good old nearby Kirana store which offered the most convenience (home delivery and credit) to consumers where maintaining social distancing and restriction on out of home trips are the norms in urban centres.

As COVID-19 started to spread across the nation, the lockdown announced in the last week of March did have a knee jerk reaction on the overall demand for the FMCG sector. The pain continued to be seen until the first week of April after which relaxations in terms of continuing manufacturing operations for essential products started to get streamlined as situations improved in terms of manufacturing and supply, although issues with labor availability and logistical challenges continued, which now have normalized to a very large extent.

According to Kanter Worldpane,l FMCG sector in India is expected to report a 4-5% volume growth in FY21, driven by rural areas that are expected to grow two percentage points ahead of the urban regions that are hit harder by COVID-19 pandemic and which continue to battle with the lockdown flip-flops at the local level. This is expected to impact Q1FY21 earnings of FMCG companies, however, it will be better than some of the consumer discretionary sectors like apparel, retail, paints etc.

During the gharbandi period there has been change in consumer buying behavior towards purchasing more of essential products and cut down on discretionary spends due to continued lockdown, job losses and salary cuts in urban areas.

The money was largely spent on essential products like food (biscuits, milk, noodles), immunity boosting foods (chywanprash, honey etc), drinks & beverages, health & hygiene (sanitizers, masks) and even on homecare & skin cleansing products (floor, toilet & surface cleaners, anti-bacterial soaps etc). Personal care and grooming products, however, took a hit both in urban and rural India given the discretionary nature. Also, preference has clearly been for value packs and smaller SKUs across product categories especially in rural regions. While, in urban regions it’s a mix of value and premium products depending on the income pyramid.

Moreover, owing to the fear of contracting the virus by going out, a notable shift is being observed of doing purchases online resulting in tie ups between FMCG companies and various e-commerce platforms like BigBasket, Grofers, Amazon, Flipkart, Dunzo etc.

The pandemic has also led to resurgence of the good old nearby Kirana store which offered the most convenience (home delivery and credit) to consumers where maintaining social distancing and restriction on out of home trips are the norms in urban centres. While the frequency of trips to the grocery store has reduced to 30.5 in May from 34.4 in March, there has been a rise in basket value by 4.3% YoY to Rs. 3,734 between March and May 2020 as against previous year.

Rural India contributes to ~36% of FMCG spends and is thus an important growth element. Managements across organized FMCG companies thus have their eyes on the rural economy to drive growth in the current trying times that have displayed relative resilience. Driving distribution expansion by increasing stockist network and direct reach could therefore be a tactical growth driver. Besides distribution, the rural economy has been relatively resilient owing to a lower impact of COVID.

Despite the migrant labour issue, the hinterland has shown relative strength all through the gharbandi supported by government proactive measures of increased allocation to MGNREGA (led to more jobs), higher farm incomes due to aggressive MSP fixation, good monsoon, higher Kharif acreages, lower disruption in retail channel and other social sector schemes (PM-KISAN, PM Garib Kalyan, distribution of free foodgrain through PDS etc). This is also reported in a surge in demand for products like agrochemicals, hybrid seeds, fertilizers, tractors, tillers and even entry level two-wheelers alongside FMCG products. Further, rising aspirations and an improved standard of living in the rural areas could direct a faster than expected recovery in FMCG volumes and also the Indian economy.

We believe for a sustained growth in FMCG sector, structural administrative reforms like amendments to Essential Commodities Act, creating a law to allow free inter-state movement of farmer’s goods and strengthening the post harvest agri-infrastructure backed by effective implementation will give the much needed boost to agri sector and rural economy thus doubling farmers income resulting in increased consumption for FMCG and other products.

(The article was written by Suvarna Joshi. Suvarna is a Senior Research Analyst at Axis Securities with over a decade of experience in fundamental research. She is an expert in tracking FMCG, Speciality Chemicals, and Mid-cap stocks & sectors.)

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