Feeble consumer sentiment and subdued demand dominated the narrative for producers of packaged consumer goods in 2023. However, the forthcoming year presents optimism, anticipating a robust volume-driven resurgence in top-line growth.
“The economy is in a robust position,” stated Saugata Gupta, Chief Executive Officer of Marico Ltd. “Inflation is predominantly under control, and the overall outlook is on a path of improvement.” He predicted an improvement in the demand situation in the next financial year.
Several factors, including heightened assertiveness of smaller players following a decrease in raw material prices, a hesitant rebound in rural demand, restricted pricing expansion, untimely rainfall, and alternative avenues of expenditure, contributed to subdued growth in the consumer goods sector this year.
While there were signs of a slight improvement in rural demand during the first quarter of the current fiscal year, it appears to have stalled, with producers of staples-to-soaps reporting a volume growth of less than 5% in the second quarter.
The period from October to December was anticipated to provide relief, given that consumers typically exhibit a greater willingness to spend during Diwali and Christmas festivities. Nevertheless, assessments from channels indicate a different scenario.
“Volume growth for most consumer goods companies remain challenging and we expect flat to low single-digit growth on a YoY basis in Q3,” Abneesh Roy, executive director at Nuvama Institutional Equities, said.
Distributors show reluctance in replenishing their inventory of cold creams or Chyawanprash, attributing it to the delayed onset of winter. Key beneficiaries such as Hindustan Unilever Ltd., Emami Ltd., and Dabur India Ltd. may anticipate an impact, as suggested by Roy.
Encouragingly, signs of recovery are emerging in rural India, although the growth in demand still lags behind that of urban markets, as noted by Dabur CEO Mohit Malhotra.
Analysts suggest that 2024 is likely to unfold in two distinct phases: the pre-election period, during which government spending will act as the primary growth driver, and the post-polls period, where increased investment will inject more funds into the hands of consumers, stimulating demand.
“Real rural wages have started to move towards the positive trajectory and election-related stimulus programmes shall lift sentiment,” Roy said.
Anticipating a robust recovery, Axis Securities foresees the FMCG sector strengthening, buoyed by the sustained low prices of raw materials. The coming year holds the potential for a substantial resurgence in volume growth, particularly in the rural segment, attributed to a rise in government spending preceding the general election.
“An increase in overall wages, the RBI intervention of controlling overall consumer inflation and a huge pent-up demand for large part of discretionary category in rural…will also aid the overall volume growth,” Preeyam Tolia, equity research analyst at Axis Securities, said.
Businesses are increasingly focused on expanding their presence in rural areas and uplifting consumer sentiment. Dabur is proactively investing to augment its distribution reach in the hinterland, aiming to extend its coverage to over 1.07 lakh villages, up from 1 lakh villages in March, as stated by Malhotra.
“In the rural market, we are also targeting the aspirational buyers with more affordable packs of products,” he said. “We are already seeing the gap between rural and urban growth shrinking.” The Dabur CEO is hopeful rural markets will post a “strong” recovery next year on the back of continued investments towards expanding rural distribution.
Major and organized players in the sector aspire that price reductions will enhance their competitiveness. Their goal is to accelerate innovation and premiumization, capitalizing on a more robust urban market.
In addition to modern trade channels, companies are placing their bets on rapid commerce as a key element of strategies aligning with Gen Z consumers. The current contribution of Q-commerce to the online grocery market, standing at just 10%, is anticipated to escalate to 40–50% in the years ahead.
“Our goal in the fast-paced year 2024 is to understand the consumer needs and preferences and fine tune our offerings accordingly,” said Krishnarao S Buddha, senior category head, Parle Products.
“The year 2023 was filled with the challenges of slowdown, yet the key takeaways include keeping a careful eye on new trends and being present on digital platforms where our consumer eyeballs are,” he said.
HUL has appointed a digital officer, set to assume the role on January 1. The most extensive consumer goods manufacturer in India has divided its beauty division into two segments: beauty and wellbeing, and personal care. This strategic decision is anticipated to expedite HUL’s progression towards transforming into an “intelligent enterprise.”
The middle class plays a pivotal role in driving consumer demand and expenditure growth. To foster expansion, FMCG companies are anticipated to show significant interest in serving this expanding middle class, primarily concentrated in urban centres with relatively advanced purchasing power, as per Anand Ramanathan, a partner at Deloitte Touche Tohmatsu India LLP.
In the realm of mergers and acquisitions, 2024 holds promise for significant activity after a subdued year marked by valuation mismatches. Bisleri International Pvt. is now strategizing its growth 2.0 under the guidance of Vice Chairperson Jayanti Khan Chauhan following the discontinuation of a potential deal with the Tatas.
Capital Foods Ltd., the producer of Ching’s Secret noodles, is contemplating an initial public offering as discussions regarding a potential stake sale with various major local and global counterparts continue to be inconclusive, even after several months of negotiations, as disclosed by anonymous sources familiar with the matter.
Nevertheless, Reliance Retail Ventures Ltd. stands out as an exception, actively acquiring brands with the intention of challenging established players in the sector. Wipro Consumer Care and Lighting has also been actively pursuing acquisitions, with the recent addition of three soap brands, marking its third acquisition in the past 12 months.
In the meantime, companies such as ITC Ltd. and Marico have entered into agreements within the lucrative direct-to-consumer domain.
Numerous companies, including Dabur and Nestle India Ltd., are actively seeking acquisitions in the direct-to-consumer (D2C) space, spanning personal care, healthcare, and the food category.
The upcoming year is poised to be advantageous for domestic companies venturing into international markets as a hedge against weak demand domestically. Varun Beverages Ltd., the second-largest bottling partner for PepsiCo Inc.’s soft drink brands outside the U.S., declared its foray into the South African market by acquiring The Beverage Co. and its subsidiaries for INR 1,320 crore. Axis Securities anticipates that Varun Beverages will sustain its robust momentum owing to its persistent commitment to expanding into newer geographies.
The collective endeavors are expected to result in a substantial revival of volume next year, propelling the consumer goods sector back into the fast lane.
Positively, a majority of FMCG companies witnessed a significant increase in gross margin and sustained robust Ebitda margin performance, thanks to favorable raw material prices.
Jefferies Financial Group Inc. analysts noted that gross margin is expected to trend positively. However, they highlighted that increased advertising expenditures and a focus on volume by companies to counter competition could limit the near-term upside of Ebitda margin.
