That Tumbling Feeling for FMCG Companies

India’s FMCG giants are struggling with sluggish growth. Declining sales and tough competition from local brands have dampened the sentiments around many popular legacy brands. Can the marquee names rev up a new growth engine? 

The signs are worrying. No wonder marketing honchos of some of the biggest fast-moving consumer goods (FMCG) companies are burning the midnight oil. Not only has growth in demand for their products in the hinterland been sluggish, consumers are opting for local brands. 

Bharat Bhushan, who runs a retail store in Dhuri, a small town in the Sangrur district of Punjab, says that he has observed a strong demand for local FMCG products. What would generally be seen as a local isolated phenomenon is now being reported as a national trend. 

The new year could not have started on a more tepid note for Hindustan Unilever (HUL), ITC, Britannia, Godrej Consumer Products and Marico among others. When the country’s largest FMCG brand HUL announced its result for the last three months of 2023, the trend was clear. Despite the quarter having multiple festivals, the volume growth of the company remained tepid at 2% and sales declined by 0.3%. 

A similar story played out at ITC which saw its cigarettes volume decline 2% in the third quarter of 2023–24 while Marico reported a listless 2% growth in volume. Overall, the volume growth across several top brands has remained near stagnant in the past two years. This prolonged slowdown has clearly dampened the sentiment of investors. 

In less than two months into 2024, HUL has seen its share price drop by nearly 10%, ITC’s scrip has dropped by 13% and Marico’s shares have seen a decline of over 3%.  

The companies’ leadership, analysts and observers agree on the need for a sustained growth recovery to boost sentiments. While the factors which have dragged down growth may appear transitory in nature, there are indications that top brands are recalibrating their strategies to find a new growth engine which can drive investor trust back.  

Double Whammy 

The performance of FMCG companies is often seen as a reflection of the general consumer sentiment in the Indian economy. As they sell items ranging from essentials to discretionary, the fate of their growth affects the overall macroeconomy.   

In the current financial year, the government expects the private final consumption expenditure to grow at 4.4%, the slowest in the past two decades barring the pandemic-hit 2020–21. Moreover, inflation has also been surging, with the current financial year witnessing the peak of 7.44% in July. Coupled a tepid consumer sentiment, inflation has dealt a blow to the volume growth of top brands.

Vijay Kumar, 44, a taxi driver in Delhi, recounts a trend in consumer behaviour in his hometown in Azamgarh, Uttar Pradesh. More and more people, including his family, are opting for Raja Masala, a local brand, rather than their earlier choice of MDH or Everest. 

A 25-year-old domestic worker in Lucknow says instead of buying Clinic Plus bottles, she now buys smaller and cheaper sachets. “I cannot afford it [bottle] and I use shampoo less frequently,” she says. 

Angshuman Bhattacharya, national leader of consumer product and retail sector at EY India, a consultancy, says that with the past couple of years being inflationary, both consumers and companies have reacted accordingly. “When we see sustained period of inflation, consumers often choose value-for-money goods to weather rising prices. Also, large, organised players put a halt on expansionary activities to focus on protecting margins,” he says.  

The sustained period of inflation post-pandemic has hurt the volumes of large FMCG players. What has also come as a challenge in this period is the surge in demand for local brands in several categories.

The numbers are revealing. In Madhya Pradesh, Supremo 51, a detergent, has seen a whopping 101% growth in household reach between April 2022 and April 2023. Or take Reflect, another detergent. It saw a 109% growth during the same period in Maharashtra. Teju, a spice brand in Karnataka, has toppled bigger brands and notched up a 65% growth in household reach between April 2022 and 2023. 

David Takes on Goliath 

A report by market-research firm Kantar shows how intense the competition has been for the top firms. An analysis of 13 categories across personal care, home care and food and beverages space showed that the volume growth of local players has seen a strong rise in the past few years. The data shows that local brands’ volume growth at 12.7% in these specific categories was higher than national brands’ 8.5% between April 2022 and 2023.   

K. Ramakrishnan, managing director, South Asia, Kantar Worldpanel, says that local brands have been giving tough competition to national players. “They are dominating growth in laundry [detergent bars and washing powders] and in personal care [soaps and talcum powder] where they have a presence and in noodles on a smaller base,” he says. 

Given the pressure on volume and market share, top national brands seem to be stuck between a rock and a hard place. To protect margins, many of these firms have resorted to price increases but as a result, they have ceded space to the local brands. In effect, the topline of the firms seems to have been hit. An Outlook Business analysis of the total income of six brands with significant presence in rural markets present in the top 10 FMCG companies list of Forbes shows that the missing volume growth has had a significant impact on these firms.  

While price hikes seem to have initially helped in offsetting the impact, consumers gradually shifted away from these firms. From double-digit year-on-year (YoY) growth in many quarters of 2022, the aggregate consolidated revenue posted just 0.8% YoY growth in the December 2023 quarter. 

Such a precarious scenario has forced these firms to return to the drawing board to take stock of their strategy. While food inflation is expected to moderate in the days ahead, relying on just the recovery of mass markets does not seem to be the only strategy which will yield better returns.  

Road to Growth 

Market-intelligence firm Bizom’s data suggests that FMCG sales fell for three straight quarters in both urban and rural markets. However, the struggle is more visible in rural markets in the current financial year due to erratic monsoon and low growth in agriculture. 

