FMCG growth slows to 12.6% in Q2FY22; rural consumption slips amid rising commodity prices: NielsenIQ

Inflation is impacting Indian households as consumers bought less, or looked for cheaper goods, in the July-September quarter, data from market research firm NielsenIQ shows.

NielsenlQ's fast-moving consumer goods (FMCG) snapshot for the second quarter of FY22 shows that inflation has dragged down demand for consumer goods, with growth slowing to 12.6 percent -- significantly lower than the 36.9 percent recorded the previous quarter.

The food category, which contributes to 59 percent of the FMCG industry, witnessed a double-digit growth driven by prices.

While urban India saw an upswing, rural India experienced a slowdown due to consumption decline (by 2.9 percent against a growth of 14.9 percent in Q1) owing to high commodity prices. The data indicates that rural households are drawing their purse strings and buying lower quantities of edible oils, packaged groceries, fabric care and personal care products, among others.

“The quarter ending in September saw consumer purchases inching back to pre-COVID levels. However, rural growth slipped on volume/consumption. Though there continues to be pressure on the consumer, this is offset by the encouraging uptick seen in urban markets,”  Diptanshu Ray, NielsenIQ South Asia lead, said.

This shows in the mainly price-led overall growth of the FMCG  industry. While 11.3 percent of the growth was price-led, only 1.2 percent was volume-led, which means that households are starting to feel the pinch.

NielsenIQ’s data, which shows that categories like staple foods such as edible oils,  habit-forming foods like hot beverages such as tea, and impulse foods like salty snacks and confectionary  saw value growth on account on rising prices, while volume growth was driven by packaged rice, breakfast cereals, butter-margarines, and chocolates.

“Overall, the Indian FMCG industry witnessed a significant price led growth in the quarter on account of increasing commodity and raw material prices, and high fuel prices leading to higher transportation costs. This resulted in a  double-digit nominal growth, but a drop in consumption (volume) growth for the industry,” NielsenIQ said.

Over the past year, India’s  consumer sector witnessed unprecedented raw material inflation. Prices of key raw materials like crude oil, palm oil, and palm fatty acid distillate (PFAD) have risen more 60 percent year-on-year, affecting most consumer categories such as food, packaged food, soaps, detergents, among others. Rising crude prices have also pushed up packaging costs. Adding to this are rising fuel prices impacting transportation costs, and unseasonal rains pushing up vegetable prices.

As a consequence, food, eating out at restaurants, personal care items, detergents, apparel, and electronics have become more expensive.

FMCG majors too have alluded to input cost pressures in the past two quarters, with the likes of Hindustan Unilever, ITC, P&G, Dabur, Britannia, Parle, Marico, and Godrej hiking prices to offset the input cost burden.

“The inflation has been tough on us. We thought there'll be a little softening of inflation, but the projection for Q3 is that inflation will only pick up; we are not seeing any signs of softening. To offset the impact of inflation and continued sustained inflation, we've increased prices," Dabur’s CEO Mohit Malhotra said in the Q2 analysts' call.

Britannia Managing Director Varun Berry too said during a Q2 analyst call that there is no substitute for price increases in the current environment -- the company hiked prices by 4 percent in Q2, and is expected to increase prices by 7.5 percent in Q3 and 10 percent in Q4. “The pressures are coming from palm and fuel, leading to increases in corrugated boxes as well as in laminates ... So, we have actioned price increases,” he said.

Parle too hiked prices of biscuits by 5-10 percent.

ITC, which hiked the prices of its Fiama & Vivel soaps and Engage perfumes, said the industry at large has hiked prices due to high input costs. “While prices of select items have been revised, ITC's focus is on effective cost management, premiumisation, favourable business mix and evaluating all avenues to mitigate costs and enhance efficiency to ensure that we don’t pass on the entire burden to the consumer. Increasing the price of the product is the last resort," an ITC spokesperson added.

In addition to consumers feeling the pinch, NielsenIQ said in its report,  input cost pressures have severely impacted small manufacturers with 14 percent churning out of the market compared to a year ago.

Sameer Shukla, customer success lead for NielsenIQ South Asia, added, “This churn is also one of the reasons for rural markets being under stress, and offers an opportunity for larger manufacturers to consolidate their share.”

And it’s not just FMCG -- inflation has impacted the apparel sector too, with manufacturers looking to hike prices anywhere between 12 and 15 percent on the back on rising cotton and yarn prices. This is expected to impact hosiery makers too. Adding to their woes has been a GST hike on apparel, textiles & footwear from 5 percent to 12 percent effective January 1. Many have urged the central government to reconsider the GST hike, especially at a time when apparel makers have just started to see revival  but still struggle with rising input costs.

Electronics and home appliances too have gotten more expensive, with more price hikes on the horizon.  Smartphone makers like Xiaomi, Oppo, and Vivo have reportedly hiked the prices of their entry and mid-segment offerings, a category severely affected by the global semiconductor shortage.

Eric Braganza, president of Consumer Electronics and Appliances Manufacturers Association, prices of air-conditioners, refrigerators, washing machines, microwave ovens and deep freezers are likely to see a 5-6 percent hike in November-December. Home appliance prices already saw a near 15 percent price hike since January 2021, and more increases are expected in January 2022 due to a combination of the global chip shortage, rising component, plastic, steel, copper prices and freight costs.

Neeraj Bahl, MD & CEO, BSH Home Appliances, said the industry faces a conundrum -- inflation and sourcing costs of imported materials like electronic chips and metal, and logistics are at an all-time high, while the dip in  demand and container shortages further impact operating costs. “So no matter how well we try to tackle this challenge, a price hike seems inevitable. In the last quarter, we initiated a minor price hike and don’t have any specific plans of doing so as yet in the coming quarters. Having said that, we at BSH India are committed to our values which are rooted in consumer centricity and approach price hikes very thoughtfully,” he added.