Retailers See Inventory Pile Up As Rural Demand Begins To Lose Steam
India’s consumption engine hasn't kept pace with the expectations of a buoyant festive season, thanks to rising prices and lower purchasing power in rural areas.
Early insights from retail intelligence platform Bizom, which tracks 75 lakh stores across the country, show the sales value growth of fast-moving consumer goods dipped 14.4% sequentially in November led by confectionary which declined 15% year-on-year and 46% sequentially.
The post-Diwali period is usually soft every year as retailers stock up aggressively in the build-up to the festive season to cater to the surge in demand and some of it gets rolled over, according to Akshay D’Souza, chief marketing officer at Bizom. Still, a double-digit decline in sales this year is “unusual”, implying slower demand recovery, he said.
An early start to the festive season didn’t help.
In October, the growth for daily essentials and personal care rose just 5.4% over September. Year-on-year, the consumer goods market grew 21.3% led by commodities and beverages. But that came on a low base as the festive season began in November last year.
Homecare sales dipped 8.4% in October and 10.3% in November as hygiene products like sanitisers and hand washes went out of favour with falling number of Covid-19 cases.
As buyers limit spending, retailers are sitting on unsold inventory. They're now lowering prices of festive packs of chocolates to cookies to entice consumers, D’Souza told BloombergQuint.
Manufacturers, too, are offering schemes for retailers to liquidate stocks, he said. “If the stocks don't move, brands will have to either take them back or it would impact billing of new stocks.”
Distributors, who deliver staples to shampoos to small stores in every corner of India, are worried. Slowing demand from retailers has increased inventory days from 10-12 days two months ago to around 20-40 now, distributors from at least five states told BloombergQuint.
Companies have been dumping goods but there are few takers, said a distributor in North India. Even for essential items, the demand has slowed as they are carrying stock for over 20 days, he said on the condition of anonymity citing business concerns.
For impulse buys like confectionery, beverages, personal care and other discretionary categories, he said, the number of inventory days is now 40. Only the winter care portfolio, both in personal care and hygiene segments, seems to be moving, he said.
In South India, heavy rainfall and floods for the past few days reversed last month’s trend when sales had recovered significantly, PM Ganeshraam, state president, Tamil Nadu FMCG Distributors’ Association, said over the phone.
The festive consumption so far was still lower than pre-Covid levels even though there has been an overall uptick, according to Dhairyashil Patil, president of the All India Consumer Products Distributors Federation, a lobby of four lakh agents of local and foreign consumer firms.
Patil, however, called this sluggishness in demand “transient” and expects it to pick up from the first week of December.
But there are signs of concern.
Dip In Rural Demand
Till now, rural consumption made up for a decline in urban demand.
In the quarter ended September, Bizom data shows, rural sales value rose at twice the urban pace.
Kantar, which tracks household consumption, found that the urban markets saw a tepid growth of 2.5% in the second quarter of FY22, while the rural category grew 6% over the pre-Covid period of 2019.
The trend is showing signs of reversal.
While the festival stocking helped fire urban growth, some of the consumer firms have warned of waning rural demand, a source of stability through much of the pandemic.
In October, urban growth stood at 6.1%, while rural was at 5.2%—unlike the last several months when consumption in the hinterland led, according to Bizom.
“Rural centres—though they are still growing—their growth rates have moderated,” Sanjiv Mehta, chairman of Hindustan Unilever Ltd., said at a media briefing after reporting earnings for three months through September. The next few quarters, he said, will provide a clearer picture of the underlying demand scenario in the country.
An average of 11 indicators representing rural consumption grew 1.6% year-on-year against 5.3% during the same period last year, analysts at Motilal Oswal wrote in a note. Overall rural demand fell 2.4% over a year earlier in July-September, the first such decline in four quarters.
NielsenIQ, too, said that sales of fast-moving consumer goods in rural India slowed as sinking incomes and input-cost led price hikes weighed on consumption.
A bunch of factors do not inspire confidence regarding rural growth, according to a research note by Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets (India) Pvt., released on Nov. 22.
While outlays for the rural jobs guarantee scheme have been falling 11.3% year-on-year since May, they are still higher than the pre-pandemic period.
Monsoon rains have been volatile.
Agricultural exports have moderated after rising at the start of the year.
Construction wages are weaker since May, partly led by volatile rains hurting activity.
Rural inflation has been moving northwards since May, hurting real purchasing power.
High energy prices pose a risk to purchasing power.
“Putting all of this together, real rural wages have slowed,” wrote Bhandari.
“Over the last two decades, rural Indians have diversified into non-agricultural activities, particularly construction,” she said, adding that it will hold the key to demand in the months to come.
The slack in sales comes at a time when the industry is battling high raw material prices, flagged by all consumer goods makers from Hindustan Unilever Ltd. to Britannia Industries Ltd. In the quarter ended September, revenue of consumer goods makers rose aided by price hikes even as volumes lagged.
“The September spends (on household items) were the highest-ever recorded on our panel, despite consumption slowing down,” K Ramakrishnan, managing director-South Asia, Worldpanel Division, Kantar, told BloombergQuint.
HUL, for instance, saw tepid volume growth of 4% in quarter ended September even as revenue grew 11%, driven by price spikes.
"There is no substitute for price increases in an (inflationary) environment like this,” Varun Berry, managing director at Britannia Industries, told investors early this month. "We (the industry) are going to see a period of low volume growth."
Analysts, too, see that happening in the ongoing October-December quarter as almost all companies have increased prices.
While consumer goods makers have raised the maximum retail price on select products, they reduced grammage of most lower-unit packs, said Vishal Gutka, research analyst for consumer goods and retail at Phillip Capital. That, he said, will have a "meaningful impact on the volume growth in an environment when demand is still weak".
“Like soap prices have gone up by a steep 25%, which would definitely hit volumes,” he said.
Gutka expects normalcy only by next fiscal. “2022 is expected to be an action-packed year with regards to welfare schemes and government spending in the run-up to the assembly elections," he said. "Also, the companies may be able to fully cover the raw material inflation by the end of March 2022 given input prices don’t move further northwards.”
A few commodities started to show signs of easing in November. Yet, he said, most companies still require an additional 4-5% price hike to compensate for the rise in input costs.
(Corrects an earlier version that cited NielsenIQ numbers as a forecast)