For the first three quarters of this financial year, rural sales have declined by –4.6%, –3.13% and –6.1% respectively. On the other hand, urban markets have on average witnessed slightly muted decline at –4.7%, –0.6% and –2.1% in the respective quarters of 2023–24. 

In such a scenario, where would growth come from? Analysts say that one of the key areas which can be tapped by the players is increasing distribution in rural areas, thus ensuring more visibility of products. Akshay D’Souza, chief of growth and insights at Bizom, says that top national brands must continue to bet on rural consumers. 

“While inflation may have dampened the sentiments of consumers in rural areas, what we must remember is the aspirational needs of those living in villages remain high. Hence, ensuring that distribution network remains robust and continues to expand is important for FMCG firms,” he says. 

Taking cues visible in the market, some brands have put faith in the expansion of distribution networks. Britannia, for example, in the recent quarter said that rural areas remain a key focus area despite the firm’s struggle. Varun Berry, managing director at Britannia Industries, said during the third quarter of 2023–24 earnings call, “We have seen that as far as consumption trends, especially in rural areas are concerned, we seem to be not doing as well as we were in the previous years.” 

However, he noted that the company has continued to increase its distribution network in rural areas. According to the company, the number of rural distributors went up to 29,000 by the end of December 2023, as compared to 28,000 at the end of 2022. 

Another firm which is looking at increasing rural distribution is Dabur. Mohit Malhotra, the company's chief executive officer, told Outlook Business that Dabur has expanded its rural footprint from 1,00,000 villages to 1,17,000 in the current fiscal. “We are also introducing new brands in the premium category, particularly on ecommerce platforms, that relate with the millennials and centennials,” he says. 

With competition from regional brands rising and inflation throwing consistent growth out of whack, companies might have to think of more than just one option of increasing distributor networks and hoping for recovery in India’s mass markets. 

Moreover, relations between some FMCG companies and their distributors have become frayed in recent times. HUL cut its fixed margin for distributors from 3.9% to 3.3% and increased the variable margin based on performance from 0.7% to 2%. 

Another reality of the Indian economy is the volatility in components of food inflation. A 2023 CRISIL report says that India’s vegetable inflation has remained volatile for the past 30 years. The top brands have witnessed what episodes of high inflation can do to their growth, specifically in rural areas. In such a scenario, could the firms look for another avenue for growth which remains sustainable in the long run?

Pricey Products

Food inflation in the past three out of four financial years remained above the 4% target set by the Reserve Bank of India for the headline consumer price index inflation. Mass brands have struggled for volume growth during periods of high inflation and low consumption. However, FMCG firms seem to have spotted a trend visible across several sectors of the economy: premiumisation. 

Whether it is HUL, Britannia, Marico or Dabur, a common thread visible in their recent commentaries was the mention of premium products doing well. HUL said that its premium offerings grew 2.5 times more than its mass portfolio in 2023–24. Other FMCG firms also said that their premium products are doing well, and they would continue to expand into this segment 

Bizom’s D’Souza agrees. “It helps in managing profits. If you can drive consumption in premium products, then you can manage profits far better than you do while just handling a mass portfolio,” he says. 

A Goldman Sachs report said that the number of affluent Indians, or those earning more than $10,000 (roughly Rs 8.3 lakh) annually, is expected to surge from 6 crore in 2022–23 to over 10 crore by 2026–27. 

The report also said that premiumisation was targeted at those who were exposed to urban premium markets, rather than the mass market. It cited the example of HUL vs Nestle which said that the latter’s growth was over 10% higher between 2018–19 and 2022–23. 

“Companies are now looking to spend more on marketing and expansionary activities but with an urban focus. Across boardrooms, the conversations are about winning over the urban markets,” says EY India’s Bhattacharya. To access depth of the market, he says that companies might not prefer to go too deep into India’s hinterland and instead focus on targeting the perimeters of urban areas. 

This strategic shift is already visible. HUL announced the split of its beauty and personal-care segments on December 1 to focus on them separately from the next financial year. Many direct-to-consumer brands such as Honasa (in beauty and personal care) and Nykaa (in fashion and beauty) have identified the potential in this segment. 

Whether it is Dabur pushing the pedal to increase growth in premium hair-oil category or Britannia entering the healthy snack market with its brand Better Snack Co, the trend of trying to establish dominance in high-growing premium segments is clear. Recently, FMCG giant Tata Consumer Products was also in the news thanks to its acquisition of Capital Foods which owns popular brands like Ching’s Secret and Smith & Jones. According to the company, the acquisition will cater to that cohort of the population witnessing consistently strong income growth. 

But it is not going to be smooth sailing all the way. For one, competition will be cut-throat as all these brands are targeting the same pockets of the market. Hence, industry experts say that companies are aggressively preparing their strategies to get back on the path of volume growth. 

A recent note by brokerage firm BNP Paribas said that in the upcoming quarters, advertising and marketing as percentage of sales will rise as companies eye growth. Ad spends as percentage of sales of FMCG firms hovered around 6% to 7% in the past few quarters, lower than the 9% share which was recorded in 2020. 

Whether growth returns to these companies on a consistent basis is something only time will tell. The stakes are higher than before. For any company, sluggish volume growth for a prolonged period is never a good sign. These storied FMCG giants, who have been around for decades and  have weathered several crises, are familiar with a challenging operating environment. 

For years, these brands have built a robust mass-market distribution network which has stood them in good stead. But after years of sluggish growth, they seem to have realised that delivering volume and value growth quarter after quarter will become easier if they are able to win over consumers looking for high-quality premium products on a consistent basis.